Hannover Rück SE (HNR1) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Hannover Re Conference Call on Q1 2024 Results. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Karl Steinle. Please go ahead, sir.

Good morning, everyone, and welcome to our earnings call on our results for the first quarter 2024. Today's speakers are Jean-Jacques Henchoz, our CEO; and Clemens Jungsthofel, our CFO. For the Q&A session, we will be joined by Klaus Miller and Sven Althoff. And with that, I would like to hand over to you, Jean-Jacques.

Thank you very much, Karl, and good morning on my side. I'm pleased to report that we had a good start to the year 2024. The group net income growth of 15% to EUR 558 million, and the business development in general, clearly supports our targets for the full year. In P&C, reinsurance revenue increased by 5% adjusted for foreign currency effects. Our successful January renewals are reflected in a strong new business CSM and loss component of EUR 1.4 billion. Compared to the previous year, this is an increase of 4% adjusted for currency effects. And in this case, also interest rates as discounting as a meaningful impact of the new business CSM. The combined ratio of 88% is well in line with our target of below 89%. This confirms the good underlying profitability of our P&C portfolio. We have followed our usual approach and booked the entire large loss budget in Q1, even though the actual impact from large losses was below expectation. In life and health reinsurance, revenue decreased moderately driven by regular portfolio management with a reduction of exposure in mortality and morbidity business. Due to the transactional character of a large part of our life and health business, the new business generation in individual quarters has generally less significance. In the case of the first quarter, I can still report that the new business written in Q1 supports our targets for the full year. The same is true for the reinsurance service results of EUR 211 million. The investment performance was very satisfying. The return on investments of 3.3%, clearly above the target and based on a strong ordinary income. Furthermore, the impact from realized losses, impairments and the valuation of assets at fair value through P&L was very limited. Altogether, return on equity of 21.3% and the solvency ratio of 267% highlight our company's strong earnings power and capitalization. Shareholders' equity increased by 7.1%, mainly driven by Q1 earnings. The impact from interest rates and currency translation was moderate, but positive as well. The CSM increased by 15.2%, mainly reflecting the new business value generated by our successful January renewals in P&C. The risk adjustment increased by 4.9%, mainly due to new business in P&C and assumption changes in life and health. On that note, let me hand over to Clemens, who will go through the detailed financials.

