Global reinsurer Hannover Re has significantly expanded its property and casualty reinsurance portfolio during the first-quarter of the year, reporting growth in premiums underwritten of 38.8% at constant exchange rates, including some further expansion in the U.S. market.
While many reinsurance firms have bemoaned the level of rate increases witnessed after the major hurricane losses of 2017, the major, globally diversified players have largely been seen to increase their underwriting portfolios, suggesting any rate rise is better than where the market sat at the last renewals before the 2017 catastrophe loss events.
Hannover Re is clearly among those that are happy with where rates rose to and felt encouraged to deploy more capacity as a result, underwriting a signficantly expanded P&C reinsurance book to ensure it benefitted from the market rate rises.
It’s likely than the major reinsurers are all acutely aware that if losses are not significant again this year then rates are likely to start to revert to a slow decline again at the 2019 renewals, hence making sure they capitalise on the improved pricing that is currently available is absolutely key to delivering a better result, even if that’s a relatively short-term target.
Rates aren’t the only factor, of course, the other element in major reinsurers growing their books at the recent renewals is likely a desire to cultivate their relationships further as well, thinking that by upsizing their commitment to key ceding companies now they can hope to secure better shares and terms going forwards, especially if the market starts to soften again when history between counterparties can become increasingly key.
So there are very good reasons to be growing your underwriting book right now, to take advantage of higher rates, cement those relationships with counterparties, and most importantly ensure that you get some improvement in underwriting returns after taking such large losses in the prior year.
Those that haven’t achieved any growth may end up kicking themselves if the market reverts to softness, as these opportunities to create a portfolio enlarged and ready to capitalise on enhanced returns are unlikely to present themselves at every renewal anymore.
Conditions are not dramatically improved, but for Hannover Re it was enough.
The firm said the market remains characterised by, “Considerable competition and an oversupply of coverage capacity” which can be seen in some markets and lines, but the reinsurer noted that “conditions as a whole improved.”
“The hurricane events in the second half of 2017 provided impetus for greater stability in property and casualty reinsurance,” which helped the firm to excercise its strategy of selective and margin-oriented underwriting.
The reinsurer achieved growth in Asia, Australia, the United Kingdom and the United States, while structured reinsurance business and agricultural risks also grew and demand for cyber cover helped to drive further growth in the portfolio.
As a result, gross premiums underwritten jumped by 27.1% to EUR 3.6 billion, up from EUR 2.8 billion, which on a constant exchange rate would have been growth of 38.8%.
Hannover Re also said it retained more of the risk, with its retention rate rising to 91.6%, up from 88.6% in the prior year.
This is interesting as it not only reflects the reinsurers confidence in better priced business enabling it to hold onto more of the risk it writes, but also means it likely has not taken the opportunity to cede more to third-party capital, which a number of other reinsurers have done in the first-quarter.
The firm said that its net premiums earned increased by 12% to EUR 2.4 billion, growth that would have been 22.4% at constant exchange rates.
The combined ratio was very slightly elevated at 95.9%, compared to 95.6%, giving Hannover Re an underwriting result of EUR 91.8 million, up slightly from EUR 90.7 million which likely reflects higher pricing of risks.
However, the P&C reinsurance underwriting profit rose by 9.4% to EUR 338.9 million, up from EUR 309.8 million, helped by investments and reserve releases.
“We made the most of the available opportunities on the reinsurance markets and substantially expanded our portfolio,” Chief Executive Officer Ulrich Wallin said. “With Group net income of EUR 273.4 million we have taken the first step towards achieving our year-end target of more than EUR 1 billion.”
Hannover Re said that the April reinsurance renewals “passed off highly satisfactorily” for the firm, with 10.3% more premiums underwritten than in the prior year.
Some of this was U.S. risk, which Hannover Re said was “renewed at adequate prices.” Some of the U.S. portfolio was increased, especially in property risks, thanks to, “advantageous conditions, especially under loss-impacted programmes,” the reinsurer explained.
As a result of the growth experienced, Hannover Re said that it now expects to beat its 3% to 5% currency-adjusted growth target for the division this year, with an EBIT margin of over 10% expected.
Hannover Re continues to target the EUR 1 billion of profit it had previously suggested it could achieve this year. With the significantly enlarged portfolio and better pricing secured it’s possible that the reinsurer could significantly beat that target by the end of the year, as premiums earn through.
However, the enlarged property portfolio in the United States could mean the firm is more exposed, should there be a significant level of catastrophe losses again. With Hannover Re having retained more of its enlarged portfolio as well, the firm has likely increased its exposure to some peak events.