Interim Report 3/2014: Hannover Re substantially increases Group net income

Hannover, 5 November 2014:

Hannover Re is very satisfied with the development of its business as at 30 September 2014. Despite difficult general conditions, Group net income was boosted by 10.3% relative to the previous year's period to EUR 695.4 million. "Both business groups and the investment income fully lived up to our expectations", Chief Executive Officer Ulrich Wallin affirmed. "We are well placed to navigate the challenging market environment and are confident of achieving our full-year profit target in the order of EUR 850 million."

Currency-adjusted gross premium slightly higher

The gross written premium booked by the Hannover Re Group for the first nine months increased by 1.6% to EUR 10.7 billion (EUR 10.5 billion). At constant exchange rates growth would have come in at 2.9%. The company is thus within its target corridor of generating stable to slightly higher gross premium for the full financial year. The retention retreated to 87.0% (88.9%). Net premium earned consequently fell by a modest 1.7% to EUR 9.0 billion (EUR 9.1 billion); adjusted for exchange rate effects, the decrease would have been 0.5%.

Good Group net income for the first nine months

The operating profit (EBIT) as at 30 September 2014 rose by a pleasing 10.7% to EUR 1,090.8 million (EUR 985.8 million). Group net income also improved on the comparable period's already good figure by a further 10.3% to reach EUR 695.4 million (EUR 630.2 million). Earnings per share amounted to EUR 5.77 (EUR 5.23).

Property and casualty reinsurance delivers another good result

Property and casualty reinsurance continues to be intensely competitive. This was also evident in the treaty negotiations as at 1 July 2014, when parts of the North American portfolio, most agricultural risks and business from Latin America came up for renewal.

Total gross premium for property and casualty reinsurance increased by 1.7% as at 30 September 2014 to EUR 6.1 billion (EUR 6.0 billion). At constant exchange rates a gain of 3.2% would have been booked. The growth generated by Hannover Re in spite of its disciplined underwriting policy can be attributed largely to attractive opportunities in emerging markets. The company's retention rose slightly to 89.6% (89.1%). Net premium earned was on the level of the previous year at EUR 5.1 billion (EUR 5.1 billion); adjusted for exchange rate effects, an increase of 1.5% would have been recorded.

Following a low burden of major losses in the first half of 2014, major loss expenditure climbed slightly in the third quarter. The aviation line was particularly hit, with the largest single loss resulting from armed conflicts in Libya which left Tripoli airport heavily damaged. Hannover Re anticipates a net strain of EUR 50.0 million in this regard. The crash of the Malaysia Airlines plane over Ukraine caused a loss of EUR 32.2 million for net account. Total net expenditure on major loss events as at 30 September 2014 came to EUR 242.2 million (EUR 446.7 million); it was thus well below the company's expected level of EUR 491 million for the period. The underwriting result was again pleasing at EUR 225.3 million (EUR 243.4 million). The combined ratio of 95.3 % (95.0 %) came in better than the company's set target.

The operating profit (EBIT) for property and casualty reinsurance as at 30 September 2014 closed at a very favourable EUR 846.8 million (EUR 804.6 million). Group net income climbed 5.0% to EUR 560.8 million (EUR 534.4 million). Earnings per share totalled EUR 4.65 (EUR 4.43).

Life and health reinsurance shows stronger result

Gross premium in life and health reinsurance increased by a modest 1.4% to EUR 4.6 billion (EUR 4.6 billion). This is equivalent to an increase of 2.6% after adjustment for exchange rate effects. The third quarter passed off particularly favourably. Hannover Re continues to see growth potential driven by rising prosperity, especially in emerging economies, and also worldwide on account of increasingly exacting regulatory requirements. In view of a reduced retention of 83.7% (88.5%), net premium earned retreated more sharply by 4.0% to EUR 3.9 billion (EUR 4.0 billion); adjusted for exchange rate effects, this corresponds to a reduction of 2.9%.

