Hannover Re's problem with its loss-making legacy U.S. mortality business "should be largely solved within 2018," according to CEO Ulrich Wallin.
The German reinsurer revealed in its second-quarter earnings announcement that racked up a $264 million bill, which will hit in the second half, as clients pulled U.S. mortality business in response to rate increases the company implemented to stem losses. Hannover Re expects the charge to increase as more clients recapture business. In a potential "extreme scenario," the total second half recapture charge could rise to between $500 million and $600 million.
The problems stem from a block of ING business that Hannover Re bought from Scottish Re in the first quarter of 2009. Wallin vowed to speed up efforts to tackle the losses from the business when discussing Hannover Re's 2017 full-year results. The company informed clients by letter on May 1 that rate hikes would be effective from the beginning of August, giving them the option to either implement the increases or recapture the business.
So far, clients representing 40% of the net amount at risk under the policies have responded, of which 80% have opted to recapture rather than accept higher rates, Wallin told analysts on a second-quarter earnings conference call.
Wallin admitted that the recapture level was higher than he anticipated, and warned that related charges could push earnings before interest and tax, or EBIT, for the whole life and health business below the €200 million it had estimated for the year. Wallin said back in March that the €200 million estimate was already "more cautious" because of the U.S. mortality problems.
But he told analysts Aug. 9 that while there was short-term pain from the remedial action, the reduction in the book and higher prices from the remaining business would reduce the burden of losses from the U.S. mortality business.
"The IFRS profit of our life and health business should increase from 2019 onwards," Wallin said, adding that the underlying EBIT for the business, excluding U.S. mortality troubles, was "quite a bit more" than €400 million.
The Hannover Re CEO said there is potential for arbitration if clients challenged the reinsurer over the higher rates, which could take two and a half years.
Hannover Re is estimating a profit of more than €1 billion for full year 2018 and expects, all things being equal, to pay a dividend of at least the €5 per share it paid in 2017. Wallin said both estimates stood regardless of losses from the U.S. mortality business.
At group level, Hannover Re reported a 3.8% increase in group net profit to €555.3 million in the first half of the year from €535.0 million in the first half of 2017.