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Press Release on Interim Results 3/2006

Hannover Re reports gratifying interim result

  • Return on equity 18.6% after tax
  • All business groups on target or better than planned
  • Major losses in property and casualty reinsurance only 3.1% of net premium
  • Operating profit (EBIT) 707 million euro
  • Group net income 380 million euro
  • Earnings per share 3.15 euro
  • Book value per share +9.4% since the turn of the year
  • Profit forecast for 2006 raised

Hannover, 14 November 2006:

In its interim report as at 30 September 2006 presented today Hannover Re expressed considerable satisfaction with the development of its business. "With our interim result we have put in place a strong platform for revising upwards and framing in more concrete terms our originally envisaged profit target for the full financial year – namely a return on equity of at least 15 percent. Against this backdrop we now anticipate a return on equity comfortably in excess of 15 percent and Group net income of around 480 million euro or earnings of roughly 4 euro a share", Chief Executive Officer Wilhelm Zeller explained.

Market conditions in property and casualty reinsurance remain for the most part risk adequate, and Hannover Re continued to generate profitable business. The development of life and health reinsurance was especially gratifying. The financial reinsurance and specialty insurance business groups developed as planned. "All underwriting business groups lived up to or indeed surpassed our expectations and delivered a healthy profit contribution", Mr. Zeller emphasised.

The operating profit (EBIT) from total business rose to 706.8 million euro (63.8 million euro). It should be borne in mind in this context that the result for the comparative period was burdened by the exceptional hurricane losses of the previous year. Group net income as at 30 September 2006 totalled 380.1 million euro (61.9 million euro); this corresponds to earnings of 3.15 euro (51 cents) a share.

Hannover Re's capital base remains strong: shareholders' equity improved by 245 million euro on the position at year-end 2005 to reach 2.8 billion euro. The book value per share consequently also rose by 9.4%. The policyholders' surplus (consisting of shareholders' equity, minority interests and hybrid capital) climbed 6.5% to 4.9 billion euro (4.6 billion euro).

Gross written premium grew by 4.3% relative to the same period of the previous year to stand at 7.6 billion euro (7.3 billion euro). At constant exchange rates growth would have amounted to 3.3%. The level of retained premium increased by a modest 4.2 percentage points to 84.4%; net premium consequently climbed 6.4% to 6.0 billion euro (5.6 billion euro).

Property and casualty reinsurance

Property and casualty reinsurance offered Hannover Re further attractive opportunities to write profitable business. The renewal phase in the USA as at 1 July 2006 once again highlighted the ongoing scarcity of reinsurance capacity for US natural catastrophe business. In this climate rates remained on a high level overall, even increasing in some areas. Under programmes that had been impacted by last year's hurricanes rates climbed by up to 100 percent – and even more sharply in individual cases. The recalibration of natural catastrophe models to include loadings for risk components that had hitherto been inadequately modelled or entirely neglected was an additional factor in this favourable rate trend. The development of the casualty lines was also thoroughly favourable, and with a few exceptions prices generally held stable across the board.

All in all, the prevailing market conditions in property and casualty reinsurance continue to be commensurate with the risks and are therefore attractive. "Yet we do not rely exclusively on an advantageous market climate. Risk management is a high-priority issue for our company", Mr. Zeller elaborated. "We have taken steps across a broad front to ensure that extraordinary catastrophe losses such as hurricane events do not place an excessive strain on our result". Hannover Re has thus significantly scaled back its peak exposures while at the same time boosting premium income, hence considerably improving its overall risk profile. In addition to using traditional retrocessions the company continues to transfer insurance risks to the capital market in order to optimally safeguard its portfolio. Following on from the "K5" transaction at the beginning of the year Hannover Re placed its first-ever conventional catastrophe bond with a volume of 150 million US dollars in July.

Gross premium in property and casualty reinsurance climbed 2.2% relative to the same period of the previous year to reach 3.7 billion euro (3.6 billion euro). At constant exchange rates, especially against the US dollar, growth would have been 1.5%. The level of retained premium was virtually unchanged at 84.5% (84.3%). Net premium earned increased by 5.0% to 3.0 billion euro (2.8 billion euro).

