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Hannover Re targets US cat growth

After announcing record 2006 profits, Hannover Re is planning growth in its US property catastrophe business as it redeploys capital following the $800mn sale of its Praetorian subsidiary to QBE Insurance Group Ltd.

The company reported operating profits of EUR819.9mn and net income of EUR514.4mn, compared with EUR91.6mn and EUR49.3mn respectively in 2005.

The results were generated from gross premium income of EUR9.3bn - level with the prior year, but excluding EUR1.6bn unconsolidated gross premiums from Praetorian.

Combined ratio was 98.4 percent - down from 112.8 percent, but higher than rivals such as Munich Re and Swiss Re, as the German reinsurer said it had increased reserving as part of a "prudent" policy on long-tail liability business, particularly for more recent years.

The company does not disclose the percentage impact of reserving on its combined ratio.

Hannover Re CEO Wilhelm Zeller said that the estimated EUR600mn freed up capital from the Praetorian sale would be primarily targeted at its core reinsurance operations.

He explained that, with rates in most US property cat business "not excessive, but still very attractive", it was natural to redeploy excess capital there once the Praetorian deal is finalised in April or May.

Zeller added that, despite recent actions in Florida to effectively nationalise a significant proportion of the homeowners cat reinsurance market, there are still an "abundance of opportunities" in the state, as well as other zones such as the North East coast of the US.

He suggested that, with prices expensive in the expanded $3bn excess of $3bn bottom layer of the Florida Hurricane Catastrophe Fund (FHCF) - typically 75-80 percent rate-on-line - buyers would seek lower premiums offered in the private market.

Furthermore, companies will buy at the side of the fund - which offers 90 percent capacity up to its $32bn limit - with those not trusting its security buying additional cover in the commercial market through the fund layers, he said.

Buyers would also look for cover above the fund, between the 1-in-50-year event it covers, and the 1-in-100-year event protection an AM Best rating requires, he suggested.

Demand for second event cover would also grow, while opportunities continue to exist in the commercial market.

"There will be an increased flight to quality and security - particularly in the state of Florida," he argued.

Hannover Re also continued to highlight its recent strategy of turning away from the traditional retro market to the capital markets to protect its portfolio.

With the extension of its K5 securitisation to $520mn, the company has ceded 41.5 percent of its non-proportional property cat business to the capital markets, and 45 percent of its aviation and marine business.

And with its recent Kepler sidecar-style securitisation - described by Zeller as a "revolution" - the reinsurer has effectively placed a $200mn aggregate excess of loss cover for the retained balance of the business ceded to K5.

This, together with the securitisation of EUR1bn of its reinsurance recoverables, leaves the reinsurer "very relaxed" as it approaches the 1 May renewal of its traditional worldwide reinsurance cover, said Zeller.

He said that unless the price of cover comes down by "at least one quarter… we would not even consider renewing it".

Earlier this month Zeller said the Kepler transaction gave the reinsurer "unprecedented independence" from the traditional retro market.

The company will also target growth in its life reinsurance business and in the German market. Part of the freed up capital from the Praetorian sale will be used to fund the acquisition of an increased share in E&S Rück, with the reinsurer taking an extra 8 percent in the domestic specialty lines subsidiary.

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