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Press Release on Annual Results 2005

Hannover Re achieves breakeven result for 2005 despite historically unprecedented natural catastrophe losses

  • Net burden of catastrophe losses in property and casualty reinsurance unchanged from Q3/2005
  • Life and health reinsurance shows vigorous growth and strong profitability
  • Financial reinsurance highly profitable despite sharply reduced premium volume
  • Restructuring of specialty insurance progressing entirely as planned
  • Policyholders' surplus +10.1%
  • Investments (excluding funds held by ceding companies) +19.4%
  • Net investment income (excluding interest on deposits) +11.8%
  • Very good earnings prospects for 2006

Hannover, 23 March 2006:

The hallmark of the 2005 financial year for international reinsurers was an unparalleled burden of natural catastrophe losses. For Hannover Re these events produced historically unprecedented major loss expenditure in excess of 1 billion euro for net account. Hurricanes "Katrina", "Rita" and "Wilma" alone inflicted a net loss on the company of almost 800 million euro. The total strain thus remained in line with the amount already estimated at the end of the third quarter. As Chief Executive Officer Wilhelm Zeller observed at the press briefing on the annual results held in Hannover: "The fact that we were able to close this difficult financial year without depletion of our capital – unlike most of our competitors – is a testament to our strong profitability and good portfolio diversification".

Leaving aside the heavy burden of catastrophe losses, Mr. Zeller expressed considerable satisfaction with the development of property and casualty reinsurance. "We achieved good results in business with no catastrophe exposure. This is one of the reasons why our combined ratio of 112.8% did not come in significantly higher despite the hurricanes", Mr. Zeller explained. Against the backdrop of exceptionally heavy expenditure on catastrophe losses, Hannover Re generated Group net income of just 49.3 million euro (279.9 million euro) for the 2005 financial year. This is equivalent to earnings of 41 cents (2.32 euro) a share. The consolidated financial statement was for the first time drawn up in accordance with International Financial Reporting Standards (IFRS); comparative figures for the previous year have similarly been translated to IFRS.

The gross premium income generated by the Hannover Re Group grew by 1.1% year-on-year to 9.7 billion euro (9.6 billion euro). The drivers of growth in the year under review were property/casualty and life/health reinsurance. Net premium earned climbed somewhat more strongly by 2.2% to 7.7 billion euro (7.6 billion euro) following a further modest increase in the level of retained premium.

Shareholders' equity increased by 3.0% to 2.6 billion euro (2.5 billion euro). The policyholders' surplus (including minority interests and hybrid capital) grew by 10.1% to 4.6 billion euro after 4.2 billon euro in the previous year.

Outside the catastrophe-exposed lines of business the development of property and casualty reinsurance was highly favourable. Almost all segments offered attractive opportunities to write profitable business. Rates and conditions remained on a high level; most notably, in the property catastrophe and marine (incl. offshore) lines that were impacted by the 2004 hurricanes rates had already improved as the year under review got underway.

New business was reserved conservatively in accordance with our accustomed practice. As in the past, on balance there was no need to constitute additional reserves for previous underwriting years.

Gross premium rose by 12.0% to 4.7 billion euro (4.2 billion euro). Net premium earned climbed by 13.4% to 3.9 billion euro (3.5 billion euro) following a slight increase in the level of retained premium to 84.4% (83.0%).

Property & Casualty Reinsurance

The property and casualty reinsurance business group incurred a hitherto unprecedented burden of catastrophe losses in the year under review. In very large measure this was attributable to the three severe hurricanes "Katrina", "Rita" and "Wilma" that swept across the Caribbean and impacted the American continent. Further significant major losses were caused by winter storm "Erwin" in Northern Europe, flooding in the Alps, damage to an oil platform in the Indian Ocean, several aviation claims and floods in India. All in all, the net burden of catastrophe losses stood at 1.0 billion euro (287.2 million euro). This amount was equivalent to 26.3% of net premium, compared to 8.3% in the previous year. The fact that the combined ratio only reached 112.8% (97.2%) clearly bears out the good diversification and high quality of the business. Yet there was no offsetting the extraordinarily high loss burden; owing to the enormous strain caused by the catastrophe losses the underwriting result came in sharply lower than in the previous year at -502.1 million euro (98.5 million euro). Net investment income, on the other hand, improved by 22.7% to 540.7 million euro (440.7 million euro) thanks to a strong underwriting cash flow and realised gains on disposals. Below the line the operating result (EBIT) slipped into negative territory at -34.8 million euro (463.0 million euro). Property and casualty reinsurance nevertheless closed in the black at 4.3 million euro (270.7 million euro) due to a tax refund, producing earnings of 4 cents (2.24 euro) a share.

