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Press Release on Interim Results 1/2003

Highly satisfactory quarterly result

  • Property and casualty reinsurance on target
  • All other business groups considerably better than planned
  • Capital market situation necessitates further write-offs

Hannover, 27 May 2003:

At today's Annual General Meeting of Hannover Re in Hannover Wilhelm Zeller, Chairman of the Executive Board, presented the consolidated figures for the first quarter of 2003. He expressed considerable satisfaction with the company's start in the new financial year. Once again, Hannover Re has been able to profitably exploit the opportunities offered by the reinsurance markets. As anticipated, the result was strained only by the difficult situation on the capital markets as had also been the case in the two previous quarters. Due to further write-offs on investments totalling 75.3 million euro, the operating profit (EBIT) fell from 174.4 million euro in the same quarter of the previous year to 109.0 million euro. Net income for the quarter as at 31 March 2003 amounted to 71.2 million euro (previous year: 90.1 million), or 73 cents (93 cents) a share. As Mr. Zeller explained: "Once again all four of our business groups were a factor in this result, and for the most part with significantly higher profit contributions".

Gross written premiums across all four of Hannover Re's business groups were roughly on a par with the previous year at 3.2 billion euro. The fact that the premium volume did not turn out to be considerably higher was due primarily to movements in exchange rates. The average value of the euro against all major currencies increased by up to 23.3% (US dollar) in the reference period. Had it not been for the strengthening of the euro gross premiums would have risen by 12.7%. Net premiums earned amounted to 1.7 billion euro (1.8 billion euro).

The treaty renewals in property and casualty reinsurance as at 1 January 2003, when around two-thirds of all treaties were renewed, were highly successful overall. Hannover Re maximised its market opportunities and especially in North American business achieved substantial improvements in rates and conditions. That the premium volume nevertheless declined gross premium income contracted by 15.2% to 1.5 billion euro, net premiums earned fell by as much as 29.6% to 715.9 million euro was on the one hand due to the appreciation of the euro against the US dollar. Had it not been for this effect the decrease in gross premiums would have been a mere 6.9%. On the other hand the decline reflects strategic decisions implemented at the turn of the year: Firstly, Hannover Re will no longer assume all the reinsurance volume of its major shareholder, HDI, but rather only the portion that it intends to run in its retention. And secondly, the US subsidiary Insurance Corporation of Hannover stopped writing property and casualty reinsurance. The effect of these two strategic decisions was to give rise to a premium decrease in the order of 330 million euro for the first quarter; this corresponds to 19 percentage points.

The combined ratio of 100.3% was 7.9 percentage points higher than the same very successful quarter of the previous year. One reason here was the increased proportion of casualty business, for which the company continues to constitute reserves on a conservative basis. Justifying the writing of such business, which the company generally considers to be highly profitable under the currently prevailing market conditions, Mr. Zeller commented: "The typically long-tail nature of casualty business places a strain on the combined ratio in the year when it is written. The positive profit contributions only make a significant impact in subsequent years". It is also important to note that the profitability of the corresponding quarter in the previous year was heavily influenced by the extremely favourable market conditions following the terrorist attacks of 11 September 2001. The loss situation in the property lines was most gratifying in the first quarter of this year: not a single catastrophe loss was recorded.

When making comparisons with the extraordinarily good first quarter of the previous year, it should be borne in mind that the write-offs on investments manifested themselves for the most part namely in the amount of 62.6 million euro in the property and casualty reinsurance segment. Overall, the operating profit (EBIT) as at 31 March 2003 fell to 52.5 million euro (145.5 million euro). Quarterly net income in property and casualty contracted to 34.6 million euro (76.0 million euro), or 35 cents (78 cents) a share .

Life and health reinsurance developed considerably better than planned in the first quarter of the current financial year. Although the gross premium income of 570.8 million euro (577.6 million euro) fell slightly short of the previous year's level, growth of 11.9% would have been generated had it not been for the restraining effect of exchange rate movements. Net premiums earned amounted to 487.1 million euro (515.7 million euro). The performance of life and health reinsurance was extremely gratifying: the operating profit (EBIT) increased by 130.4% to 15.9 million euro (6.9 million euro). Net income climbed from 2.7 million euro to 9.6 million euro, or 10 cents (3 cents) a share.

