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Morningstar | Hannover Re Is Probably the Best Specialist Reinsurance Franchise, but You Pay a Premium

While reinsurance still faces pricing pressure in the near term, we believe Hannover Re is in a better position to weather the headwinds, given its exposure to moatier specialist lines. The benign natural catastrophe environment largely continues and has led to strong insurance balance sheets, and alternative capital continues to compound the issue. Hannover Re’s booked losses have not been enough to offset cyclical headwinds, which will remain until we see a heavy U.S. natural catastrophe event.Reinsurance is about cycle management, underwriting discipline, reputation, capital, and cost control. As a traditional reinsurer, Hannover Re has managed its commitments slightly more easily when renewing treaties. Management has been reducing exposure to softer lines, such as marine and aviation, and increasing underwriting in stronger markets. We believe near-term underwriting will improve as prices rebound following last year's events, lifting short-term returns on equity to 12%. We expect pricing pressure to persist in the medium term, but in the longer term, high exposure to specialist lines will help the business.Hannover Re is the largest specialist lines reinsurer that we cover and one of the largest globally. Average underwriting expertise is just shy of two decades, and a third of clients have been with the business for a similar period. The business has a history of positive reserve development, and has been voted number one for value in Flaspohler surveys. Despite its comparatively lower life reinsurance operations, the business is in good standing. But as with the P&C side, there are issues here. The legacy U.S. mortality business remains a drain, though this is an inherent industrywide life underwriting risk. Restructuring should lead to savings going forward.The value of service Hannover Re provides comes from a low-cost business model. With its traveling underwriters and centralised underwriting expertise, it operates in a low-cost environment, and this has enabled it to achieve an administrative expense ratio of around 3%, superior to competitors.