- Reinsurance revenue reaches EUR 6.6 billion
- Large losses in property and casualty reinsurance within the bounds of expectations
- Result in life and health reinsurance well on track
- Return on investment ahead of target at 2.7%
- Group net income of EUR 484 million very well on track for 2023 full-year target
- Return on equity well above minimum target at 20.8%
- Guidance for 2023 Group net income confirmed
- Contractual service margin amounts to EUR 7.4 billion
Hannover Re generated an increased profit in the first quarter of 2023 and confirms its Group net income guidance for the full financial year.
"With the result for the first three months we have achieved more than a quarter of the full-year guidance of at least EUR 1.7 billion and are thus very much on course," said Jean-Jacques Henchoz, Chief Executive Officer of Hannover Re. "At the same time, we have further strengthened our resilience. In the face of the current challenges we are thereby remaining a reliable partner for our clients."
Hannover Re is reporting its results for the first time based on the new financial reporting standards IFRS 17 and IFRS 9, both of which have been applicable since 1 January 2023.
Group net income rises to EUR 484 million
Reinsurance revenue remained broadly unchanged at EUR 6.6 billion (previous year: EUR 6.6 billion). A decline of 0.9% would have been booked at constant exchange rates. The new business value (net) increased to EUR 1.5 billion (EUR 1.0 billion).
The reinsurance service result, reflecting the profitability of underwriting activity including business ceded (primarily retrocessions and insurance-linked securities), climbed by 35% to EUR 568 million (EUR 421 million). The reinsurance finance result amounted to EUR - 167 million (EUR -122 million) adjusted for exchange rate effects.
The operating profit (EBIT) increased by 21% to EUR 720 million (EUR 598 million). Group net income was up by 13% at EUR 484 million (EUR 428 million). Earnings per share thus amounted to EUR 4.02 (EUR 3.55).
"Initial application of the new financial reporting standards led to a number of changes in our key performance indicators that reflect our business model even better," said Chief Financial Officer Clemens Jungsthöfel. "Hannover Re's successful business development and extremely robust capital strength remain unaffected."
Return on equity of 20.8% remains above minimum target; continued robust capital adequacy ratio under Solvency II
The shareholders' equity of Hannover Re as at 31 March 2023 totalled EUR 9.5 billion (31 December 2022: EUR 9.1 billion). The annualised return on equity amounted to 20.8% (previous year: 16.8%) and outperformed the minimum target of 1,000 basis points above the risk-free interest rate. The book value per share stood at EUR 79.03 (31 December 2022: EUR 75.12).
The contractual service margin (CSM) surged by an appreciable 13% to EUR 7.4 billion (31 December 2022: EUR 6.6 billion). The increase was driven largely by the very positive new business value. The risk adjustment increased by 2.9% to EUR 3.8 billion (31 December 2022: EUR 3.7 billion).
The capital adequacy ratio under Solvency II, which measures Hannover Re's risk-carrying capacity, amounted to 261.2% at the end of March and thus remained comfortably above the limit of 180% and the internal threshold of 200%.
Large losses in property and casualty reinsurance within the bounds of expectations
The expenditures from catastrophe losses in property and casualty reinsurance were within the bounds of expectations in the first quarter. At the same time, the main renewal season in property and casualty reinsurance on 1 January 2023 delivered significantly better risk-adjusted prices and conditions for Hannover Re.
Reinsurance revenue in property and casualty reinsurance was broadly unchanged at EUR 4.6 billion (EUR 4.6 billion). A key factor here, among others, was a quality-focused underwriting approach in recent renewals that contributed to a substantially higher new business value. The new business value (net), comprised of the CSM and the loss component from new business, increased by a gratifying 61% to EUR 1.4 billion (EUR 889 million).
Expenditures from large losses in the first three months of the year came to EUR 334 million (EUR 336 million). This was within the large loss budget of EUR 356 million estimated for the first quarter.
The largest individual losses were the earthquake in Turkey with net expenditure of EUR 201 million as well as an intense cyclone and major flooding that impacted New Zealand at a cost of EUR 52 million and EUR 47 million respectively.