Thank you, Jean-Jacques, and good morning, everyone. Starting with the development in P&C reinsurance, the top line growth in the first quarter is in line with expectations. Main drivers for growth are here structured reinsurance and ILS as well as our regional markets in North America and in EMEA. The growth in net revenue is slightly more pronounced due to the reduced volume of our retrocession program. The impact from large losses from natural catastrophes was very benign in the first quarter. The largest loss event in the first quarter has been the Baltimore Bridge loss. However, there are still a number of unknown factors to this loss, such as the root cause for this accident, which might have an impact on the final insured loss. Against this backdrop, it is really too early to come up with an initial loss estimate in Q1, but as you know, we've always reserved the full large loss budget in situations where the actual impact from large losses is below budget. And as we are very confident that the final impact from the Baltimore Bridge will comfortably fit within our reserve Q1 budget, the reserves to cover the loss are booked anyhow. Runoff result in P&C was an overall positive EUR 171 million. It includes around EUR 100 million negative runoff for the Italy hail events 2023, which should not come as a surprise after our comments in March and the media reports on the development of the market loss. As you know, we have added substantial reserves also to the more younger underwriting year before closing the books for year-end 2023. And a part of those have been used to cover the development of the losses in Italy. Furthermore, I'd like to add that the overall loss from the Italy hail reflects our leading market share in this country. The combined ratio in the first quarter includes a discount effect of around 7%. This is still higher than the interest accretion in the reinsurance finance result, but our prudent initial reserving should reflect the difference. Altogether, the combined ratio of 88% is well in line with our target and reflects a very healthy underlying profitability. The strong investment result in P&C primarily stems from the increased ordinary income from fixed income securities. The increase is mainly driven by higher interest rates, supported by a strong operating cash flow. Last not least, the amortization of our inflation-linked bonds added EUR 49 million, slightly more than expected. The other result is mainly reflecting the other income and expenses. The currency result had a minor impact of minus EUR 7 million. The main contributor to the P&C's reinsurance services is the CSM release, reflecting the recent renewals in a very attractive market environment. The service results includes the fully booked large loss budget, as mentioned, and is therefore not showing the underlying result in the quarter as the large loss situation was benign, the recovery from retrocession was also low, which is the main driver for the negative experience variance that you see here on the slide. The loss component from new business is quite low confirming the attractive rate environment in P&C. I already commented on the runoff result. Just to be -- for the sake of completeness, the release of adjustment within the LIC added only EUR 3 million to the overall EUR 171 million runoff result. The CSM growth is mainly determined by our successful January renewals reflected in a strong new business CSM of EUR 1.4 billion. And as Jean-Jacques already mentioned, the growth compared to the previous year needs to be adjusted for currency and interest rate changes to get to a comparable number. So we are looking at an increase adjusted for these effects of 4%. So let's move on to life and health reinsurance, revenue decreased slightly. The growth in financial solutions has been offset by the developments in mortality and morbidity. Reinsurance service result is fully in line with our expectations with favorable contributions from mortality, longevity and financial solutions. Just as a reminder, we had reported an extraordinary strong result in mortality in the previous year. And in morbidity, the result has mainly been impacted by further strengthening of the reserves for critical illness business in China. The investment result here in life and health mainly reflects a good ordinary income and a negative impact of around EUR 20 million from the change in fair value of financial instruments, mainly driven by derivatives for currency hedging. On top, we recorded a negative currency result of roughly minus EUR 30 million in the other result. Both effects together explain why the EBIT of EUR 181 million looks slightly weaker than the reinsurance service result, but altogether, really the performance of our life and health business group clearly supports our expectations for the full year. Looking at the drivers for the reinsurance service results, both the CSM release and the risk adjustments release are within the expected range. Experience variance is not driven by one larger effect, but really just several smaller effects adding up to the EUR 62 million that you can see here. This largely mitigates the negative impact from the loss component of EUR 85 million. The new business loss component was only a minus EUR 8 million. The main driver here has been really the reserve strengthening in morbidity. Altogether, again, reinsurance services are fully in line with our expectation. The new business CSM and extensions on existing contracts together amounted to EUR 190 million based on a diversified contribution from all reporting lines, adding positive currency effects and the interest accretion to total CSM increase by 1.9%, also considering the regular CSM release and almost no impact from changes in estimates. On investments, I think it's fair to say that the development was again very satisfactory. The ordinary investment income, as mentioned before, very strong. Several factors play a role here. The asset volume increased based on a strong operating cash flow. In addition, the reinvestment yields are still quite nicely above our average portfolio yield with a continued positive impact on our returns from fixed income. Our inflation-linked bonds contributed EUR 49 million to the ordinary income. For the full year, we expect the contribution of the inflation-linked bonds of around EUR 160 million. So Q1 was slightly ahead of our expectations. Finally, the contribution from alternative investments increased as well. And other than that, really the investment income is pleasantly unremarkable, in particular, the ECL and any valuation impact at fair value through P&L or in the form of impairments, had only a minor impact in the first quarter. All in all, ROI of 3.3% is above our 2.8% target, which still, I should say that still includes some allowance for negative valuation volatility later in the year. On reserving, on the next slide as the annual reserve review by Willis Towers Watson was concluded, I'm happy to provide you with their final view on our reserve adequacy at year-end 2023. As indicated in March, the resiliency reserve increased to around EUR 2 billion. To be precise, final number is EUR 2.057 billion. Just as a reminder, the reserve study does not yet include any resiliency reserves in the most recent underwriting years, which -- and we also stated that in March, have also been strengthened at year-end 2023. Therefore, we will most likely see those resiliency reserves coming through in future reserve studies. Generally, we feel very comfortable with the current reserving position. Hence, we are not planning for any further extraordinary change to the confidence level of our reserves. And if you would like to perform further analysis on our reserving position, we have also published the loss triangles for the year 2023 on our website today. To conclude my remarks, the first quarter of 2024 was rather pleasantly uneventful one. As things stand today, the overall performance is supportive to reach or exceed our group net income target of EUR 2.1 billion. And on that note, I'll hand back to you, Jean-Jacques, for the comments on the outlook.