Life & Health Reinsurance

The development of life and health reinsurance, on the other hand, was highly gratifying. "Following a contraction in 2004 we are very much back on track for growth in this business group", Mr. Zeller emphasised. Impetus derived primarily from the European markets, including for example the United Kingdom – where Hannover Re was able to write particularly vigorous new business in annuity insurance. Annuity and health insurance are profiting especially strongly from the demographic trend. With this in mind Hannover Re has also identified a highly promising market for the future in the area of products tailored specially to the needs of senior citizens. This is especially relevant in Germany, where – unlike in the Anglo-Saxon markets – insurers have hitherto neglected such products. In the year under review Hannover Re transferred a portfolio of life insurance risks worth 100 million euro to the capital market and has thereby already converted future profits to liquid funds that can be invested in the further expansion of this business group.

Gross premium income was boosted by 11.4% to 2.4 billion euro (2.2 billion euro). Net premium surged by an even more appreciable 15.4% to 2.3 billion euro (2.0 billion euro) due to a higher retention of 92.8% (90.2 %). The operating profit (EBIT) in life and health reinsurance surpassed the previous year by 21.5% to reach 93.1 million euro (76.7 million euro). Group net income increased substantially by 56.7% to 59.6 million euro (38.0 million euro), producing earnings of 49 cents (32 cents) a share.

Financial Reinsurance

Overall, the development of financial reinsurance in the year under review was satisfactory. Although premium income again contracted sharply, the profitability of the business was sustained. As Mr. Zeller stressed: "With an EBIT margin of 9.2% we again surpassed our minimum target of 7.5%". Gross premium declined by 21.9% to 924.1 million euro (1.2 billion euro). With the level of retained premium reduced to 90.6%, net premium earned retreated by an even more marked 30.9% to 833.8 million (1.2 billion euro). Following substantial decreases in premium volume in recent years, however, early indications began to emerge of a renewed growth trend. With the market hardening as a consequence of the hurricanes and growth opportunities for primary insurers picking up again, an upsurge in demand for financial reinsurance contracts could be observed – especially among small and mid-sized insurers in the USA that are not able to access the capital market. This resurgence will not, however, be reflected in the figures until 2006.

The operating profit (EBIT) in financial reinsurance decreased by 37.7% to 76.8 million euro (123.3 million euro) owing to the substantially lower premium volume. Although the net return on premium was only slightly lower, Group net income for the year under review also fell well short of the previous year at 49.4 million euro (88.9 million euro). Earnings of 41 cents (74 cents) a share were generated.

Specialty Insurance

Hannover Re continued to optimise the business processes in specialty insurance in the year under review. "Having already repositioned Clarendon in July with a stronger specialisation in niche business, we moved to systematically raise the profile of our specialty insurance business in the second half of the year. Although the result for the year under review cannot be considered satisfactory, the trend towards a more profitable future can already be clearly discerned", Mr. Zeller explained. As a consequence of the focus on clearly defined specialty business the gross premium volume in the specialty insurance business group contracted by 16.4% to 1.8 billion euro (2.1 billion euro). Net premium earned declined by 22.2% to 743.3 million euro (955.1 million euro) due to the slight reduction in retained premium. Although the operating result (EBIT) improved on the previous year, it still closed in negative territory at -12.6 million euro (-141.5 million euro) in view of the additional costs associated with capital spending on Clarendon's infrastructure as well as the hurricane-related losses. Specialty insurance posted a virtually breakeven result of -2.4 million euro (-90.7 million euro), it reduced the Group net income by 2 cents (-75 cents) a share.

Investments

Hannover Re is broadly satisfied with its net investment income. Thanks to the strong inflow of cash from the technical account, assets under own management grew by 19.4% to 19.1 billion euro (16.0 billion euro). Including funds held by ceding companies, the total asset volume increased to as much as 27.5 billion euro (25.2 billion euro). This growth more than offset the decline in average yields, and ordinary investment income therefore came in substantially higher than in the previous year at 671.8 million euro (604.5 million euro). Gains of altogether 272.2 million euro (217.6 million euro) were realised on disposals in the reporting period, contrasting with realised losses of 110.0 million euro (56.4 million euro). The positive balance of realised gains and losses was therefore virtually unchanged from the previous year at 162.2 million euro (167.4 million euro). Net income from assets under own management was boosted by 11.8% to 780.5 million euro (697.9 million euro). Interest income and expenses on funds withheld and contract deposits contributed 343.1 million euro (382.1 million euro) on balance to the investment result. Net investment income came in 4.1% higher than in the previous year at 1,123.7 million euro (1,079.9 million euro). This is equivalent to a return on investment of 4.8 %.

