Interim Report 3/2013: Hannover Re well on track to achieve full-year target

Hannover, 5 November 2013:

Hannover Re expressed considerable satisfaction with the development of its business in the first nine months of the year. "Despite challenging market conditions, and particularly in view of the low interest rate level, we generated Group net income of EUR 613 million and are thus well on track to achieve our full-year target in the order of EUR 800 million", Chief Executive Officer Ulrich Wallin explained. "The positive development in the third quarter was again driven by a very good underwriting result in non-life reinsurance."

Further moderate growth

Gross written premium for the Hannover Re Group increased by a modest 2.3% to EUR 10.5 billion (EUR 10.3 billion) as at 30 September 2013. At constant exchange rates growth would have come in at 4.7%. The level of retained premium retreated to 88.9% (89.7%). Net premium earned climbed by 1.8% to EUR 9.1 billion (EUR 9.0 billion); adjusted for exchange rate effects, growth would have amounted to 4.2%.

Good Group net income

The operating profit (EBIT) as at 30 September 2013 contracted slightly by 5.4% to EUR 961.6 million (EUR 1,016.8 million). The Group net income of EUR 613.2 million (EUR 670.8 million) was in line with the full-year planning, despite a decline of 8.6%. This is because the result for the previous year had been exceptionally high on account of one-off effects. As a further factor, the burden of natural catastrophe losses in the comparable period had been unusually low. Earnings per share amounted to EUR 5.08 (EUR 5.56).

Significantly higher underwriting profit

In the third quarter of 2013 non-life reinsurance treaties came up for renewal primarily in North America, Australia and New Zealand. The picture in these markets was a mixed one, although overall the rate level was broadly commensurate with the risks. While US catastrophe business was impacted by rate reductions, satisfactory prices were achieved in other US property business as well as in Australia and New Zealand. The decline in margins in US catastrophe business is of merely limited relevance to Hannover Re owing to the company's below-average market share here.

"Our strategy of pursuing a selective underwriting policy continues to be of great importance in view of increasing competition and declining investment returns. With this in mind, we are prepared to relinquish business that we do not consider to be adequately priced – even if this leads to a reduction of our market shares in certain areas", Mr. Wallin emphasised.

Gross premium in non-life reinsurance increased by a modest 1.0% as at 30 September 2013 relative to the comparable period, rising to EUR 6.0 billion (EUR 5.9 billion). At constant exchange rates growth would have come in at 2.8%. The level of retained premium decreased to 89.1% (89.9%). Net premium earned rose by 1.5% to EUR 5.1 billion (EUR 5.0 billion); adjusted for exchange rate effects, growth stood at 3.3%.

After the heavy major loss expenditure already incurred in the second quarter, a number of natural disasters and other large losses were also recorded in the third quarter. The largest single event was hailstorm "Andreas" in Germany, with a net loss of EUR 64.0 million for Hannover Re's account. Total major loss expenditure as at 30 September 2013 amounted to EUR 446.7 million (EUR 193.0 million). While this is substantially higher than the figure for the comparable period, it is still in line with the loss expectancy for the first nine months of the current year.

The underwriting result for total non-life reinsurance surpassed the comparable period's already pleasing performance, rising by a further 43.4 % to close at EUR 243.4 million (EUR 169.7 million). This more than offset the expected decline in investment income. The combined ratio was very favourable at 95.0% (96.5%).

The operating profit (EBIT) in non-life reinsurance consequently increased by 5.0% to EUR 804.6 million (EUR 766.0 million) as at 30 September 2013. Group net income improved by 1.8% to EUR 534.4 million (EUR 524.8 million); earnings per share stood at EUR 4.43 (EUR 4.35).

Life and health reinsurance delivers solid growth

Although the pace of growth slowed in the third quarter, Hannover Re nevertheless continues to see attractive growth opportunities. This is especially true of emerging markets in Asia and South America. Substantial profitable growth was also generated in US mortality and UK longevity business.

