Hannover Re benefits from significant retrocession relief in 2021

German reinsurer Hannover Re booked gross losses from natural and man-made losses of approximately €2.65 billion in 2021, but its net impact from these 29 events amounted to just €1.25 billion, suggesting the firm passed a sizeable amount of its losses to its retrocession partners during the year.

Early this morning, Hannover Re reported an almost 40% rise in net income to €1.23 billion, despite COVID-19 losses in its L&H business and major losses of almost €1.3 billion in P&C reinsurance, which is roughly €200 million above expectations.

While net major losses in P&C reinsurance actually declined, year-on-year, by around €300 million, gross losses amounted to a huge €2.65 billion, which is up on 2020’s €2.1 billion figure and substantially above the previous ten-year trend.

In 2021, the gap between Hannover Re’s gross and net major losses is roughly €1.4 billion, suggesting the firm shared a reasonable proportion of these losses to its retro partners.

Looking at just natural catastrophe events, and the gross impact from 15 events in 2021 was €2.3 billion and the net impact €963 million, which is a gap of more than €1.3 billion.

On a gross basis, the European floods were the most impactful for Hannover Re in 2021, at a cost of €801.8 million, but the net impact from this event was just €208.4 million, suggesting a relatively significant effect from retrocessional reinsurance protection.

The largest net impact for the reinsurer in 2021 came from Hurricane Ida at a cost of €304.9 million, although the gross loss from this event was €790.6 million, so less than seen with the European floods but still a large loss for the company where its retro played a key role in limiting the impact.

As we reported previously, the size of these two events means that it’s likely both saw the reinsurer call on its third-party investors for support, which means it’s possible the third-party investors backing the its K-Cessions quota share retro reinsurance sidecar facility may have assisted in paying in some of the cat losses for the year.

While the gross nat cat burden appears to be one of the highest ever seen at Hannover Re, the significant relief it achieved from its retro programme greatly reduced the net impact for the firm, which in turn helped bring down the P&C reinsurance combined ratio to 97.7%, compared with 101.6% in 2020.

While this result was aided by a year-on-year dip in large losses, Hannover Re notes that the P&C underwriting performance also included interest on funds withheld and contract deposits of €384 million.

In 2021, the P&C reinsurance arm achieved operating profit of €1.5 billion, which is up 84%, while the contribution made by the segment to Group net income improved by a substantial 76% to €1.1 billion.

Looking forward, the reinsurer expects to achieve net income of between €1.4 billion and €1.5 billion for 2022, although this is based on major loss expenditure not significantly exceeding the higher budget of €1.4 billion.

“In 2021 we once again demonstrated Hannover Re’s profitability and risk-carrying capacity. The above-average expenditure for natural catastrophe events in property and casualty reinsurance as well as considerable pandemic-related losses in life and health reinsurance were challenging.

“That said, thanks in part to our exceptionally good investment income we were able to significantly increase our Group net income and we are in a position to offer our shareholders the prospect of an attractive dividend,” said Jean-Jacques Henchoz, Chief Executive Officer (CEO) of Hannover Re.