It looks a good time to invest in the insurance sector. That's because the hefty losses that hit insurers during 2011 - from catastrophes such as earthquakes in New Zealand and Japan, tornadoes in the US and floods in Australia and Thailand - also mean that premiums have to rise on policies exposed to catastrophes. Yet, with the exception of Hurricane Sandy and the Costa Concordia cruise ship disaster, 2012 turned out to be a benign year for claims. That backdrop is proving good news for most insurers and German reinsurance giant Hannover Re (0M9A) looks well placed to benefit.
- Catastrophe-related premiums still rising
- Investment performance looking good
- Life side provides diversification
- Nice dividend yield
- Losses on Hurricane Sandy
- Currency risk on dividends
Hannover Re insures other insurers against the losses they sustain, so it is heavily exposed to precisely those catastrophe-exposed classes where rates have been rising the most. Some 56 per cent of its gross premiums are generated from its non-life reinsurance unit, covering such reinsurance business lines as 'property catastrophe' or marine cover. With the group's results for 2012, its bosses say that "prices for reinsurance cover improved markedly" during the year, with the "most appreciable" price increases coming from the group's property catastrophe book. The energy book delivered "appreciable" price increases as well.
Admittedly, not all of Hannover's lines are experiencing such buoyant conditions and some areas of non-catastrophe focused business are seeing rates fall. For example, aviation reinsurance experienced "rate erosion" during 2012, while the credit and surety book suffered "modest" rate declines. But, overall, Hannover is still seeing premium rates generally harden and the group's rates rose 0.5 per cent overall during January's renewal stage. Within that, lines affected by Hurricane Sandy saw premium rates rise over 30 per cent, while marine rates rose by between 15 per cent and 25 per cent.
That favourable pricing backdrop was enough to help Hannover's combined ratio (of claims to premiums) recover to a solidly profitable 95.8 per cent in 2012 from 2011's lossmaking 104.3 per cent. That outcome was all the more impressive given that last year - while benign for claims compared with 2011 - was hardly loss-free for Hannover. It suffered a painful €258m (£220m) loss from Hurricane Sandy, for instance, along with a €53m hit from the Costa Concordia disaster. Investment bank JPMorgan expects the combined ratio to improve to 95 per cent in 2013, and then to 94 per cent in 2014.
HANNOVER RE (0M9A) | ||||
|---|---|---|---|---|
| ORD PRICE: | €62.33 | MARKET VALUE: | €7.52bn | |
| TOUCH: | €61.04-€62.33 | 12-MONTH HIGH: | €64.47 | LOW: €40.5 |
| DIVIDEND YIELD: | 5.0% | PE RATIO: | 9 | |
| NET ASSET VALUE: | €50.2 | COMBINED RATIO | 95.8% | |
| Year to 31 Dec | Gross premiums (€bn) | Pre-tax profit (€bn) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2009 | 10.3 | 1.07 | 608 | 210 |
| 2010 | 11.4 | 1.09 | 621 | 230 |
| 2011 | 12.1 | 0.74 | 502 | 210 |
| 2012 | 13.8 | 1.30 | 712 | 300† |
| 2013* | 14.5 | 1.26 | 704 | 310 |
| % change | +5 | -3 | -1 | +3 |
*JPMorgan estimates Normal market size: 700 Matched bargain trading Beta: 0.8 †Includes 40¢ special dividend £1=€1.17 | ||||
Hannover's life and health reinsurance book looks in good shape, too. That business offers such products as insurance for life assurers to cover the risk that members of pension schemes live longer than predicted. The unit saw gross premiums rise 15 per cent during 2012 to €6.1bn, while the divisional cash profit jumped 34 per cent to €291m. Given the long-term nature of life assurance products, this business provides some sensible diversification away from Hannover's more volatile and catastrophe-driven non-life side.
The group's investment portfolio is also performing well. It's 94 per cent invested in high-quality bonds and cash, with the remainder mostly in property and equities. Despite today's ultra-low interest rates, the portfolio delivered a decent 4.1 per cent return - notably above management's 3.5 per cent target and better than the returns generated by many UK insurers. Indeed, investment returns from some UK underwriters were noticeably worse - Catlin (CGL) and Beazley (BEZ), for instance, both generated 2 per cent investment returns. A prospective dividend yield of nearly 5 per cent, based on JPMorgan's forecast payout for 2013, is fine for income seekers, too. The dividend is paid in euros, which brings a currency risk, although the shares are traded in a decent size on the London Stock Exchange.
