Hannover Re has issued some earnings guidance for the 2022 financial year;
“Even before the extensive devastation caused by Hurricane ‘Ian’, 2022 was a year of above-average large loss expenditure,” said Jean-Jacques Henchoz, Chief Executive Officer of Hannover Re. “What is more, high inflation rates are only adding to the costs of rebuilding. Our full-year earnings guidance nevertheless remains achievable. Among other things, this is possible thanks to healthy profit contributions from the investments as well as life and health reinsurance and it shows how important the interplay of diversification and risk management is.”
Group net income of EUR 871 million after nine months
Gross written premium for the Group increased by 21% to EUR 26.3 billion (EUR 21.6 billion). Operating profit (EBIT) on the Group level increased by 3.7% to EUR 1,328 million (EUR 1,281 million). Group net income grew by a modest 1.7% to EUR 871 million (EUR 856 million). Earnings per share thus amounted to EUR 7.22 (EUR 7.10). All good news.
More good news
The shareholders’ equity of Hannover Re amounted to EUR 8.3 billion as at 30 September (31 December 2021: EUR 11.9 billion). The decline was due to the higher interest rate level, which significantly reduced the prices of fixed-income securities in the investment portfolio, says the company.
The annualised return on equity stood at 11.5% (31 December 2021: 10.8%) and surpassed the minimum target of 900 basis points above the risk-free interest rate. The book value per share amounted to EUR 68.42 (31 December 2021: EUR 98.55).
The capital adequacy ratio under Solvency II, which measures Hannover Re’s risk-carrying capacity, amounted to 231.8% at the end of September and thus remained comfortably above the limit of 180% and the internal threshold of 200%. So the company still has a huge cash reserve in case another large scale Cat event happens.
That hurricane thing
In property and casualty reinsurance Hurricane “Ian” caused severe devastation in Cuba as well as, most notably, the US states of Florida and South Carolina at the end of September, putting it at the top of the current year’s costliest insured natural catastrophe events by a wide margin. Natural disasters such as floods in Australia and winter storms in Europe had already caused substantial insured losses in the first half of the year, says Hannover Re.
These are normal weather events, they happen each year and Hannover Re seems to have made a profit despite the payouts on claims related to Cat events.
Hannover Re is writing more reinsurance business. Gross written premium in property and casualty reinsurance grew by 28% to EUR 19.5 billion (EUR 15.3 billion). The increase would have been 18.6% adjusted for exchange rate effects. Net premium earned was up 29% at EUR 15.6 billion (EUR 12.1 billion).
In view of the significant natural catastrophe expenditures, the net burden of large losses rose to EUR 1,484 million as at the end of September (previous year: EUR 1,070 million) and was thus clearly higher than the expected level of EUR 1,079 million budgeted for the first nine months.
The largest individual losses for net account in the first nine months of the year were Hurricane “Ian” with a net strain of EUR 276 million, the severe floods in Australia at a cost of EUR 211 million and winter storm “Ylenia” in central Europe in an amount of EUR 115 million.
Ukraine – was it really such a surprise?
In addition, Hannover Re set aside an IBNR reserve of EUR 331 million for possible losses from the war in Ukraine. All things considered that is quite a low figure. You could argue that after ongoing military activity in Ukraine since 2014 some escalation of the conflict in the disputed eastern half of Ukraine was inevitable at some point. Every risk analyst in every major reinsurance company should have seen the potential for a total loss of insured assets in Donbass, Luhansk and other regions. But yes, in some respects this was an unexpected event earlier in 2022, certainly in terms of scale.
Furthermore, says Hannover, additional reserves were established in the first nine months for sizeable losses from the past year based on corresponding loss advices, including an amount of EUR 130 million for the drought in Brazil.
Despite these losses, Hannover still says they made a healthy profit on reinsurance.
“The operating profit (EBIT) in property and casualty reinsurance fell by 16.4% to EUR 887 million (EUR 1,061 million). Net income contracted by 26% to EUR 545 million (EUR 739 million).”
Earnings guidance for 2022
Hannover Re is still keeping to its targets for the current financial year and expects gross premium on the Group level to grow by more than 7.5% adjusted for exchange rate effects as well as a return on investment in excess of 2.5%. Following the extraordinary burden of large losses in the first nine months the Group net income is expected to be at the lower end of the EUR 1.4 billion to EUR 1.5 billion range.
Attainment of these targets is conditional on large loss expenditure not significantly exceeding the budgeted level in the fourth quarter and assumes that the Covid-19 pandemic does not have a major unexpected influence on the result in life and health reinsurance and that there are no unforeseen distortions on capital markets.
Dividend? Probably about the same
Hannover Re continues to aim for an ordinary dividend at least 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.
“Despite all the challenges facing insurers and reinsurers, significant price increases across the various lines of business are absolutely essential. Only in this way can we respond to the changed risk landscape,” said Jean-Jacques Henchoz. “Over the coming months it is more important than ever to safeguard the profitability of our business. We are well positioned to do this thanks to our vast expertise and discipline in underwriting.”