Hannover Re AG's (HNR1.XE) reinsurance rates are likely to rise
only moderately at the January renewals round, as the economic
crisis damps demand for insurance protection from large industrial
clients and the current mild U.S. hurricane season keeps a lid on
rate rises.
Chief Executive Ulrich Wallin told Dow Jones Newswires that
average rate rises in January should be in line with the 4%-8%
growth seen in July this year, a level which Hannover Re said in
August was insufficient for some types of risk.
Wallin warned that rates need to rise more significantly in some
segments - including large liability risks with U.S. exposure - in
order for risks to be priced adequately.
Wallin, who took the helm at Hannover Re on July 1, was talking
ahead of next week's annual gathering of reinsurers and their
clients in Monte Carlo. The meeting kicks off talks about current
market and economic conditions that will determine the rates for
reinsurance contracts coming up for renewal. The meeting starts
Sunday.
"Our message for Monte Carlo is that reinsurance prices are
risk-adequate in many market segments, but not in all of them,"
Wallin said.
Primary insurers are able to transfer certain types of risk to
reinsurers through mostly annual contracts, thereby spreading the
risks they can take on their own books. Primary insurers are
suffering from lower demand from recession-hit large industrial
companies that are report lower revenue. Many primary industrial
insurance contracts are tied to revenue or headcount.
Wallin said that policies covering U.S. storms remained more
expensive, though the increasing momentum in rate rises that many
market participants had hoped for didn't materialize this year.
"We did see average rate increases of between 10% and 15% for
U.S. natural disaster reinsurance policies at the Jan. 1, June 1,
July 1 contract renewals. What we didn't see was an acceleration of
the rate rises," Wallin said, attributing this to sufficient supply
and lower demand from some customers.
Rates for aviation reinsurance should rise substantially next
year due to the higher number of plane crashes, he said.
The relatively mild U.S. hurricane season will also have an
impact on premium growth with demand for such cover and the
readiness to pay higher prices likely to remain muted.
"We expect rates for natural disaster policies and also overall
rates to be stable in the Jan. 1, 2010, renewals if we get a
loss-free U.S. hurricane season," Wallin said.
Hannover Re usually renews about two-thirds of its non-life
reinsurance portfolio in January, when European storm policies come
due.
Wallin said he expects European storm rates to be "stable or
(show) small rate increases in policies with recent storm losses."
Winter storm Klaus, which ripped across parts of France and Spain
in late January, cost Hannover Re a net EUR67.2 million.
Reinsurance rates for European storms have risen moderately in
recent years even though claims reached similar levels to U.S.
hurricanes as they are often spread over several countries, Wallin
said.
Wallin said the absence so far of major claims in the third
quarter means Hannover Re is on track to hit its full-year earnings
targets.
"The third quarter isn't over yet, but so far there hasn't been
any development that would lead us to believe that the
third-quarter profit will deviate from our plan," Wallin said.
For 2009, the company is targeting an after-tax return-on-equity
of at least 18%, including the earnings-accretive contribution from
the acquisition of a large ING life-reinsurance portfolio it bought
from Bermuda-based reinsurer Scottish Re Group Ltd. (SKRRF).
It aims to achieve earnings-per-share of at least EUR5, a rise
of about 20% in gross premium income and a dividend payout of 35%
to 40% of net profit. It didn't pay a dividend last year after it
swung to a net loss of EUR127 million from a year-earlier profit of
EUR721.7 million.
In the first half this year Hannover Re posted a net profit of
EUR419 million, up 66% from EUR252.2 million a year earlier.
Wallin said Hannover Re won't resume investment in stocks in the
third quarter but will review the situation in October.
Last year, the company issued a profit warning for the full-year
2008 after being hit by turmoil in capital markets. It was forced
to book a charge after disposing of most of its stock market
investments last autumn.
"We aren't invested in stocks and won't resume stock investment
in September," Wallin said, adding that the company will review the
situation in October. "We'll decide in the fourth quarter if we'll
resume stock investment and how much we'll invest in stocks," on
condition that markets are relatively stable. In August, it said it
would cap any future stock investment at 5% of its portfolio.
Hannover Re's portfolio is currently 90% invested in bonds,
virtually no stocks, and less than 1% in real-estate. It aims to
reduce the bond portion to 80% in the medium term and increase its
real-estate to 5%.
"We will continue to stick to a conservative investment strategy
in the immediate future," Wallin said, adding that he expects a
return on investment of below 4% this year and next.
Hannover Re currently isn't working on any concrete M&A
projects, Wallin said. He said it will likely buy as many
life-reinsurance portfolios, or so-called block-assumption
transactions, next year as it did this year, excluding the large
ING portfolio it bought in January. "We are currently working on
more than three transactions," but they aren't finalized yet,
Wallin said.
Company Web site: www.hannover-re.com
-By Ulrike Dauer and Ruediger Schoss, Dow Jones Newswires; +49
69 29725 500; ulrike.dauer@dowjones.com