Interim Report 3/2011: Hannover Re confirms profit target for 2011

Hannover, 9 November 2011:

Hannover Re expressed satisfaction with its Group net income as at 30 September 2011. "Despite loss expenditure overshadowed by the severe natural catastrophe losses of the first quarter as well as a challenging capital market environment, we succeeded in generating Group net income for the first nine months of EUR 381.7 million. This puts in place a good platform for achieving our profit target of at least EUR 500 million for the full financial year", Chief Executive Officer Ulrich Wallin confirmed.

Continued organic growth

Gross written premium in total business increased by 6.0% as at 30 September 2011 to reach EUR 9.1 billion (EUR 8.6 billion). At constant exchange rates growth would have come in at 8.1%. The level of retained premium was virtually unchanged at 90.7% (91.0%). Net premium climbed 5.5% to EUR 7.9 billion (EUR 7.5 billion). The increase would have amounted to 7.5% at constant exchange rates.

Group net income in line with current expectations

The operating profit (EBIT) of EUR 487.8 million fell short of the strong performance in the comparable period (EUR 862.0 million) owing to the heavy burden of major losses in the first quarter and reduced profitability in life and health reinsurance. The result in the previous year had, however, been influenced by positive special effects. Group net income totalled EUR 381.7 million (EUR 582.0 million). Earnings per share came in at EUR 3.16 (EUR 4.83).

Satisfactory result in non-life reinsurance despite heavy major loss expenditure

The situation on international reinsurance markets is broadly positive. In view of the substantial natural catastrophe events that occurred in the first quarter, the treaty renewals during the year brought the anticipated sharp surges in rates – especially under programmes that had suffered losses. In the area of casualty covers, however, at best moderate improvements in conditions can be observed for reinsurers, although the lowest point has now passed.

Gross premium in non-life reinsurance increased by 8.2% as at 30 September 2011 to stand at EUR 5.2 billion (EUR 4.8 billion). At constant exchange rates, especially against the US dollar, growth would have been as much as 10.5%. The level of retained premium remained virtually unchanged at 90.3% (90.5%). Net premium earned climbed 8.0% to EUR 4.4 billion (EUR 4.1 billion). The increase would have been 10.0% at constant exchange rates.

The third quarter passed off relatively moderately in terms of major losses; at EUR 118.0 million, the strain was below the expected level of EUR 165 million. The largest single loss was hurricane "Irene", with a net cost of EUR 20.2 million for Hannover Re's account. In view of the exceptionally heavy major loss incidence in the first quarter, the net burden of major losses as at 30 September 2011 totalled EUR 743.2 million – a figure still well in excess of the corresponding period of the previous year (EUR 554.1 million).

The combined ratio stood at 105.0% (99.0%), or 95.2% (98.2%) for the third quarter in isolation. The net underwriting result came in at –EUR 229.2 million (EUR 32.4 million).

As anticipated, the operating profit (EBIT) fell short of the comparable figure for the previous year (EUR 633.4 million) at EUR 332.9 million. Group net income totalled EUR 295.0 million (EUR 437.7 million). "Bearing in mind that the major loss expenditure is EUR 343 million higher than our expectation for the first nine months, this performance is thoroughly gratifying overall", Mr. Wallin emphasised. "It is a testament to the underlying favourable development of our non-life reinsurance portfolio." This is all the more true given that the performance of the inflation swaps taken out for hedging purposes also adversely impacted the result in the third quarter. Earnings per share amounted to EUR 2.45 (EUR 3.63).

Result in life and health reinsurance particularly hard hit by adverse capital market climate

The international life and health reinsurance markets continue to offer attractive business opportunities. The demographic shift in mature markets such as the United States, United Kingdom, Germany, France and Australia is generating heightened awareness of the need for provision. Yet in leading emerging markets such as China, India and Brazil demand for retirement provision solutions is also rising.

Gross written premium improved by 3.0% as at 30 September 2011 to reach EUR 3.8 billion (EUR 3.7 billion). At constant exchange rates growth would have come in at 5.0%. Net premium earned increased by 2.4% to EUR 3.5 billion (EUR 3.4 billion). The increase would have been 4.6% at constant exchange rates.

Profitability in life and health reinsurance did not entirely live up to expectations. Among other factors, the further widening of credit spreads on bond markets resulted in a strain of EUR 69.9 million on deposits held by US clients for Hannover Re's account. In addition, negative currency effects of EUR 11.8 million were incurred for the first nine months, contrasting with a positive effect of EUR 31.8 million in the corresponding period of the previous year.

