Interim Report 2/2013: Hannover Re posts good half-yearly result

Hannover, 7 August 2013:

With its result for the first half-year Hannover Re has put in place a good basis for achieving its full-year targets. "The modest rise in Group net income to EUR 408 million was driven mainly by an 85% increase in the underwriting profit for non-life reinsurance", Chief Executive Officer Ulrich Wallin explained. "This more than made up for the reduced profitability in life and health reinsurance and somewhat lower investment income."

Continued organic growth

Gross written premium for the Hannover Re Group increased by 4.9% to reach EUR 7.2 billion (EUR 6.9 billion) as at 30 June 2013. At constant exchange rates growth would have amounted to 6.2%. The level of retained premium remained virtually unchanged at 90.0% (89.8%). Net premium earned climbed 6.3% to EUR 6.2 billion (EUR 5.8 billion), equivalent to growth of 7.7% adjusted for exchange rate effects.

Good Group net income

The operating profit (EBIT) for the first six months of 2013 was thoroughly pleasing, rising 12.3% to EUR 670.7 million (EUR 597.2 million). Owing to a higher tax ratio Group net income increased less strongly relative to the comparable period, coming in at EUR 407.7 million (EUR 405.3 million). Earnings per share amounted to EUR 3.38 (EUR 3.36).

Pleasing result in non-life reinsurance

The pace of growth in gross and net premium has slowed in non-life reinsurance. This is due in part to increased competition, but also to the disciplined underwriting policy practised by Hannover Re. "For reasons of profitability we concentrate our acceptances exclusively on business that meets our margin requirements. We are even prepared to accept a contraction in premium income", Mr. Wallin emphasised.

Gross premium in non-life reinsurance increased only slightly relative to the comparable period, rising 0.4% to EUR 4.1 billion (EUR 4.1 billion). At constant exchange rates growth would have come in at 1.3%. The level of retained premium was unchanged at 90.2% (90.2%). Net premium earned climbed 3.0% to EUR 3.4 billion (EUR 3.3 billion); growth of 4.0% would have been recorded after adjustment for exchange rate effects.

Following a very calm major loss situation in the first quarter, a number of large losses were recorded in the second quarter. The largest single event was the severe flooding in Germany and other European countries. The resulting net strain for Hannover Re amounts to EUR 136.9 million. Further sizeable losses occurred shortly before the end of the quarter, including for example hail damage in Germany and a flood event in Canada. Total major loss expenditure for Hannover Re as at 30 June 2013 amounted to EUR 259.5 million (EUR 132.4 million). It was only slightly higher than the loss expectancy and hence the major loss budget for the first half-year. The underwriting result for total non-life reinsurance surged by a pleasing 85.0% to EUR 183.6 million (EUR 99.2 million) and thus more than offset the reduced investment income for the business group – a decrease which had been anticipated in view of the low level of interest rates. The combined ratio for the first half-year was positive at 94.4% (96.8%).

The operating profit (EBIT) in non-life reinsurance consequently improved by a thoroughly gratifying 27.6% to EUR 549.1 million (EUR 430.3 million) as at 30 June 2013. Group net income increased by 18.6% to EUR 362.1 million (EUR 305.4 million); earnings per share stood at EUR 3.00 (EUR 2.53).

Life and health reinsurance offers attractive growth opportunities

As anticipated, good business opportunities presented themselves in life and health reinsurance during the first half of the year. The dominant topics here continue to be protection for a progressively ageing population in industrialised nations as well as financially oriented reinsurance solutions designed to optimise a client's capital structure. "We also booked particularly healthy growth in promising future markets such as Latin America, Eastern Europe and Asia, where demand for our life reinsurance products is especially strong", Mr. Wallin noted.

Gross written premium in life and health reinsurance climbed 11.4% to EUR 3.1 billion (EUR 2.8 billion) as at 30 June 2013. New transactions written for the assumption of UK pension business as well as substantial growth in emerging markets were the key factors here. At constant exchange rates growth would have been as high as 13.4%. Net premium earned increased by 10.5% to EUR 2.8 billion (EUR 2.5 billion), equivalent to growth of 12.6% after adjustment for exchange rate effects.

Profitability fell short of expectations in the reporting period just ended. This can be attributed principally to losses incurred in part of the book of US mortality business. The operating profit (EBIT) in life and health reinsurance as at 30 June 2013 consequently retreated to EUR 111.4 million (EUR 155.4 million). Group net income closed at EUR 83.8 million (EUR 128.0 million); earnings per share totalled EUR 0.70 (EUR 1.06).

