Hannover Re will realign its portfolio in response to the soft market
German reinsurer Hannover Re is refocusing its property/casualty business in terms of which regions and lines of business it will focus as it looks to avoid markets where rates are particularly unattractive.
Hannover Re is reducing its exposure to China, but growing the business in North America, executives explained at a Feb. 2 conference call on property/casualty (P&C) treaty renewals. It is also boosting the structured reinsurance business following other competitors like Swiss Re.
The reinsurance industry has been facing a soft market for some time as overcapacity and the absence of very large losses has driven down rates.
“The demand and supply dynamic has not changed,” said Jürgen Gräber, member of the executive board for coordination of worldwide P&C reinsurance during the call. At the January renewals, “there was an oversupply of capacity both from traditional markets as well as alternative markets. […] This was the fourth consecutive year of rate reductions in many lines of business, some of which actually were below the technical minimum.”
Within Hannover Re’s global reinsurance, worldwide P&C treaty reinsurance premium dropped 17.1 percent year-on-year to €776 million in the 1.1.2017 renewals. It proved impossible to avoid making share reductions in unprofitable business - above all in China -, which consequently led to lower premium income in this market, the company said in a statement.
“We have done a deep-dive about the profitability and only wrote those treaties where we felt the profitability is up to our margin requirements and this led to a reduction between $50 million to $70 million in premium volume just to our Chinese business,” Gräber said.
Hannover Re is also shrinking its exposure to specialty lines worldwide like marine and aviation. In marine, premium volumes shrank 9.2 percent year-on-year to €113 million in the January 2017 renewals.
“The marine business has had [rate] declines in the last couple of years despite meaningful loss activity,” Gräber said. “We saw the rates in our book declining 7.5 percent to 10 percent,” he noted.
Low rates are also driving Hannover Re to shrink its aviation book, but the company claims that it is still making money with it.
But at the same time, the North America business grew 6.5 percent to €980 million. The economic recovery in the United States led to an increase in insurance premiums and hence to solid demand for reinsurance protection, the company said in the statement. The pressure on rates has eased appreciably, the company added.
“Clients with whom we had a good relationship on the property side and also our regional accounts grew significantly. We were able to gain 23 new regional customers, which is the core of our property business in the US,” Gräber said.
The treaty renewals in Canada passed off very favourably: significant rate increases were secured under virtually all programmes in property business, driven crucially by the heavy losses caused by devastating wildfires in the province of Alberta.
“Due to a selective underwriting stance we could avoid some of the negative effects of the soft market because we concentrated with our very wide variety of geographies and products on those which still offer better opportunities,” CEO Ulrich Wallin said.
A segment Hannover Re is particularly optimistic about is structured reinsurance, similarly to competitors like Swiss Re.
In the January 2017 renewals, Hannover Re increased its structured reinsurance premiums by €710 million to €1.78 billion, driven by North America, Europe and Latin America.
“These are global surplus relief covers,” Wallin said. These products are popular in the US and more recently in Canada, and demand is growing significantly in the UK and Germany, he explained.
Hannover Re expects that structured reinsurance will be the primary growth driver for P&C premium in 2017. The company has raised its premium target for 2017 and now expects an increase in the low single-digit percentage range.
“Our financial solutions business is going well and we still have a very good pipeline of treaties,” Wallin said. “For the future development we are quite optimistic on that business.”
The German reinsurer has also raised its 2017 guidance for group net income from more than €950 million to more than €1 billion. The profit guidance was changed mainly due to successful conclusions of a number of financial solutions transactions in life & health.
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