INTERVIEW: Hannover Re Sees Moderate Rate Rises Jan '10

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; [phone]; [e-mail]