Well, thank you very much, Clemens. So firstly, the April renewals were characterized by a market environment quite similar to the January renewals. We have not observed any meaningful inflow of new capital in the market, but reinsurance capacity was generally available to fill most placements. In this market environment, we were able to grow our premium base for the April renewals by 7.1% with an overall risk-adjusted price increase of 1.5%. The quality of our portfolio has further improved on top of a healthy starting point. Main drivers for growth have been the markets in North America where we have mostly observed stable-to-slightly increasing rates, also in underlying primary insurance market. In the Asia Pacific region, we were able to maintain our position in slightly more competitive markets based on the limited loss impact in recent years. In Japan, we're very satisfied with a risk-adjusted flat pricing for our renewals. In marine, capacity is starting to have an impact on pricing. Overall, the premium growth of 7.1% will be reflected in reinsurance revenue over the next couple of years, supporting our general growth ambitions in P&C. As the business development in the first quarter supports our expectations for 2024, we've kept our guidance unchanged. We continue to expect a growth in revenue of at least 5%, mainly supported by our P&C business. The combined ratio is expected to come in below 89%, and the life and health service results above EUR 850 million. We target a return on investments of at least 2.8%. Altogether, we've had a good start to the year and are quite confident that we will achieve our net income guidance of at least EUR 2.1 billion. This concludes our remarks, and we'll be happy to answer your questions at this stage. Thank you.

[Operator Instructions] The first question comes from Kamran Hossain from JPMorgan.

A couple of questions from me. The first one is just on -- I guess it's the underlying performance in your business. I'm sure you saw that one of your peers had very, very strong underlying results last week. Now I know you're historically very cautious. NatCat, that's clear, so your reported result will be much better than the one you've kind of reported today if you took the NatCat benefit. But do you think the economics of the business that's on the books at the moment is much better than the reported results we're seeing, kind of if we look through the cat side? I appreciate that it's probably a very complex question to answer. The second question is around the S&P Rating review. Would you expect the review to -- when it's concluded, I think that's kind of Q2, to free up capital when it's finalized? And do S&P take into account the reserve resilience that you've kind of talked about today in their calculations?

Yes, Kamran, this is Clemens. So I'll probably start with the second one, the S&P one. So the factors that are being determined are really up for discussion yet. So we are in the discussion with S&P on the model. So really in the middle of the process and really early to comment also on any sort of allowance for, for example, reserve resiliency, et cetera. We do expect this to be -- to some extent, to be incorporated. But again, too early to say, and we will come back to you, I guess, in the August call to comment on this. On the first one, and happy for Sven to complement on this, I think, on the underlying combined ratio, I think it's a fair statement, Kamran, it's early in the year. We usually, particularly with 3 months of the year just being passed, we are very cautious generally on the combined ratio. It is overall, fair to say, it's a bit of a managed number in the first quarter. But it's also fair to say that the underlying profitability, the increased margins in the P&C portfolio are clearly visible in the first quarter. I mean you mentioned the large loss budget that we fully booked in the first quarter, and I think it's also worth mentioning that we don't take any advantage on potential retro recovery on that budget that we are booking. So we only book the retro recovery on actual claims, which, as you know, have been very benign. We have not taken advantage of the discount tailwind that is still there, the 7% discount within the combined ratio versus the PC. So we have not taken advantage of the tailwind in the first quarter. As for the runoff losses that we mentioned, particularly on Italy in the first quarter, I mean, as mentioned earlier, Kamran, we have been quite cautious also on recent underwriting years. We've strengthened the reserves there at year-end 2023, so we were able to use some of that really to compensate for that. So therefore, it's a bit of a mixed picture. But again, the underlying profitability is, of course, becoming very visible. But again, let's see how the year goes, and then we will adjust accordingly over the course of the year.

