Hannover Re reports very pleasing result for the first half of 2009
- Gross premium + 26.7%
- Net premium + 30.8% due to stronger demand, ING acquisition and increased retention
- Net investment income +27.9%
- Operating profit (EBIT) +49.9%
- Group net income +66.1%
- Burden of catastrophe losses within the expected bounds
- Combined ratio 97.1%
- EBIT margin in non-life and life/health reinsurance clearly better than target range
- Annual targets within reach
Hannover, 6 August 2009:
In its interim report published today Hannover Re expressed considerable satisfaction with the development of its business. "We achieved gratifying results in both our underwriting business and on the investments side, and we are therefore well on track to generate the forecast return on equity of at least 18% for the full 2009 financial year", Chief Executive Officer Ulrich Wallin explained.
The operating profit (EBIT) as at 30 June 2009 grew by a substantial 49.9% year-on-year to reach EUR 600.1 million (EUR 400.2 million). Group net income increased by a similarly gratifying 66.1% – inter alia due to the good overall development of business as well as positive special effects in life and health reinsurance – to EUR 419.0 million (EUR 252.2 million). This was equivalent to earnings of EUR 3.47 (EUR 2.09) a share; the annualised return on equity stood at 27.9% (16.4%).
Gross written premium climbed 26.7% as at 30 June 2009 to EUR 5.3 billion (EUR 4.1 billion). "This significant increase derived in large measure from organic growth, although the acquisition of the ING life reinsurance portfolio was also a factor here", Mr. Wallin noted. Given the higher level of retained premium at 93.0% (89.5%), net premium earned grew to EUR 4.5 billion (EUR 3.4 billion).
The development of non-life reinsurance continued to be highly satisfactory for Hannover Re. The capital squeeze felt by primary insurers in the wake of the financial market crisis has led to stronger demand for reinsurance protection. "The treaty renewals on 1 June and 1 July also passed off very well for our company overall. Yet we were not satisfied with the movements in the rate level in all segments", Mr. Wallin explained. "In view of our profit-oriented underwriting policy, we therefore reduced our exposures – especially in property catastrophe business in the United States and Japan, but also in some casualty segments."
Stronger demand for reinsurance protection was also observed in worldwide credit and surety insurance. In the area of structured covers, too, the reverberations of the financial market crisis injected significant growth impetus as anticipated. All in all, the prospects for worldwide non-life reinsurance are very promising.
Gross premium in non-life reinsurance as at 30 June 2009 improved on the comparable period of the previous year by 16.0% to reach EUR 3.1 billion (EUR 2.7 billion). At constant exchange rates, especially against the US dollar, the increase would have been 12.0%. The level of retained premium climbed to 94.1% (89.4%) due to sharply lower retrocessions. Net premium earned consequently rose by 19.2% to EUR 2.5 billion (EUR 2.1 billion).
In the second quarter Hannover Re incurred only a modest number of major losses. The largest single loss event was the crash of an Air France passenger jet with a strain of some EUR 30 million for net account. The total net burden of major losses amounted to EUR 163.3 million (EUR 130.0 million). This was equivalent to 6.6% of net premium in non-life reinsurance, a figure below the expected level of 10%. The combined ratio stood at 97.1% (98.4%).
Net underwriting income in non-life reinsurance improved from EUR 23.6 million in the corresponding period of the previous year to EUR 57.3 million. The operating profit (EBIT) in this business group increased by 10% to EUR 317.1 million (EUR 288.2 million). Group net income grew by 14.1% to EUR 223.2 million (EUR 195.7 million).
Life and health reinsurance
Developments in life and health reinsurance were exceptionally pleasing. Owing to a visible weakening in the solvency position of life insurers, demand for reinsurance solutions continued to rise – leading to an increased clamour for risk- and financially oriented products. This state of affairs was especially evident in the United States, where the insurance industry had suffered considerable erosion of its capital base.
Hannover Re's worldwide life and health reinsurance business enjoyed further profitable growth following the acquisition of the ING portfolio in January 2009. "With this transaction we were able to further strengthen the segment of risk-oriented life reinsurance, which had hitherto been underrepresented in the United States", Mr. Wallin explained. Hannover Re remains keenly interested in the seniors' health market and the financial solutions sector in the US. Not only that, the new markets segment – in which Hannover Re writes enhanced annuities and ranks among the market's leading reinsurers in the United Kingdom – also offers considerable potential. Here, as is also the case with the reinsurance of existing pension funds, the opportunities for further profitable expansion are very good.
Hannover Re maintains a regional focus on the so-called BRIC markets (Brazil, Russia, India and China), although Korea – the largest life reinsurance market in Asia – also offers good growth prospects. The main drivers of business nevertheless continue to be the developed insurance markets of the United Kingdom, United States, Germany and Australia.
Spurred on by the acquisition of the ING life reinsurance portfolio and brisk organic growth, gross written premium as at 30 June 2009 surged by 45.6% to EUR 2.2 billion (EUR 1.5 billion). At constant exchange rates growth would have been as high as 49.6%. The level of retained premium rose from 89.6% to 91.6%, while net premium earned increased by 48.9% to EUR 2.0 billion (EUR 1.3 billion).
