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U


nlike many newly appointed chief executives of reinsurers, when Ulrich Wallin took the reins of Hannover Re two years ago, in 2009, he did not take charge of a company in turmoil


or in need of change. He has already been on the board of the business for eight years and the company was stable. “The change was not revolutionary, but one more of continuity,” he says.


But as any football manager will tell you, taking over an organisation


already performing well can be something of a poisoned chalice. It can be easier to make tough decisions and achieve fast and obvious improvements in companies that, for whatever reason, are ailing. If things are running smoothly already, beware rocking the boat too much.


Wallin was not comfortable with everything in the company, however, and he chose his goals carefully. For some time, he says the company’s growth had been stagnating and even slipping backwards. “I felt it was important to bring the company back into growth mode, not only in terms of the top line, but also the bottom line. That worked relatively well and was aided by the good market in 2009, and it has continued in 2010 and 2011,” he says.


He also sought to reduce the volatility of the company’s profitability. In


three years out of 10 preceding his appointment, the company barely broke even. There were good reasons for all three instances, namely the 2001 World Trade Center attacks, Hurricane Katrina in 2005 and the financial crisis of 2008. “But one of my major goals was to reduce this volatility. It meant even stricter controls of our nat cat aggregates and stricter risk management on the investment side of our business,” Wallin says.


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“In terms of the third and fourth quarters, as long as the losses remain


within expectations and there is no major downturn in the capital markets, we would expect to see profits in line with the second quarter, which should bring us to the 500 million,” he says.


There are other reasons why the company has remained successful, forward to 2011, and he believes some of the strategies he


implemented have borne fruit. Despite some heavy losses emanating from catastrophe losses in the first quarter, the company remains on course to achieve its revised after-tax profit guidance estimate of €500 million for the full year.


“I would say that the business model has shown relatively good resilience


against the quite heavy loss activity which we have seen this year,” he says. “If you look at the percentage of our first quarter catastrophes as a percentage of premium income earned in the first quarter, we have the lowest percentage of our peer group. Therefore we feel that striving to reduce volatility has worked and has worked at a time where we were growing the business.”


Wallin explains that the company’s initial profit estimate of €650 million would have meant that it would have needed to generate roughly €165 million per quarter. Despite the losses and aided by some tax repayments that it received from the German tax authorities following a legal dispute it won, it generated a profit of €50 million in the first quarter. In the second quarter, its after-tax profit was €166 million—in line with the original target of €650 million and also the revised target of €500 million.


14 | INTELLIGENT INSURER | October 2011


despite recent challenges, Wallin says. He sets great store by the company’s ability to keep close control of its costs. This discipline, which prevents its expenses growing faster than its profits in any part of its business, protects the bottom line in both the good times and the bad.


“It is very important that we only spend money where we generate


bottom and top line income,” he says. “This means we only offer services to clients that are strictly related to the actual reinsurance business. We also ensure our expenses are not growing faster than the profitability of our business on a normalised basis. We look at our expenses and personnel development every year, but we also need mid-term planning based on what kind of profitability increases are realistic over a five-year period.


“It is through this kind of cost consciousness that we try to ensure we


operate lean structures, even in a company that is growing and profitable and not in crisis mode. This is never an easy task. There is always pressure from the organisation to increase resources, but this is why it is very important to be very clear that there is a limit to the expenses which we can afford. The line is drawn to fit with our business model—we can only grow our expenses at the same rate as we grow our profitability.”


He gives an example of this discipline in action. Recent regulatory changes, including the impending switch to Solvency II, has meant increased costs on the compliance and regulatory side of the business. This has meant the business has been forced to find greater efficiencies elsewhere.


“ If you look at the percentage of our first quarter catastrophes as a percentage of premium income earned in the first quarter, we have the lowest percentage of our peer group. Therefore we feel that striving to reduce volatility has worked and has worked at a time where we were growing the business.”


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