Interim Report 1/2013: Hannover Re makes a good start to the 2013 financial year

Hannover, 7 May 2013:

Hannover Re posted Group net income of EUR 221.4 million for the first quarter of 2013. "This result is a first successful step towards accomplishment of our full-year goal, namely Group net income after tax in the order of EUR 800 million", Chief Executive Officer Ulrich Wallin stated. "The key factors here are a very good underwriting profit in non-life reinsurance and a satisfactory result in our life and health reinsurance business."

Continued organic growth

Gross written premium for the Hannover Re Group grew more strongly than forecast by 7.0% to reach EUR 3.8 billion (EUR 3.5 billion) as at 31 March 2013. At constant exchange rates growth would have come in at 7.4%. The level of retained premium was slightly lower than in the corresponding period of the previous year at 89.9% (91.0%). Net premium earned rose by 9.4% to EUR 3.1 billion (EUR 2.8 billion). Growth of 9.8% would have been booked at constant exchange rates.

Good quarterly Group net income

In the absence of the positive special effects recorded in the unrealised gains of the comparable quarter, the operating profit (EBIT) declined as anticipated to EUR 352.5 million (EUR 393.2 million) as at 31 March 2013. Group net income totalled EUR 221.4 million (EUR 261.3 million), putting in place a good platform for achieving the full-year target. Earnings per share amounted to EUR 1.84 (EUR 2.17).

Non-life reinsurance delivers pleasing profit contribution

In non-life reinsurance the generally good results posted by reinsurers in 2012 led to a more competitive market environment. The supply of reinsurance protection exceeded demand in many areas. The non-life treaty renewals as at 1 January nevertheless passed off satisfactorily for Hannover Re. Rate increases were obtained under programmes that had suffered losses. They were particularly marked in marine business on account of the historically high major loss expenditure caused by the wreck of the "Costa Concordia" cruise ship and Hurricane Sandy in 2012.

Gross premium in non-life reinsurance increased by 3.8% relative to the comparable quarter to reach EUR 2.2 billion (EUR 2.1 billion). At constant exchange rates, especially against the US dollar, growth would have been 4.0%. The level of retained premium decreased slightly to 89.8% (91.2%). Net premium earned climbed 8.8% to EUR 1.7 billion (EUR 1.6 billion), equivalent to growth of 8.9% after adjustment for exchange rate effects.

Assisted by an exceptionally untroubled major loss experience in the first quarter of 2013, the underwriting profit in total non-life reinsurance more than doubled to EUR 98.1 million (EUR 46.8 million). Hannover Re incurred a net loss of merely EUR 13.4 million (EUR 60.6 million) from a satellite failure, a figure well below the expected level. "Despite this, we constituted IBNR reserves broadly in line with the loss expectancy for the first quarter in those segments with major loss exposure", Mr. Wallin noted. The combined ratio improved to a very good 94.0% (96.8 %).

The operating profit (EBIT) for non-life reinsurance as at 31 March 2013 remained virtually on a par with the previous year's level at EUR 258.7 (EUR 263.0 million), despite a sharp decline of around EUR 44 million in investment income connected with unrealised gains from the inflation swaps. Group net income nudged slightly higher to EUR 174.9 million (EUR 173.2 million). Earnings per share amounted to EUR 1.45 (EUR 1.44).

Life and health reinsurance enjoys vigorous growth

Hannover Re is thoroughly satisfied with its life and health reinsurance business. The company continues to see good growth prospects in the United States, Australia and parts of Europe. What is more, growing demand for reinsurance solutions can be observed in Asia and South America. "We got off to a particularly successful start this year in UK longevity business", Mr. Wallin noted. "We were able to assume pension commitments of altogether GBP 3 billion at attractive conditions and expect this business alone to generate additional gross premium income of around GBP 150 million for the current financial year."

Gross premium income for life and health reinsurance as at 31 March 2013 increased more strongly than anticipated by 11.9% to EUR 1.6 billion (EUR 1.4 billion). At constant exchange rates growth would have come in at 12.6%. Net premium earned rose by 10.1% to EUR 1.4 billion (EUR 1.3 billion), equivalent to growth of 10.8% on a currency-adjusted basis.

The operating profit (EBIT) as at 31 March 2013 amounted to EUR 88.3 million (EUR 122.3 million). The EBIT margin reached 4.8% in the areas of Longevity and Financial Solutions and 7.6% in Mortality and Morbidity business, thereby beating the strategic targets of 2% and 6% respectively. Group net income for life and health reinsurance totalled EUR 65.3 million (EUR 100.2 million). Earnings per share stood at EUR 0.54 (EUR 0.83).