The operating profit (EBIT) in life and health reinsurance rose by a substantial 39.6% as at 30 September 2014 to EUR 233.9 million (EUR 167.6 million). Losses such as those incurred in the previous year in the Australian disability portfolio and to some extent also in US mortality business played virtually no further role in the current reporting period. Group net income improved by 8.6% to EUR 166.2 million (EUR 153.0 million). The fact that the increase was not more marked can be attributed to exceptionally low tax expenditure in the previous year's comparable period. Earnings per share reached EUR 1.38 (EUR 1.27).

Very positive investment income

The portfolio of assets under own management grew by EUR 3.2 billion as at 30 September 2014 to EUR 35.0 billion. The increase was supported in particular by currency translation effects associated with the USD and GBP holdings and by the cash flow from the technical account. Growth was also assisted by the placement of a further subordinated bond with a volume of EUR 500 million.

Despite the low interest rate environment, ordinary investment income excluding interest on funds withheld and contract deposits came in modestly higher than the level of the comparable period at EUR 791.8 million (EUR 781.1 million). A positive factor here was stronger income from private equity and real estate investments, which more than offset the diminished returns from fixed-income instruments. Interest on funds withheld and contract deposits amounted to EUR 285.3 million (EUR 267.6 million).

Net realised gains increased to EUR 137.4 million (EUR 97.4 million) as at 30 September 2014. Changes in the fair values of financial assets measured at fair value through profit or loss – the so-called ModCo derivatives and the inflation swaps are included here – amounted to EUR -8.8 million (EUR -18.8 million).

Investment income from assets under own management climbed by a very pleasing 6.4% as at 30 September 2014 to EUR 836.0 million (EUR 785.6 million). The resulting annualised return on investment amounted to 3.3%. Net investment income including interest on funds withheld and contract deposits improved by 6.5% to EUR 1,121.3 million (EUR 1,053.2 million).

Further growth in shareholders' equity

Hannover Re's shareholders' equity climbed to a new record high of EUR 7.0 billion as at 30 September 2014 (31 December 2013: EUR 5.9 billion). Despite this increase the annualised return on equity stood at a pleasing 14.4% (31 December 2013: 15.0%). The book value per share reached EUR 58.01 (31 December 2013: EUR 48.83).

Outlook 2014

In view of its results for the first nine months, Hannover Re is confident of achieving its full-year targets for 2014. Based on constant exchange rates, the company continues to expect stable to slightly higher gross premium and Group net income after tax in the order of EUR 850 million for the full 2014 financial year. This is conditional on major loss expenditure not significantly exceeding the anticipated level of EUR 670 million and assumes that there are no unforeseen adverse developments on capital markets.

In property and casualty reinsurance there are no indications as yet of a change in the market. Nevertheless, reinsurance rates should – aside from certain exceptions – stabilise as at 1 January 2015, since the scope for further reductions is limited in light of the return on equity targets that reinsurers need to meet. Faced with the prevailing soft market, Hannover Re remains committed solely to preserving the profitability and quality of its portfolio in property and casualty reinsurance.

The improved performance in life and health reinsurance should be sustained. The full 2014 financial year is therefore expected to close with a significantly stronger result than the previous year.

Hannover Re's targeted full-year return on investment is 3.2%. The company is not currently planning to make any significant adjustments to the allocation of its investments to individual asset classes. The focus is primarily on stability while maintaining an adequate risk/return profile.

As for the dividend, the company envisages a payout ratio in the range of 35% to 40% of its IFRS Group net income after tax.

Outlook 2015

For the 2015 financial year Hannover Re anticipates – adjusted for currency translation effects – stable or slightly higher gross premium. The return on investment will likely be around 3.0%, while Group net income after tax should be in the order of EUR 875 million. As usual, all statements are subject to the proviso that major losses remain within the expected bounds and that there are no unforeseen adverse movements on capital markets.