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Morningstar | Hannover Re 1Q: Average to Below Average; Shares Overvalued

Hannover Re has reported average to below-average results for the first quarter of 2019. Operating and net income was EUR 450 and 295 million respectively, approximately the same as our expectations. The book value is EUR 82.0 per share, still significantly below the EUR 130.0 per share market value. This is difficult to get to on a justified basis. We are maintaining our EUR 110.0 per share fair value estimate and no-moat rating.

At a group level, the underlying theme of these results has been premium. Gross and earned have increased 20% and 15% respectively. The investment book has performed well, with impairments of EUR 17.5 million, about 4 basis points of the overall portfolio. This has mainly been driven by EUR 7.0 billion in alternative investments. EUR 330 million of net investment income on assets under management delivered a return of 300 basis points. This is ahead of management's annualised target of 280 basis points.

The growth in premium at group level has predominantly been driven by higher premiums in property and casualty, which increased 20% after the renewals in January. This segment accounts for 62.5% of group gross premium. The combined ratio was 95.7%, behind what we think is a decent and achievable long-term target of 95.0% or better.

The major loss budget is currently EUR 875 million, up from EUR 825 for 2018 and prior years. The large losses for the first quarter were EUR 60.0 million, well below the EUR 175 million budget for the first quarter. While this may sound good, it actually translates into either bad attritional or loss development. It looks like Typhoon Jebi, that hit Japan in 2018, has resulted in an adverse development of estimates.

The margin in the property and casualty book was 11.5%, above the 10.0% targeted. Interest on funds withheld, included in the underwriting result, rose to EUR 125.0 million based on higher values. Meanwhile, the provision of alternative capital seems to be waning.

The operating result for property and casualty was EUR 335.0 million. This is about 10 basis points ahead of our forecasts. However, we anticipate this to drag over the next three quarters.

The life and health division has overall posted a good result because the unit has started to benefit after sorting out its United States' legacy mortality drag. Loss-making treaties have either been terminated, recaptured, or addressed with price increases. Last year, this made quarterly earnings look nasty. Profitability for Hannover life and health is now looking more positive.

Growth for this division is coming from Asia, particularly critical illness in China, where primaries seek solvency relief. And there is growing interest in longevity products with equity release. We think this is where the premium for protection in retirement products is paid for by drawdown. This could provide a decent transition in future from the typical home-ownership retirement model in this region to a more mature suite of retirement products among primaries.

Overall, operating profit in the life and health division has increased 20% to EUR 115.0 million. Currently this is tracking our forecasts.