Hannover Re attempts to set new targets, confirms uber-prudence instead

Global reinsurance giant  Hannover Re took a run at signalling new financial targets for 2023, but may have succeeded instead in reconfirming its famed uber-conservative approach to the business, brokerage analysts assured investors who had sold off on word of the group's new targets.

”As is often the case with Hannover Re, the group's forward guidance appears relatively prudent,” analysts at Jeffries told market participants in an early understatement of the story.

Shares lost some 6.3% on the announcement February 1 before finding any traction and remain 4.6% below pre-announcement levels as of mid-afternoon the next day.

The net profit figure may “screen as disappointing” versus the to-date consensus of €1.9 billion given the likely mid double digit uplift from the switch in accounting standard to IFRS17, analysts at Deutsche Bank Securities said in their note to investor clients. But take it in context.

“We are actually very relaxed with Hannover Re’s disclosure,” analysts nonetheless claimed. “It simply highlights the company’s typical conservatism in guidance.”

Not everyone was so relaxed. Shares of the German behemoth went 5% lower on word of the new 2023 targets.

Hannover Re CFO Clemens Jungsthöfel (pictured) told analysts after the announcement that the group would use the excess margin from the hard market to rebuild prudency buffers. Guidance had also been built conservative to protect against increased volatility possible under IFRS17, especially given the lay of some asset markets in 2023.

Hannover Re may have burnt through some €300 - 400 million of its reserve redundancy in 2022 in order to deliver on its annual profit guidance, analysts at Berenberg concluded. Reserve redundancy had stood at €1.7 billion at end-2021.

Berenberg calls it a classic move from the Hannover Re playbook. Putting heightened hard-market margins to reserves “goes hand in hand with Hannover’s business model and its desire to deliver through the cycle.”

Worse-sounding yet from the guidance announcement, reinsurance revenues - the IFRS17 replacement for measures of premium - are set to rise by only 5%-plus, a thoroughly underwhelming figure if taken against more dramatic headlines outlining the hardness of the reinsurance market.

The shift into IFRS17 alone could take the steam out of the market revenue read. Hannover Re estimates that its 2022 reinsurance revenues would have been some 25 to 30% below gross written premium as the new measure adjusts for ceding commissions and non-distinct investment components, removes unearned premiums and discounts against a risk-free rate.

But a move by Hannover Re away from quota share to the benefit of XoL structures, potentially a boon to margin, could further the impression, analysts at Berenberg remind. They see “less premium volume but more margin” in the move.

“These dynamics could also help to explain the cautious ‘at least 5% growth’ guidance, in our view.”

The 5% revenue target also looked underwhelming when taken against the roughly 20% boost which Hannover Re made to its net major-loss budget for 2023 to €1.725 billion.

Hannover Re CFO Clemens Jungsthöfel said that increase results in large part from “substantial” 2022 growth above initial estimate “so there is kind of a catch-up effect here as well.” Nat cat did not grow as a portion of the book at the 1.1 renewals, he added.

Management did not offer insights into what level of retro protections might stand behind the net exposure guidance, although Hannover Re had given encouraging signals on the matter late in 2022. Details on the group’s 1.1 renewals are due February 8.

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