Annual Report 2012: Hannover Re achieves record result and increases dividend

Hannover, 7 March 2013:

Hannover Re has posted the best result in the company's history with net income of EUR 858.3 million. The most important keys to this success were solid growth, a good underwriting result in non-life reinsurance and exceptionally pleasing investment income. "Our shareholders should also share in this success. The Executive Board and Supervisory Board will therefore propose to the Annual General Meeting that a dividend of EUR 2.60 and a bonus of EUR 0.40 per share should be paid", Chief Executive Officer Ulrich Wallin stated.

2012 financial year

Gross written premium in total business increased by a pleasing 13.9% to EUR 13.8 billion (EUR 12.1 billion). At constant exchange rates – especially against the US dollar – the increase would have been 9.5%. Growth thus exceeded the forecast range of 7% to 8%, which itself had been revised upwards during the year. The level of retained premium decreased slightly to 89.8% (91.2%). Net premium earned climbed 14.2% to EUR 12.3 billion (EUR 10.8 billion). At unchanged exchange rates the increase would have been 9.9%.

The operating profit (EBIT) as at 31 December 2012 soared to EUR 1,406.5 million (EUR 841.4 million). Group net income surged 41.6% to EUR 858.3 million (EUR 606.0 million). Earnings per share consequently rose appreciably to EUR 7.12 (EUR 5.02).

Non-life reinsurance delivers very pleasing profit contribution

The state of the market in non-life reinsurance was favourable. "Not least owing to the major losses in 2011, we were able to push through price increases for most business segments. As a result, the rate level for our company in 2012 was significantly better than in the previous year", Mr. Wallin noted. Markets in Asia and Australia that had suffered losses in 2011 were particularly important drivers of growth. In addition, gratifying growth rates were recorded in North America and in global facultative reinsurance.

Altogether, gross written premium in non-life reinsurance increased by 13.1% (currency-adjusted: 9.3%) to EUR 7.7 billion (EUR 6.8 billion); growth rates thereby beat the forecast target range of 5% to 7%. The level of retained premium retreated slightly to 90.2% (91.3%). Net premium earned rose sharply by 15.0% to EUR 6.9 billion (EUR 6.0 billion).

In contrast to the previous year, the major loss situation in the year under review was comparatively moderate. Costing in excess of USD 20 billion, the largest loss for the international insurance industry was Hurricane Sandy, which caused fatalities and considerable devastation along the US East Coast. The net loss for Hannover Re from this event was EUR 257.5 million. Further major losses included the wreck of the "Costa Concordia" cruise ship and the protracted drought in the United States, at a cost of EUR 53.3 million and EUR 43.3 million respectively for net account. Total major loss expenditure for 2012 came in at EUR 477.8 million net – roughly half that of the previous year (EUR 980.7 million) – and remained within the calculated major loss budget of EUR 560 million. The combined ratio consequently improved to a very good 95.8% (104.3%). The underwriting result increased from EUR -268.7 million to EUR 272.2 million. The operating profit (EBIT) for non-life reinsurance as at 31 December 2012 rose by 82.2% to EUR 1,091.9 million (EUR 599.3 million); Group net income climbed to EUR 685.9 million (EUR 455.6 million). Earnings per share stood at EUR 5.69 (EUR 3.78).

Life and health reinsurance stays on growth track

In life and health reinsurance, too, Hannover Re continued to grow. "We generated above-average growth in the United States, using the platform acquired in 2009 under the ING transaction to expand our business", Mr. Wallin explained. "We also recorded appreciable gains in Australia, but first and foremost in the emerging markets of China and Latin America."

Gross premium in the financial year just ended grew to EUR 6.1 billion (EUR 5.3 billion), a pleasing increase of 14.9%. Adjusted for exchange rate effects, growth would have been 9.8%, hence surpassing the target range of 5% to 7%. Net premium also rose sharply by 13.3% to EUR 5.4 billion (EUR 4.8 billion).