"The operating profit (EBIT) of EUR 138.6 million generated despite the adverse factors is a testament to the good quality and excellent diversification of our book of business", Mr. Wallin emphasised. "In most markets the business development was – as anticipated – pleasing." The EBIT margin stood at 4.0% (6.3%). As expected, the Group net income of EUR 113.1 million did not match up to the result for the corresponding period of the previous year (EUR 170.2 million). Earnings per share amounted to EUR 0.94 (EUR 1.41).

Investment income thoroughly satisfactory despite low interest rate level

Despite the turmoil on international capital markets Hannover Re is thoroughly satisfied with the development of its investments. This can be attributed in particular to the fact that holdings of listed equities have only been very minimal since the first quarter, as a consequence of which virtually no strains were incurred in this area. "Our policy on bonds continues to be geared towards a diversified portfolio", Mr. Wallin explained. "Relative to our total assets under own management, our exposure to Eurozone countries with high credit spreads remains slight at roughly 1.5%. Our portfolio does not contain any instruments of Greek issuers."

The portfolio of assets under own management grew sharply to EUR 27.1 billion (EUR 25.4 billion). Despite the sustained low level of interest rates, ordinary income excluding interest on deposits comfortably surpassed the corresponding period of the previous year (EUR 655.1 million) to reach EUR 712.0 million. Interest on deposits also increased to EUR 247.2 million (EUR 223.7 million). Owing to the widening of credit spreads on bond markets, the unrealised losses on deposits held by US life insurers for Hannover Re's account increased to EUR 69.9 million. Altogether, the unrealised losses on assets recognised at fair value through profit or loss amounted to EUR 70.0 million (EUR 93.6 million). The inflation swaps taken out to hedge part of the inflation risks associated with the loss reserves in the technical account gave rise to unrealised losses of EUR 11.3 million (EUR 89.4 million).

With interest rates in some cases at historically low levels Hannover Re realised gains in the third quarter, producing a net balance of realised gains in an amount of EUR 113.4 million (EUR 135.2 million). Net investment income clearly surpassed the previous year's level at EUR 950.8 million (EUR 872.2 million). The average return on investments under own management thus stood at 3.6%, a figure slightly in excess of the defined target of 3.5%.

Equity base further strengthened

The equity attributable to shareholders of Hannover Re grew by EUR 189.8 million relative to the position as at 31 December 2010 to reach EUR 4.7 billion (EUR 4.5 billion). The book value per share consequently increased by 4.2% to EUR 38.96 (EUR 37.39 ). The annualised return on equity stood at 11.1% (19.0%).

Outlook for 2011

In light of the available market opportunities in international reinsurance business and its very good positioning, Hannover Re is looking to grow its net premium volume for the current year by 7% to 8% at constant exchange rates.

In non-life reinsurance market conditions remain good. In view of the heavy losses from natural disasters, especially in the first quarter, the market hardening observed across the board – albeit to varying degrees – in the renewals during the year appears set to continue. This tendency was confirmed not only by the industry gatherings in Monte Carlo, Baden-Baden and the United States, but also by the most recent round of renewals in North America. Hannover Re expects net premium in total non-life reinsurance to grow by around 8% to 10% assuming exchange rates remain unchanged.

The prospects in international life and health reinsurance remain favourable. A particularly significant factor here is the demographic trend in established insurance markets such as the United States, Japan, United Kingdom and Germany. Yet rising demand can also be observed in the markets of Eastern Europe and Asia. In key markets for Hannover Re, including the United States, risk-oriented reinsurance solutions are taking on greater importance. Financially oriented reinsurance solutions, i.e. models designed to strengthen the solvency base of primary insurers, continue to enjoy sustained demand. Business involving longevity risks also offers healthy growth opportunities, particularly in the United Kingdom. For the current financial year Hannover Re is looking to grow net premium in life and health reinsurance by more than 5% at constant exchange rates.

On the investments side the expected positive cash flow should – subject to stable exchange rates – lead to further growth in the asset portfolio. In the area of fixed-income securities the emphasis continues to be on the high quality and diversification of the portfolio. The targeted return on investment for the 2011 financial year is 3.5%.

In view of its very good positioning and the advantageous situation on reinsurance markets, Hannover Re expects to generate Group net income of at least EUR 500 million for 2011. This is subject to the premise that the burden of major losses in the fourth quarter does not significantly exceed the remaining expected level and also assumes that there are no drastic downturns on capital markets.

Depending on the development of the underwriting result and IFRS equity in the fourth quarter the company aims to pay a dividend for the 2011 financial year which could even exceed 40% of Group net income.