Annual Report 2008: Hannover Re enters the new financial year in optimistic mood
- 2008 financial year overshadowed by the financial market crisis
- Net investment income: 278.5 million euro (1,121.7 million euro) due to write-downs and losses realised on equities of 640.9 million euro
- Combined ratio in non-life reinsurance: 95.4% (99.7%)
- Operating profit (EBIT): 148.1 million euro (928.0 million euro)
- Group net loss: -127.0 million euro (Group net income: 721.7 million euro) owing to negative tax effect
Hannover, 11 March 2009:
At its press briefing on the annual results Hannover Re presented the figures for the 2008 financial year. Owing to the effects of the financial market crisis the company had to take significant value adjustments, in particular on equity holdings. As anticipated, therefore, Group net income after tax closed in negative territory.
"The fact that 2008 was a lost year for our company can be attributed entirely to the problems on the investment side. The development of our underwriting business, on the other hand, was satisfactory", Mr. Zeller emphasised.
2008 financial year
The gross written premium booked by the Hannover Re Group contracted by a modest 1.7% to 8.1 billion euro (8.3 billion euro). At constant exchange rates the premium volume would have grown by 3.9%. The level of retained premium climbed to 89.1% (87.4%), inter alia as a consequence of appreciable savings on the company's own protection covers and reduced proportional cessions; net premium earned fell by 3.2% to 7.1 billion euro (7.3 billion euro).
On account of sharply lower investment income due to write-downs and the realisation of losses on equities, the operating profit (EBIT) plunged by 84.0% to 148.1 million euro (928.0 million euro). Group net income slipped into negative territory at -127.0 million euro after the record profit of 721.7 million euro in the previous year. The result posted in the year under review was additionally impacted by the fact that losses on equities are not tax-deductible in Germany, as a consequence of which the company incurred a tax load of 205.6 million euro despite reporting a pre-tax profit of just 70.6 million euro. This resulted in earnings of -1.05 euro (5.98 euro) a share.
Shareholders' equity decreased by 519.0 million euro relative to the position as at 31.12.2007 to stand at 2.8 billion euro. The policyholders" surplus (including minority interests and hybrid capital) totalled 4.7 billion euro after 5.3 billion euro in the previous year.
Non-life reinsurance
In non-life reinsurance the year under review was notable for further softening in market conditions, although the rate reductions proved to be smaller than expected. "By and large, we were able to obtain prices and conditions commensurate with the risks", Mr. Zeller explained.
The gross premium written in the non-life reinsurance business group contracted as anticipated by 3.9% to 5.0 billion euro (5.2 billion euro). The decisive factors here were, first and foremost, the restraining effects of movements in exchange rates, predominantly in the first half of the year. At constant exchange rates – especially against the US dollar – growth of 1.3% would have been generated. The withdrawal from US specialty business also served to curb premium volume. The level of retained premium rose from 85.2% to 88.9%; net premium earned retreated by 4.9% to 4.3 billion euro (4.5 billion euro).
In terms of major losses, the year under review witnessed a series of significant natural catastrophes. They included, most strikingly, the severe earthquake in the Chinese province of Sichuan, snow- and ice-storms in China, European winter storm "Emma", hailstorms in Germany and the two hurricane events "Gustav" and "Ike". The latter produced a net strain of 222.1 million euro for Hannover Re's account. Numerous other major losses were also recorded. In total, the net burden of catastrophe losses and major claims for 2008 amounted to 457.8 million euro (285.4 million euro). This figure is equivalent to 10.7% of net premium in non-life reinsurance and was thus slightly above the expected level of 10%. The sharp improvement in the combined ratio in the year under review to 95.4% – as against 99.7% in the previous year – was principally due to positive run-off results from prior years. The reserves remained on the positive level of the previous year.