And the next question comes Tryfonas Spyrou from Berenberg.

I guess maybe just to follow up on the last point on the sort of on the combined ratio, the discount versus sort of the easy benefit that you're not really taking into your combined ratio. Is it fair to say that, that is around sort of running around 86.4 when we strip that out. And that would compare to sort of the 87.5 combined ratio, you talked about at Q4. So the actual difference would be sort of that margins are now early through, which appears to be slightly better than you expected. So maybe just some comments around that. The second one is on sort of life and health re. I guess I was wondering if you can share some color on what is driving the reserving on the morbidity business coming from China? And whether we should expect this to be sort of one-off or part of a sort of a bigger trend? And I guess staying on life and health re revenue growth, you can share maybe some color on what is sort of driving the reduction in the business, the top line. And how comfortable you are that this would rise throughout the year closer to the 5% run rate that you expect?

Yes, happy to comment on the first one, a quick one. Quick answer. The 1.6 percentage point, so 86.4, you mentioned, I think it's a good number, if you strip out what we've taken in the reserving as for now as the tailwind. And I'll let Klaus answer on the life and health.

Yes, your first question was about CI and China. Maybe, in general terms, we do an actual to expected analysis for all our portfolios, mortality, morbidity, longevity, whatever. And usually, we do that in the second and third quarter because we do it on the last year's data. We receive that sometime in the first quarter usually from our clients. This year, we have seen that we will probably over-exceed our planned figures and took the opportunity to speed up the analysis a little bit and booked a lot of the CI claims experience from China already in the first quarter so this avoids any headwinds in the second and third quarter. Your question, is that a one-off? Or is it a more permanent issue? You know that we are a little bit cautious on CI in China than, I guess, 2015, '16, have stopped writing business there. And on the life and health side, you always have to do a best estimate, including everything what you expect for the future. So this is currently our best estimate. If we would expect higher reserves by year-end, we would have to reserve for it already now. So currently, this is the best estimate. But in more general terms, you have seen in the last couple of years that we are focusing on financial solutions. This is the main profit driver for us. And if you ask me, not about our portfolio, but about the lines of business in general, we are more bullish about longevity. We are more or less neutral about mortality, thinking that it's a competitive market, but we are able to get the price right, but we won't get too rich with mortality business. And we are more cautious with critical illness, long-term care and similar lines of business. So this is why we are not writing that much pure risk business on the morbidity side. Currently, this is why our reinsurance revenue is slightly decreasing. I hope that answers your question.

Yes, it does. Maybe just a follow-up on sort of should we expect the financial solutions part then to sort of pick up and sort of accelerate in the remainder of the year, so that revenue growth FX-adjusted should be getting closer to that sort of 5% level?

The financial solutions business is more towards the end of the year, usually because people are or the companies or clients are looking for a balance sheet support, and this is usually with the year-end accounts. So mostly in Q3 and Q4, you should expect that there are larger deals. But it's impossible to estimate that some of these treaties have lead times of up to 18 months, 24 months. It's hard to estimate what you will see as new business in the CSM by year-end. But we have a full pipeline. It's just a question when these deals are closed.

And the next question comes from Freya Kong from Bank of America.

Just a follow-up on the comment you made on retro recoveries, you've assumed none in Q1, but with the Baltimore Bridge loss when you book it, do you expected to have some retro recoveries? Secondly, on the reinsurance revenue growth of 3% is running a bit behind the over 5% target for the full year. And I think Jean-Jacques has previously said that we'd expect to see a return to historic growth levels of high single digits. Does your greater caution in some lines of life and health re affect the growth outlook for 2024 and beyond? And last question, if I can. The solvency of 267% was a bit lighter than expected, given we would have seen strong capital generation in the quarter. And what I assume would be a positive market effects. Can you help me bridge this gap?

