German reinsurer Hannover Re has posted strong growth in its net income over the first nine months of 2019, but its combined ratio (CR) missed targets due to the large losses incurred during the third quarter.
At September 30, Hannover Re’s net income for 2019 stood at €1.0 billion, representing a 38.3% increase when compared to the same period in the prior year, when net income was €725.3 million.
On the back of this improvement, the reinsurer has decided to raise its profit guidance for the current year to more than €1.25 billion, up from the originally envisaged €1.1 billion.
Earnings were boosted in particular by the performance of Hannover Re’s life and health segment, as well as improvements to investment income.
However, the property and casualty (P&C) reinsurance segment was impacted by €405.3 million of large losses in Q3 alone, clearly surpassing the quarterly budget of €295 million.
After a very moderate major loss experience in the first half of the year, Hannover Re took €186.6 million of losses from Hurricane Dorian in the US, €75.9 million from Typhoon Faxai in Japan, and €112.4 million due to the insolvency of UK tour operator Thomas Cook.
Altogether, the net burden of large losses over the first nine months of the year was higher than in 2018 (when losses totalled €364.6 million), but within the budget of €665 million set aside for this period.
The result was a deterioration of Hannover Re’s combined ratio from 96.8% last year to 98.6% at Q3 2019, meaning the company failed to reach the targeted level of no more than 97% for the full year.
The reinsurer intends to raise its major loss budget for 2020 from €875 million to €975 million, motivated by the continued expansion of underlying business. Its risk appetite will remain unchanged.
Despite the losses, Hannover Re did continue to see a “growing turn for the better” in the development of P&C prices and conditions this year, although it noted that not all areas have yet returned to adequacy.
Gross written premium in P&C reinsurance increased by 20.7% to €11.7 billion over the nine-month period, compared with €9.7 billion previously. This was due to rate increases and appreciable growth, most notably in North America, Asia, Germany, and structure reinsurance business.
Operating profit for P&C reinsurance declined by 8.4% to €919.0 million, down from €1.0 billion last year, and the segment’s contribution to the Group’s overall net income fell by 4.8% to €640.1 million.
In the life and health reinsurance segment, the picture was more positive, as Hannover Re tripled its operating result from €155.2 million to €477.7 million, supported by improved profitability in the US, among other factors.
Gross written premium for this business also improved by 7.6% to €5.7 billion and the segment’s investment income grew by 43.0% to €527.8 million. Life and health’s contribution to overall net income increased to €402.9 million, up from €93.0 million last year.
On the investment side, Hannover increased its portfolio of assets under management to €47.8 billion, up from €42.2 billion at year-end 2018, and ordinary investment income was up 4.8% to €1.0 billion, driven by fixed-income securities and a rise in earnings from real estate and private equity. Annualised return on equity was 13.7%.
Overall, the Group’s gross written premium increased by 16.0% to €17.4 billion, while operating profit improved by 20.6% to €1.4 billion.
“After nine months we are looking at an excellent result and a very good return on equity”, said Jean-Jacques Henchoz, Chief Executive Officer of Hannover Re.
“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,” he explained. “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.”
Henchoz continued: “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.”