The underwriting result in non-life reinsurance improved to 184.7 million euro after a deficit of -26.7 million euro in the previous year. Net investment income plunged by 98.6% in the year under review to 11.1 million euro (783.3 million euro) as a consequence of the considerable write-downs taken on equities. The operating profit (EBIT) generated by non-life reinsurance therefore fell sharply to 2.3 million euro (656.7 million euro). Group net income contracted to -160.9 million euro (549.5 million euro), equivalent to earnings of -1.33 euro a share.
Life and health reinsurance
The growth recorded in life and health reinsurance in the year under review was less dynamic than in previous years, principally due to the moderating effects of exchange rate movements in the first half of 2008, but also owing to the decline in risk-oriented business in the United Kingdom – Hannover Life Re's largest single market. "In the medium term, though, it remains our goal to generate double-digit growth in the original currency", Mr. Zeller stressed.
Hannover Life Re sees clear growth potential for life and annuity insurance in light of the demographic trend in industrialised nations and the growing urban middle class in emerging markets. While traditional life insurance accounts were influenced by softening new business in the year under review as part of the mortgage crisis, the private annuity insurance segment enjoyed undiminished vitality.
Hannover Life Re appreciably strengthened its international market position in the year under review: in the high-growth markets of China and South Korea business operations were launched through newly established branches in Shanghai and Seoul. In India, too, Hannover Re has put in place a platform for building a profitable portfolio by reaching a cooperation agreement with the leading Indian reinsurer.
"In the year under review we again transferred a portfolio of life reinsurance to the international capital market. Under the transaction designated "L7" we were able to convert a future earnings stream into a current liquidity position and monetise an embedded value of 100 million euro as at year-end 2008", Mr. Zeller noted.
Gross written premium in life and health reinsurance climbed by 1.7% in the year under review to 3.1 billion euro (3.1 billion euro). At constant exchange rates growth would have reached 7.9%. The level of retained premium was reduced by a modest 1.5 percentage points to 89.3%. Net premium earned remained virtually on a par with the previous year at 2.8 billion euro.
The abrupt fall of 47.5% in the operating profit (EBIT) to 120.7 million euro (229.8 million euro) was attributable largely to non-recurring positive special effects in the previous year as well as to losses incurred in the financial year from the required fair-value measurement of assets deposited with clients.
The EBIT margin in life and health reinsurance – standing at 4.3% – fell short of the target corridor of 6.5% to 7.5%. In light of the aforementioned factors Group net income retreated by 58.3% to 78.3 million euro (187.7 million euro); this corresponds to earnings of 65 cents (1.57 euro) a share.
Investments
The income from investments generated by Hannover Re was adversely impacted in the year under review by the crisis on financial markets, especially the marked downward slide in share prices. The development of assets under own management, on the other hand, was gratifying: thanks to a very positive cash flow from the technical account and the rise of the US dollar towards the end of 2008 the portfolio grew to 20.1 billion euro (19.8 billion euro). Owing to portfolio regroupings into low-risk government bonds in the fourth quarter, the ordinary income excluding deposit interest fell slightly short of the previous year (859.0 million euro) at 829.8 million euro.
The bulk of the write-downs on securities totalling 479.9 million euro (71.4 million euro) can be attributed to the massive slump in share prices; a mere 96.9 million euro was taken on fixed-income securities. The hedges entered into in the first quarter on around one-fifth of the equity portfolio prevented a need for heavier write-downs. Profits on the disposal of investments amounting to 379.2 million euro (244.0 million euro) were driven by the tactical modification of durations in the US dollar portfolio undertaken in the first quarter as well as the liquidation of the hedge on the equity portfolio in the fourth quarter. This contrasted with realised losses of 492.8 million euro (69.7 million euro) that were due principally to the sharp reduction of the equity allocation in the fourth quarter.
Reflecting the reverberations of the financial market crisis, net investment income fell by a significant 75.2% to 278.5 million euro (1,121.7 million euro).
In view of the negative business result, the Executive Board and Supervisory Board will propose to the Annual General Meeting that a dividend should not be paid. For the 2007 financial year Hannover Re had paid a dividend of 1.80 euro and a bonus of 50 cents a share.
