German reinsurer Hannover Re is the first of the top-tier reinsurance firms to report its quarterly results this morning and says that it expects reinsurance rates will largely stabilise at the coming key January 2015 renewal season.
Currently, in property and casualty reinsurance lines of business, Hannover Re says that there are no indications as yet of a change to current market conditions. But the reinsurer does expect that pricing will reach the bottom of the technical limits that reinsurers can continue to underwrite at and that this will force more discipline on pricing and result in a largely rate-stable renewal in January.
“Nevertheless, reinsurance rates should – aside from certain exceptions – stabilise as at 1 January 2015, since the scope for further reductions is limited in light of the return on equity targets that reinsurers need to meet,” Hannover Re’s results release states.
Hannover Re’s strategy is to maintain the profitability of its portfolio in the most affected lines of business in the reinsurance marketplace.
The reinsurer explained; “Faced with the prevailing soft market, Hannover Re remains committed solely to preserving the profitability and quality of its portfolio in property and casualty reinsurance.”
At the most recent major renewal in July Hannover Re said that competition remained fierce. However the reinsurer actually grew its P&C premiums slightly, saying that it found attractive opportunities in emerging markets which will please its shareholders.
Overall the reinsurer grew its net income by over 10% for the quarter, to EUR 695.4 million (up from EUR 630.2 million). Net losses remained well below the expected level, net premiums were up, investment income was up and the combined ratio in P&C of 95.3% helped the company to report a return on equity of 14.4%, which under current market conditions seems very good.
At the same time Hannover Re’s life and health reinsurance unit has seen improved performance and this is expected to continue to year-end, resulting in a much higher performance for the year.
“Both business groups and the investment income fully lived up to our expectations,” commented Chief Executive Officer Ulrich Wallin. “We are well placed to navigate the challenging market environment and are confident of achieving our full-year profit target in the order of EUR 850 million.”
Looking ahead Hannover Re is targeting even higher profits for 2015, saying that it hopes to achieve net income after tax of around EUR 875 million.
Once again the low-level of losses impacting the major reinsurers is helping results to look outstanding, despite any attrition to their underwriting profitability from lower prices. At the same time the diversification evident in large global reinsurers clearly offers them options to navigate the market better and to avoid the worst priced business or softest markets.
Whether reinsurance rates will broadly stabilise remains to be seen, some of the early indicators would appear to suggest that some programs are heading down again as January renewals catch up to rate decreases seen throughout the year. The other indicator for property catastrophe risks is the two recent catastrophe bonds, both of which have come out of the blocks with pricing that suggests even lower multiples at completion that we have seen through the year so far.
Perhaps Hannover Re’s breadth of business diversity, initiatives in emerging markets and ability to switch its underwriting focus will see it navigate around the softest parts of the market in January, but we find it hard to believe that the market will stabilise across the property catastrophe lines of business at the moment.