On the claims side the third quarter passed off entirely unremarkably. Hannover Re incurred just two major losses with a total net strain of 12.1 million euro for own account. Overall, the net burden of major losses for the first nine months amounted to 92.6 million euro (867.0 million euro). Equivalent to 3.1% of net premium in property and casualty reinsurance, this figure is well below the multi-year average of 8%. The fact that the combined ratio still stood at 97.9% (113.0%) is a reflection of the company's continued prudent reserving policy.

The underwriting result as at 30 September 2006 totalled 63.2 million euro as against -368.3 million euro in the corresponding period of 2005. The previous year had, however, been adversely impacted by the extraordinarily severe hurricane season. The operating profit (EBIT) in property and casualty reinsurance surged to 479.8 million euro (-32.3 million euro). Group net income came in at 268.1 million euro (33.7 million euro), producing earnings of 2.22 euro (28 cents) a share.

Life and health reinsurance

Life and health reinsurance again progressed highly satisfactorily in the third quarter. "Our goal of generating a three-figure operating profit (EBIT) and an EBIT margin of 5% on a sustained basis from 2006 onwards is more than realistic", Mr. Zeller affirmed.

This business group continues to generate double-digit organic growth and is the second major pillar of Hannover Re's business alongside property and casualty reinsurance. New business was particularly brisk in the annuity sector on European markets, including for example the United Kingdom, although growth rates were also strong in various Asian countries and South Africa. The demographic trend in the industrial nations continues to drive growth in annuity and health insurance business. Gross premium in this business group rose by 13.0% to 2.0 billion euro (1.8 billion euro). At constant exchange rates growth would have amounted to 12.4%. The level of retained premium fell by 7.9 percentage points to 86.0% (93.9%), principally as a consequence of the "L6" securitisation concluded at the turn of the year. Net premium earned therefore climbed by a mere 2.6% to 1.7 billion euro (1.7 billion euro).

Hannover Re, which operates worldwide in this business group under the Hannover Life Re brand, improved its operating profit (EBIT) by 58.3% to 107.8 million euro (68.1 million euro); it should, however, be noted that this amount includes extraordinary income of around 20 million euro from the commutation of a sizeable US treaty in the second quarter. Yet even without this special effect the increase in the operating profit (EBIT) would have been highly gratifying. Group net income as at 30 September 2006 climbed 50.6% to 70.8 million euro (47.0 million euro), equivalent to earnings of 59 cents (39 cents) a share.

Financial reinsurance

Financial reinsurance developed according to plan. "Having already got off to a good start in the first half-year, we further expanded our business – especially in Eastern Europe and Asia. I am confident that demand for structured products will continue to stabilise", Mr. Zeller stressed.

Gross written premium climbed sharply by 34.4% to 924.3 million euro (687.6 million euro) as at 30 September 2006. At constant exchange rates growth would have been 32.6%. The level of retained premium increased by 4.5 percentage points to 96.0% (91.5%). Net premium earned rose by a less marked 16.6% to 658.6 million euro (564.9 million euro) due to the effects of unearned premium as at 30 September 2006.

Against the backdrop of the anticipated significant decline in interest on deposits, the operating profit (EBIT) contracted by 25.4% to 43.8 million euro (58.8 million euro). Group net income fell 22.6% short of the corresponding period of the previous year, amounting to 36.0 million euro (46.6 million euro) as at 30 September 2006. This was equivalent to earnings of 30 cents (39 cents) a share.

Specialty insurance

The specialty insurance business group developed as planned and demonstrated that the restructuring of specialty business in the United States is bearing fruit. The separation of the two subsidiaries, Praetorian Financial Group and Clarendon Insurance Group, is now almost complete. "The specialty insurance that constitutes Praetorian's strategic focus has developed satisfactorily. This is true of both the growth in premium volume and the profitability of the business written", Mr. Zeller added. Clarendon, which bears responsibility for the remaining commodity business as well as for the management and winding up of terminated programmes, has not yet been able to reduce its residual catastrophe-exposed business to the desired extent on account of regulatory restrictions dating from 2004 and 2005 – including government-imposed moratoria. For this reason the programme of protection cover for natural catastrophe exposures had to be retained, albeit at significantly increased costs.

