Renewal season provides satisfactory results

This year’s treaty renewals in property and casualty reinsurance are generally satisfactory as the hard market has been sustained, according to Hannover Re.
“Although not all our expectations were realised, we were still able to top the already very high rate level in some areas,” Wilhelm Zeller, CEO of Hannover Re, says. “The treaty renewals again demonstrated that ceding companies are attaching ever-greater importance to their reinsurers’ financial strength; thanks to its above-average ratings Hannover Re has thus been able to profit disproportionately strongly from this climate.”
Although Hannover scaled back its writing of risks in particularly loss-prone segments by as much as 22% in US windstorm business, for example gross premium income for the entire property and casualty reinsurance portfolio remained stable due to the rate increases.
Out of a total premium volume of EUR 3,978 million in property and casualty reinsurance in the 2005 underwriting year, treaties worth altogether EUR 2,665 million (67%) were due for renewal as at 1 January 2006, according to Hannover.
A volume of EUR 2,347 million (59%) was renewed, whereas treaties worth EUR 318 million (8%) were either cancelled or renewed in modified form. Including additions of EUR 278 million (7%) from new and modified treaties as well as rate improvements, the new premium volume thus amounted to EUR 2,625 million and gross premium income for the property and casualty reinsurance business group remained virtually unchanged at EUR 3,950 million.
Last year’s exceptionally intense hurricane season was the primary factor in preserving a favourable market climate for reinsurers in the US. Rate increases averaging around 50% but sometimes in excess of 100% were obtained, most notably in the programs impacted by windstorm losses. The development of the other segments was also highly gratifying, with average rate increases of 5 to 10%.
This positive trend was further fostered by updated accumulation control and by pricing calculations revised in light of the experience with hurricane “Katrina”: loadings were implemented on the market for components that had previously been neglected or inadequately modelled, such as cyclical climate fluctuations, flood and inundation damage, business interruption losses or demand-driven price rises for restoration services.
“By adjusting our accumulation and pricing models and reducing peak risks we have done our homework in the aftermath of the storms and made optimal use of the market opportunities that presented themselves,” Zeller says. “Our portfolio is now considerably more weatherproof and superbly poised for the challenges ahead in the current year.”
Zeller adds that the adjustment of Hannover’s pricing models ere not restricted to windstorm aggregates in the US, but extended to other areas of peak exposure in the Company’s portfolio such as earthquake covers.
Competitors who have not as yet built the new loadings into their quotations will have to follow suit in the course of the year, a move that should cause prices for catastrophe covers to rise across the board, according to Hannover Re.
“In view of the rating agencies’ more exacting capital adequacy requirements which also have to be incorporated into the pricing calculations and the risks that have to be remodeled across a broad front, we expect increasing demand to go hand-in-hand with shrinking supply,” Zeller says.
In light of the successful treaty renewals as at 1 January, Hannover Re anticipates a very good 2006 financial year. Hannover reports that assuming the burden of major losses is in line with the multi-year average and, as long as there are no unexpected downturns on the capital markets, a record result should be attainable in the current year.
“It is our expectation that we can achieve a return on equity of at least 15% in 2006,” Zeller says. “As for the dividend, the company will then look to a payout ratio of some 35 to 40%.”