Hannover Re CEO shows optimism for P&C business

Hannover Re is showing more optimism for the property/casualty (P&C) business which has been particularly impacted by the current soft market after recording significant growth in the first quarter of 2017.

The improved outlook is mainly driven by the expectation that rates may recover as well as higher demand for structured solutions.

“In the medium term we expect that we will be able to increase the profitability of our business on the P&C side,” CEO Ulrich Wallin said during Hannover Re’s May 10 first quarter results presentation.

“This is largely based on the expectation that as results gradually get worse and a major catastrophes may occur, we will see some changes in the market which we feel we are well positioned to profit from,” Wallin explained.

Chief financial officer Roland Vogel added that Hannover Re has also seen “healthy” demand in in its property lines in several regions around the world in the first quarter, leading to further diversified growth.

Moreover, conditions are improving for the reinsurer’s growing retro coverage, according to the presentation.

Wallin is also increasingly optimistic for the firm’s structured solutions business.

“We continue to write new treaties largely in Europe. It’s surplus relief treaties in Europe motivated by Solvency II. We are a little bit more bullish on the volumes there,” Wallin noted.

In the first quarter of 2017, gross written premium in P&C grew 12.5 percent year-on-year to €2.82 billion driven mainly by demand for structured solutions.

“We have hit the growth target on the property/casualty line. There is some growth back in the business after 2016 when the topline was developing more sideways,” Wallin commented.

Net income in P&C grew 5.4 percent year-on-year to €215 million in the first quarter. During the period, Hannover Re recorded major losses of €134 million, which was below the budgeted €170 million.

Nevertheless, the combined ratio in P&C deteriorated slightly to 95.6 percent in the first quarter from 94.7 percent in the same period a year ago.

“The increase of structured reinsurance business generally leads to a higher combined ratio as the lower risk transfer also justifies lower margins,” Vogel explained. Moreover, profit recognition happens conservatively, which is the reason why the initial combined ratios for the new contracts are booked “remarkably” above Hannover Re’s target of 96 percent, inflating combined ratios, he added.

Hannover Re expects volumes and profitability in the P&C business to rise particularly in North America. Meanwhile, prior-year reserves help Hannover Re to stabilize underwriting profits. Rates in P&C remain under pressure due to excess capacity, mainly driven by investors looking for yield in a historically low interest rate environment.

“In the short term, the high level of loss reserves should help us to maintain acceptable and stable underwriting earnings,” Wallin said.

However, Hannover Re’s reserves were hit by the change in the UK’s bodily injury Ogden discount rate in the first quarter.

Hannover Re booked additional loss reserves to take these changes into account of €126 million in the first quarter. The claims are mostly in Hannover Re’s UK motor excess of loss business, Wallin said.

The change in the Ogden rate will require further additional reserves to be set aside in the course of the year, the company said in a statement.

Overall, Hannover Re booked a group net profit of €264.8 million in the first quarter, a 2.4 percent decrease on the €271.2 million it made a year earlier.

For the full year of 2017 Hannover Re expects net income to exceed €1 billion.

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