Outlook
Hannover Re has got off to a very good start in the new financial year. "For our company, the crisis on financial markets is at once a curse and a blessing", Chief Executive Officer Wilhelm Zeller explained. "Now that the negative repercussions are behind us, we can profit from the positive effects. We enjoyed a very pleasing treaty renewal season as at 1.1.2009 – with prices moving higher again – in non-life reinsurance, and thanks to our robust financial strength we are in a position to benefit accordingly from the available business opportunities".
The capital depletion at primary insurers as a consequence of the financial market crisis led to stronger demand for reinsurance protection – and hence to higher prices. Rate increases were obtained in many markets, sometimes even running into double digit percentages; this was especially evident in worldwide credit and surety reinsurance, but also applied to property catastrophe business in regions that had suffered losses. Yet rates in catastrophe business – especially in the US market – are still not adequate. In this segment Hannover Re anticipates further price rises at the time of the mid-year renewals. The capital erosion at primary insurers is also likely to stimulate demand for structured reinsurance products.
Overall, the situation in non-life reinsurance is significantly brighter than in the previous year. In light of this climate, the very good diversification of its portfolio and its excellent ratings, Hannover Re is looking forward to a very favourable business development. "We anticipate growth of 10% in net premium and a healthy profit contribution in non-life reinsurance", Mr. Zeller remarked. In the current financial year Hannover Re has incurred three major losses to date: winter storm "Klaus" produced an estimated net burden in the order of 70 million euro, while the expenditure associated with a satellite failure is likely to remain under 10 million euro; Hannover Re currently expects a strain of around 15 million euro from the devastating bush fires in Australia.
The general business environment in life and health reinsurance is similarly favourable. Here, too, the financial and economic crisis will raise awareness of the need for individual provision among the urban middle classes and hence provide sustained growth impetus worldwide. Business will continue to be driven primarily by the developed insurance markets of the United Kingdom, United States, Germany and Australia. Over the long term, however, the company sees considerable potential in the markets of Brazil, Russia, India, Korea and China. Owing to the visible weakening of their solvency position, primary insurers will find themselves compelled to adopt a significantly more cautious risk strategy and financial policy in the immediate future. This development will prompt stronger demand for both risk- and financially oriented reinsurance solutions.
In January Hannover Re charted a course for further profitable growth in life and health reinsurance. "With the acquisition of a large US individual life reinsurance portfolio we have taken a major step towards attainment of our global life reinsurance goals", Mr. Zeller explained. In 2009 the transaction will not only contribute to current income, it will also generate a positive non-recurring effect.
In view of this acquisition – which is expected to produce a premium volume of around 1.2 billion US dollars – Hannover Re anticipates growth of 35% in net premium in life and health reinsurance for the current financial year. The EBIT margin should be within the target corridor of 6.5% to 7.5%.
For total business Hannover Re is looking to growth of 20% in net premium earned at constant exchange rates.
Turning to investments, the expected positive cash flow that Hannover Re generates from its technical account and asset holdings should – subject to stable exchange rates – lead to further growth in the investment portfolio. In the area of fixed-income securities the focus remains on the high quality and diversification of the portfolio. Now that Hannover Re has reduced its equity exposure to near zero, the adverse effects of market fluctuations on its investment income can be at most limited.
Given its strategic orientation and the available market opportunities in non-life and life/health reinsurance, Hannover Re anticipates a good result for the full 2009 financial year. "Provided the burden of catastrophe losses and major claims does not significantly exceed the expected level of 10% of net premium in non-life reinsurance and assuming there are no further downturns on capital markets, we expect to see – leaving aside the one-off effect from the acquisition of the ING portfolio – a return on equity in excess of 15 percent and earnings per share of 4.75 to 5.25 euro for the 2009 financial year", Mr. Zeller affirmed. As for the dividend, the company continues to aim for a payout ratio in the range of 35% to 40%.