Hannover Re’s life and health reinsurance segment performed well in the opening six months of 2018, however, the reinsurer’s decision to increase rates across a block of U.S. mortality business, in light of its negative earnings situation, is expected to result in considerable strains during the second-half of the year.
The German reinsurance giant decided last year to analyse its U.S. mortality business amid rising losses that had been adversely impacting the company.
Overall, and excluding mortality business, Hannover Re’s life and health reinsurance segment performed better than expected in H1 2018, recording an operating profit of €219 million, which is an increase of 33% on the previous year.
The reinsurer noted, in its H1 2018 earnings release, that the performance of life and health reinsurance in H1 highlights the potential for healthy profits in this business, but in order for this to be fully realised, the negative earnings situation in U.S. mortality needs to be contained.
Based on analysis of the business, and particularly with respect to a large block of business acquired in early 2009, in Q2 2018 Hannover Re decided to implement consistent reinsurance rate increases across “all similar treaties that form part of this business,” which gives ceding companies the right to recapture treaties.
“The right of ceding companies to recapture treaties will, however, lead to considerable strains on the IFRS result in life and health reinsurance in the second-half of 2018,” warned Hannover Re.
Adding that, in the third-quarter of 2018, it’s already been notified about recaptures from ceding companies in the period until August 6th, 2018, that will drive a pre-tax charge of $264 million.
In an extreme scenario, says Hannover Re, this figure could jump to between $500 million and $600 million. Should the recapture charges amount to this much, the operating profit of €200 million expected for the life and health reinsurance unit in 2018, would not be attainable, warned the reinsurer.
While the impact of rate increases across the block of business and subsequent recaptures is expected to result in short-term strains, in the long-run, the recaptures will have a positive effect as Hannover Re avoids future losses that would have occurred absent the rate increases.
“On the other hand, the charge to earnings from US mortality business in subsequent years would be extensively eliminated, and we could therefore anticipate a substantial surge in profitability,” continued Hannover Re.
Hannover Re’s Chief Executive Officer (CEO), Ulrich Wallin, commented: “Bearing in mind the business development to date, we confirm our net income target of more than EUR 1 billion for 2018, although strains will be incurred in the second half of the year from portfolio management actions in connection with our US mortality business. This is something that we are willing to accept because we are thereby avoiding higher losses in subsequent years.”
The reinsurer clearly sees the potential for its life and health reinsurance segment to produce solid profitability and generate increased value for the firm, but, recognises the need to take a smaller hit now, by taking actions on its poorly performing U.S. mortality book, in order to reap the benefits in the future and ultimately ensure the unit can operate more profitably.