Financial reinsurance also developed highly favourably in the first quarter. Unlike in the previous year, demand for financial reinsurance products was already very vigorous in the first quarter. As a well-known provider with a strong reputation and many years of experience, Hannover Re was a sought-after partner and succeeded in writing numerous new treaties in the first quarter. Gross written premiums were more than doubled to 457.6 million euro (217.1 million euro). If exchange rates had remained unchanged the growth would have been as much as 32.1% higher. Net premiums earned climbed by 122.5% to 236.5 million euro. As Mr. Zeller explained: "In accordance with our strategy geared to improving the geographical diversification of our financial reinsurance business, we were able to significantly enlarge our portfolio, particularly in Europe". The operating profit (EBIT) was also more than doubled to 17.7 million euro (8.4 million euro). Quarterly net income increased by 109.8% to 12.8 million euro, or 13 cents (6 cents) a share.

Program business remains on a successful track. The gross written premiums of 645.1 million euro were on a par with the same period in the previous year (640.3 million euro). Here too the strengthening of the euro against the dollar disguised the true growth: Gross premium income would have been 23.0% higher if exchange rates had remained unchanged. On the basis of the increased retention net earned premiums rose by 17.0% to 236.4 million euro. The quality of the business written is borne out by the underwriting result, which was boosted by 31.9%. The combined ratio fell from 93.0% to 92.1%; especially in the USA, the positive trend of the previous year was thus sustained. With net investment income slightly higher, the operating profit (EBIT) improved by 69.6% to 22.9 million euro. The quarterly net income generated on this basis almost tripled to 14.1 million euro (5.4 million euro), or 15 cents (6 cents) a share.

Although capital markets continued to experience severe volatility in the first quarter of 2003, Hannover Re was relatively satisfied with its net investment income. As Mr. Zeller emphasised: "Once again our low equity ratio of currently just 5.4% and the quality of our fixed-income securities have proved their worth". Nevertheless, in the first three months of this year further write-offs on investments were necessary. They totalled 75.3 million euro after a mere 6.8 million euro in the comparable period of the previous year. Of this amount 46.0 million euro was attributable to equities. Primarily due to higher interest on deposits, ordinary income increased by 12.4% to 260.2 million euro. Net investment income as at 31 March 2003 grew by 10.8% to 208.0 million euro.

Outlook

Leaving aside the write-offs on investments, the financial year has to date proven highly satisfactory for Hannover Re. The market development and the renewal season in property and casualty reinsurance have demonstrated that the "hard market" is holding up. Even isolated signs of a levelling-off or slight declines in premium volumes as well as the absence of further improvements in conditions in specific segments cannot overshadow the generally positive impression. As Mr. Zeller stressed: "For the year as a whole we do not anticipate any premium growth in property and casualty reinsurance, but we do expect a higher profit contribution ".

Following the substantial premium increases of recent years Hannover Re expects the premium volume in life and health reinsurance to remain largely unchanged in 2003. The company nevertheless anticipates a sharp rise in results.

In view of the current economic situation, the demand for financial reinsurance products is likely to increase. This trend is expected to generate double-digit premium growth as well as an increased profit contribution.

While gross premium income in program business for the current financial year is forecast to remain on a par with the previous year, results here too are expected to show further improvement.

Overall, subject to an average catastrophe loss incidence, the goal of generating a significantly increased profit despite a slowdown in growth appears realistic.

In view of the difficulty of foreseeing developments on the capital markets, it is scarcely possible to make forecasts about the net investment income. Hannover Re expects the investment volume to grow, although the attainable yields will decline. Provided there are no further price declines on the international stock markets, Hannover Re does not anticipate any further need for significant write-offs. As things currently stand, it should therefore be possible to offset the write-offs incurred in the first quarter with price gains in the course of the year.

Summing up, Mr. Zeller stated: "Given the developments described above, a catastrophe loss experience in line with the multi-year average and at least no further deterioration on the capital markets, we anticipate a highly successful 2003 financial year. In our assessment, net income of between 280 million and 310 million euro remains a realistic target".

Key Figures Interim Results 1/2003 PDF, 10 KB