Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Hannover Re cites increased retentions, pressure from ILS at renewals


German reinsurance firm Hannover Re is the first of the big-four reinsurers to release its profit forecast and results of the January renewal season, in which it cites continuing growth of retentions at ceding companies and continued pressure from ILS and alternative capital sources.

Hannover Re CEO Ulrich Wallin told a media event that competition in the reinsurance market continues to be intense and that he saw no sign of the competitive market environment changing, according to Reuters.

However the reinsurer reports a stable property and casualty portfolio at the January reinsurance renewals, where the firm felt that its size and scale assisted it to maintain market share, leaving it “Largely satisfied with the outcome of the treaty renewals as at 1 January 2015 in light of the challenging business environment.”

This despite an admission that the rate, or price, quality of the renewed portfolio fell short of that achieved a year earlier, reflecting the continued decline in pricing across the reinsurance marketplace worldwide.

“The price decline in many markets was significant compared to the previous year. Thanks to our good rating and long-standing customer relationships we nevertheless achieved a rather pleasing outcome. Despite our systematic selective underwriting policy we were able to keep our portfolio stable,” CEO Ulrich Wallin commented.

The reinsurer said that the Jan 1 treaty renewals were especially notable for “a clear trend towards increased retentions carried by ceding companies.” It notes that this is largely due to the continued absence of large losses in the insurance market, leaving ceding insurers with significant capital at hand and an enhanced ability to retain more risk.

Hannover Re also noted that the inflow of capital into insurance-linked securities (ILS) and collateralized reinsurance from alternative market sources continued to put prices under additional pressure, especially in natural catastrophe reinsurance business.

The combined effects of increased retentions and ample capital put pressure on rates, leading to reductions in many areas and in some cases worsened terms and conditions, the reinsurer said. However some bright spots were found, such as being able to push through rate increases on loss affected programmes, including in Germany, although Hannover Re notes this did not include aviation.

Approximately two-thirds of the premium volume Hannover Re wrote a year earlier came up for renewal in January, totaling EUR3.988 billion. The reinsurer only renewed EUR3.617 billion of these treaties in current form, while EUR371m were cancelled or renewed in a modified form.

Including increases of EUR350m from either new treaties or changes in price and share, the firm renewed a total premium volume of EUR4.023 billion at 1/1, which is a 1% increase at a constant exchange rate.

It will be encouraging for the reinsurer that it has not seen any decline in premiums, as this will either reflect new business or business won from competitors. Given the challenging environment it is possible that the large reinsurers like Hannover Re may benefit from reinsurance buyers shifting allegiances to larger, perceived as more stable perhaps, firms.

The firm grew its North America premium volume by 5%, which will be helpful as rates there across property and casualty lines can be higher than other continents. In Germany the firm expanded again, and achieved rate increases in areas affected by windstorms and hail events.

In global reinsurance Hannover Re reports a “mixed picture” citing “soft market conditions overall and fiercely competitive placements” in Latin America, although the firm maintained its market position and said pricing was commensurate with the risks.

In catastrophe reinsurance, U.S. rates were down, Hannover Re said, but other regions saw increases (such as Germany at 5% to 10%), and the firm grew its share here, increasing its premium volume by 8%.

Looking ahead for 2015, Hannover Re said that “despite softer market conditions overall in property and casualty reinsurance” it expects to achieve an underwriting result that is inline with that achieved in 2014, depending on its loss experience.

It expects to be able to generate continued good underwriting results in 2015, thanks to its renewal portfolio, “even though the rate quality in the reinsurance market has deteriorated appreciably.”

On the reinsurance market as a whole, Hannover Re notes that continued satisfying results in the sector attract more alternative capital creating additional competition. The firm believes that as one of the largest reinsurers in the world, globally active and diversified, it is better positioned to cope than most.

At the same time the firm reports that softening retrocession markets continue to assist reinsurers by allowing them to lay off risk more cheaply. Access to alternative capital also assists here.

Hannover Re continues to place an increasing focus on its structure reinsurance and ILS business, where it facilitates ILS capital to access risks as a transformer and fronting reinsurer, amongst other activities. The firm reports an expected premium volume for 2015 in structured reinsurance and ILS of EUR944m and this is one of the few areas that it anticipates underwriting additional volume in 2015, showing the incremental nature of a lot of this business for the traditional reinsurer.

Finally, on M&A, Hannover Re said that while it looks at many targets it feels they are largely too expensive, according to Reuters. Wallin said that Hannover Re is not working on a large M&A transaction, but that it is looking at “one or two smaller things.”

There is nothing particularly unexpected in Hannover Re’s announcement today, however it is interesting to note the ability of a large reinsurer to seemingly successfully navigate the market, without a need to pull-back considerably, something its smaller competitors are almost all doing.

It’s also interesting to note the increasing input of structured reinsurance and ILS at the firm, as it displays an ability to leverage alternative capital itself. However the profit margin on business fronted or facilitated for third-party investors in ILS is likely lower than had Hannover Re written it directly on its own balance-sheet. But, what this does provide is a way to manage capital and to maintain shares in some areas where its own capital might not be the most suitable anymore.

Artemis Live - ILS and reinsurance video interviews and podcastView all of our Artemis Live video interviews and subscribe to our podcast.

All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance video content and video interviews can be accessed online.

Our Artemis Live podcast can be subscribed to using the typical podcast services providers, including Apple, Google, Spotify and more.

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.