Annual Report 2011: Hannover Re beats return on equity target

Hannover, 14 March 2012:

For the international reinsurance industry the most striking feature of the 2011 financial year was an exceptionally heavy burden of losses from natural disasters. In the case of Hannover Re, the resulting major loss expenditure of EUR 980.7 million for net account was the second-highest in the company's history. "The fact that we were still able to generate a pleasing profit shows that we are moving forward towards our goal of reducing the volatility of results", Chief Executive Officer Ulrich Wallin noted. The return on equity of 12.8% surpassed the targeted level of 750 basis points above the risk-free interest rate.

2011 financial year

Gross written premium in total business increased by 5.8% to EUR 12.1 billion (EUR 11.4 billion). At constant exchange rates – especially against the US dollar – growth would have come in at 7.5%. The level of retained premium climbed slightly to 91.2% (90.1%). Net premium earned rose 7.0% to EUR 10.8 billion (EUR 10.0 billion).

As anticipated, the operating profit (EBIT) of EUR 841.4 million as at 31 December 2011 fell short of the previous year's figure (EUR 1.2 billion). Group net income amounted to EUR 606.0 million (EUR 748.9 million), comfortably beating the company's guidance of EUR 500 million. That the result was so positive can be attributed both to the quality of the underlying business and to very good investment income. The Group's profit also benefited from the refund of excess taxes and interest paid thereon in an amount of EUR 128 million. Earnings per share stood at EUR 5.02 (EUR 6.21).

Non-life reinsurance delivers very healthy profit contribution despite heavy major loss expenditure

"In non-life reinsurance we were able to sustain the growth trajectory of recent years", Mr. Wallin stated. "Our selective growth derived in particular from our business in the specialty lines and in emerging markets; it was, however, also boosted by appreciably improved reinsurance conditions as a consequence of the significant major losses."

Gross written premium in the non-life reinsurance business group increased by 7.7% to EUR 6.8 billion (EUR 6.3 billion). At constant exchange rates growth would have come in at 9.4%. The level of retained premium rose to 91.3% (88.9%). Net premium earned climbed 10.5% to EUR 6.0 billion (EUR 5.4 billion).

In terms of major losses, the 2011 financial year was an extraordinary one: the total net burden of major losses for Hannover Re amounted to EUR 980.7 million (EUR 661.9 million), a figure EUR 450.7 million higher than the expected level. The largest single loss event for the insurance industry – and also for Hannover Re – in the year under review was the devastating earthquake and subsequent tsunami in Japan. This alone resulted in a net strain of EUR 228.7 million for the company.

Against this backdrop the combined ratio deteriorated to 104.3% (98.2%). The underwriting result fell to EUR -268.7 million (EUR 82.4 million). The operating profit (EBIT) contracted to EUR 599.3 million (EUR 879.6 million) on account of the major loss expenditure. The result was favourably influenced by the refund of taxes and interest paid thereon in an amount of altogether EUR 128 million. Group net income in non-life reinsurance totalled EUR 455.6 million (EUR 581.0 million). This is a gratifying performance in light of the exceptional burden of major losses. Earnings per share stood at EUR 3.78 (EUR 4.82).

Further growth in life and health reinsurance

Even though the development of life and health reinsurance was less vigorous in 2011 than in prior years, a good result of EUR 182.3 million was still achieved. Profitability was supported by pleasing business conditions in the United Kingdom – especially in the area of longevity risks – as well as in Germany, Scandinavia, France and Asian markets. It was thus possible to largely offset negative effects from the performance of deposits held by US cedants on behalf of Hannover Re (ModCo) as well as adverse impacts in Australian disability business.

Gross written premium in life and health reinsurance climbed 3.5% in the year under review to EUR 5.3 billion (EUR 5.1 billion). At constant exchange rates growth would have come in at 5.2%. Net premium earned increased by 2.9% to EUR 4.8 billion (EUR 4.7 billion).

