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Expected year-end results for 2000 / Outlook for 2001

Hannover, 14 March 2001:

  • strong growth in all strategic segments;
  • Net underwriting result improved;
  • Investment income modest in second half-year;
  • Net income for the year up 78%;
  • Dividend increase envisaged;

Outlook for 2001:

  • Encouraging renewal season in property/casualty reinsurance;
  • Increase in pre-tax result anticipated;

Wilhelm Zeller, Chairman of the Executive Board of Hannover Re, reported on the expected results for the 2000 financial year at a press conference in Frankfurt. Furthermore he reviewed the findings from the so-called renewal season in property and casualty reinsurance, i.e. the annual treaty negotiations between reinsurers and their clients.

Expected results for 2000

Mr. Zeller expects the gross premium income of the Hannover Re Group to grow by 25% in the 2000 financial year to approximately EUR 8.4 billion (EUR 6.7 billion the previous year), whereby 5 percentage points can be attributed to currency exchange rate fluctuations. He emphasised that the main factor in this growth was financial reinsurance, which posted the highest rate of increase (75%). However, also life and health reinsurance, which is transacted world-wide under the Hannover Life Re brand, showed similar vigorous expansion and recorded growth of 19% (the previous year's figure having been recalculated so as not to take into account one exceptional effect). Program business, which now comprises not only the US Clarendon Insurance Group but also for the first time the activities of Inter Hannover in London, similarly generated impressive growth of 32%. Property and casualty reinsurance had been written with a markedly conservative approach in previous years due to the prevailing inadequate terms and conditions. However, following appreciable improvements in a few, albeit significant markets in the course of 2000, this business also made a highly gratifying 26% contribution to growth, most notably due to a number of special transactions.

The results were influenced by very different, sometimes contradictory factors. In property and casualty reinsurance, on the one hand, the gross burden of major losses decreased from EUR 468 million in 1999 to approximately EUR 140 million (from EUR 213 million to EUR 40 million net) in 2000. On the other hand, the inadequate terms and conditions from the previous years still left their mark, resulting in only a slight improvement on balance. The result in program business declined appreciably due to two one-off effects (cf. press release dated 8 March 2001). In life and health reinsurance and financial reinsurance the planned targets will probably be attained.

Mr. Zeller emphasised the highly advanced diversification of Hannover Re's reinsurance portfolio, in which traditional property and casualty reinsurance now accounts for just 40% of the total business volume as a consequence of the vigorous expansion of the new segments. Together with life/health reinsurance, financial reinsurance and program business, the company now enjoys four independent sources of income. Even if one particular segment should experience a difficult period, this can therefore be successfully offset.

With a slightly reduced pre-tax result, the result after tax was heavily impacted by the cut in the corporate tax rate from 40% to 25%. Mr. Zeller explained that this had led to the recalculation of deferred taxes and produced additional income of around EUR 200 million in all. The investment income should also be seen against this backdrop: while ordinary income showed a slight increase, the company dispensed almost entirely with the realisation of gains on investments in the second half-year. Total investment income thus dropped accordingly. Including the exceptional effect associated with the tax reform, the after-tax result grew, however, by approximately 78% to roughly EUR 360 million. The company envisages using the reduction in the corporate tax rate in Germany to further increase the dividend distribution.

Outlook for 2001

After presenting the expected results for the past year, Mr. Zeller offered detailed insights into prospects for the current year, especially in the property and casualty reinsurance segment. Since a large portion of these reinsurance treaties is renewed at 1 January each year, Hannover Re holds an internal "renewal conference" every February. Here, members of staff responsible for each market present the results of their negotiations with their clients, the primary insurers. This provides senior management with a condensed and up-to-date overview of the state of the property and casualty reinsurance markets throughout the world.

This year the developments reported by these market representatives can be rated almost without exception as positive. This means that the negative trend has finally stopped in all markets. Some markets are already witnessing initial and in parts even considerable rate increases and improvements in terms and conditions. In some areas premiums have even reached a level which makes significant growth possible.

Since a corresponding development had already been anticipated one year ago and for the most part fell short of expectations, the majority of market players implemented the necessary improvements more systematically during the latest renewals. In Mr. Zeller's view, this was attributable to the unsatisfactory results of the previous years, especially 1999. It is very evident that owners and, especially in the case of listed companies, the stock markets had demanded an appropriate return on their invested capital. This confirms the correctness of the strategy pursued by Hannover Re, which is geared to exercising restraint during the depressed market phases in cyclical property/casualty reinsurance business, hence avoiding the losses associated with a fixation on market share and premium volume. Hannover Re is now in a position to derive a disproportionately strong benefit from the market upswing, and it anticipates further double-digit, profitable growth in 2001.

In the USA, for example, which with a total share of roughly 20% is Hannover Re's largest foreign market in property and casualty reinsurance, premium rates in numerous segments of non-proportional reinsurance improved by up to 30% - and in some cases to an even greater extent. In previous years Hannover Re had withdrawn almost entirely from proportional reinsurance, under which the reinsurer participates with a fixed share in the performance of an insurance portfolio. However, following comparable premium increases in the primary insurance markets, a reduction in reinsurance commissions and improvements in treaty terms and conditions, this segment too is currently not without appeal and has therefore been the target of opportunistic expansion. In various classes of business, most notably liability business, these increases have unfortunately not yet been significant enough for us to dispense with our existing policy of selective underwriting.

In Germany, we have only observed the first signs of favourable developments. Further improvements will be necessary before appreciable growth is also possible in this market. A 5% to 10% increase in motor insurance premiums and a slightly greater improvement in reinsurance conditions are by no means adequate, according to Mr. Zeller. This is even more true of industrial fire business, in which attempts to restore business to profitability are only now just beginning to become visible.

In the London Market, however, reinsurance terms and conditions have improved considerably. This is particularly attributable to the fact that London is dominated by small and medium-sized reinsurers (companies and Lloyd's syndicates), who are dependent on retrocession, i.e. being reinsured themselves. As retrocession capacity has become very scarce, and that which is available is being offered at significantly poorer conditions, this has been the sector where the pressure for premium increases has been most intense.

According to Mr. Zeller, Latin America has also experienced notable developments. The property and natural catastrophe, business which generally dominates these markets, has also developed exceptionally positively following several years of deteriorating premiums in both the primary and reinsurance sectors.

Despite sometimes considerable differences, favourable tendencies could also be observed in other countries. In those markets affected by natural catastrophes in previous years, such as France, Turkey, Greece, Taiwan and Japan, the demand for capacity to cover natural hazards has risen sharply, thereby fostering the general upward trend. In all other areas of property and casualty reinsurance i.e. with no catastrophe exposure the lowest point has been reached. There are only initial signs that conditions and premium rates may be improving. These circumstances are therefore not yet satisfactory, although it is hoped that the terms of trade will continue to improve over the course of the year.

As for the three other business segments life and health reinsurance, financial reinsurance and program business the company envisages a normal, as-planned expansion of business with growth again running into double digits. Total gross premium income is therefore expected to increase by approximately 15% to over EUR 10 billion. Based on the favourable development in property/casualty reinsurance, normal profit growth in financial reinsurance and life/health reinsurance and further profit contributions from program business, 2001 is expected to close with an appreciably higher pre-tax result.