Hannover Re satisfied with treaty renewals

Hannover, 8 February 2007:

This year's round of treaty renewals in property and casualty reinsurance passed off well for Hannover Re. "Although the peak of the 'hard market' is now behind us and ceding companies are increasingly running higher retentions thanks to improved capital resources, we can look back on successful negotiations with our clients", Chief Executive Officer Wilhelm Zeller explained. "It is gratifying to see that our competitors, too, are maintaining their underwriting discipline, and we were therefore again able to obtain prices and conditions commensurate with the risks". Hannover Re's first-class ratings also favourably affected the outcome of the renewal phase: with ceding companies attaching ever-greater importance to their reinsurers' financial strength, Hannover Re was able to profit particularly strongly. In 2006 both Standard & Poor's and A.M. Best had confirmed their very good ratings for the company.

The vigorous premium growth on the German market was an especially notable factor in the slight rise of 2% in gross premium income for the total property and casualty reinsurance portfolio as at the renewal date of 1 January 2007; premium developments varied in the individual segments. Of the total premium volume of EUR 3,713 million written in property and casualty reinsurance in the 2006 underwriting year, more than two-thirds of the treaties worth altogether EUR 2,562 million (69%) were due for renewal as at 1 January 2007. Treaties worth EUR 2,190 million were renewed, while a premium volume of EUR 371 million was cancelled or renewed in modified form. Including growth of EUR 446 million deriving from new or modified treaties and thanks to improved prices, the total renewed premium volume therefore amounted to EUR 2,636 million – hence producing slightly higher gross premium income of EUR 3,779 million for the property and casualty reinsurance business group.

As in the past, the bulk of our acceptances are attributable to lower-volume but highly profitable non-proportional business, which accounts for more than 80% of the treaties and about half of the premium income.

Business developments in Germany were especially pleasing: the premium volume here grew by a substantial 16%. "Thanks to new client relationships and increased treaty shares under existing accounts we have been able to further boost our already high market share and extend our position as one of the leading reinsurers in the profitable German market", Mr. Zeller emphasised.

Despite the modest hurricane losses recorded last year in the United States, the market there remained favourable in view of the intense hurricane seasons of 2004 and – especially – 2005. Although rates in catastrophe-exposed property business retreated somewhat compared to the mid-year renewals as at 1 July 2006, they are still thoroughly satisfactory and around 35% higher than the previous year's level; premium income here increased slightly and held stable in property insurance overall. In US casualty business, on the other hand, reinsurance prices declined somewhat owing to more lively competition.

Rates in marine business held firm at the peak level achieved last year. In credit and surety business, too, the favourable market climate made possible premium growth of 6%. Prices in non-proportional aviation reinsurance are still adequate. Given the reduction of less profitable proportional business total premium income in aviation reinsurance contracted by 15%.

Risk management

Risk management at Hannover Re remains firmly focused on the protection of capital. "In addition to traditional retrocessions we shall continue to make use of risk transfers to the capital market. As at 1 January 2007, for example, we increased the volume of our K5 securitisation to USD 520 million", Mr. Zeller noted. Hannover Re will respond to the brisk interest in such transactions – i.e. the transfer of reinsurance risks to the capital market – by concluding further securitisations of this type going forward.

Outlook for 2007

The prevailing largely adequate market conditions in property and casualty reinsurance should be sustained in the other renewal phases upcoming this year (1 April, 1 June/July and 1 October): "The effects of the market softening that has begun to set in will not make themselves felt in our results before 2008/2009", Mr. Zeller affirmed. "At the same time, though, winter storm 'Kyrill' should then have a positive impact on rates in European catastrophe business."

New segmentation

Following the sale of Praetorian Financial Group, Inc., the company's US primary insurance subsidiary transacting specialty business – the deal is expected to close in the second quarter of 2007 –, Hannover Re will concentrate exclusively on its core business of reinsurance. "Sufficient scope for profitable growth is available to us here – including for example the continuing opportunities in US catastrophe business, in life and health reinsurance and in Germany as well as through the cultivation of new markets in central and eastern Europe and in Sharia-compliant reinsurance", Mr. Zeller explained. As far as Hannover Re's business groups are concerned, too, the sale of Praetorian will bring changes. Going forward, the company has decided to limit its segmentation to just two strategic business groups, namely "non-life reinsurance" and "life & health reinsurance". From now on the non-life reinsurance business group will include not only property and casualty business, but also financial reinsurance and specialty business. This restructuring of business groups will preserve intact the important diversification effect for the portfolio.

Profit guidance

In light of the successful treaty renewals as at 1 January Hannover Re is looking forward to a highly favourable 2007 financial year. Assuming that expenditure on catastrophe losses and major claims remains within the multi-year average and as long as there are no unexpected downturns on capital markets, another very good result should be possible in the current year: "Although the year got off to a stormy start with 'Kyrill', we anticipate a return on equity of at least 15% for 2007", Mr. Zeller commented. In this scenario the company's dividend target remains unchanged, with an envisaged payout ratio in the range of 35 to 40%.