Hannover Re falls to P&C underwriting loss on COVID & catastrophes

Global reinsurance firm Hannover Re has reported an underwriting loss for its property and casualty reinsurance unit, as the combined ratio increased to 101.4% for the third-quarter driven by over budget major losses as the company added more COVID-19 impacts and the costs of a range of catastrophe events.

Despite this and the impacts of the COVID-19 coronavirus pandemic so far, Hannover Re expects to make a group net profit of around EUR 800 million for 2020 and is now forecasting a better year for 2021, with between EUR 1.15 billion and EUR 1.25 billion anticipated.

While 2020 has been a costly year for all the major reinsurers thanks to COVID-19 and elevated catastrophe loss activity, the global and diversified nature of businesses like Hannover Re’s remains resilient and able to capitalise on now hardening reinsurance rates.

“The impacts associated with the Covid-19 pandemic can be better estimated following the close of the third quarter, and we therefore believe that we are now in a position again to provide profit guidance for 2020 and 2021,” Jean-Jacques Henchoz, Chief Executive Officer of Hannover Re, explained. “While we feel very comfortable with our 2020 guidance based on our prudent reserving, the outlook for the coming year is dependent on the further course of the pandemic. Movements in reinsurance prices nevertheless give us grounds for optimism.”

Hannover Re’s P&C reinsurance business has added EUR 100 million of loss reserves for the COVID-19 pandemic during the third-quarter, taking the total P&C pandemic loss to EUR 700 million for the firm.

On the life reinsurance side, Hannover Re has pegged its reserves at EUR 160 million after Q3, with EUR 91 million being from actual loss advices.

Hannover Re previously explained that it expects that as losses from the Covid-19 pandemic convert from IBNR reserves to reported claims, a proportion of these will end up being ceded to third-party investors in its K-Cessions sidecar vehicle.

As reinsurers ultimate losses rise from the pandemic, so too will the amount ceded through some quota shares, reinsurance and retrocession arrangements.

On the underwriting side, Hannover Re continued to take advantage of improving market conditions, reporting 10.9% premium growth to EUR 19.3 billion for the first-nine months of the year, delivering group net income of EUR 667.8 million.

Reflecting the impact of the pandemic, Hannover Re’s operating profit (EBIT) was down 35.3% for the first-nine months of the year.

The company remains bullish on P&C reinsurance market conditions, expecting, “an increasing and sustained improvement in prices and conditions for insurers and reinsurers alike was evident in the various rounds of renewals held during the year on account of the strains associated with the pandemic, large losses and the low interest rate environment.”

P&C reinsurance premium growth was 14.5% to EUR 13.3 billion for the year-to-date, but net loss expenditure for the year so far has reached EUR 1.1 billion. EUR 700 million is attributable to COVID-19, suggesting the rest is from natural and man-made catastrophes.

During the busy third-quarter of catastrophes, Hannover Re has disclosed specific losses of EUR 83.9 million from the midwest US derecho storms, EUR 64.4 million from Hurricane Laura in the US at and EUR 67.4 million from the explosion at the Port of Beirut, Lebanon.

As a result, the P&C reinsurance combined ratio came out at 101.4% (up from the prior years 98.6%), but making allowance for large loss expenditure in line with expectations and stripping out the pandemic impacts, Hannover Re said that its combined ratio would have been 97.6%..

As a result, P&C reinsurance operating profits feel by some 36.0% to EUR 588.5 million (down from EUR 919.0 million).

The higher combined ratio will signal higher attritional losses being passed to investors in Hannover Re’s K-Cessions vehicle during Q3, it is assumed, as third-party capital may have shared in some of the catastrophe loss activity of the period.

Looking ahead, Hannover Re forecasts higher profits for 2021 and also growth in terms of premiums written, as it expects to capitalise on the firming reinsurance marketplace.

The company explained, “In recent rounds of renewals held in property and casualty reinsurance Hannover Re was able to benefit from stronger demand for high-quality reinsurance protection at improved prices and conditions. Coming on the back of a protracted soft market phase, this trend reversal is likely to continue both in primary business and on the reinsurance side.

“For the renewals as at 1 January 2021 in property and casualty reinsurance Hannover Re therefore expects to book increased premium income and higher prices.”

“The Covid-19 pandemic will continue to be a concern for us in the year ahead”, Jean-Jacques Henchoz said. “That said, we already have a clearer picture of the situation now and we feel conservatively enough positioned in our assessment that we can anticipate Group net income in the range of EUR 1.15 billion to EUR 1.25 billion in the coming year. That also puts the good result of 2019 back in reach.”

Analysts this morning called this guidance for 2021 “conservative” and expect that it includes some continued uncertainty about ongoing pandemic impacts.

Hannover Re has also boosted its major loss budget for 2021, to EUR 1.1 billion, saying that the growth it expects in the underlying business could drive more impacts throughout the year.

This suggests growth in property catastrophe reinsurance risks as well, which could also signal a chance for growth in the reinsurers long-standing K-Cessions sidecar vehicle as well, which is supportive of Hannover Re’s catastrophe risk appetite.