Hannover, a Rare Moat in Reinsurance

Business Strategy & Outlook

Hannover Re is a property and casualty, and life and health reinsurer with property and casualty contributing a little over two thirds of the business’ profits to shareholders. Hannover Re has a slightly less than double-digit market share in both these divisions. This is a business that is characterized by underwriting and carving the deep expertise in niche areas. While this may sound a bit woolly, is that some of this underwriting difference comes from the overall ownership of the underwriting process by Hannover Re’s underwriters. To conceptualize this through lenses of decision-making and responsibility. Whereas in other reinsurance firms, underwriters may need to defer back to a head of risk or perhaps even the c-suit, underwriters at Hannover Re have the authority, experience, and expertise to make and take those decisions more directly. With more of these decisions being made closer to the front line this leads to better standards of underwriting. Furthermore, as per anticipate this leads to stronger client relationships. Because underwriters are client-facing and thus renewals a reiterative negotiation, with Hannover Re’s underwriters in the position to directly negotiate and discuss client needs without the need for constant deferral, clients feel and are more connected to Hannover Re and this drives stronger retention rates. As stronger retention drives lower commission and acquisition costs.

In addition to the culture of excellence in underwriting with a proven reputation for expertise in specialist lines, Hannover Re benefits from an expense advantage and these two benefits are aligned. For example, with deeper and stronger expertise in underwriting, Hannover Re retrocedes less than comparable European reinsurance companies. As the business has the institutional capacity to absorb this internally with regard to its frontline, coupled with the lower levels of internal referrals outlined, Hannover Re supports more premium per employee than other comparable. The outcome of this is tangible with the business benefiting from at least a 100-basis-point expense ratio advantage.

Financial Strengths

The Hannover Re has a relatively decent balance sheet. Leverage is quite low with debt standing at around EUR 3.4 billion. That stands in contrast to equity owned by shareholders of EUR 10.9 billion. Admittedly, of that EUR 2.3 billion is attributable to gains on securities classified as available for sale. One has already touched on where Hannover’s balance sheet is weakest with the largest part of Hannover’s market risk attributable to default and spread risk. As dig a bit deeper, one can see that this relates to Hannover’s allocation to credit. Of the EUR 14.2 billion held in corporate bonds, EUR 7.8 billion is held around investment-grade. The shape of the government and semi-government bond portfolios is much more appealing. Hannover has also substantially increased its allocation to equities. Goodwill is however nice and low. Overall, this is a balance sheet that has room for quite a bit of improvement. First and foremost, the allocation to equities very opportunistic. This does not fit in with the typical corporate culture at Hannover Re. The quality of the credit portfolio is also a little light. But in the main this is a business that is not highly leveraged and is very financially disciplined.

Bulls Say

Hannover Re has a strong culture of expertise and experience in specialist underwriting.

Hannover Re is a cost leader with one of the lowest proportional amounts spent on administrative expenses.

Hannover Re focuses on organic growth rather than acquisitions. This not only comes through in its lean structure and lower expenses, but also in its approach to capital management and returning capital to shareholders.

Company Description

Hannover Re is a German-based reinsurance company with a strong reputation in writing specialist lines of reinsurance and also a low-cost operating model. The business and its management team are highly disciplined, rarely ever making an acquisition and favoring a strategy of specials over a commitment to a buyback when looking to return excess capital to shareholders. The business to be innovative in finding alternative and unearthed profit sources.

(Source: Morningstar)

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