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Hannover Re continues successful performance

  • Gross premium income + 49%
  • Life and Health reinsurance + 58%
  • Financial reinsurance + 38%
  • First-time consolidation of Clarendon with profit contribution
  • Consolidated net income and earnings per share + 18%
  • Return on equity 24% before and 17% after tax
  • Sixth consecutive dividend increase

Hannover, 6 June 2000:

As announced by Wilhelm Zeller, Chairman of the Executive Board, at today's press briefing on the annual results in Hannover, the Hannover Re Group generated its fifth successive record result in the 1999 financial year. The annual financial statement, based for the first time on US GAAP (Generally Accepted Accounting Principles), shows year-on-year increases of 18% in both the net income and earnings per share, which rose to EUR 202 million and EUR 6.86 respectively. With return on equity of 24% before and 17% after tax Hannover Re surpassed its profit targets. In accordance with the dividend policy already established four years ago, the operating profit of the parent company will again be distributed in full to shareholders. The gross dividend will thus increase by 33% to EUR 2.91 per share.

Special factors combined with strong organic growth boost premium income by almost 50%

Mr. Zeller reported that the gross premium income of the Hannover Re Group increased in 1999 by 49% to EUR 6.7 billion (previous year: EUR 4.5 billion). Major contributions to this growth were the first-time consolidation of Clarendon Insurance Group, New York and hence the new strategic segment of program business, which accounted for 30 percentage points. With approximately 7 percentage points attributable to exchange-rate factors, real organic growth accounted for an increase of 12 percentage points. Of this, life and health reinsurance produced growth of 15 percentage points, while financial reinsurance generated 2 percentage points. The currently difficult segment of property and casualty reinsurance, on the other hand, was written on a strictly profit-oriented basis, thus leading to a decline in premium volume of 5 percentage points. The proportion of property and casualty reinsurance in the Hannover Re Group's total portfolio contracted to 39% (previous year: 61%) in the 1999 financial year.

Owing to the fact that program business is by its very nature virtually entirely reinsured (89% in the year under review) and given the increasing transfer of acquisition expenses from life and health reinsurance to the capital markets by way of innovative securitization instruments, the growth in net premiums earned was lower although at 18% still well into double figures.

All strategic business segments post favourable profit contributions, albeit of varying quality

As part of its US GAAP financial reporting, Hannover Re also presented for the first time a complete segmental report disclosing the profit contributions of the individual strategic segments, down to the result after tax.

The deterioration of EUR 36 million in the technical result in property and casualty reinsurance was entirely attributable to the substantially above-average losses caused by natural catastrophes and other major loss events. Although Hannover Re has significantly scaled back its participation in this business over recent years due to the unsatisfactory terms and conditions, it too saw its burden of losses in this segment rise to a new record high due to natural catastrophes such as the hailstorm in Sydney, the earthquakes in Turkey, Greece and Taiwan, typhoon "Bart" in Japan, the winter storms in Western Europe as well as numerous major fire losses and aircraft crashes. These dramatic events were also reflected in the withdrawal from the market of a number of providers who had pursued aggressive pricing policies and a bottoming-out of the downward slide in premium rates and terms and conditions. The combined loss/expense ratio rose to 111% (previous year: 109%). Nevertheless, after taking into account investment income and especially as a consequence of the sharp drop in tax charges, the after-tax result was virtually unchanged at EUR 128 million.

Mr. Zeller explained that life and health reinsurance continued in line with the strategic objective to be the most significant growth area. It has also benefited most from the new presentation of the accounts and finally displayed "its true face". In this segment Hannover Re has specialised in treaties with prefinancing components, whose high one-off burden in the initial year produces losses under German accounting principles. Under US GAAP, however, these value-creating investments are deferred as acquisition costs, meaning that their profit contribution at least to some extent is shown up. This gives rise to an overall operating result before general expenses of EUR 46 million. In addition, the present value of future profits (PVFP) of the portfolio of life and health reinsurance has been disclosed for the first time. Particularly in the case of life reinsurance, this can be calculated using actuarial rules on the basis of expected future earnings flows; the PVFP amounts to EUR 609 million. The non-activated part of the portfolio value not entered on the asset side increased last year by EUR 90 million. The combination of these two profit variables now clearly demonstrates the level of profitability inherent in the life and health reinsurance portfolio.

Due to the limitation of the underwriting risk typically associated with financial reinsurance, Mr. Zeller noted that the increases in claims development had only a minimal impact on this segment. Financial reinsurance, in which it is not uncommon for innovative and individually tailored treaty structures to take account of an insurer's entire financial situation and where the reinsurer's assumption of the underwriting risk is limited, again developed very favourably. With an after-tax result of EUR 36 million, this segment generated another substantial profit contribution.

