Hannover Re goes over budget on cat losses in Q1, sets Ukraine reserve

Global reinsurance company Hannover Re has reported a loss-challenged start to the year, as natural catastrophes and other man-made events eroded its large loss budget, while the company also set a low triple-digit million euro reserve for potential losses from the war in Ukraine.

Net large losses reached EUR 336 million during the first-quarter of 2022, with the flooding in Australia and European windstorm activity the main drivers.

In fact, the Australia floods and windstorms Ylenia / Zeynep alone absorbed Hannover Re’s large loss budget for Q1.

Gross losses from those two, the largest catastrophe events Hannover Re experienced in the quarter, came to EUR 363.9 million, but after retrocessional reinsurance support the net impact fell to EUR 309.8 million.

In addition, Hannover Re suffered large losses from one marine event (the sinking of the cargo ship Felicity Ace) and one property loss, taking the total gross large loss impact for the period to EUR 391.7 million gross, which after retrocession fell to EUR 335.8 million net.

The budget for the first-quarter was around EUR 284 million, so this starts the year off on the wrong foot, as far as large losses go for Hannover Re, despite the reinsurer having raised its large loss budget again for 2022, to EUR 1.4 billion for the year, across nat cat and man-made events.

Adding to the impacts from loss activity, Hannover Re said this morning its has set a low triple-digit million euro reserve for potential losses related to the conflict in Ukraine.

While not putting a number on this, we believe it is close to the EUR 150 million mark, as the reinsurance firm said the precautionary reserve equates to roughly 3% of net premium earned.

For the property and casualty reinsurance unit of Hannover Re, these losses and precautionary reserves elevated the combined ratio to 99.5% for the first-quarter of 2022.

Adding the the loss burden for Q1, Hannover Re also reported EUR 123 million of pandemic related mortality losses due to Covid-19, although the company did note that these “diminished progressively over the course of the quarter.”

Despite all of these negative underwriting loss related impacts, Hannover Re has reported EUR 264 million of quarterly profit and a target-beating 9.3% return on equity for the period.

Gross premiums written soared by 19.5% to EUR 9.3 billion (up from EUR 7.8 billion), as Hannover Re took advantage of improved rates in the firmer reinsurance market.

“While we are all appalled by the suffering that Russia has unleashed in its war on Ukraine, it is not yet possible to put a concrete figure on the economic impact at this point in time,” Jean-Jacques Henchoz, Chief Executive Officer of Hannover Re commented. “Along with the potential implications of the war in Ukraine, we faced numerous natural catastrophes and further pandemic-related strains in life and health reinsurance in the first three months of the year. Against this backdrop, we again demonstrated the quality of our risk and capital management and stood shoulder-to-shoulder with our clients as a reliable partner.”

Profits were down slightly on the prior year, as the impacts of the catastrophes, pandemic losses and Ukraine reserving dented the result.

But operating profit only fell from EUR 404 million to EUR 396 million, and net income fell 13.8% from EUR 306 million to the EUR 264 million reported, which are not particularly significant declines considering and show that had losses been under budget and the Ukraine war reserve not been necessary, Hannover Re would have delivered a significant quarterly beat.

In terms of P&C reinsurance renewals, Hannover Re noted that inflation- and risk-adjusted price increases amounted to 4.1% at January 1st, importantly with the biggest gains recorded in Europe as the continent repriced in the wake of last year’s flooding.

The reinsurer reported 26% gross premium growth for P&C reinsurance, but the elevated combined ratio of 99.5% meant just an EUR 26 million underwriting result in this segment.

However, despite the substantial loss impacts in P&C reinsurance, Hannover Re generated an operating profit (EBIT) of EUR 284 million (down from the prior years EUR 312 million), while net incomewas EUR 177 million (down from EUR 261 million).

At April 1st renewals, Hannover Re’s premium volume increased by 17.4%, while inflation- and risk-adjusted price increases for the renewed business were 3.7%.

Hannover Re confirmed its 2022 guidance this morning, but noted “It is still too soon to put a definitive figure on losses for global insurance and reinsurance markets resulting from the war in Ukraine.”

Losses are the one wild-card to achieving its EUR 1.4 billion to EUR 1.5 billion net income goal, with Ukraine adding significant uncertainty to this.

“Even though it will take some time before the impact of the war on insurers and reinsurers can be precisely quantified, we have taken the precaution of establishing additional provisions in the first quarter,” Henchoz explained.

“Despite all the uncertainties, I remain confident that we can achieve the goals we have set ourselves for the full year thanks to our considerable resilience and robust profitability.”