German reinsurance giant Hannover Re has continued to expand its underwriting portfolio in property & casualty reinsurance, increasing gross premiums written by over 19% in the second-quarter, but citing “fierce competition” and the effects of alternative capital in markets such as Florida.
Hannover Re targeted growth at the all the renewals so far this year, experiencing growth in premiums underwritten of 38.8% at constant exchange rates during the first-quarter of the year.
Growth has been found across the United States and including in property catastrophe reinsurance, but the company has felt competitive pressures including from ILS players.
During the second-quarter Hannover Re reports growing its P&C reinsurance book by 19.2% to EUR 6.5 billion (up from EUR 5.4 billion in the prior year). The growth could have been as high as 27.6% if adjusted for exchange rate effects, the company said.
The growth in Hannover Re’s underwriting book has helped to drive higher profits, with the reinsurer reporting a 13.5% increase in operating profit to EUR 907.3 million (up from EUR 799.4 million). Group net income increased by 3.8% to EUR 555.3 million (EUR 535 million).
Property and casualty reinsurance saw an increase in underwriting result of 37.4% to EUR 204.7 million (EUR 149.0 million), while the life and health reinsurance operating result increased by 32.8% as at 30 June 2018 to reach EUR 219.4 million (EUR 165.2 million)
The enlarged P&C reinsurance book performed better than the smaller one underwritten in 2017 as well, with the combined ratio coming out at 95.7% (down from 96.5%).
As a result, the firm reported return on equity of 13.2%, much higher than its targeted 9.5% minimum.
“Once again, both business groups, namely property and casualty as well as life and health reinsurance, plus a stable investment income shaped the positive result,” commented Chief Executive Officer of Hannover Re Ulrich Wallin. “Bearing in mind the business development to date, we confirm our net income target of more than EUR 1 billion for 2018.
However, Hannover Re has work to do on its mortality life reinsurance book, as underwriting actions need to be taken to improve performance, Wallin said, “Strains will be incurred in the second half of the year from portfolio management actions in connection with our US mortality business. This is something that we are willing to accept because we are thereby avoiding higher losses in subsequent years.”
Overall the company grew its gross reinsurance premiums written by 11% across the business, 18.1% if adjusted for exchange rates.
Hannover Re retained slightly more of the business, on a percentage basis, as well, with 91.3% retained, compared to 90.3% last year.
In the core property and casualty reinsurance business, Hannover Re said that it was “able to push through higher reinsurance rates on average,” at renewals in Q2 2018.
However, the firm said that generally, “rate movements in the industry failed to live up to the expectations of many market players.”
In particularly Hannover Re said that, “US catastrophe business saw a continued abundant supply of additional capacity from alternative capital markets, which prevented a stronger response on the pricing side in traditional reinsurance.”
Wallin said, “The state of the property and casualty reinsurance markets remains fiercely competitive. The losses of the previous year did not prompt traditional market players or alternative capital providers on the ILS market to pull capacity from the market. Quite the contrary, in many instances the available capacity has even continued to grow. This means that, as before, the supply of reinsurance capacity exceeds demand, even though it should be noted that demand for reinsurance has also risen.”
As ever, we have to note here that ILS funds report strong competitive pricing from traditional reinsurance majors as well.
While the market places its business in the way it does we will not truly find out who has the largest appetite that is pressuring pricing. A placement marketplace, where reinsurance capital can express its appetite for risks more clearly will help in the future here.
Hannover Re saw increased demand for structured reinsurance solutions in Europe and North America and rate increases in traditional reinsurance, which helped to drive its premium growth in P&C Reinsurance.
Here Hannover Re’s retention was even higher again, with 91.4% of the P&C reinsurance premiums retained, up from 89.4% in the prior year.
The significant growth in the P&C book and higher retention does mean Hannover Re, like other major reinsurers, will be more exposed to catastrophe risks than in the prior year it seems.
However, Wallin explained that, “Our exposure to natural catastrophe risks therefore remains comfortably within our risk appetite, which is unchanged from the previous year.”
But this could eventually result in more cessions to third-party capital, more opportunity for investors in Hannover Re’s K-Cessions sidecar like structure and even perhaps more catastrophe bonds, as major reinsurers look to control PML’s.
Large losses were below expectations during the quarter for Hannover Re, with the company saying the total was EUR 258 million below expectations, despite the impacts of winter storm Friederike and an earthquake in Papua New Guinea during the period.
On the renewals, Hannover Re said, “The treaty renewals in property and casualty reinsurance as at 1 June and 1 July 2018 passed off successfully for Hannover Re. This is all the more gratifying given that market conditions continue to be intensely competitive.”
The reinsurer said that the June 1st natural catastrophe risk renewals in Florida were particularly competitive.
“When it came to the renewal of reinsurance treaties in Florida, some of which had suffered considerable losses in the previous year, we continued to pursue our profit-oriented underwriting policy,” Wallin said.
Continuing, “The renewal season in Florida, where hurricane Irma had caused considerable reinsured losses in 2017, proved particularly disappointing overall, prompting us not to increase our exposures here. On the whole, though, we were able to generate appreciable double-digit growth in these renewals by strengthening our position with some larger customer accounts.”
Looking ahead, the company expects 10% premium growth across the full year and targets net income of over EUR 1 billion, as long as major losses remain below the budgeted EUR 825 million.
The lower losses in Q2 will help the firm to this goal, although it is important to note that the enlarged portfolio underwritten could hold less profitability on a per-unit of risk basis, as Hannover Re’s 1 billion Euro target existed before the renewals and so the firm did not have a clear picture of what growth would be achievable at the time it initially forecasted this.
Of course this also means Hannover Re could easily beat that target as well, if loss conditions remain quieter and the enlarged book delivers the performance from rate increases achieved.
You can read the full results statement from Hannover Re here.