The annual financial statement includes for the first time the results of US program business. This American niche segment transacted by Clarendon Insurance Group, New York, is relatively unknown in Europe and follows its own rules and practices. Clarendon principally earns fees in its role as the link between the highly specialised managing general agents and the reinsurers who ultimately carry the risk. As set out in detail in Clarendon's recently published annual report (cf. press release dated 15 May 2000), also from a Group standpoint program business produced a highly gratifying after-tax profit of EUR 16 million. Mr. Zeller emphasised that it was thus evident just how profitable the investment in Clarendon had been even in the first year following its acquisition, and he reiterated that in Clarendon the Hannover Re Group had acquired one of the market's foremost program insurers.

Further increase in investment income

Despite the continuing low average yield on fixed-income securities, ordinary investment income rose by 5% to EUR 625 million. In addition, the investment result benefited from the at times explosive developments on the stock markets and capital gains of EUR 286 million were realised a figure which is nevertheless slightly lower than that of the previous year. Overall, investment income increased by 2% to EUR 828 million.

Sharp decrease in tax charges despite the strains of tax reform

As Mr. Zeller explained, the new provisions introduced by the so-called Tax Relief Act resulted in additional tax payments of EUR 82 million. However, since these for the most part have the character of tax prepayments, they were offset in the annual financial statement by "deferred tax assets". Additionally, the extraordinary tax expenditure of the previous year was no longer a factor, and it was possible to profit from a reduction in the corporation tax rate. Overall, the tax charges of the Hannover Re Group therefore decreased to EUR 80 million.

Further dividend increase

As in previous years, the operating profit of the parent company will be distributed in full to shareholders. Especially given the additional increase in the corporation-tax credit, this means that a gross dividend distribution of EUR 2.91 almost one-third higher than in the previous year will be proposed to the Annual General Meeting.

Favourable forecast for 2000

Mr. Zeller anticipates another predominantly favourable business development in the current year. However, based on the insights gained from the last renewal season, which for the most part was completed by 1 January, expectations differ for each of the individual business segments.

In property and casualty reinsurance the rock bottom has at least been reached. In some markets not only those which suffered natural catastrophes in the previous year it has been possible to obtain improved terms and conditions, sometimes markedly so. Yet too many market players are still prepared to accept inadequate conditions merely in order to enlarge their market share. The current year is therefore not yet the right moment to undertake a sustained expansion of the premium volume. Favourable indications are particularly discernible in the London Market, the USA and Latin America. It is also gratifying to note that catastrophe losses have been considerably lower to date this year than in the previous year.

In life and health reinsurance, by contrast, the company remains on a growth path. In this segment, the clear focus on a limited number of target markets and target clients is bearing fruit. Furthermore, the organisational concentration of all activities in life and health reinsurance under the brand "Hannover Life Re" has contributed to a consistent market profile and facilitates the unlocking of synergistic potentials within the Group. This segment will again generate profitable growth well into double digits.

The portfolio of financial reinsurance is based on a comparatively small number of large-volume treaties, some of which are also as originally intended of a one-off nature. Consequently, the development of gross premium income is substantially more volatile here than in the other segments. This business too, however, is expected to generate further disproportionately large growth and earnings.

In the second year following the acquisition of Clarendon Insurance Group, its membership within the Hannover Re Group is to be used vigorously to expand business relationships. Clarendon is thus on course to position itself as the clear market leader in program business in the USA. Mr. Zeller anticipates a double-digit expansion of premium income and corresponding profit increases. What is more, Clarendon is striving to export its successful business model. An application has already been filed for a licence in Canada, and the company hopes to expand its operations into this market by the fourth quarter. A promising project is also being implemented in Brazil. Furthermore, an international team has been assembled within the Hannover Re Group to work on launching the Clarendon model in Europe. For this purpose, the well established subsidiary International Insurance Company of Hannover (Inter Hannover) in London has been designated as the centre for non-American activities and initial steps have been taken to set up the infrastructure. The first target markets are the United Kingdom and Ireland. In South Africa, too, where this business model already exists, further expansion of the premium volume is envisaged. Overall, therefore, this segment is expected to generate double-digit increases in premium income and profit.

As Mr. Zeller observed, forecasts regarding investment income are by their very nature difficult to make. Given a "normal" scenario with no dramatic interest rate rises or sharp stock market corrections, higher current earnings on the basis of an increased portfolio and a normalised level of realised capital gains are expected.