The operating profit (EBIT) in the life and health reinsurance business group contracted to EUR 217.6 million (EUR 284.4 million). The EBIT margin amounted to 4.5%. Group net income in life and health reinsurance retreated from EUR 219.6 million to EUR 182.3 million. In the previous year the result had profited from exchange rate effects. Earnings per share stood at EUR 1.51 (EUR 1.82).

Investment income reaches all-time high

Given the difficult capital market climate, Hannover Re is thoroughly satisfied with the performance of its investment portfolio. The return on investment for assets under own management – at 3.9% – surpassed the target level of 3.5%. Positive operating cash flows of EUR 2.5 billion and a favourable movement in fair values boosted the portfolio of assets under own management by 11.5% to EUR 28.3 billion (EUR 25.4 billion). Including funds withheld by ceding companies, the total volume of assets grew to EUR 41.7 billion (EUR 38.0 billion).

Thanks to the enlarged asset volume, it was possible to boost ordinary investment income – despite the low level of interest rates – by 9.7% to EUR 966.2 million (EUR 880.5 million). In addition, in the context of portfolio reallocations from government into corporate bonds Hannover Re realised profits that accounted for a significant portion of the total realised net gains. Inflows from the operating cash flow were invested primarily in corporate bonds, asset-backed securities and real estate. The balance of net realised gains and losses improved by 10.8% to EUR 179.6 million (EUR 162.0 million).

The unrealised losses recognised in the statement of income amounted to EUR 38.8 million (EUR 39.9 million). The bulk of this amount (EUR 55.4 million) derived from the performance of securities deposits held by US life insurers on behalf of Hannover Re. The inflation swaps taken out to hedge part of the inflation risks associated with the loss reserves in the technical account gave rise to unrealised gains of EUR 11.6 million, as against unrealised losses of EUR 31.2 million in the previous year.

Net investment income reached EUR 1,384.0 million (EUR 1,258.9 million), the highest figure in the history of Hannover Re – also in part because no write-downs had to be taken on government bonds.

Pleasing growth in shareholders' equity

Despite the considerable strains from major losses, shareholders' equity showed very positive growth. It increased by 10.2% relative to the level as at 31 December 2010 to reach EUR 5.0 billion (EUR 4.5 billion). The total policyholders' surplus (including non-controlling interests and hybrid capital) grew by 5.0% to EUR 7.3 billion (EUR 7.0 billion).

Dividend proposal: EUR 2.10 per share

"Particularly thanks to the further increase in our shareholders' equity, we are able to pay a dividend for 2011 that is somewhat higher than our strategic dividend target of 35% to 40% of Group net income. The Executive Board and the Supervisory Board will therefore propose to the Annual General Meeting that a dividend of EUR 2.10 per share should be paid", Mr. Wallin stated.

Outlook for 2012

Hannover Re is looking to the current financial year with optimism. The treaty renewals as at 1 January 2012 in non-life reinsurance passed off satisfactorily for Hannover Re. For the current financial year the company anticipates – at unchanged exchange rates – gross premium growth in the range of 5% to 7%. Potential for growth stimuli is expected to come from modifications made to natural perils models for risks in the United States and Europe as well as from the more exacting risk capital requirements imposed by Solvency II on insurance undertakings, for whom the transfer of risk to reinsurers with good ratings offers an economically attractive alternative. Hannover Re has budgeted an amount of EUR 560 million for major losses.

In life and health reinsurance the company sees good prospects for further profitable growth. Hannover Re expects organic growth of 5% to 7% in the gross premium volume. Established markets such as the United States, United Kingdom, Germany, France and Scandinavia will continue to play a major role for the company. Additional growth impetus is to be anticipated from Asia, Eastern Europe and India.

Hannover Re expects gross premium in total business to grow by 5% to 7%.

In 2012 a net return on investment in the order of 3.5% should be attainable. Hannover Re is looking forward to a good 2012 financial year.

For the current financial year the company is targeting a dividend payout ratio in the range of 35% to 40% of its post-tax IFRS Group net income.