German reinsurance firm Hannover Re is not overly concerned about meeting earnings expectations, despite the softening of the reinsurance market, but it has changed its portfolio mix to be underweight catastrophe business, according to analysts at RBC.
Hannover Re now finds property catastrophe reinsurance profits to be marginal, which has caused the reinsurer to adjust where its underwriting capacity is focused and resulting in it becoming underweight catastrophe reinsurance when compared to its non-life reinsurance market share.
Analysts from RBC Capital Markets met with Hannover Re’s CEO Ulrich Wallin recently and found that despite the softening market the reinsurer remains confident in its ability to continue to grow earnings each year.
However, the meetings showed that the upside to earnings would not be found in property catastrophe risks, rather they are likely to come from life and health reinsurance business, with U.S. financial solutions expected to perform particularly well.
RBC’s analysts note that the share of the reinsurance market attributed to the top ten companies has grown during the softening of the market, which is to the benefit of a player of the size of Hannover Re.
Hannover Re expects the softening of reinsurance will continue due to capacity oversupply and continued buying rationalisation among some large cedents.
As a result of this the reinsurer sees catastrophe pricing as marginal based on its technical margin expectations and has gone underweight catastrophe exposed business in its portfolio.
However, despite marginal profits to be made, Hannover Re still expects the catastrophe reinsurance business will be profitable in many years to come, due to an absence of large losses.
And that is the reason for the prolonged softening in recent years, the lack of major catastrophe loss events. With so much capital and capacity supplied in years when losses have been low, there has been no reason for rates to increase but still many underwriters and ILS managers are making good profits from that business.
Of course for a large global reinsurer like Hannover Re remaining concentrated on catastrophe risks at a time of softening would be foolish, hence the becoming underweight and more diversified into other lines of business.
But for catastrophe focused reinsurers and ILS specialists, the fact that the business remains profitable, particularly as some have lower return requirements, has resulted in the ongoing growth of capacity targeting that space and kept pricing down.
With pricing on catastrophe bonds looking to be leveling out, or even showing a slight upturn, and other instruments such as ILW’s also having shown that a floor in pricing is being approached, it seems likely that specialists in catastrophe risks will try to maintain some margin in the business going forwards while losses remain benign.