Annual Report 2010: Hannover Re generates record result in 2010

Hannover, 9 March 2011:

The 2010 financial year was a very pleasing one for Hannover Re. "With net income after tax of EUR 748.9 million we beat our record result of 2009", Chief Executive Officer Ulrich Wallin noted. Although operational business was impacted by a heavy major loss incidence, the resulting strains were more than offset by lower basic losses and very healthy investment income as well as a positive special effect associated with a decision of the Federal Fiscal Court.

2010 financial year

The gross written premium booked by the Hannover Re Group showed another sharp increase of 11.2% – after vigorous growth in the previous year – to reach EUR 11.4 billion (EUR 10.3 billion). At constant exchange rates the premium volume would have risen by 6.8%. The level of retained premium retreated slightly to 90.1% (92.6%). Net premium earned climbed 7.9% to EUR 10.0 billion (EUR 9.3 billion).

The operating profit (EBIT) improved to EUR 1.2 billion (EUR 1.1 billion). The previous year had been influenced by positive special effects in life and health reinsurance amounting to EUR 144.7 million. Group net income increased from EUR 733.7 million to EUR 748.9 million. This figure already includes a charge of EUR 69.2 million from the sale of the company's US subsidiary Clarendon. The result benefited in an amount of EUR 112.2 million on balance from a positive special effect associated with the decision of the Federal Fiscal Court regarding the taxation of foreign sourced income. Yet even without this effect the result would have surpassed the original profit forecast for 2010. Earnings per share stood at EUR 6.21 (EUR 6.08).

In the light of this healthy profitability the shareholders' equity of Hannover Re improved by more than 21.4% on the level as at 31.12.2009 to reach EUR 4.5 billion (EUR 3.7 billion). The policyholders' surplus (including minority interests and hybrid capital) climbed by 24.3% to EUR 7.0 billion (EUR 5.6 billion). The return on equity amounted to 18.2% (22.4%) and thus comfortably surpassed the guidance of 15%.

Non-life reinsurance delivers very good profit contribution despite heavy major loss expenditure

"Even though the competitive pressure in non-life reinsurance intensified, we are still satisfied with the development of our operational business. Prices and conditions were for the most part preserved on a stable level thanks to the largely disciplined underwriting practice among reinsurers", Mr. Wallin stressed.

Gross written premium in the non-life reinsurance business group increased as expected by 10.3% to EUR 6.3 billion (EUR 5.7 billion). At constant exchange rates – especially against the US dollar – growth would have come in at 6.7%. The level of retained premium fell to 88.9% (94.1%). Net premium earned climbed by 3.1% to EUR 5.4 billion (EUR 5.2 billion).

The situation as regards major losses was extremely strained in 2010, causing total net expenditure of EUR 661.9 million (EUR 239.7 million) for Hannover Re; the expected level had been around EUR 500 million.

Three severe earthquakes dominated the year under review: the largest single event for Hannover Re was the earthquake in Chile with a net loss burden of EUR 181.9 million. The earthquake in New Zealand gave rise to net loss expenditure of EUR 113.8 million. On account of lower insured values in Haiti the loss amount here was relatively moderate at EUR 27.2 million. Also noteworthy were winter storm "Xynthia" in Europe, numerous flood events in various parts of the world and the loss of the "Deepwater Horizon" drilling rig in the Gulf of Mexico.

Despite the heavy burden of major losses the combined ratio increased only modestly from 96.6% to 98.2%. The underwriting result for non-life reinsurance contracted accordingly by 42.6% to EUR 82.4 million (EUR 143.5 million). The operating profit (EBIT) climbed to EUR 879.6 million (EUR 731.4 million). Group net income in the non-life reinsurance business group surged by an appreciable 22.9% to EUR 581.0 million (EUR 472.6 million). Earnings per share amounted to EUR 4.82 (EUR 3.92).

Life and health reinsurance books further substantial growth

"We again accomplished our growth targets in 2010", Mr. Wallin emphasised. "This was assisted by the very positive development of our business in the United Kingdom, most notably in the area of longevity risks." Particularly vigorous growth was also recorded in China, where Hannover Re was the first reinsurer to write liquidity-affecting financing contracts.

Gross written premium in life and health reinsurance increased by 12.4% to EUR 5.1 billion (EUR 4.5 billion) in the year under review. At constant exchange rates growth would have amounted to 6.8%. Net premium earned surged by 14.1% to EUR 4.7 billion (EUR 4.1 billion). The life and health reinsurance business group now contributes 44.5% of Hannover Re's total premium volume.

The operating profit (EBIT) in life and health reinsurance declined to EUR 284.4 million (EUR 374.7 million). EBIT would have grown by 24% if positive special effects in the previous year associated with the acquisition of the US ING life reinsurance portfolio as well as fair value adjustments were factored out. The EBIT margin of 6.1% was in line with expectations. Group net income in life and health reinsurance totalled EUR 219.6 million (EUR 298.1 million); earnings per share came in at EUR 1.82 (EUR 2.47).

Very good investment income

The portfolio of assets under own management grew substantially to EUR 25.4 billion (EUR 22.5 billion) on the back of positive cash inflows from the technical account and changes in fair values. Even though interest rate levels were lower overall, ordinary investment income therefore surpassed the previous year (EUR 810.5 million) to reach EUR 880.5 million.

Income from investments under own management increased by 11.7% to EUR 942.5 million (EUR 843.6 million). Including income on funds withheld and contract deposits, net investment income totalled EUR 1.3 billion (EUR 1.1 billion). The return on investment stood at 3.9% (4.0%).

In the third quarter of 2010 Hannover Re began to move back into listed equities with a limited budget. The equity allocation at year-end was 2.1%.

Increased dividend proposal for 2010: EUR 2.30

"In view of our gratifying Group net income and our dividend policy of paying out 35% to 40% of our profit, the Executive Board and Supervisory Board will propose to the Annual General Meeting that the dividend should be increased by EUR 0.20 relative to the previous year to an amount of EUR 2.30 per share", Mr. Wallin stated.

Outlook for 2011

Hannover Re is optimistic about the prospects for the current financial year. The treaty renewals as at 1 January 2011 in non-life reinsurance passed off better than expected. The company anticipates premium growth of up to 3% and a good profit contribution for the current financial year. In 2011 Hannover Re will again concentrate – in keeping with its strategy of active cycle management – on segments in which adequate premiums can be obtained or prices are rising. The more exacting requirements for risk capital at insurance companies (Solvency II), for whom the transfer of risk to reinsurers with good ratings offers an economically attractive alternative, are expected to open up potential growth opportunities.

In life and health reinsurance the company is looking to generate growth of 10% to 12% in net premium. In developed insurance markets such as the United States, United Kingdom and Germany the ageing of the population should lead to stronger demand, especially for annuity and health insurance products. Progressive urbanisation in major emerging markets such as China, India and Brazil is producing a rapidly expanding middle class with an increasing need for insurance solutions.

For 2011 Hannover Re anticipates a return on investment of around 3.5%.

Hannover Re is looking to generate a good result for the full 2011 financial year. "Assuming that the burden of major losses does not significantly exceed the anticipated level of roughly EUR 530 million and provided there are no drastically adverse movements on capital markets, we continue to expect Group net income in the order of EUR 650 million for the current year", Mr. Wallin stated. Hannover Re stands by its targeted payout ratio in the range of 35% to 40% of IFRS Group net income after tax.