Signs of rates stabilising in competitive reinsurance market: Hannover Re

German reinsurance firm Hannover Re, one of the world’s largest and most diverse, said that conditions in the reinsurance market at the key January renewal remained “essentially unchanged year-on-year” but that there were signs of rate stabilisation among the competitive conditions.

“The situation on worldwide property and casualty reinsurance markets was essentially unchanged year-on-year. With market-changing large losses again absent in 2015 and clients carrying more risks in their retention, the supply of reinsurance coverage continues to exceed demand,” the reinsurer explained this morning in an update on the recent renewals.

However, more encouragingly, the reinsurer went on to say that the reinsurance market demonstrated “indications that the decline in rates is bottoming out. Signs of this trend had already begun to emerge last year for the US market.”

Hannover Re said that it saw “sustained significant competition in most areas of property and casualty reinsurance” but that this would not hinder the company from achieving its targets and that it is largely satisfied with the treaty renewals in January 2016.

“Fierce competition” was cited in property catastrophe reinsurance though, as well as in specialty lines at the renewals, which has resulted in some significant pull-back in certain areas of the market.

“Even though the price decline in some markets was considerable, our broad diversification enabled us to secure a level of profitability for our portfolio that can still be described as good. We do not therefore anticipate any negative impacts on our profit targets for 2016. Once again, our long-standing customer relationships and very good ratings had a stabilising effect on the treaty renewals”, CEO Ulrich Wallin explained.

In property and casualty reinsurance Hannover Re noted the ongoing lack of market-changing loss events and continued trend towards cedents retaining more of their risks. As a result “the supply of reinsurance coverage continues to exceed demand” the reinsurer said, which pushed the firm to continue to display discipline, pulling back by 1.5% on premium volume underwritten.

Encouragingly Hannover Re reflected the sentiment seen by many others at 1/1, that rates are definitely beginning to become more stable, particularly across U.S. property and catastrophe reinsurance placements.

The reinsurer noted that “signs of this trend had already begun to emerge last year for the US market” and that this continued at the key January renewal period.

On the volume underwritten the reinsurer explained that it had EUR 4.422 billion up for renewal at 1st January 2016, of which EUR 4.003 billion was renewed, while EUR 419 million were either cancelled or renewed in a modified form. The total renewed reinsurance premium volume amounted to EUR 4.355 billion, a decrease of 1.5% at unchanged exchange rates.

In the U.S. Hannover Re noted that “the pressure driving rate reductions has eased somewhat.” With modest rate decreases booked for profitable loss-free treaties in property reinsurance, while the firm achieved slight rate improvements for loss-affected non-proportional covers. Hannover Re also noted that terms and conditions for proportional treaties remained stable at 1/1.

Interestingly, differing to some other observers, Hannover Re said that pressure on pricing in casualty lines in the U.S. was not evident, as “the anticipated pressure on prices failed to materialise.”

As a result in casualty reinsurance the reinsurer “wrote a number of new programmes and was able to grow its premium volume for North America by 8.5%.”

Specialty risks reinsurance is where the real blood-letting appears to have been, with Hannover Re reporting “rates in marine reinsurance declined across virtually all lines and regions,” despite large losses such as the Tianjin port explosions. Also in specialty lines “significant rate reductions were also recorded in the energy sector on account of abundant surplus capacities” Hannover Re continued.

In marine Hannover Re pulled-back quite considerably, with its premium volume for renewed business retreating by 8.9% as the reinsurer accepted fewer renewals this year.

Aviation is also noted as particularly competitive, with rates down 10% to 15% due to ample capacity, to which Hannover Re “responded by cutting back our exposure to aviation business and reduced our market share. The premium volume contracted sharply by 17.8%.”

Interestingly, Hannover Re said that agricultural risks in worldwide reinsurance remain “relatively isolated from the otherwise soft market prevailing in property and casualty reinsurance.”

This is perhaps a little surprising, given the clear weather exposure in many of these contracts makes them of interest to some ILS fund managers and other alternative capital players. You would perhaps expect this segment to come under greater pressure, but the fact contracts are often bundled to include commodity price risks goes some way to explain this.

In agricultural reinsurance, Hannover Re said that, “Although competition is making itself felt here too in certain regions or lines, for the most part stable rates and conditions were booked.”

In Asia-Pacific reinsurance Hannover Re saw some opportunities for growth, in markets such as China. However, despite growth in selective markets, the reinsurer said “the premium volume booked for worldwide treaty reinsurance contracted by 3.5%.”

In natural catastrophe reinsurance, as the market remained free of large losses “rates continued to decline in the absence of market-changing large losses. In the United States, for example, rates for loss-free programmes fell by around 6%.” This led to a 5.5% pull-back on catastrophe reinsurance at the reinsurer during the renewal.

Hannover Re did not note any impact to the renewals from losses at the end of the year such as the UK flooding, although it does expect there to be some implications for renewals through 2016.

Looking ahead, Hannover Re said that despite the soft market and competition it expects to achieve its profit targets for the year.

This is based on its positioning in reinsurance and the high quality of its loss reserves, it said. This should enable it to, depending on major loss experience, “generate another good underwriting result in 2016, irrespective of the fact that the rate quality in the reinsurance market has deteriorated in some areas.”

With an expectation that across its whole portfolio, including life and health, there will be a slight premium decline, Hannover Re still expects to hit targets, with an expected return on investment of around 2.9% and net income of around EUR 950 million.

The scale of the very large reinsurance firms is insulating them from market conditions to a degree. What’s interesting is the changes in their portfolio mixes over the last few years, which likely appear very different as they have pulled-back on highly competitive areas of the market.

With more longer-tailed lines underwritten, the mix shifted further towards specialty, casualty and other lines, away from nat cat, this has implications for reserving, and means the portfolio has a longer-tail that could affect profitability in future.

However it could be a more sustainable profit for these firms, particularly those, like Hannover Re, which have also positioned themselves as providing services (such as fronting or transformation) to ILS capital and ILS investors.

But the real upshot is that profitability remains possible and targets can be met, as long as the market is remaining free of very large losses. How the profitability of these large reinsurance firms reacts when that changes and how the cycle responds, are key issues for their future success.

Read our other reinsurance renewal coverage here.