In accordance with its usual practice Hannover Re is also reporting on the Market Consistent Embedded Value (MCEV) in the context of its interim report on the first quarter. The MCEV captures the entire life and health reinsurance portfolio, since it recognises the corresponding cost of capital in addition to the expected future profits. The MCEV therefore serves as a very good means of assessing the profitability of long-duration life and health reinsurance business. Bearing in mind the protracted strain on capital markets, the MCEV developed favourably as at 31 December 2012 and stood at EUR 3,133.9 million (EUR 3,065.8 million). This corresponds to growth of 2.2%. The company recorded a sizeable increase of 30.3% in the value of new business (excluding non-controlling interests); amounting to EUR 313.6 million (EUR 240.6 million), this was the highest value of new business achieved to date.

Solid investment income

Investments developed satisfactorily despite the protracted period of low interest rates. The portfolio of investments under own management showed further growth to reach EUR 32.5 billion (EUR 31.9 billion). Ordinary investment income fell only slightly short of the corresponding period of the previous year at EUR 246.1 million (EUR 258.2 million). Interest on funds withheld and contract deposits increased from EUR 83.7 million to EUR 93.8 million.

Investment income from assets under own management totalled EUR 260.9 million (EUR 356.9 million) in the reporting period, producing an annualised average return of 3.2 %. Unlike in the previous year, investment income was not influenced by appreciable special effects connected with changes in the fair values of the inflation swaps taken out by the company and of the ModCo derivatives. Unrealised gains consequently declined from EUR 84.6 million to EUR 3.3 million. Net investment income including interest on funds withheld and contract deposits closed satisfactorily at EUR 354.7 million (EUR 440.6 million).

With write-downs of just EUR 3.2 million (EUR 7.2 million) having to be taken, this is seen as affirmation of the company's conservative safety-first investment strategy.

Shareholders' equity further strengthened

Shareholders' equity increased by 4.3% in the first quarter of 2013 to EUR 6.3 billion (31 December 2012: EUR 6.0 billion). The total policyholders' surplus (including non-controlling interests and hybrid capital) grew to EUR 9.2 billion, as against EUR 9.0 billion at the end of the previous year. The book value per share amounted to EUR 52.18 (EUR 50.02). The annualised return on equity reached 14.4% (20.3%).

Outlook

For the current financial year Hannover Re believes that both non-life and life/health reinsurance offer sufficient growth potential for the company to be able to achieve its goals. Adjusted for exchange rate effects, gross premium for the Hannover Re Group is expected to increase by around 5%.

The business environment in non-life reinsurance is more competitive than it was in the previous year. "Despite this, we have largely been able to preserve the rate level of the previous year – on a risk-adjusted basis – in the treaty renewals to date", Mr. Wallin emphasised. The company sees attractive growth opportunities in a number of areas, including for example emerging markets.

Hannover Re is also satisfied with the outcome of the treaty renewals as at 1 April. Against a backdrop of stable prices growth of around 11% was achieved in the portfolio that came up for renewal. Movements in prices and conditions were very pleasing in Japan after the significant rate increases of the past two years. This level was for the most part maintained. The company therefore enlarged its shares under existing treaties and booked premium gains of around 6% in the original currency. Faced with more challenging market conditions in Korea, the exposure to proportional business was scaled back while higher-margin non-proportional acceptances were expanded. In US property catastrophe business only a small number of treaties are renewed on 1 April. Additional capacities from the non-traditional market meant that the further price increases which had been anticipated on the back of losses from Hurricane Sandy failed to materialise. In the area of agricultural risks Hannover Re made the most of the attractive rate level to substantially enlarge its portfolio. For 2013 the company is looking to generate growth in its non-life reinsurance business group in the range of 3% to 5% at constant exchange rates.

The prospects for life and health reinsurance are similarly bright. Adjusted for exchange rate effects, Hannover Re is looking to grow its gross premium organically by 5% to 7% in the 2013 financial year.

The expected positive cash flow should – subject to stable exchange rates – lead to further growth in the asset portfolio. Hannover Re is targeting a return on investment of 3.4% for the full year.

Based on the good start to the current financial year and the prevailing market climate, Hannover Re is looking to a successful 2013 financial year. The company anticipates Group net income for the full year in the order of EUR 800 million. This is conditional upon major losses not significantly exceeding the expected level of EUR 625 million for the full year and also assumes that there are no drastic downturns on capital markets.

As for the dividend, Hannover Re continues to aim for a payout ratio in the range of 35% to 40% of its IFRS Group net income after tax.