The investment income generated in life and health reinsurance doubled from EUR 154.8 million to EUR 314.0 million. Positive special effects were a factor here. They derived from the reversal of unrealised losses on deposits with US cedants (B36 derivatives) and from improvements in the value of deposits assumed by Hannover Re in the context of the ING transaction. The result was adversely impacted by opposing effects in UK annuity business. On balance, the operating result (EBIT) in life and health reinsurance profited from non-recurring effects of around EUR 150 million in the first half-year.
The operating profit (EBIT) as at 30 June 2009 consequently increased sharply to EUR 266.1 million (EUR 87.2 million). The EBIT margin of 13.4% thus comfortably surpassed the target corridor of 6.5% to 7.5%. Group net income rose appreciably to EUR 212.5 million (EUR 65.0 million).
Although conditions on the financial markets are still challenging, Hannover Re expressed satisfaction with the development of its investments. Thanks to a positive cash flow, the assets under own management grew to EUR 21.0 billion, thereby improving on the volume as at 31 December 2008 (EUR 20.1 billion). Ordinary income excluding interest on deposits fell just slightly short of the level in the corresponding period of the previous year at EUR 398.8 million (EUR 407.9 million), a testament to the fact that the company is correct in pursuing an investment policy geared to generating stable ordinary income. The balance of realised gains and losses totalled EUR 55.5 million for the first half-year, as against EUR 102.3 million in the comparable period of the previous year; this had been influenced by high realisations owing to the tactical shortening of durations in the USD portfolio. Along with impairments taken on structured products in the amount of EUR 26.2 million, the volume of write-downs totalling altogether EUR 93.4 million (EUR 130.6 million) was due in large measure in the amount of EUR 64.1 million to alternative investments; of this amount, EUR 41.9 million was attributable to private equity. Unrealised gains on asset holdings measured at fair value through profit or loss amounted to EUR 87.2 million; this contrasted with unrealised losses of EUR 15.1 million in the corresponding period of the previous year. This gratifying development was due chiefly to the doubling of investment income in life and health reinsurance.
Net investment income increased by 27.9% to EUR 569.2 million (EUR 445.1 million), assisted first and foremost by the improvement in unrealised gains and the reduced volume of write-downs. This figure includes income from interest on funds withheld, which at EUR 144.9 million was substantially higher than in the comparable period of the previous year (EUR 102.3 million).
Based on its strategic orientation and the available market opportunities, Hannover Re anticipates a good result for 2009 in both non-life and life/health reinsurance. At constant exchange rates the net premium volume is expected to grow by approximately 25%.
In non-life reinsurance the markets offer a good price level overall, although further rate increases are needed in certain segments. The treaty renewals as at 1 July 2009 in the United States, when around one-third of the portfolio is renegotiated, reinforced the trend of prior renewal phases. Yet prices did not rise in all areas to the extent needed. Particularly in the case of property catastrophe covers, efforts to secure the required price increases were only partially successful. Sufficient capacity was for the most part available here. While the rate level in standard casualty business remained stable, price rises were obtained in the workers compensation segment. Rates in the professional indemnity lines were broadly unchanged, although conditions improved under treaties that had suffered losses. Hannover Re was satisfied overall with the treaty renewals in Australia and New Zealand.
Net premium in non-life reinsurance should show growth of around 20% by year-end 2009. Provided the burden of major losses remains within the anticipated bounds of roughly 10% of net premium, a very healthy profit contribution is to be expected.
The fundamental business climate in life and health reinsurance is also positive. Here, too, the financial and economic crisis has prompted stronger demand for reinsurance and hence provided growth stimuli. Hannover Re will continue to expand its involvement in the field of enhanced annuities and intends to extend its activities to the North American market during the current financial year.
Owing to the acquisition of the ING life reinsurance portfolio effective 1 January 2009, net premium for the current year in life and health reinsurance is likely to grow by more than 35% and the profit contribution to total business should be very good.
On the investments side the anticipated positive cash flow should – subject to stable exchange rates – result in further growth in the asset holdings. In the area of fixed-income securities the company continues to stress the high quality and diversification of its portfolio. Following Hannover Re's move to reduce its exposure to listed equities to virtually zero, further volatility on stock markets can of course have only a limited effect on the investment income. "Our goal is to protect our portfolio even better against interest rate fluctuations and other market risks. Although we have made plans to resume our investments in equities in the future, such a step will only be contemplated once the market climate is more stable", Mr. Wallin emphasised.
In light of its strategic orientation and the available market opportunities in non-life and life/health reinsurance, Hannover Re continues to anticipate a good result for the full 2009 financial year. Assuming that the burden of major losses does not significantly exceed the expected level of 10% of net premium in non-life reinsurance, and as long as there are no further adverse movements on capital markets, Hannover Re expects – allowing for the non-recurring effect from the acquisition of the ING life reinsurance portfolio – a minimum return on equity of 18% and earnings per share of at least EUR 5 for the 2009 financial year. It remains the company's goal to pay a dividend in the range of 35% to 40%.