Satisfactory investment income

Bearing in mind the continued challenging and volatile capital market environment, investments developed in line with expectations. Despite the sustained positive cash flow, the portfolio of investments under own management contracted slightly to EUR 31.6 billion (31 December 2012: EUR 31.9 billion). This was driven by reduced fair values in the portfolio of fixed-income securities due to interest rate increases shortly before the end of the second quarter. Exchange rate effects were an additional factor here. Owing to the protracted low level of interest rates, the ordinary investment income of EUR 503.6 million came in below the comparable period (EUR 532.0 million) as had been expected. Net income from investments under own management contracted in the period under review from EUR 553.2 million to EUR 501.4 million. This was due largely to the balance of unrealised gains and losses: the inflation swaps taken out to hedge part of the inflation risks associated with technical reserves produced an unrealised loss of EUR 39.7 million (EUR -9.9 million) as at 30 June 2013. Altogether, unrealised losses of EUR 37.5 million (EUR +2.9 million) were recognised.

The annualised average return on the portfolio of assets under own management amounted to 3.2%. Excluding the aforementioned unrealised effects, the figure was 3.4% and hence within the range of our expectations for the full year. In view of the decline in ordinary and unrealised income in what remained a challenging capital market environment, investment income including interest on funds withheld and contract deposits was still gratifying at EUR 689.0 million (EUR 709.5 million).

Shareholders' equity remains robust

Hannover Re's equity base remained strong in the first half-year at EUR 5.6 billion (31 December 2012: EUR 6.0 billion). The expected reduction was due to dividend payments as well as interest rate rises on the US side, which led to a decrease in the fair values of investments in this area. The annualised return on equity of 14.0% was comfortably above our minimum target of 750 basis points above risk-free. The total policyholders' surplus (including non-controlling interests and hybrid capital) amounted to EUR 8.5 billion (31 December 2012: EUR 8.9 billion). The book value per share stood at EUR 46.40 (EUR 50.02).

Outlook

In view of its strong positioning and the development of business to date, Hannover Re expects to post a result in the region of the declared year-end targets in both non-life and life/health reinsurance for the full 2013 financial year. Based on constant exchange rates the company continues to anticipate growth of around 5% in gross premium.

In some areas of non-life reinsurance the competitive pressure has continued to intensify relative to the previous year. "The importance of our strategy of systematic cycle management combined with rigorous underwriting discipline remains undiminished. Going forward, then, we shall continue to write only business that meets our margin requirements", Mr. Wallin emphasised.

Despite a more intensely competitive environment, Hannover Re is broadly satisfied with the treaty renewals in non-life reinsurance as at 1 July 2013. Treaties for North American business as well as in the Australian and New Zealand markets traditionally come up for renewal at this time of year. Even though appreciable competitive pressure could be felt in US catastrophe business due to additional capacities from the catastrophe bond market, margins here are for the most part still adequate. However, given that Hannover Re has scaled back the proportion of US property catastrophe business in its non-life reinsurance portfolio to 8%, the implications of this softening market trend for the company are limited. Rate hikes in retail property business, on the other hand, were sustained; in commercial property business, too, Hannover Re booked moderate price increases.

For 2013 Hannover Re is looking to grow its gross premium income from total non-life reinsurance by 3% to 5% after adjustment for exchange rate effects.

In life and health reinsurance Hannover Re sees good prospects for further profitable growth. Particularly notable growth impetus is anticipated from Asia, India and Eastern Europe, where awareness of the need for individual provision is on the rise. Yet mature markets such as the United States, United Kingdom, Germany and France will also continue to play a pivotal role for Hannover Re. Gross premium is expected to increase by 5% to 7% for the full year after adjustment for exchange rate effects. Growth here could also come in somewhat higher on the basis of the half-year figures.

Hannover Re's targeted return on investment for the full year remains unchanged at 3.4%.

The results for the first six months constitute a good platform for a continued successful 2013 financial year as well as for attainment of the company's guidance, namely post-tax Group net income in the order of EUR 800 million. This is conditional on the burden of major losses not significantly exceeding the expected level of EUR 625 million for the full year and assumes that there are no unforeseen 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 IFRS Group net income after tax.