Despite the challenging business conditions facing the international (re)insurance industry and the protracted low level of interest rates, Hannover Re expects to be able to operate with sustained success even in this environment. Based on constant exchange rates, we anticipate growth of more than 5% in the gross premium for our total business in the current financial year.
As had been anticipated, the treaty renewals in property and casualty reinsurance as at 1 June and 1 July 2017 were impacted by sustained competition. It is on these dates that parts of the North American portfolio, natural catastrophe risks and some areas of credit and surety business traditionally come up for renewal. This was also the main renewal season for business in Australia and New Zealand. Appreciable premium erosion was observed here in some cases, although it was also possible to obtain significant price increases under loss-affected programmes. This was especially true of Australia as a consequence of cyclone “Debbie” and in New Zealand following an earthquake in that country. Our strong market position enabled us to generate adequate margins for the Australasian region.
We are satisfied with the treaty renewals for the North American market and were able to boost our premium volume here by around 15%. A key factor, among others, was that we wrote larger shares in the business that we renewed with selected clients. In property business the pressure on rates remained moderate overall. Rate declines for loss-free programmes were in the low single-digit percentage range, mostly less than 3%. For treaties that had been impacted by losses, on the other hand, rate improvements of between 10% and 20% were achieved. An exception here is business in Florida, which has seen significantly more marked rate reductions of up to 10%. The impact of competition from the ILS market is particularly evident here. The casualty lines were for the most part still competitive; in the general liability and workers’ compensation lines rates were lower than in the treaty renewals as at 1 January 2017. In Canada, on the other hand, we wrote a number of new treaties in the medical malpractice sector with the associated attractive growth in premium.
In natural catastrophe business premium erosion was observed in most markets. We were able to offset this thanks to a positive rate trend in Australia.
In credit and surety business we grew our portfolio. Not only did we write new programmes in these lines, we also increased our shares in existing treaties.
Premium growth of 10% was booked for the total renewed portfolio of property and casualty reinsurance.
For the full 2017 financial year it is our expectation that the underwriting result in property and casualty reinsurance will still be good despite the protracted soft market. We continue to aim for a combined ratio of less than 96%. The targeted EBIT margin for property and casualty reinsurance is at least 10%.
In life and health reinsurance we expect that international markets will continue to show a promising development overall and that potential new business opportunities will open up throughout the remainder of 2017. Gross premium – adjusted for exchange rate effects – is likely to post a modest increase compared to the previous year. This expectation is, however, subject to the proviso that unforeseeable changes in large-volume treaties can have significant implications – both positive and negative – for the total premium volume. The value of new business should be in excess of EUR 220 million. Our targeted EBIT margins also remain unchanged at 2% for financial solutions and longevity business and 6% for mortality and morbidity business.
We are, however, anticipating further losses from older underwriting years of our US mortality portfolio for the full financial year as well. At issue here is a large block of business that we assumed at the beginning of 2009. In the third quarter we already expect to take a charge against earnings in the order of USD 50 million from the commutation of treaties as part of our portfolio management activities. While this will reduce the losses from the business over the long term, it will adversely impact the result in life and health reinsurance for the current year.
The expected positive cash flow that we generate from the technical account and our investments should – subject to stable exchange rates and yield levels – lead to further growth in our asset portfolios. In the area of fixed-income securities we continue to emphasise the high quality and diversification of our portfolio. As far as the allocation of our investments to the individual asset classes is concerned, we are planning – aside from the temporary exceptions on the USD side already discussed – to further expand our holdings of fixed-income securities rated BBB or slightly lower while at the same time enlarging our portfolio of government bonds. Similarly, we shall further expand our exposure to the real estate sector as attractive openings arise. Overall, the primary focus will remain on stability while maintaining an adequate risk / return ratio that will enable us to respond flexibly to general developments and emerging opportunities. For 2017 we are targeting a return on investment of more than 2.7%.
In light of the business development to date, we currently expect to generate Group net income in excess of EUR 1 billion for 2017. This is conditional upon the burden of major losses not significantly exceeding the budgeted level of EUR 825 million and assumes that there are no unforeseen distortions on capital markets.
Hannover Re envisages a payout ratio for the dividend in the range of 35% to 40% of its IFRS Group net income. If the comfortable level of capitalisation remains unchanged, this figure will probably increase in light of capital management considerations through payment of a special dividend.