Freya, it's Sven, and I'm happy to take the Baltimore Bridge question. As Clemens explained, there are still uncertainties given the complexity of the claim, the root cause of the claims. So therefore, we have not allocated any reserves to specific segments of contracts at this stage. But your assumption is correct that we do expect retro recoveries on the marine side, where we have significant retrocessional protection, further down the line. And hopefully, we will be able to share more details in Q2.

Maybe Freya, on the revenue growth, generally I can confirm that we remain confident about the year-end. We will probably be a bit below the 5% on the life and health side. But we also have a very good pipeline of transactions. So I'm quite positive about life and health. And P&C, I think as we earned through comes in from quarter-to-quarter, we'll see underlying growth come in. So we'll be above, in all likelihood, well, above the 5%. So all in all, I think 5% remains a very realistic target for revenue growth.

So Freya, then I had one question on Solvency II that I caught. So just to give a bit of flavor on the numbers. So the own funds in the first quarter increased by EUR 680 million due to the strong operating impact that you mentioned. The SCR rose by EUR 325 million in the first quarter. And that's mainly due to some diversification effects that increased the SCR a bit, and that's the main driver really for the impact on the Solvency II ratio.

And the next question comes from Derald Goh from RBC.

My first one is just on the reserve buffers. So I think at the end of your introductory remarks, you're saying that you're comfortable with your position and you don't plan for any, I think in your words, extraordinary change to the confidence level, but yet, you spoke about not to get advantage of the discount benefit. So I guess the question is really how much room do you have to add to that reserve buffer, whether you quantified within this EUR 2 billion? Or do you also have a lot of pockets, like younger underwriting years, risk adjustment, discount benefit that you can actually add to that over the course of the year? And my second question, so you've announced this new specialty reinsurance unit, the focus -- that will be focusing on cyber and digital risk, I believe. Is that sort of a change in risk steering? Or is this more about an alignment of reporting lines and business segments, et cetera, any more you can share behind that, please?

Yes. Just on the reserve buffer. It's Clemens. So just to be very clear here. So what we're reporting here, the roughly EUR 2 billion is the resiliency of our reserving position within the liability for incurred claims. So within the liability for incurred claim. So within the LIC, that's the resiliency only within that position. It doesn't cover any reserve strengthening or resilience that we have in more younger underwriting years, hence, also in the unearned part of the LRC. So that is not included. And as mentioned earlier, we have been cautious in 2023 also on more younger, I think, underwriting years is a bit more prudent in our loss picks. And then also on -- I think that's -- that's very important to note is that the risk adjustment of roughly EUR 850 million that we reported at the end of 2023 is also not included in that number. So I think we always -- when we look at -- talk about resiliency, we should take these numbers together. As for any further extraordinary increases of resiliency, I think it's -- what I said earlier is, we have not planned for 2024 to grow that number extraordinary. However, with the growth of our P&C book, we will, of course, see further reserve increases, but really just with the growth of the book. So overall, we feel comfortable with the 5% resiliency plus risk adjustment at this stage.

Yes. On the reorganization, you are mentioning the main change is really on the cyber side, our digital underwriting activities have been in a centralized unit before, but we have now combined that with the centralized unit for cyber, which historically we have written in our regional accounts. This is just the evolution on how we look at our increased sophistication when it comes to pricing capability, modeling capability, but also the trends we are seeing in the market. So historically, buyers have solely concentrated on quota share and aggregate stop-loss kind of solutions. But now we see the emergence of also event-based cyber protection. And in addition, by now, we have established 4 different types of retrocessional coverage and bring that all together in one unit that is concentrating on building on the development of additional risk-bearing capability, also in combination with the capital market. And having a homogeneous approach when it comes to the question, what is the cyber event, what language do we -- are we prepared to provide, lends itself to a centralized approach, like we have in many other specialty classes, like marine, aviation, political, surety and so on. So just an evolutionary step here.

