Strong Financials And P&C Expansion Will Drive Future Profitability

Key Takeaways

• Hannover Re's strong financial foundation and strategic positioning indicate potential for sustained earnings growth and book value appreciation.
  
• Expansion in the Property & Casualty portfolio and Life & Health opportunities suggests future revenue growth and improved profitability through strategic management.
  
• Regulatory changes, competition, reduced retrocession, cautious provisioning, and currency fluctuations could negatively impact Hannover Rück’s revenue, profit margins, and earnings growth.

Catalysts

Provides reinsurance products and services in Germany, the United Kingdom, France, Europe, the United States, Asia, Australia, Africa, and internationally.

• Hannover Re's strong financial foundation and strategic positioning are seen in its 21.2% return on equity, highlighting potential for sustained earnings growth and book value appreciation. This indicates an ability to generate higher earnings while maintaining healthy capitalization.
  
• The expansion of the Property & Casualty (P&C) portfolio and positive reinsurance market conditions, including a combined ratio of 86.6% and a significant currency-adjusted revenue growth rate of 11%, suggest future revenue and earnings growth while maintaining profitability.
  
• Strategic reserve strengthening, with a 7.4% increase in risk adjustment and conservative underwriting amidst large loss resilience, signals the potential for improved future profitability and net margins through careful risk management.
  
• Opportunities in Life & Health, especially through Financial Solutions and in-force management actions, provide pathways for stable or increased profitability, with a reinsurance service result target of more than €850 million, suggesting expected steady earnings from this segment.
  
• A projected sustainable dividend policy with an increased ordinary dividend of €7 per share, grounded in strong earnings growth, illustrates confidence in further revenue and net income expansion while providing shareholder value.

Hannover Rück Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hannover Rück's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.8% today to 9.4% in 3 years time.
• Analysts expect earnings to reach €2.8 billion (and earnings per share of €23.58) by about April 2028, up from €2.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.6x on those 2028 earnings, down from 14.6x today. This future PE is lower than the current PE for the GB Insurance industry at 14.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.55%, as per the Simply Wall St company report.

Hannover Rück Future Earnings Per Share Growth

Risks

• The regulatory changes in China's Financial Solutions business could negatively impact future revenue streams in Life & Health, as the company needs to adapt to new constraints, potentially slowing growth.
  
• Competition in the longevity business, particularly in the UK, has led Hannover Rück to miss out on large transactions that did not meet their hurdle rates, which could impact future revenue and earnings growth in Life & Health.
  
• The reduction in retrocession can increase risk exposure in the Property & Casualty (P&C) business, potentially affecting net profit margins if large unexpected losses occur.
  
• The cautious provisioning for Russia-Ukraine and aviation-related losses reflects uncertainty and increased prudence, which could constrain earnings if actual claims exceed these provisions.
  
• Currency fluctuations, including the recent strengthening of the U.S. dollar, could result in unfavorable exchange rate impacts on profitability, as was evident from the negative currency result affecting the EBIT.

Valuation

• The analysts have a consensus price target of €280.875 for Hannover Rück based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €320.0, and the most bearish reporting a price target of just €220.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €30.1 billion, earnings will come to €2.8 billion, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 4.6%.
• Given the current share price of €282.4, the analyst price target of €280.88 is 0.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.