Hannover Re gets “long overdue price increases”, Jebi creep dents P&C

German headquartered global reinsurance player Hannover Re has reported yet another quarter of expansive premium growth, but the firms results were dented by continuing loss creep from typhoon Jebi, as well as weakness on the life & health side.

Hannover Re reported 17.1% growth in gross premiums (14.5% at constant exchange rates) across its business, but an expansive 21.3% across the property and casualty reinsurance business (18.4% adjusted) as the firm grew at the June and July renewals this year.

The reinsurance firm reported operating profit (EBIT) for the second-quarter of the year increasing 3.8% to EUR 942.1 million (up from EUR 907.3 million), while group net income reached EUR 662.5 million, up 19.3% compared to the previous year.

The quarter’s results were boosted by the investment return, without which Hannover Re could have fallen to a negative result, as the underwriting side of the business did not perform this quarter with the P&C underwriting result dented by loss creep from typhoon Jebi, while the life & health business fell to a net underwriting loss on the back of impacts from Australian disability business and UK mortality business.

However, the growth continues to be seen as positive and Hannover Re feels well positioned and is pleased to have finally seen some positive rate development.

“In the 1 June and 1 July treaty renewals in property and casualty reinsurance we were able to secure long overdue price increases,” commented Chief Executive Officer Jean-Jacques Henchoz. “In view of the business development to date we are well on track to achieve Group net income in the order of EUR 1.1 billion for 2019. In addition, the result will be positively influenced by a one-off effect to the tune of EUR 100 million associated with our participation in Viridium Group.”

The reinsurance firm said that it has been able to “substantially expand its portfolio in property and casualty reinsurance in the course of the year to date.”

However, the reinsurer also noted that, “Competition remained fierce because many markets and lines continued to see surplus capacities,” but Hannover Re saw overall market conditions as stable or slightly improved.

Large loss expenditure also dented the P&C reinsurance result slightly, with accident year net impacts of EUR 140.5 million being up on the prior year, although still well below (almost half) the budgeted levels.

The biggest two events for Hannover Re so far this year were the refinery explosion in Philadelphia in June, costing the firm EUR 45.7 million, and the Townsville floods in the Australian state of Queensland in January, costing EUR 25.9 million.

However, typhoon Jebi really dented the P&C result and drove Hannover Re’s net underwriting result in reinsurance down to EUR 71 million for Q2 (compared to EUR 121 million in the prior year), or EUR 196 million for the first-half (down from EUR 221 million in the prior year).

Typhoon Jebi loss creep cost Hannover Re EUR 58 million for the second-quarter and EUR 106 million year-to-date, without which both the quarter and half-year results would have beaten the prior year figures.

There’s a good chance some level of loss creep and also a share in the current accident year losses will have flowed to Hannover Re’s retrocession partners, including third-party capital and ILS fund investors backing the reinsurers KCessions sidecar vehicle.

Henchoz commented on the loss creep, “We also incurred – in common with many of our competitors – late reported claims from events in prior years. In particular, typhoon Jebi in Japan continues to prove more costly than originally anticipated for the entire industry.”

In addition, the current year combined ratio reached 96.7%, up slightly from the prior years 95.7%, but still in-line with targets. As a result, operating profit in P&C reinsurance slipped by 4.3% to EUR 656.9 million for the half-year.

Life and health reinsurance premiums written also rose, as Hannover Re was expansive on both sides of the business, increasing by 9.3% to EUR 3.8 billion.

However the net underwriting result was negative in life and health reinsurance, at EUR -89 million for Q2 2019 and EUR -138 million for the first-half, both much worse than the prior year.

Hannover Re had cited impacts to the technical underwriting result from Australian disability business and UK mortality business. Like its peers, Hannover Re is taking action in certain areas of the life and health book to improve performance right now,

The investment return saved the life and health side though, while the restructuring of Viridium boosted this side by EUR 99.5 million, enabling Hannover Re to report a 30.3% increase for the first-half to EUR 286 million.

“The stronger profitability of life and health reinsurance can be attributed in large measure to the one-off effect associated with our participation in Viridium Group,” Henchoz said. “As a further factor, the termination of loss-making treaties in US mortality business in the previous year – which had given rise to exceptional strains – continues to have a favourable effect on the result.”

Hannover Re’s growth story continues though, as the company continues to expand its P&C reinsurance book in particular.

The June and July renewals were seen as favourable, with price increases that the firm said were in some cases “appreciable.”

Reflecting the regions up for renewal, Hannover Re said, “The renewals in North America proved to be particularly successful for Hannover Re.”

“Based on the outcome of this year’s various rounds of treaty renewals and assuming constant exchange rates, Hannover Re continues to expect significant premium growth at broadly stable conditions for its total property and casualty reinsurance portfolio,” the company explains.

While the price increases were clearly welcomed, Hannover Re still does not feel they have improved significantly.

CEO Henchoz said, “In the most recent treaty renewals in property and casualty reinsurance – above all the renewals in June and July – we were able to push through price increases. These put us in a somewhat better position now than in 2017 or 2018, altough we still find ourselves below the pricing level of earlier years.”

Targets are maintained though, for profit and combined ratio, hence it will be interesting to see how the enlarged portfolio performs over the year ahead and whether further growth is the target at January 2020.