Interim Report 2/2011: Hannover Re posts continued growth and confirms guidance

Hannover, 8 August 2011:

In its interim report as at 30 June 2011 published today Hannover Re expressed satisfaction with the development of its business; coming in at EUR 166.2 million, the second quarter delivered the anticipated profit contribution. "Our Group net income of EUR 218 million for the first half-year should enable us – given a normal experience in the second half of the year – to comfortably attain our targeted year-end profit of around EUR 500 million", Chief Executive Officer Ulrich Wallin affirmed.

Further premium growth in the first half of 2011

Gross written premium for the Hannover Re Group climbed by an appreciable 6.4% as at 30 June 2011 to reach EUR 6.0 billion (EUR 5.7 billion). At constant exchange rates growth would have come in at 7.9%. The level of retained premium nudged slightly higher to 90.8% (90.3%). Net premium earned grew by 6.8% to EUR 5.1 billion (EUR 4.8 billion).

Owing to the considerable burden of major losses in the first quarter, the operating profit (EBIT) of EUR 246.8 million as at 30 June 2011 fell short of the result for the corresponding period of the previous year (EUR 490.7 million). Group net income totalled EUR 218.5 million (EUR 310.6 million). Earnings per share stood at EUR 1.81 (EUR 2.58). The post-tax result was favourably influenced by a tax refund including accrued interest in an amount of EUR 124 million as a consequence of last year's decision of the Federal Fiscal Court (as already reported).

Satisfactory result in non-life reinsurance despite major losses

In non-life reinsurance the gradual hardening of the markets already observed in the renewals as at 1 April 2011 was sustained in the second quarter. The treaty renewals as at 1 June and 1 July consequently produced a broadly pleasing outcome, especially in property business. "It is our expectation that this tendency will continue in the second half of 2011, and for 2012 too we are looking to further positive movement in reinsurance premiums", Mr. Wallin explained. Hannover Re notes a less pronounced tendency towards market hardening in areas that have been spared losses and in the casualty lines.

Gross premium in non-life reinsurance increased by a substantial 8.3 % relative to the corresponding period of the previous year to reach EUR 3.5 billion (EUR 3.3 billion). At constant exchange rates, especially against the US dollar, growth would have come in at 10.3%. The level of retained premium remained virtually unchanged at 90.0% (90.1%). Net premium earned rose by 8.0% to EUR 2.8 billion (EUR 2.6 billion).

The major losses incurred by Hannover Re in the second quarter were comparatively moderate at EUR 53 million; an amount of EUR 22.7 million was attributable to the series of tornadoes in the United States in May. In view of the sizeable major loss burden in the first quarter, however, the net major loss expenditure of EUR 625.2 million was significantly higher than in the corresponding period of the previous year (EUR 407.6 million). The combined ratio therefore stood at 110.3% (99.5%); considered in isolation for the second quarter, it was 97.7%.

The net underwriting result amounted to –EUR 299.4 million (EUR 7.2 million). The operating profit (EBIT) in non-life reinsurance retreated to EUR 151.2 million (EUR 333.8 million). Group net income totalled EUR 164.1 million (EUR 215.1 million). "Bearing in mind that the major loss burden for the first six months exceeded the anticipated level by EUR 390 million, this performance is thoroughly satisfactory overall and it underscores the positive development of our non-life reinsurance portfolio", Mr. Wallin emphasised. Earnings per share amounted to EUR 1.36 (EUR 1.78).

Development of life and health reinsurance below expectations

The general business environment in international life and health reinsurance remains favourable. The ageing of the population in mature markets such as the United Kingdom, United States and Germany is generating heightened awareness of the need for provision and hence boosting demand for annuity and life insurance products. What is more, in leading emerging markets such as China, India and Brazil demand for retirement provision solutions also continues to rise.

Gross written premium climbed by 3.7% as at 30 June 2011 to EUR 2.5 billion (EUR 2.4 billion). At constant exchange rates growth would have amounted to 4.5%. Net premium earned increased by 5.3% to EUR 2.3 billion (EUR 2.2 billion).

Despite Group net income of EUR 73.9 million, the first half of 2011 did not entirely live up to our expectations for life and health reinsurance. This was due primarily to the additional reserves that had to be set aside for Australian disability business; this portfolio is, however, in run-off since Hannover Re stopped writing new business in this area in 2009. As a further factor, the result in life and health reinsurance was impacted by adverse movements in exchange rates.

The operating profit (EBIT) contracted to EUR 78.4 million (EUR 145.5 million). The EBIT margin stood at 3.4% (6.7%). Group net income as at 30 June 2011 for life and health reinsurance totalled EUR 73.9 million (EUR 113.8 million), producing earnings per share of EUR 0.61 (EUR 0.94).

Pleasing investment income

The portfolio of assets under own management remained virtually unchanged at EUR 25.3 billion (EUR 25.4 billion); a very positive cash flow was opposed by portfolio reductions resulting from exchange rate effects. Despite the sustained low level of interest rates, ordinary income from assets under own management improved slightly on the corresponding period of the previous year to reach EUR 447.9 million (EUR 441.2 million). Interest on deposits also increased to EUR 161.3 million (EUR 151.2 million). Unrealised gains on assets recognised at fair value through profit or loss amounted to altogether EUR 53.7 million – as against unrealised losses of EUR 86.2 million in the corresponding quarter of the previous year. The primary factor here was the positive change in the fair values of inflation swaps taken out last year. Thanks to the stable ordinary investment income and the favourable development of unrealised gains, net investment income climbed 22.0% to EUR 672.8 million (EUR 551.4 million). The exposure to so-called peripheral Eurozone nations (Portugal, Ireland, Italy, Greece, Spain) continues to be very low at EUR 254 million - a figure equivalent to just 1% of the assets under own management. Since Hannover Re does not hold any Greek government bonds, impairments were not incurred in this regard either.

Shareholders' equity remains on a high level

The equity attributable to shareholders of Hannover Re totalled EUR 4.3 billion at the end of the first half-year (31.12.2010: EUR 4.5 billion). The book value per share amounted to EUR 35.86 (EUR 37.39). The reduction was due in large measure to the dividend of EUR 277.4 million paid in the second quarter.

Outlook

In light of the company's good market position and the highly satisfactory conditions prevailing on international reinsurance markets, Hannover Re expects to achieve its growth and profit targets for 2011. At constant exchange rates, the net premium volume should grow by 7% to 8%.

In non-life reinsurance the favourable outcome of the 1 April treaty renewals was followed by further good to very good results from the 1 June and 1 July renewals. "We were able to obtain further significant rate increases in Australia and New Zealand, while the North American market also showed appreciable tendencies towards hardening", Mr. Wallin noted. Although rates climbed sharply here in property catastrophe business, additional rate improvements are still needed in casualty lines.

For 2011 Hannover Re expects net premium in total non-life reinsurance to grow by around 7% to 8% in the original currencies.

In life and health reinsurance, too, the prospects are bright. Hannover Re is looking to generate net premium growth in a range of 7% to 10% for 2011 – at constant exchange rates – and expects a positive business experience in the second half of the year.

The company anticipates a return on investment of 3.5% on its asset portfolio for 2011.

In view of the business opportunities that are opening up and the advantageous situation on reinsurance markets, Hannover Re confirms its guidance of Group net income in the order of EUR 500 million for the full 2011 financial year. This is subject to the premise that the major loss expenditure in the second half of the year does not significantly exceed the remaining expected level of EUR 295 million and also assumes that there are no drastic downturns on capital markets.

As for the dividend, Hannover Re continues to aim for a payout ratio in the range of 35% to 40% of its Group net income after tax.