Profits dip at Hannover Re but it heralds ‘bottoming out’ of P/C rates

Profits and gross written premiums (GWP) for Hannover Re Group fell in the second quarter of 2016, largely due to the performance of its property/casualty reinsurance segment, which it stressed was facing challenging market conditions.

However, the company also said a bottoming out of rates could now be discerned in the P/C market and its life and health reinsurance grew and performed well.

Hannover Re's group net income decreased by 14.8 percent in the second quarter of 2016 to €214.9 million compared with €252.2 million for the same period in 2015.

The group's net income for its property/casualty reinsurance segment was €171.9 million, a 30.4 percent decrease from €247 million, the result from last year.

It attributed this to continued competition and excess capacity as well as high levels of losses in the period compared with the same period a year earlier.

“Supply continued to far exceed demand in worldwide property and casualty reinsurance, although further indications of a bottoming out in prices could be discerned. In some areas this was also true of the treaty renewals as at 1 April 2016, which passed off satisfactorily on the whole for Hannover Re,” said Ulrich Wallin, chief executive officer.

He added: “The incidence of major losses in the first half-year was considerably in excess of the comparable period. The losses incurred by Hannover Re in the second quarter were significantly higher than expected. Nevertheless, in view of the fact that the amount budgeted for the first quarter of 2016 had not been fully utilised, the net burden for the company at EUR 352.7 million (EUR 197.4 million) was still within the overall bounds of expectations for the first six months.”

The net income for its life and health reinsurance segment increased by 191.5 percent to €52.7 million in Q2 2016, a big increase on the €18.1 million it made in for the same period in 2015.

Hannover Re reported GWP of €4 billion for the three-month period ending June 30, a decrease of 4 percent compared with €4.2 billion in the same period in the previous year.

Specifically, the GWP for its property/casualty reinsurance segment for the second quarter was €2.1 billion, a 9.8 percent decrease from €2.4 billion for the same period in 2015.

However, its life and health reinsurance segment generated GWP of €1.9 billion, a 3.5 percent increase from €1.8 billion for the previous year.
Hannover Re's combined ratio for its property/casualty reinsurance segment decreased 1.1 percentage points to 96.1 percent in the second quarter of 2016.

"The half-yearly profit benefited overall from pleasing investment income, solid results in life and health reinsurance and an acceptable result in property and casualty reinsurance," said Wallin.

"Nevertheless, increased loss expenditure in the second quarter and diminished return opportunities in the investment portfolio did lead to a smaller profit."

In an in-depth analysis of its results and the market more generally, the company went onto stress the challenging environment it is operating in but also noted that some bottoming out of the market is starting to occur.

“The half-yearly results presented today put Hannover Re well on track to achieve its targets. It remains the company's expectation that net income after tax will reach at least EUR 950 million for the full 2016 financial year. This is conditional on major loss expenditure not significantly exceeding the budgeted level of €825 million and assumes that there are no unforeseen distortions on capital markets. Based on constant exchange rates, the company anticipates a stable or slightly lower gross premium volume,” it said.

“The general climate in property and casualty reinsurance remains challenging; this was demonstrated again by the treaty renewals as at 1 June and 1 July 2016, when parts of the North American portfolio, agricultural risks and business from Latin America traditionally come up for renewal. This was also the main renewal season for business in Australia.

“In North America rates and conditions are still under pressure owing to the absence of market-changing large losses; however, increasing indications of a bottoming out can be discerned in both the property and casualty lines. Hannover Re boosted its premium, principally owing to the expansion of existing customer relationships. The pressure on prices for US and European property catastrophe business eased in comparison with the previous year's renewals. In Canada the destructive forest fires led to the anticipated rate increases in property business, an area in which the company offered additional capacities.

“In life and health reinsurance Hannover Re anticipates good opportunities to generate further profitable new business in the second half of the year.

“Hannover Re's targeted return on investment for the full 2016 financial year remains unchanged at 2.9 percent. The company is not currently planning any significant changes to its allocation of investments to the individual asset classes.

“Hannover Re still envisages a payout ratio for the dividend in the range of 35 percent to 40 percent of its IFRS Group net income. This figure is likely to increase in light of capital management considerations if the company's comfortable level of capitalisation remains unchanged.”