Interim Report 3/2012: Hannover Re generates strong growth and doubles operating profit (EBIT) as at 30 September 2012

Hannover, 6 November 2012:

Hannover Re reported strong premium growth and exceptionally good Group net income as at 30 September 2012. "Hannover Re's financial strength continued to grow appreciably in the first nine months of 2012. Based on very healthy investment income and a favourable loss experience we were able to boost the book value per share by almost 20% to EUR 49.12", Chief Executive Officer Ulrich Wallin noted. The very good performance over the first three quarters was assisted by unrealised gains of EUR 57.2 million from the valuation of inflation swaps and ModCo derivatives. Yet even if these unrealised gains are factored out the result remains highly gratifying. Based on excellent investment income and a sharply improved underwriting result, especially in non-life reinsurance, the company generated Group net income of EUR 670.8 million.

Further vigorous organic growth

Gross written premium increased by 13.6% as at 30 September 2012 to reach EUR 10.3 billion (EUR 9.1 billion); both non-life reinsurance and life/health reinsurance played a part here. At constant exchange rates growth would have come in at 8.6%. The level of retained premium remained virtually unchanged at 89.7% (90.7%). Net premium climbed 13.7% to EUR 9.0 billion (EUR 7.9 billion), equivalent to growth of 8.7% adjusted for exchange rate effects.

Very good nine-month result

Driven by the pleasing development of both business groups and the investment portfolio, the operating profit (EBIT) doubled to EUR 1,016.8 million (EUR 490.8 million). Group net income increased substantially to EUR 670.8 million (EUR 381.7 million). Earnings per share stood at EUR 5.56 (EUR 3.16).

Pleasing business development in non-life reinsurance

Hannover Re is satisfied with the situation on international reinsurance markets. The company achieved favourable outcomes in the 1 July treaty renewals in North America, Australia and New Zealand. Along with the positive trend in global property (catastrophe) lines, in the United States the first encouraging signs of an improved overall climate could also be discerned in some casualty lines, such as workers' compensation business and certain segments of professional indemnity.

Gross premium in non-life reinsurance improved on the comparable period by 13.0% to reach EUR 5.9 billion (EUR 5.2 billion). At constant exchange rates, especially against the US dollar, growth would have come in at 8.6%. The level of retained premium was almost unchanged at 89.9% (90.3%). Net premium earned climbed 14.3% to EUR 5.0 billion (EUR 4.4 billion); adjusted for exchange rate effects, growth stood at 10.1%.

As in the first half-year, the major loss experience was again moderate in the third quarter. The net burden of EUR 60.6 million was substantially lower than the expected level of EUR 178 million. The largest single loss in the third quarter was the disastrous drought in the United States, which caused enormous agricultural damage. Hannover Re's involvement in this region is concentrated primarily on non-proportional reinsurance treaties, which have upper limits; based on the information available to date, the company's net loss of EUR 49.2 million was therefore rather moderate. The total net burden of major losses for the first nine months amounted to EUR 193.0 million, as against EUR 743.2 million in the comparable period.

The combined ratio as at 30 September 2012 stood at 96.5% (105.0%). The underwriting result closed at a pleasing EUR 169.7 million (–EUR 229.2 million).

The operating profit (EBIT) surged to EUR 766.4 million (EUR 332.9 million), more than twice the figure in the comparable period. The moderate major loss experience was a crucial factor here. Group net income climbed 78.0% to EUR 525.0 million (EUR 295.0 million). Earnings per share stood at EUR 4.35 (EUR 2.45).

Gratifying performance in life and health reinsurance

The life and health reinsurance business group also fared well. Both mature insurance markets, such as the United States, Germany or the United Kingdom, and emerging markets offer good business opportunities. Especially in Asia and Latin America, Hannover Re sees stronger demand for life insurance products and retirement provision solutions on the back of rising prosperity.

Gross premium income totalled EUR 4.4 billion (EUR 3.8 billion) as at 30 September 2012, an increase of 14.5%. Growth would have come in at 8.6% adjusted for exchange rate effects. Net premium earned climbed 13.0% to EUR 3.9 billion (EUR 3.5 billion). At constant exchange rates net premium would have grown by 7.0%.

The operating profit (EBIT) improved by 68.0% to EUR 232.9 million (EUR 138.6 million). In contrast to the second quarter, the so-called ModCo derivatives delivered a positive performance of EUR 45.8 million as at 30 September 2012; the changes in value here are recognised as unrealised gains. IFRS accounting requires Hannover Re to establish ModCo derivatives in relation to the credit risk associated with certain securities deposits held by US life insurance clients on its behalf.