The overall result of Hannover Re in the year under review was overshadowed by the historically unparalleled burden of catastrophe losses caused by the hurricanes. The operating profit (EBIT) consequently contracted from 538.8 million euro to 122.2 million euro. Group net income was reduced from 279.9 million euro to 49.3 million euro, producing earnings of 41 cents (2.32 euro) a share.

In view of this result the Executive Board and Supervisory Board intend to propose to the Annual General Meeting that a dividend should not be distributed in the interests of conserving the company's capital.

Outlook for 2006

The outcome of the treaty renewals in property and casualty reinsurance as at 1 January 2006 – the date when around two-thirds of the business was renegotiated – was highly satisfactory for Hannover Re. "Even though not all our expectations were realised, we were able to boost the already very high rate level still further – in some areas by a substantial margin", CEO Zeller emphasised.

Thanks to its good financial strength ratings Hannover Re profited disproportionately strongly from the sustained hard market: in lines that had been heavily impacted by last year's hurricane events the company obtained sometimes significant rate increases. Yet even in lines that had been spared major losses it was possible to secure at least stable – and hence highly attractive – rates.

The updating of pricing models to reflect the experience gained in the wake of the latest hurricane events was another factor in this positive development: the market accepted the loadings implemented by Hannover Re for hitherto neglected or inadequately modelled components such as cyclical climate fluctuations, flood and inundation damage, business interruption losses and demand-induced price rises for restoration services. The currently prevailing advantageous market conditions are likely to continue or even improve still further in the treaty renewals as at 1 April, 1 June/July and 1 October. At this time the adjustment of pricing models should no longer be restricted solely to windstorm aggregates in the USA. "As part of our risk management approach we have not only adjusted our models, we have also reduced our peak risks. With a roughly stable premium volume our property and casualty reinsurance portfolio is therefore optimally poised to face the challenges of the current year", Mr. Zeller explained. Through a further transfer of catastrophe reinsurance risks to the capital market ("K5" transaction) in February 2006 Hannover Re obtained an equity substitute of 370 million US dollars, thereby enabling the company to make the most of the profitable market opportunities.

In property and casualty reinsurance Hannover Re expects the favourable business development to be sustained and anticipates premium income on a par with the previous year, albeit with a reduced level of risk. Providing the burden of major losses remains within the multi-year average of 8% of net premium, the profit contribution should be very healthy.

In life and health reinsurance Hannover Re anticipates appreciable new business in several European markets. In view of the demographic trends, demand for both risk-oriented and retirement solutions will continue to rise steadily. In the area of unit-linked products – primarily annuities – the company will continue to concentrate on the financing of new business acquisition costs. All in all, Hannover Re is again looking to boost both premium income and profitability by a double-digit margin in the current year.

In financial reinsurance the upsurge in demand observed in the USA in the fourth quarter of the year under review should be sustained in the current year, especially with respect to solvency-stabilising surplus relief contracts. Hannover Re expects to generate profitable growth worldwide, most notably in Eastern Europe and Asia. Overall, double-digit percentage increases in gross and net premium should be possible. Net income is again likely to be highly attractive.

The specialty insurance business group is now on track to move back into the profit zone: the newly established Praetorian Financial Group in New York will take over all specialty business from Clarendon in the course of the current year, while Clarendon will assume responsibility solely for the professional management of terminated programs as well as for the existing commodity business. "This separation of responsibilities marks the last logical step in the restructuring measures that we initiated with a view to maximising the value of our specialty insurance business group", Mr. Zeller stressed. For the current financial year Hannover Re expects increased net premium and a positive result well above the cost of capital.

As long as there are no adverse movements on capital markets, Hannover Re anticipates net investment income at least on a par with the previous year. The positive underwriting cash flow should lead to further expansion of the asset volume. Given a modest rise in interest rates, ordinary investment income will likely also come in higher.

All in all, Hannover Re is looking to a very good overall result for 2006. As always, this is subject to the proviso that the major loss expectancy remains within the bounds of the multi-year average of 8% and that capital markets do not experience any unusual downturns. "Our goal is to generate a return on equity of at least 15%", Mr. Zeller affirmed. In accordance with its dividend policy Hannover Re will seek to distribute 35-40% of net income for the year.