The operating result (EBIT) in life and health reinsurance increased by 33.7% to EUR 291.1 million (EUR 217.6 million). This improved profitability was assisted by pleasing fair value gains on so-called ModCo derivatives, which produced a profit contribution of some EUR 52 million. The EBIT margin improved to 5.4% (4.5%). Group net income in life and health reinsurance climbed 26.7% to EUR 230.9 million (EUR 182.3 million) and thus outpaced the growth in gross premium income. Earnings per share amounted to EUR 1.91 (EUR 1.51).

Particularly gratifying investment income

Although interest rates continued to fall in the year under review, the return on investment for the portfolio of assets under own management comfortably surpassed the targeted 3.5% to reach 4.3%. Driven mainly by the positive cash flow from operating activities, assets under own management grew to EUR 31.9 billion, an increase of 12.5% relative to the end of the previous year (EUR 28.3 billion). Including funds withheld and contract deposits, the total volume of assets grew to EUR 46.6 billion (EUR 41.7 billion).

Ordinary investment income excluding income from funds withheld and contract deposits came in well above the level of the previous year (EUR 966.2 million) at EUR 1,088.4 million. This can be attributed primarily to the enlarged investment portfolio on the basis of what continues to be a very positive cash flow, although substantial planned expansion in the asset classes of corporate bonds and asset-backed securities over the past two years was also a factor here. The balance of net realised gains and losses was higher than in the previous year at EUR 227.5 million (EUR 179.6 million). Investment income was also boosted by the rise in unrealised gains: the balance of unrealised gains and losses was positive at EUR 89.3 million, compared to losses of EUR 38.8 million in the previous year. This was due principally to the change in fair values of the aforementioned ModCo derivatives as well as to the performance of inflation swaps taken out by Hannover Re to partially hedge the inflation risk associated with the loss reserves in its technical account. Write-downs of just EUR 21.7 million (EUR 31.0 million) had to be taken. Income from assets under own management grew by 24.4% to EUR 1.3 billion (EUR 1.0 billion). Including higher income from funds withheld and contract deposits, net investment income surpassed the previous year's record level to reach EUR 1,655.7 million (EUR 1,384.0 million).

Shareholders' equity sharply higher

The equity attributable to shareholders of Hannover Re continued to develop favourably; compared to the position as at 31 December 2011 it increased by 21.8% to EUR 6.1 billion (EUR 5.0 billion). The total policyholders' surplus (including non-controlling interests and hybrid capital) grew by 22.3% to EUR 9.0 billion (EUR 7.3 billion). The improvement in the book value per share was correspondingly pleasing, rising to EUR 50.22 (EUR 41.22). The return on equity amounted to 15.6%, after 12.8% in the previous year.

Outlook for 2013

Hannover Re looks to the current financial year with optimism. The treaty renewals as at 1 January 2013 in non-life reinsurance passed off satisfactorily for the company despite growing competition. "Thanks to our comparatively low expense ratio and our long-standing good business relations we are well equipped for the present competitive environment. The key is maintaining a disciplined focus on writing business that meets our margin requirements, while making allowance for the declining interest rate level", Mr. Wallin stated.

As already announced, Hannover Re expects to be able to increase its gross premium volume for the 2013 financial year by around 5% based on constant exchange rates. Premium growth in non-life reinsurance should be in the range of 3% to 5%, while in life and health reinsurance it is expected to be in the region of 5% to 7%. The company is targeting a return on investment of 3.4%.

Assuming that major loss expenditure does not significantly exceed the anticipated level of EUR 625 million and provided there are no unexpectedly adverse movements on capital markets, it remains Hannover Re's assumption that Group net income for the 2013 financial year will be in the order of EUR 800 million.

For the current financial year Hannover Re is targeting a dividend payout ratio in the range of 35% to 40% of its post-tax IFRS Group net income.