Monte Carlo, 9 September 2013:
Competitive pressure intensified in some reinsurance lines on the back of the favourable outcome of the treaty renewals as at 1 January 2013. This is especially true of US property catastrophe business. Sustained good results posted by insurers and additional capacities from the market for catastrophe bonds prompted corresponding rate reductions. Yet in most cases the rate level was still commensurate with the risks. For Hannover Re the decrease in margins has limited implications, since the company's market share of US catastrophe covers is disproportionately low.
Owing to the protracted low level of interest rates and the associated drop in investment income, discipline on the technical pricing side remains very high.
"In recent renewals we continued to pursue our selective underwriting policy and have systematically written only business that satisfies our margin requirements", Chief Executive Officer Ulrich Wallin emphasised during a press conference in Monte Carlo. Going forward, Hannover Re sees a continued stable need on the part of its clients for high-quality reinsurance protection. This is true not only of mature markets but also growth markets in Asia and Latin America as well as business with agricultural risks.
Looking ahead to the upcoming renewal phases, Hannover Re expects to be able to achieve conditions that appropriately reflect the risks. Demand for reinsurance protection should be stable overall. This expectation is supported by the rising concentrations of values in urban conurbations and by the adoption of risk-based solvency systems in Europe and Asia. The most recent flood events in Europe and Canada should at least have a stabilising effect on rates. The loss experience from natural catastrophes until year-end will be a particularly crucial factor in price movements.
Hannover Re expects the three pillars of its non-life reinsurance portfolio – target markets, specialty lines and global reinsurance – to develop as explained below in the treaty renewals as at 1 January 2014:
I. Target markets
North America
On the whole, the upturn on the North American primary insurance market has been sustained, with rates set to rise further. While non-proportional business has been affected only indirectly, the reinsurance market has profited directly in the area of proportional acceptances. Hannover Re has boosted its property business here by around 10%. The company has maintained its well diversified, non-proportional book of business on a high level.
Casualty business has seen rate increases for two years now, most recently in the range of 5% to 10%. Reinsurance prices in non-proportional casualty business, on the other hand, have been stable. Despite the continued prevailing trend among some US insurers to raise their retentions, Hannover Re has enjoyed adequate opportunities to gradually enlarge its portfolio.
Germany
While the rehabilitation efforts in motor insurance – which are likely to continue in 2014 – are showing further progress, particularly heavy losses have been recorded in the own damage lines in the current year. Both the flooding in June and severe localised hail events in a number of federal states led to appreciable losses for insurers and reinsurers alike. Homeowners' insurance, which has been running at a loss for years, was also impacted by these events, as a consequence of which the steps being taken to restore this line to profitability failed to bring relief.
Industrial and commercial insurance lines have fared better so far than in the previous year; there were still, however, no indications of a long overdue improvement in premiums.
In view of the heavy loss expenditure incurred to date, considerable improvements in conditions are anticipated for the German market on 1 January 2014.
II. Specialty lines
Aviation
The increase in available capacities on the direct market has continued in 2013. This development, combined with the absence of sizeable major losses, is putting the already low price level under strain. Despite a higher claims frequency in 2013, especially in hull business, a significant improvement in the market climate cannot therefore be expected. As one of the leading markets for aviation reinsurance, Hannover Re sees further good business opportunities in this environment.
Marine
The hard market climate in marine reinsurance should be sustained. The deteriorations subsequently reported by clients in their losses from Hurricane Sandy during the current year have not been reflected in the reinsurance programmes so far and will be priced into the renewals. Furthermore, higher salvage costs for the "Costa Concordia" as well as increased liability claims will cause conditions to harden under the affected programmes. Even though the reinsurance of offshore energy risks has not to date been impacted by major losses in 2013, a stable price level is expected here.
Credit and surety
Following exceptionally low claims activity over the past three years, loss ratios in credit and especially surety insurance climbed on account of the slowdown in economic growth around the world. Loss ratios in the area of political risks remained unchanged on a good level. It is anticipated that insurance and reinsurance prices will remain broadly stable.
Insurance-Linked Securities
Hannover Re continues to use – as it has in the past – the capital market to protect against peak exposures. It is also increasingly the case that interesting opportunities are available here to generate low-risk, stable margins for Hannover Re, such as through the provision of services (fronting and transformation). To this end the company works together with carefully chosen specialised ILS investors, for example by fronting business selected by an investor and then passing it on in packaged form to this investor. In view of the advantageous situation enjoyed both by the investor and the reinsurer/insurer, Hannover Re anticipates steadily growing demand over the coming years.
