Hannover Re’s hurricane Ida & Bernd flood losses reduced by retro

The gaps between German reinsurance firm Hannover Re’s gross and net catastrophe losses from third-quarter events hurricane Ida and the flooding from windstorm Bernd in Europe are wide, suggesting the reinsurer has shared a reasonable proportion of these losses with its retrocession partners.

Hannover Re reported its nine-month results this morning and said that the high burden from catastrophe activity has elevated its combined ratio to 97.9%.

On the more positive side of the reinsurers business, the company has expanded its gross premiums by 14%, exchange rate adjusted, which in the better rate environment and with lower losses from the COVID pandemic in 2021, means a more profitable year so far, despite the catastrophes.

Hannover Re said that its Group operating profit (EBIT) rose by 42% to EUR 1,281 million for the nine-months, compared to the prior years EUR 903 million.

Group net income also improved, by 28%, to reach EUR 856 million, up from the prior years EUR 668 million.

“In recent months insurers and reinsurers were faced with unusually heavy losses from hurricanes, flooding and other catastrophic events,” commented Jean-Jacques Henchoz, Chief Executive Officer of Hannover Re. “Our solid nine-month result again demonstrates Hannover Re’s resilience in a volatile environment.”

Property and casualty reinsurance premiums rose to EUR 15.3 billion (up from EUR 13.3 billion) which is a roughly 18% increased, if adjusted for exchange rates, while net premiums rose a similar percentage, on the adjusted basis.

Net major loss expenditure rose for the nine-months 2021 to EUR 1,070 million (up from the previous years EUR 1,149 million) and was “substantially higher than the budgeted expectation of EUR 849 million for the first nine months”, Hannover Re explained.

Interestingly, on a net basis hurricane Ida was the largest individual catastrophe loss Hannover Re suffered this year so far. But on a gross basis, the European floods related to windstorm Bernd were more impactful.

In fact, the European floods from Bernd cost Hannover Re a gross loss of EUR 643 million, but that was reduced by a huge 67% to EUR 214.2 million net, suggesting a relatively significant effect from retrocessional reinsurance protection.

Hurricane Ida meanwhile cost Hannover Re EUR 527.3 million gross, but the loss was reduced by 42% to EUR 305.7 million net, again suggesting a relatively large retrocessional reinsurance recovery.

Both of these events may have seen Hannover Re calling on some support from its third-party capital investors, given the size of the gross losses.

Which means that, it’s possible the third-party investors backing the reinsurers capital markets backed K-Cessions quota share retro reinsurance sidecar facility may have assisted in paying in some of the catastrophe losses of the last quarter.

There’s a chance the reinsurers other retrocession arrangements, its aggregate XL retro coverage or its whole account retro, could also have played a role in reducing these large gross losses down to their much smaller net totals, but it’s not possible to tell.

As a result of the large loss experience, Hannover Re’s property and casualty reinsurance combined ratio came out at the aforementioned 97.9%, so is running above its 96% full-year target.

But, demonstrating the profitability of its book and its resilience in the face of major catastrophe losses, part of which is down to its retrocession arrangements we suspect, Hannover Re said that its P&C reinsurance operating profit (EBIT) surged 80% to EUR 1,061 million (up from EUR 589 million), while net income improved by 77% to EUR 739 million (up from EUR 418 million).

As a result, Hannover Re said it remains on-track for its previous guidance of Group net income in the range of EUR 1.15 billion to EUR 1.25 billion for full-year 2021.

“The third quarter has shown us once again how quickly an unexpectedly benign loss experience during the year can completely turn around,” said Henchoz. “Despite this, we believe we are in a position to achieve our guidance for 2021.”

For 2022, Hannover Re forecasts even better market conditions and profits, lifting its guidance to Group net income of EUR 1.4 billion to EUR 1.5 billion for the year.

“The profitable growth and our successful cycle management in recent years will lead to a sharp rise in earnings in the 2022 financial year,” said Jean-Jacques Henchoz. “Not only that, in life and health reinsurance we anticipate that the strains from the Covid-19 pandemic will diminish appreciably as vaccination programmes make increasing progress and the underlying healthy profitability of the portfolio will once again be reflected in the result.”

However, it has also lifted its budget for major losses, to EUR 1.3 billion, up from EUR 1.1 billion, although that is said to be “commensurate with the growth in the underlying business” so the reinsurance firm has not boosted its catastrophe budget for any concerns over rising climate risks at this stage, it seems.