German reinsurance firm Hannover Re has beaten consensus as its second-quarter 2017 net income came in ahead of expectations, largely assisted by a quarter lacking in large losses and higher investment income.
Half-year net income rose 9.6% to EUR 535 million, up from EUR 488 million in the prior year, putting the reinsurer on track to reach its annual profit target of EUR 1 billion.
“Once again, both of our business groups, namely property & casualty and life & health reinsurance, as well as exceptionally good investment income all contributed to our pleasing half-yearly result,” commented Chief Executive Officer Ulrich Wallin.
However, market conditions and the effects of softening prices are clearly evident in the results of Hannover Re, with the reinsurance firm going for growth in writing considerably more premiums, but which have not translated into a considerably higher underwriting result.
This has been seen across the major reinsurers, where premium growth no longer means beating prior year results, as the business underwritten is no longer driving the same level of profitability for them.
Wallin acknowledged the difficulties faced; “We are nevertheless faced with a market situation that remains challenging going forward.”
In the half-year Hannover Re grew its gross premiums by 8.6% to EUR 9 billion, with a slightly higher retention rate and net premiums earned rising 5% overall.
Operating profits reached EUR 799.4 million, up from EUR 747.2 million so 7.0% higher than in the previous year.
In property and casualty reinsurance Hannover Re increased its gross written premiums by a substantial 17.3%, hitting EUR 5.4 billion, up from EUR 4.6 billion in the prior year.
The company experienced no major losses in P&C reinsurance during the second-quarter, helping it to free up capital that will help it to deal with any major loss events that occur through the rest of the year.
Hannover Re has booked loss reserves of EUR 291 million related to the Ogden Rate change for the first half-year, which impacted its P&C reinsurance result somewhat.
However, despite the considerable growth in premiums the soft market is evident, as Hannover Re reported an underwriting result for property & casualty reinsurance that had dropped by 10.5% to EUR 149 million, down from EUR 166.4 million in the prior year.
The company said that higher frequency losses and attrition had caused this decline, but on the back of a considerably enlarged book of business at least some of the decline has to be related to the generally less profitable underwriting environment in P&C reinsurance.
In life and health reinsurance Hannover Re reported a slight decline in premiums written of -2.4%, and noted that here market conditions are also challenging for it.
However, the reinsurer is seeing some new demand for reinsurance solutions offering capital relief for life and annuity insurers, which it has benefitted from.
In the U.S. mortality reinsurance business Hannover Re is set to take a charge, as higher-then-expected mortality for older underwriting years caused an impact.
Overall the life and health reinsurance operating result dropped 7.8% to EUR 165.2 million, down from EUR 179.1 million in the prior year.
Investment income has helped to offset some of the issues in life and health, increasing by 15.3% to EUR 656 million, which Hannover Re said is equivalent to an annualised return of 3.2%.
This helped the company to boost its profitability in the quarter, offsetting the lower underwriting results in P&C and life and health.
Looking ahead, Hannover Re believes it remains on track, expecting to see an underwriting result deemed “good despite the protracted soft market.”
The reinsurer targets a combined ratio of 96% for the P&C reinsurance unit, but its targeted earnings for life and health has declined to EUR 300 million, from EUR 350 million, due to the U.S. mortality business.
Overall, Hannover Re expects to grow gross premiums by at least 5% across the whole year, a target it is well on track for with the growth seen so far, and the EUR 1 billion net income target remains intact.
But like the other large reinsurers, if loss activity picked up it does not seem that it would take much to begin to erode profitability quite considerably at this stage of the cycle.
The full results from Hannover Re can be accessed here.