Despite the record levels of catastrophe losses in 2017 German reinsurance giant Hannover Re has reported group net income of just less than EUR 1 billion, beating its guidance although coming in short compared to the prior year, but the reinsurer notes continued competitive pressure from the capital markets.
The key to remaining profitable in 2017 for Hannover Re was, “because we avoided an underwriting deficit in property and casualty reinsurance despite the quite considerable large losses,” CEO Ulrich Wallin said.
Also key were around EUR 1.1 billion of reserve releases which Wallin noted, “the result consequently benefited from substantial releases of loss reserves” which he explained was only due to the reinsurers practice of setting “very conservatively calculated loss reserves that we have established over many years.”
Commenting on the results, Chief Executive Officer Ulrich Wallin said, “The 2017 financial year was a challenging one; it was the year with the heaviest burden of large losses in our company’s history. While the generated Group profit fell short of the previous year’s good result, it is still pleasing at EUR 959 million. Protecting our clients against catastrophic events is the core of our business model. The fact that we achieved such a good performance despite the large number of losses shows that we have adequately mapped our exposures in our risk management system and the losses fit with the expected values calculated for our risk appetite.”
Overall the underwriting result in P&C reinsurance was just over EUR 15 million for the year, well down on the EUR 500 million plus it reported for 2016, but the impact of reserve releases and investment returns helped the company to report a much higher profit, demonstrating the levers large reinsurers have at their disposal to boost profitability for their shareholders.
Hannover Re reported a combined ratio for the P&C reinsurance business of 99.8% but over EUR 1 billion of reserve releases and the additional investment income helped the firm to report net income of EUR 837.3 million for the P&C business, down from EUR 949.9 million in the prior year.
Losses of EUR 749.4 million for hurricanes Harvey, Irma and Maria, alongside another EUR 101.1 million for the California wildfires losses in the fourth-quarter, hurt Hannover Re during the year 2017.
Additionally, the impact of a higher than expected mortality experience from its U.S. life reinsurance book also dented profits for the firm in 2017.
But overall Hannover Re’s results are a lesson in putting the various levers that major reinsurers have at their disposal to work, in order to bring in profits for shareholders.
Morgan Stanley analysts said that on a normalised basis the P&C reinsurance combined ratio would have been as high as 108.1% for 2017, as reserve releases had a massive 11 points or more of impact on the reinsurers results.
This is a key lever for companies like Hannover Re and the other major reinsurers, enabling them to report satisfactory results (as Hannover Re itself called them) even when major losses have dented the balance-sheet considerably during the year.
In the property reinsurance market Hannover Re continues to feel the pressures from excess capital, something it noted right the way through 2017.
“The situation in property and casualty reinsurance initially showed little change in the 2017 financial year. The state of the market remained intensely competitive; what is more, the market for catastrophe bonds continued to make capacity available,” the reinsurer explained in its results statement.
However, Hannover Re felt it managed to secure sufficient attractive underwriting opportunities during the year and at the renewals at January 2018 the company took advantage of the higher rates and said, “The company is satisfied with the development of its property and casualty reinsurance portfolio, especially because early tendencies towards an increase in prices could be discerned in the second half of the year following the major loss events.”
Hannover Re hopes that rate rises continue into the mid-year renewals and is pleased with the book it has underwritten at January 1 2018. However the pressure from excess capital remains a factor the reinsurer is acutely aware of.
CEO Wallin explained, ” In the latest treaty renewals we obtained thoroughly pleasing rate increases overall; the premium quality for 2018 is consequently better than was the case for 2017. The reason here is the market response to the considerable losses of 2017. While the available reinsurance capacity still clearly exceeded demand, reinsurers were successful in securing moderate rate increases. This brought about a trend reversal, after primary insurers had consistently been able to push through reduced rates for their reinsurance cessions since mid-2013.”
Pleasing for the reinsurer, was the ability to grow in more than just property risks at the renewals and Hannover Re clearly feels it has developed a book that remains as diverse as before, while growing premiums and securing better rates where it could.
“We made the most of the improved market climate and booked premium growth of more than 20 percent in the renewal season as at 1 January 2018. This was true of virtually all regions and lines, but derived again in special measure from the area of structured reinsurance, where demand for bespoke reinsurance solutions tailored to provide solvency relief showed further growth. In life and health reinsurance, too, we anticipate slightly higher premium income because we are continuing to write attractive new business,” Wallin explained.
Hannover Re feels it has positioned itself for a profitable year, as long as major losses remain below budgeted levels. The company targets more than EUR 1 billion of group net income as a result.
But the fact remains that excess capital and the capital markets remain highly competitive with the company, so its shareholders will be pleased to hear the company has found growth in structured solutions and life and health risks, areas where it is less in competition with the ILS market.