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Hannover Re 2017 income nears EUR 1 billion despite catastrophes

13th March 2018 - Author: Steve Evans

German reinsurer Hannover Re has reported net income of EUR 958.6 million for the full-year 2017, as its results showed how its global scale and diversity has helped them firm to a reasonable result, despite the major catastrophic losses of last year and a plummeting underwriting result in P&C reinsurance.

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In fact, Hannover Re beat its guidance for profit of EUR 800 million and reports a return on equity of 10.9% for 2017, down from 13.7% for 2016. The firms combined ratio came in at 99.8%, while the major loss expenditure of EUR 1.1273 billion was above budget.

“The 2017 financial year was a challenging one; it was the year with the heaviest burden of large losses in our company’s history. While the generated Group profit fell short of the previous year’s good result, it is still pleasing at EUR 959 million,” commented Chief Executive Officer Ulrich Wallin. “Protecting our clients against catastrophic events is the core of our business model. The fact that we achieved such a good performance despite the large number of losses shows that we have adequately mapped our exposures in our risk management system and the losses fit with the expected values calculated for our risk appetite.”

The company saw 2017 as “a challenging market environment” with the reinsurance sector still over-capitalised and pressure coming from insurance-linked securities (ILS) investors, whose appetite for insurance risks remained strong.

It was a strong year for underwriting, with premiums written rising by 8.8% to EUR 17.8 billion in 2017 and premiums earned were up by 8.5%.

Hannover Re’s operating profit (EBIT) shrank to EUR 1.3644 billion (down from EUR 1.6893 billion in 2016), but the reinsurer called this “a pleasing performance” against the backdrop of record levels of natural catastrophe losses.

There are a number of factors that have helped Hannover Re to report such good results though, not least the investment return which the company said was “exceptionally good” as investment income increased by 10.9% to EUR 1.289 billion for the year.

Also important and helping Hannover Re to report better results were reserve releases, which the reinsurer made available where reserves were no longer required to be held for prior year losses.

Analysts at Morgan Stanley said that around EUR 1.1 billion of reserves were released which had a large impact on the combined ratio of around 11.1 percentage points.

In fact, the analysts see Hannover Re’s normalised combined ratio at 108.1% for 2017, which reflects the importance of reserves when major catastrophe years occur, as they allow large reinsurers to stay on track for profits despite heavy loss loads.

In property and casualty reinsurance Hannover Re noted the continuation of competitive market conditions in 2017, saying, “The situation in property and casualty reinsurance initially showed little change in the 2017 financial year. The state of the market remained intensely competitive; what is more, the market for catastrophe bonds continued to make capacity available. Hannover Re was nevertheless able to act on profitable business opportunities in the treaty renewals. All in all, the company is satisfied with the development of its property and casualty reinsurance portfolio, especially because early tendencies towards an increase in prices could be discerned in the second half of the year following the major loss events.”

But the impact of catastrophe events is the main story in P&C reinsurance for the firm, with EUR 749.4 million of losses from hurricanes Harvey, Irma and Maria, as well as another EUR 101.1 million from the California wildfires.

The result was a total major loss expenditure of EUR 1.1273 billion for the year, above the large loss budget of EUR 825 million.

In the end the underwriting result came in at just EUR 15.5 million for the year, down from EUR 503.1 million for 2016, with a combined ratio of 99.8% down from 93.7%.

As a result the P&C reinsurance operating profit (EBIT) fell to EUR 1.1202 billion due to the impact of large losses, while the group net income fell by 11.8% to EUR 837.3 million (down from EUR 949.9 million).

Life and health reinsurance fell “short of expectations” Hannover Re noted, a disappointment in a year where P&C had been so affected by loss events.

Hannover Re reported that life and health reinsurance made a “less satisfactory” profit contribution for the year, as operating profit (EBIT) reached EUR 245.2 million, down by 28.6% fromm EUR 343.3 million in 2016 and falling “well short of the previous year’s figure.”

Part of the issue was a higher than expected mortality experience for some older blocks of U.S. life reinsurance business, which was exacerbated by Hannover Re taking one-time charges of around EUR 45 million due to commutation of loss-making treaties as it managed its portfolio.

Group net income in life and health reinsurance fell from 2016’s EUR 252.9 million to EUR 172.6 million for 2017.

Looking forward, Hannover Re hopes for a better year in 2018 as it will target higher rates where possible at renewals.

The reinsurer expects single-digit gross premium growth for 2018 and group net income of over EUR 1 billion, as long as its major loss expenditure does not exceed a budgeted EUR 825 million. The firm recently said it had a solid platform to take advantage of any improvement in rates.

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