Hannover Re targets growth, using retro & ILS to expand balance-sheet

Global reinsurer Hannover Re is clearly expecting the benefits of the hard market environment to earn through in 2024, as it targets a 24% increase in net income next year, while key among strategic drivers for its new corporate plan for years 2024 through 2026 are the use of retrocession and ILS to expand its balance-sheet.

Hannover Re said this morning that it is targeting group net income of at least EUR 2.1 billion for 2024, which is 24% up on the current year.

At the same time, the firm expects its reinsurance revenue to grow by more than 5%, also saying that the current strategic cycle that closes at the end of this year has seen its targets overachieved.

For the next strategic cycle, 2024-2026, Hannover Re is expecting to deliver a return on equity of more than 14%, alongside EBIT growth of more than 5% per year.

“Our strong position in the reinsurance market combined with successful cycle management will result in material earnings growth in 2024,” Jean-Jacques Henchoz, Chief Executive Officer of Hannover Re explained. “Thanks to the improved underlying profitability of our reinsurance business, Hannover Re is superbly placed to continue on its successful course and generate further strong results in the coming financial year.”

Property and casualty reinsurance is anticipated to grow faster than life and health, and it is clear that Hannover Re sees market conditions as conducive to continuing the build-out of its portfolios in the P&C space.

For the P&C reinsurance business, Hannover Re is targeting a combined ratio of below 89%, which it says is “owing to the improved market environment.”

Hannover Re’s comments today and its strategic plan, clearly do not anticipate any significant softening, with growth and profit hinging to a degree on the continuation of market conditions at a level close to what is seen today.

Of course, the achievement of its targets is dependent on large loss events, and for 2024 Hannover Re has increased its large loss budget to EUR 1.825 billion, up from the EUR 1.725 billion set for 2023.

As our readers are aware, we’ve covered Hannover Re’s development into one of the key insurance-linked securities (ILS) market facilitators in recent years, through its collateralised reinsurance fronting, risk transformation and catastrophe bond fronting activities.

As we recently reported, these ILS market activities have continued to expand at the reinsurer, bringing increasing amounts of fee income, while also helping to grow premiums that flow through Hannover Re’s own business and balance-sheet.

It’s no surprise therefore, that ILS deserves a mention in the 2024-2026 strategic plan outline for Hannover Re.

Hannover Re intends to stay focus on what is making its business a success, saying, “We are maintaining our healthy focus on cost-efficiency and cost-effectiveness and by continuing to rely on an optimal mix of capital instruments, we will maintain a very competitive cost of capital. Our conservative reserving approach and active use of the retrocession market help us manage earnings volatility and make us a reliable partner for the capital market.”

Growth is a key strategic goal for the next three years, with Hannover Re saying, “Growing profitably and achieving outperforming underwriting portfolios continue to be essential to us. We will achieve this by enabling our clients to grow and succeed, by enhancing our cycle management and portfolio steering, and through innovation and leadership in promising areas such as tailored solutions, longevity and insurance-linked securities.”

Adding, “It is our clear aim to win profitable new business and we will do so by leveraging knowledge and expertise e.g. from our structured reinsurance solutions, insurance-linked securities and parametric business teams.”

Hannover Re also highlights the important role of retrocession and ILS, saying that, “To satisfy our clients’ demand for high-quality capacity, we will expand our balance sheet capacity through retrocessions and the insurance-linked securities market.”

It’s clear that the ILS business and also its robust retrocession partnerships, that include capital market investors, are seen as a key lever for Hannover Re’s own business and balance-sheet, effectively helping in growing the book, while managing the cycle.

“The new strategy cycle puts the focus squarely on what Hannover Re stands for: we are pragmatic, client-centric and have a business model geared to the utmost efficiency. Our financial ambition thus builds on our robust foundation to ensure Hannover Re’s lasting stability and resilience,” explained Jean-Jacques Henchoz. “We shall actively engage with the major trends affecting our business, the increasing global competition for talent, digitalisation and not least climate change, and develop tangible solutions to tackle our clients’ current and future challenges.”

The growth targets are ambitious, but also a sign that Hannover Re feels the reinsurance cycle is not going to dramatically change anytime soon and that it believes the higher rate environment will continue to drive higher returns, as it grows and tailors its products and portfolios over the coming years.