The reinsurance service result improved by 67% to EUR 315 million (EUR 189 million). The previous year’s result included provisions for losses from the Ukraine war and for additional reserves in connection with prior-year losses. The combined ratio in property and casualty reinsurance improved to 92.3% (95.6%). The reinsurance finance result, which includes in particular the interest accretion on technical reserves discounted in previous years, amounted to EUR -129 million (EUR -93 million).
Net income from investments in property and casualty reinsurance grew by 38% to EUR 298 million (EUR 216 million).
The operating profit (EBIT) rose by 56% to EUR 466 million (EUR 299 million). Hannover Re is thus well on course to achieve the full-year target of at least EUR 1.6 billion.
Result in life and health reinsurance well on track
The result for the first quarter in life and health reinsurance surpassed expectations. This was driven primarily by sustained strong demand in the financial solutions segment and for solutions designed to protect against longevity risks as well as by sharply lower pandemic-related losses.
Reinsurance revenue contracted by a modest 2.6% to EUR 2.0 billion (EUR 2.0 billion). The new business value (net) in the first quarter fell short of the previous year's level, amounting to EUR 77 million (EUR 117 million).
The Covid-19 pandemic has now transitioned to a milder endemic state. This has been accompanied by a trend towards fewer severe illnesses and more rapid recovery. Pandemic-related strains were not material in the first quarter at EUR 11.5 million.
The reinsurance service result improved accordingly by 9.0% to EUR 253 million (EUR 232 million), reflecting in particular better profitability in the area of mortality covers. The reinsurance finance result before currency effects decreased to EUR -38 million (EUR -29 million).
Net income from investments in life and health reinsurance, which had benefited from two sizeable special effects in the previous year, consequently contracted by 53% to EUR 83 million (EUR 177 million).
The operating result (EBIT) amounted to EUR 253 million (EUR 300 million) and hence reached a good level for achieving the full-year target of at least EUR 750 million.
Return on investment ahead of target at 2.7%
The portfolio of investments totalled EUR 57.0 billion as at the end of March (31 December 2022: EUR 55.3 billion).
In an effort to counteract the sharp surge in inflation, central banks have responded with sometimes steep interest rate hikes, the positive effects of which will only be felt in investment income after a time lag. As a hedge against inflation risks Hannover Re has built up a portfolio of inflation-linked bonds in recent years. This delivered a positive profit contribution in the first quarter of EUR 39 million.
The income from investments of EUR 381 million (EUR 393 million) was only slightly below the level of the previous year's quarter. The resulting annualised return on investment amounted to 2.7% and thus beat the full-year target of at least 2.4%.
Outlook for 2023: Net income of at least EUR 1.7 billion
For 2023 Hannover Re expects to grow the reinsurance revenue in total business by at least 5% assuming constant exchange rates. The currency-adjusted growth in reinsurance revenue should again be stronger in property and casualty reinsurance than in life and health reinsurance.
The renewals in traditional property and casualty reinsurance on 1 April 2023, which are focused on the Asia-Pacific region and North America as well as some lines of specialty business, once again resulted in significantly better risk-adjusted prices and conditions. Volume growth reached 7.1%, while the inflation- and risk-adjusted price increase for the renewed business amounted to 6.0%.
"In the renewal negotiations at 1 April we were able to build further on the significant improvements in prices and conditions achieved in the 1 January renewals," Henchoz said. "We have thus put in place another major cornerstone to secure Hannover Re's long-term profitability."
For 2023 Hannover Re anticipates a contribution of at least EUR 1.6 billion from property and casualty reinsurance to the operating result (EBIT), with life and health reinsurance expected to contribute at least EUR 750 million.
Group net income for the full year should reach at least EUR 1.7 billion. This assumes that large loss expenditure does not materially exceed the budgeted level of EUR 1.725 billion, no unforeseen distortions occur on capital markets and the Covid-19 pandemic does not have any further significant impact on the result in life and health reinsurance.
The investment portfolio should continue to show moderate growth – assuming stable exchange rates and interest rate levels. The return on investment from the asset portfolio should reach at least 2.4%.
Hannover Re's dividend policy remains unchanged. It is envisaged that the ordinary dividend will at least be on the level of the previous year. This will be supplemented by a special dividend provided the capitalisation exceeds the capital required for future growth and the profit target is achieved.