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Hannover Re remains on target, despite using up major loss budget in Q3

8th November 2018 - Author: Steve Evans

Global reinsurance player Hannover Re said this morning that it remains on target for its full-year profit, despite the impacts of catastrophe events in the third-quarter using up its full major loss budget.

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Hannover Re noted that its group net income was up by 32.1% at September 30th to EUR 725.3 million and as a result it confirms it is on track to reach its profit guidance of more than EUR 1 billion for 2018.

The company said that while large losses utilised its full budget during the quarter, they still fell within its expectations and so enabled it to remain on track.

“In property and casualty reinsurance developments in the third quarter were dominated by large losses from typhoons in Japan and hurricanes in the United States”, CEO Ulrich Wallin explained. “The resulting strains for Hannover Re were, however, in line with our expectations. For this reason, and thanks to the good income from our investments, we are well on track to achieve our profit target for 2018.”

Hannover Re has been growing its book throughout 2018, achieving gross written premium growth of 11.2% across the first nine-months of the year to EUR 15.0 billion (up from EUR 13.5 billion) across the business.

Growth was primarily driven by significant expansion in structured reinsurance solutions in property and casualty reinsurance business, the reinsurer said.

Overall the company retained a little more of the premium as well, at 90.8% versus 90.1% in the prior year, suggesting greater retention of underwriting profits.

In property and casualty reinsurance Hannover Re noted the competitive nature of the June and July renewals, which saw the firm growing into the P&C reinsurance sector and achieving significant rate increases in some cases on programs that had suffered severe losses, the firm said.

Despite this, the company assures that it is managing its catastrophe exposures, keeping them within risk appetite which is unchanged from the prior year.

Property and casualty reinsurance underwritten premiums grew 17.8% to EUR 9.7 billion (up from EUR 8.2 billion), which Hannover Re said is thanks to rate increases and substantial growth in structured reinsurance.

The company used up almost all its EUR 279 million large loss budget in the third quarter, with loss expenditure reaching EUR 271 million. Typhoon Jebi in Japan resulted in EUR 103 million of losses, while Typhoon Prapiroon cost the firm EUR 54 million. Hurricane Florence resulted in a EUR 40 million hit as well. Man-made large losses resulted in just under EUR 30 million of impacts.

However, despite these large loss events during Q3, large loss expenditure only reached EUR 364.6 million for the first nine-months, so well below the full-year pro-rata budget of EUR 630 million.

The P&C reinsurance combined ratio reached 96.8%, which is slightly ahead of planned 96%, which the firm said was influenced by the increasing frequency of smaller and mid-sized losses. For Q3 alone the combined ratio was 98.7%.

Overall, operating profit (EBIT) in P&C reinsurance was up 66.8% to EUR 1,003.6 million, with the EBIT margin coming in above the 10% minimum target at 12.5%. While group net income for property and casualty reinsurance increased by 49.8% to EUR 672.4 million.

In life and health reinsurance Hannover Re has been affected by U.S. mortality business in recent quarters, but is making efforts to improve the performance of this business.

“In life and health reinsurance the steps taken to improve US mortality business are weighing on profitability,” Wallin explained. “These strains will be largely eliminated for the relevant treaties in subsequent years, and we therefore anticipate substantially improved earnings going forward.”

U.S. mortality business recaptures has an impact on the profits of this unit, resulting in pre-tax charges of EUR 218 million or USD 260 million in the quarter, an amount which is expected to increase further in Q4.

Hannover Re expects the full-year impact of this will be around USD 350 million to USD 400 million, but said it will be offset by an improved risk experience in U.S. mortality business over the year so far.

Despite stable gross written premiums, the life and health reinsurance business saw its operating result (EBIT) contract by 24.6% to EUR 155.2 million, while group net income reached EUR 93.0 million (down from the prior years EUR 135.7 million).

Investments drove profitability during the quarter with a return of 3.3% and the portfolio of assets growing to a huge EUR 41.5 billion during the period.

Looking forward to the rest of 2018, Wallin said, “Hannover Re is confirming its targets for the current financial year. The good results for the first half-year and a successful third quarter with large losses in line with our expectations should enable us to absorb the aforementioned strains from our US mortality business.”

The firm expects premium growth of 10% for the full-year, a large part of which is expected to be P&C reinsurance and structured reinsurance.

If large losses remain within expectations and budget for the rest of the year, Hannover Re hopes to hit its 96% combined ratio target, and looking ahead it hopes the mortality book will stabilise as well.

“In the coming year the result from US mortality business should improve substantially,” Wallin noted. “We also anticipate a stable profit contribution from property and casualty reinsurance and therefore expect Group net income in the order of EUR 1.1 billion.”

Looking forward to 2019, Hannover Re hopes to continue to grow its premiums by single digits, which is lower than this year and suggests it does not expect a particularly attractive rate environment next year.

However, the company did say that it is raising its large loss budget for the first time in three years, from EUR 825 million to EUR 875 million for 2019.

While its risk appetite remains unchanged, the firm said that this reflects the growth in the underlying business, hence is a prudent move as with a larger P&C reinsurance book, even keeping catastrophe exposure in-line the firm will be more exposed to volatility should loss activity be higher.

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