German reinsurance giant Hannover Re managed to maintain its technical underwriting profitability despite the impact of large catastrophe loss events in the third-quarter, with the result sufficient to enable the reinsurer to raise its full-year target.
Hannover Re was hit by all of the major natural catastrophe events around the world in Q3, which drove its P&C reinsurance combined ratio to an above target 98.6%, but across its diversified business the firm increased its Group net income by a significant 38.3% to EUR 1,003.2 million for the period.
“After nine months we are looking at an excellent result and a very good return on equity,” Jean-Jacques Henchoz, Chief Executive Officer of Hannover Re, explained. “In life and health reinsurance the good underlying profitability is becoming increasingly evident, while property and casualty reinsurance continues to deliver stable results on a high level despite persistent strains from large losses. A further factor is the very strong investment income, enabling us to raise our profit guidance for 2019 to more than EUR 1.25 billion.”
Hannover Re has underwritten 16% more premiums during the quarter, with virtually unchanged retention, putting it in a position to achieve much better results from its portfolio given the higher pricing available in reinsurance this year.
However, it’s not all plain sailing and Hannover Re continues to bemoan the excess capacity that dampens pricing.
“The market for reinsurers continues to be marked by a number of considerable challenges. The long-standing excess of capacity for coverage of insurance risks remains a drag on prices for reinsurance protection. In addition, low interest rates are restricting investment income for the industry, necessitating rigorous discipline in technical underwriting,” the company explained.
These challenges and pressures have driven the need for higher pricing, but Hannover Re does not believe it is enough, seeing the need for more price increases in some sub-markets.
Large loss expenditure in the P&C reinsurance unit reached EUR 405.3 million, with Hurricane Dorian drivingf EUR 186.6 million, Typhoon Faxai in Japan EUR 75.9 million and the insolvency of UK tour operator Thomas Cook EUR 112.4 million.
As a result, the large loss burden for the first none months was higher than the previous year at EUR 545.9 million (EUR 364.6 million), however it does remain with Hannover Re’s loss budget of EUR 665 million.
This drove the combined ratio to above plan, but still within profitability at 98.6%.
Hannover Re’s retrocessionaires have helped considerably during the third-quarter, taking a 10% share of the reinsurers losses from hurricane Dorian, but a considerable 55% of the typhoon Faxai loss.
Hannover Re reported a EUR 167.2 million gross loss due to typhoon Faxai during the quarter, but on a net basis this came down to the EUR 75.9 million mentioned above.
The companies collateralised retro reinsurance sidecar vehicle K-Cessions likely took its share of these loss events during the period, in particular the Japanese typhoon.
So far this year Hannover Re has reduced its gross catastrophe losses by more than 28% thanks to its robust retrocession program, while man-made losses have also been reduced by its retro protections.
In addition, the life and health reinsurance business had a profitable quarter, as premiums rose 7.6% and investment income soared in this division and group wide. As a result the life and health business tripled its quarterly profit compared to the prior year.
“We are highly satisfied with the development of our life and health reinsurance portfolio in the current year”, Henchoz said. “In the United States we recorded a strong profit contribution after the actions taken here in the previous year to improve the profitability of US mortality business.”
Looking ahead, Hannover Re said it is targeting “significant growth” for the P&C reinsurance business this year, with the combined ratio full-year target remaining at 97%.
Having raised the company profit target from EUR 1.1 billion to now EUR 1.25 billion for 2019, Hannover Re also targets a better EUR 1.2 billion for 2020.
“In the coming year we are looking for a relatively stable profit contribution from property and casualty reinsurance and sustained good contribution from life and health reinsurance. Investment income will likely contract slightly, however, owing to the elimination of the non- recurring effect. We therefore anticipate Group net income of around EUR 1.2 billion in 2020,” Henchoz explained.