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 stable or slightly reduced gross premium volume for our total business in the current financial year.
In property and casualty reinsurance we expect to book slightly lower premium income – adjusted for exchange rate effects. This assumption is based on our selective underwriting policy, under which we only write business that meets our margin requirements.
The outcome of the treaty renewals as at 1 June and 1 July 2016 was broadly positive. It is on these dates that parts of the North American portfolio, agricultural risks and business from Latin America traditionally come up for renewal. This was also the main renewal season for business in Australia, where Hannover Re successfully enlarged its portfolio by writing a large-volume new treaty.
The treaty renewals in Latin America and the Caribbean as at 1 July 2016 were notable overall for price declines. Surplus capacity for natural catastrophe covers continues to be available, albeit on a somewhat reduced scale. The losses from the earthquake in Ecuador led to rate improvements, although these were only seen in the impacted region. We scaled back our involvement in agricultural risks owing to rate erosion in this business.
In North America the trend seen in previous renewals was confirmed. Large losses from natural disasters and man-made events were again notable for their absence. Rate reductions were nevertheless not as marked as expected in some areas. As had already been observed in the 1 January and 1 April renewals, there were indications of prices bottoming out – both in the property and the casualty lines. Adequate rate improvements of between 5% and 15% were booked for loss-impacted non-proportional treaties. Casualty business was still intensely competitive in most lines, although we were able to act on new opportunities – for example in connection with the coverage of cyber risks. The forest fires in the province of Alberta – the largest market loss in Canadian history – led to the anticipated sharp rate increases in the property sector. In US property catastrophe business the pressure on prices eased compared to the previous year's renewals. Prices moved in a range of between -3% and +3%. Hannovery Re systematically adhered to its pricing discipline, focused on target customers and continued to underweight its share of US catastrophe business. Rates in Europe and Latin America remained under pressure.
Premium growth of 8% was booked for the total volume of treaty business renewed as at 1 June / 1 July.
For the full 2016 financial year we anticipate a good underwriting result in property and casualty reinsurance that should be roughly on a par with 2015. This is conditional on major loss expenditure remaining within the budgeted level of EUR 825 million. We are aiming 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, too, we anticipate attractive business opportunities throughout the remainder of 2016. This 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. In view of opportunities that are already opening up to generate further profitable new business, we nevertheless anticipate a largely stable premium volume. The value of new business should be in excess of EUR 220 million. Our targeted EBIT margins remain unchanged at 2% for financial solutions and longevity business and 6% for mortality and morbidity business.
With regard to our IVC targets – which we use internally to map economic value creation –, we are aiming for returns that exceed the cost of capital both in property and casualty reinsurance and in life and health reinsurance.
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. The historically low reinvestment returns in the fixed-income portfolio as a consequence of the Brexit vote have resulted in an even more complex situation than at the beginning of 2016. Despite this, we are still targeting a return on investment of 2.9% for 2016.
Assuming that the burden of major losses does not significantly exceed the expected level and that there are no unforeseen distortions on capital markets, Hannover Re continues to anticipate Group net income of at least EUR 950 million for the current financial year.
Hannover Re envisages a payout ratio for the dividend in the range of 35% to 40% of its IFRS Group net income. This figure will probably increase in light of capital management considerations if the company's comfortable level of capitalisation remains unchanged.