Life and health reinsurance contributed EUR 188.3 million (EUR 113.1 million) to Group net income. This is equivalent to an increase of 66.5% relative to the corresponding period of the previous year. Earnings per share totalled EUR 1.56 (EUR 0.94).

Excellent investment income

Despite the difficult situation on international capital markets, Hannover Re is thoroughly satisfied with the development of its investments. The portfolio of investments under own management grew by 10.0% relative to the volume as at 31 December 2011 to reach EUR 31.2 billion (EUR 28.3 billion). Net income from assets under own management climbed to EUR 822.0 million (EUR 712.0 million) as at 30 September 2012, an improvement of 15.4% on the comparable period despite the low level of interest rates. This can be attributed principally to the enlarged asset portfolio and significantly expanded investments in corporate bonds over the past two years. The portfolio of assets under own management generated an average return of 4.3% (3.6%), thereby beating the return on investment of 3.5% targeted for the full year.

The unrealised gains on assets recognised at fair value through profit or loss, which are influenced primarily by changes in the value of the inflation swaps and ModCo derivatives, had a positive effect on investment income as at 30 September 2012. The change in value of the so-called ModCo derivatives gave rise to unrealised gains of EUR 45.8 million, while those resulting from the inflation swaps amounted to EUR 11.4 million. Altogether, the unrealised gains totalled EUR 61.0 million.

Driven above all by the further rise in ordinary income, but also thanks to realised and unrealised gains, net investment income (including interest on funds withheld and contract deposits) comfortably surpassed the previous year's level at EUR 1,208.8 million (EUR 950.8 million).

Equity base further strengthened

The equity attributable to shareholders of Hannover Re continued to develop favourably, growing by 19.2% relative to the position as at 31 December 2011 to reach its current level of EUR 5.9 billion (EUR 5.0 billion). The book value per share showed a correspondingly pleasing increase to EUR 49.12 (EUR 41.22). The annualised return on equity stood at 16.4% (11.1%).

Forecast 2012

In view of the opportunities on international reinsurance markets and its very good positioning, Hannover Re is expecting a very good result for the 2012 financial year. The company has revised upwards its growth forecast from the previous range of 5% - 7% to 8% - 9%.

Market conditions in non-life reinsurance remain good. The rates obtained in the various rounds of treaty renewals within the year were for the most part adequate. Demand for reinsurance protection should continue to be strong owing to the growing concentration of values in urban conurbations as well as the implementation of risk-based solvency systems. The positive factors that have already shaped previous treaty renewals will likely also affect pricing as at 1 January 2013 and prevent market softening. This tendency was confirmed not only by the industry gatherings in Monte Carlo, Baden-Baden and the United States, but also by the latest round of renewals in North America. Hannover Re is raising its growth forecast for non-life reinsurance – at unchanged exchange rates – from the previous 5% - 7% to 8% - 9%.

As far as international life and health reinsurance is concerned, the company expects the dynamic growth of worldwide markets to be sustained under present conditions. For the current year Hannover Re anticipates organic growth in its gross premium volume of between 8% and 9% in life and health reinsurance, as against the previously forecast 5% to 7%.

Turning to the investment portfolio, the anticipated positive cash flow – assuming stable exchange rates – should lead to further growth in the asset volumes. In the area of fixed-income securities Hannover Re continues to stress the high quality and diversification of its portfolio. For the full 2012 financial year the company is targeting a return on investment greater than 3.5%.

"The Group net income reported for the first nine months puts in place a good platform for achieving a very pleasing result for the full 2012 financial year", Mr. Wallin stated. "At this point in time it is our assumption that Group net income in excess of EUR 800 million is realistic." This is conditional on the burden of major losses not significantly exceeding the expected level of EUR 560 million and assumes that there are no drastic downturns on capital markets.

It should be pointed out in this connection that it is currently still too early to make reliable statements on strains from the possible major loss event Superstorm Sandy.

Outlook 2013

As things currently stand, Hannover Re expects to be able to enlarge its gross premium volume by around 5% for the 2013 financial year – based on constant exchange rates. The company is targeting a return on investment of 3.4%. Assuming that the burden of major losses does not significantly exceed the expected level of around EUR 600 million in non-life reinsurance and provided there are no adverse movements on capital markets, Hannover Re is looking to generate Group net income in the order of EUR 800 million for the 2013 financial year.