The gross premium volume of the specialty insurance business group was distorted in the first and second quarters by consolidation effects; this was adjusted retrospectively in the third quarter. Gross premium contracted by 2.2% as at 30 September 2006 to 1.3 billion euro (1.3 billion euro). At constant exchange rates premium income would have declined by 3.7%. The level of retained premium increased by 13.6 percentage points to 54.0%, following 40.4% in the comparative period. The special effect had no implications for net premium earned, which climbed 11.4% to 629.3 million euro (565.1 million euro).

The combined ratio improved on the figure for the corresponding period of the previous year – which had been influenced by catastrophe losses – to 98.6% (108.5%). The operating profit (EBIT) for the first nine months increased to 45.0 million euro (-15.1 million euro). Group net income in the specialty insurance business group grew to 31.2 million euro (-7.1 million euro) as at 30 September 2006, producing earnings of 26 cents (-6 cents) a share.

Investments

The development of the investment portfolio was gratifying. The sustained strong inflow of cash more than offset price effects associated with the rise in yields on international bond markets, and assets under own management consequently increased by 0.8 billion euro compared to year-end 2005 to stand at 19.9 billion euro. Ordinary income excluding interest on deposits thus climbed by an appreciable 22.4% to 590.5 million euro (482.5 million euro).

Profits of 191.4 million euro (198.7 million euro) were generated on the disposal of investments, slightly less than in the comparative period of the previous year. This contrasted with realised losses of 71.1 million euro (60.9 million euro). The write-downs taken on securities were again marginal at 11.0 million euro (11.4 million euro). Due to sharply lower interest on deposits of 150.4 million euro (252.5 million euro), net investment income declined by a further 1.1% year-on-year to 816.4 million euro (825.4 million euro).

Outlook

In view of the attractive market opportunities that are opening up, particularly in property/casualty and life/health reinsurance, Hannover Re is looking forward to a good result for the full 2006 financial year – provided the burden of major losses remains in line with the multi-year average and there are no unforeseen adverse movements on capital markets.

The market environment in property and casualty reinsurance remains good on balance. All the treaty renewal phases completed to date have presented opportunities to write attractive business at prices and conditions appropriate to the risks. In catastrophe-exposed property business – at least in the United States – further rate increases can be anticipated. The annual gatherings of reinsurers and their clients in Monte Carlo, Baden-Baden and the USA also clearly demonstrated that there is no reason to expect widespread rate cuts or deteriorations in terms and conditions in the year ahead. In those areas that are witnessing rate reductions – such as aviation lines –, prices for the risks written are still adequate.

Despite the currently advantageous state of its main markets, Hannover Re always keeps an eye on opportunities to tap into new markets: in view of the enormous growth potential offered by the worldwide Islamic insurance market Hannover Re has decided to establish a subsidiary in Bahrain for the writing of Sharia-compliant reinsurance (known as retakaful business). The company will commence business operations in November in good time for the renewal season.

Despite scaling back peak exposures Hannover Re expects premium growth of 2% to 4% in its total property and casualty reinsurance portfolio. As long as the burden of major losses remains within the multi-year average of around 8% of net premium, the company anticipates a very healthy profit contribution.

In life and health reinsurance growth impetus is expected first and foremost from European and various Asian markets as well as South Africa. Having received a business licence for China in November, Hannover Re should enjoy particularly promising growth prospects in this market going forward. For the business group as a whole, double-digit increases are anticipated in both the premium volume and the result. An EBIT margin of 5% is within reach.

In financial reinsurance Hannover Re expects further lively demand for structured products. Premium growth is likely to reach double digits in percentage terms. The goal of achieving an EBIT margin of 7.5% should be attainable. Although it will be lower than in the previous year, another pleasing overall contribution to Group net income is anticipated.

Hannover Re's primary focus in the specialty insurance business group continues to be on enhancing profitability; for the full financial year the company expects a positive result significantly in excess of the cost of capital.

As far as the investment portfolio is concerned, the highly favourable underwriting cash flow should lead to further growth in the total asset volume. Given a normal market environment the income from investments under own management should increase again.

In light of the development to date of its business groups, Hannover Re is looking to a good result for the full 2006 financial year. "Subject to the premise that the burden of major losses remains within the bounds of the multi-year average and provided there are no downturns on the capital markets, we expect to generate a return on equity significantly in excess of 15 percent and Group net income in the order of 480 million euro (or earnings of 4 euro a share)", Mr. Zeller stated. As for the dividend, the company is aiming for a payout in the range of 35% to 40% of Group net income.