And the next question comes from Faizan Lakhani from HSBC.

The first one is on the PYD. So I can see the PYD was EUR 171 million for the quarter. Can you just remind us when thinking about the 89% combined ratio guidance implicitly, what are you assuming for PYD within that? And I guess by extension, with the hailstorm, as you mentioned, it's sort of deducted from the prudence in the newer underwriting years. Would it be fair to say that the new underwriting years have the same level of sort of reserve margin as the prior years? If you could provide some sort of qualitative guidance on that one. My next question is coming back to the critical illness in China. Have you seen a further adverse development from the fact that China has reopened post COVID? And if that sort of factors in when thinking about setting your loss component for this quarter?

On the first one, PYDs. So I think, in general, it's fair to say that we have not changed our quite prudent reserving approach in the initial loss picks. That's also true for the underwriting year, let's say, 2022, 2023. And also 2024, what you see here at the initial recognition. What I would say is that, particularly at year-end 2023, we have added a bit more prudency to the younger underwriting years, which have not become visible yet in the reserve study, as mentioned before, and which you're also not being seen yet in the first quarter, apart from the fact that we've used some of that prudency to cover for the Italian runoff losses. Generally, I would say, any run-off result is somewhere let's say, on a discounted basis above EUR 500 million, EUR 600 million per year, I think, is a good number, of course, varying a bit on the current development, but I think that's a good proxy for the overall discounted runoff results for the financial year 2024.

So sorry, just to touch on that, you said EUR 500 million to EUR 600 million. If I annualize the EUR 171 million, it's close to EUR 700 million. So would that be fair to say that the underlying is developing better than the sort of EUR 88 million that you posted effectively there?

Yes. I think the EUR 170 million is a healthy runoff result. However, a bit subdued in the first quarter, first of all, by the development that we just mentioned, although that being covered a bit. But in the first quarter, we are usually a bit more prudent when it comes to runoff results. You would -- those more developed -- seen developing within the third and the fourth quarter. So yes, I would say it's still a prudent number in the first quarter and the EUR 500 million, EUR 600 million is really just a proxy. It can go above that number also in a healthy year. But it's just -- really just as a proxy for what we take into account for the overall year.

Maybe one comment on the critical illness side, you referred to China and the changes after COVID. One thing is already in 2015, '16, we stopped writing this business because there is much more screening, which, of course, impacts mainly cancer, not so much heart attack and stroke. But you also have seen less visits to the doctor during COVID. So there is a backlog of a maybe potential heart attack and stroke cases. This has come through in the last 2 years. But one of the major impacts, which are difficult to quantify is, the number of agents -- sales agents in China has reduced significantly after COVID. Because during COVID time, they could not sell anything. What happens then is that nobody takes care of their customers. Healthy customers then tend to lapse. People with health issues tend not to lapse. So the lapse rates increased and mainly with the healthy people. So the claims ratio increased. I think this is mainly over now, but it has certainly an impact on the claims ratio, but it's very, very difficult to quantify because you have nothing to compare it to. But the number is about half what we have seen before the COVID pandemic.

And the next question comes from Will Hardcastle from UBS.

Two questions from me. The first one is just really trying to get a grip of this normalized run rate. I kind of feel like there's a few different numbers out there. I think you said at the full year the normalized run rate ex-reserve build was sort of around the 87.5% to 87%. Then we've got the 89% guidance. And then I think earlier on the call, there was an 86.5% comment. I guess perhaps just where do you feel like the business is running through this year would be really helpful? And how does that 1.5% rate increase reported today fit with that? The second question is, it looks like just going through some of the reserve triangles that around EUR 0.5 billion of strengthening has gone through in general liability, [ nonproportional ] across 2017 to EUR 22 million. Is that effectively where the reserve resilience build has come in? Or is some of that EUR 0.5 billion best estimate deterioration as well?