Structured reinsurance/Advanced Solutions
In light of the adoption of risk-based models for calculating solvency requirements within and beyond the borders of the European Union, Hannover Re expects to expand this business. Demand for innovative and tailor-made reinsurance solutions is likely to continue rising. This development includes aggregate covers, which protect the net retention of clients against significant loss scenarios with a low probability of occurrence.
III. Global reinsurance
Global catastrophe business
Global catastrophe business has experienced further price erosion in the course of 2013, driven especially in North America by capacities made available in the ILS market. Prices for natural catastrophe covers are nevertheless still on a good level and the attainable margins are broadly adequate. Hannover Re expects the individual markets to develop as follows:
North America: While price increases are anticipated in Canada in the aftermath of the flood events, rates in the United States are likely to decline further in some segments owing to an adequate supply of capacity. Particularly marked of late was the drop in prices for business in Florida, with further movements here dependent on how costly the present hurricane season proves to be. The implications for Hannover Re, which writes only a modest portfolio in Florida, are limited.
Europe: Slight rate erosion was initially recorded in the current year. The severe floods in Germany and other European countries as well as hail events will nevertheless likely prompt rate increases. Hannover Re expects prices for the next renewals to be risk-appropriate from a technical standpoint.
Japan: In light of the major losses incurred in prior years, the price level is still comparatively high; rates have barely budged within the year. The company takes a positive view of the coming year too and expects to see stability here.
Australia/New Zealand: The good price level in both markets was broadly maintained in the 2013 renewals. Hannover Re does not expect to see any changes on the pricing side or structurally in the year ahead.
Treaty reinsurance worldwide
Developments in worldwide treaty reinsurance varied across markets and regions:
Emerging markets: Emerging markets continue to offer substantial growth potential, even though the pace of their economic expansion has slowed somewhat of late. In view of rising demand for high-quality reinsurance protection – inter alia as a consequence of the flood damage in Central and Eastern Europe – Hannover Re is looking to above-average growth rates and consistently very healthy profitability.
Agricultural covers: The growing need for agricultural commodities and foodstuffs as well as the increased prevalence of extreme weather events are boosting demand for agricultural covers, above all in emerging and developing markets. Yet the latest natural disasters in Europe should also generate further interest in protecting against potential crop failures. The drought in North America during 2012 is expected to be reflected in further rate hikes. All in all, an increasingly diverse and innovative product range will open up greater opportunities to generate profitable business with agricultural covers.
Outlook
Hannover Re anticipates a competitive climate, in some cases with corresponding implications for conditions in reinsurance treaties. The market nevertheless remains in a position to respond to losses with rate increases. With this in mind, the company continues to have confidence in its systematic cycle management coupled with strict underwriting discipline. In this context it concentrates its acceptances exclusively on business that meets the required margins. In areas where markets are attractive Hannover Re intends to enlarge its portfolio. This is expected to be the case in Latin America and Asia, in business with agricultural risks and – increasingly – also now in the United States.
In view of its very good positioning in the markets and its financial strength Hannover Re is a reliable partner for its clients. Thanks to its excellent ratings ("AA-" from Standard & Poor's and "A+" from A.M. Best) the company is able to participate to a disproportionately large extent in attractive market opportunities.
Hannover Re continues to attach central importance to the issue of risk management in order to ensure that risks to the reinsured portfolio remain calculable and that the result is not unduly impacted by exceptional major losses. A key factor here is diversification, for example with respect to reinsurance treaties, lines of business and segments.
In the face of a challenging capital market climate, preserving the value of the assets under own management and maintaining the stability of returns take on considerable significance. For this reason, Hannover Re aligns its portfolio according to the principles of a balanced risk/return profile and broad diversification. Based upon a low-risk investment mix, the invested assets reflect both the currencies and the durations of the company's liabilities.
For 2013 the company expects to generate currency-adjusted growth of around 5% overall in its gross premium.
In view of the broadly favourable business prospects in non-life and life/health reinsurance and given its strategic orientation, Hannover Re anticipates a pleasing 2013 financial year with Group net income still expected to be in the order of EUR 800 million. This is conditional on the burden of major losses not significantly exceeding the expected level of EUR 625 million for the full year and assumes that there are no unforeseen downturns on capital markets.