Gross written premium in life and health reinsurance climbed by 4.1% as at 30 September 2013 to reach EUR 4.6 billion (EUR 4.4 billion). At constant exchange rates growth would have come in at 7.4%. Net premium earned increased by 2.1% to EUR 4.0 billion (EUR 3.9 billion); adjusted for exchange rate effects, growth amounted to 5.4%.

The result in life and health reinsurance, however, fell short of expectations: this was due to losses from the reinsurance of Australian disability income insurance products (DII). The operating profit (EBIT) in life and health reinsurance as at 30 September 2013 consequently contracted sharply to EUR 143.4 million (EUR 233.3 million). The comparable figure for the previous year had, however, been disproportionately high due to special effects. Group net income came in at EUR 136.0 million (EUR 188.6 million); earnings per share amounted to EUR 1.13 (EUR 1.56).

Investment income in line with expectations

Faced with what is still a challenging and volatile capital market environment, particularly high importance attaches to preserving the value of investments and the stability of the return. For this reason, Hannover Re's asset portfolio is guided by the principles of a balanced risk/return profile and broad diversification. The portfolio of assets under own management remained stable at EUR 31.8 billion (31 December 2012: EUR 31.9 billion).

Reflecting the persistently low level of interest rates, ordinary investment income excluding interest on funds withheld and contract deposits came in as expected below the level of the comparable period at EUR 781.1 million (EUR 822.0 million).

The volume of write-downs taken in the period under review was again only very minimal. Owing to the difficult conditions on capital markets and the elimination of positive special effects recorded in the previous year, income from assets under own management fell short of the comparable period at EUR 785.6 million (EUR 961.2 million). The resulting annualised average return stood at 3.3% (4.3%). Excluding unrealised effects from the ModCo derivatives and inflation swaps, the annualised figure was 3.4 % and thus corresponded exactly to the target for the entire year. Net investment income including interest on funds withheld and contract deposits was in line with expectations at EUR 1.1 billion (EUR 1.2 billion).

Shareholders' equity slightly lower

The shareholders' equity of Hannover Re continues to be robust at EUR 5.8 billion (31 December 2012: EUR 6.0 billion). The annualised return on equity of 13.9% is comfortably in excess of the minimum target of 750 basis points above risk-free. The total policyholders' surplus (including non-controlling interests and hybrid capital) amounted to EUR 8.6 billion (31 December 2012: EUR 8.9 billion). The book value per share stood at EUR 47.73 (EUR 50.02).

Forecast 2013

With its published results as at 30 September 2013 Hannover Re is well placed to achieve the targeted net income after tax in the order of EUR 800 million for the full 2013 financial year. This is conditional upon major losses not significantly exceeding the expected level of EUR 625 million and assumes that there are no unforeseen downturns on capital markets.

Based on constant exchange rates it remains the company's expectation that gross premium will grow by around 5%.

The intensely competitive climate in non-life reinsurance is likely to be sustained, with corresponding implications for prices and conditions. Nevertheless, the market should be able to respond to losses with rate increases. With this in mind, the company will continue to trust in systematic cycle management coupled with rigorous underwriting discipline. Yet Hannover Re also sees growth opportunities in non-life reinsurance: the rising concentration of values in urban conurbations as well the adoption of risk-based solvency systems in Europe and Asia hold the promise of stable demand for reinsurance protection.

For total non-life reinsurance Hannover Re expects to generate growth of around 3% – at constant exchange rates – in gross premium in 2013.

Hannover Re continues to see growth potential in life and health reinsurance. Gross premium for the full year is expected to increase by 5% to 7% after adjustment for exchange rate effects.

The return on investment targeted by Hannover Re for the full year remains at 3.4%. With a view to stabilising the return in a stubbornly low interest rate environment the company will maintain its holding of corporate bonds and further slightly enlarge the real estate portfolio.

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.

Outlook 2014

At this point in time Hannover Re does not expect 2014 to bring any easing in the competitive pressure in non-life reinsurance. It will therefore be considerably more important to stay focused on risk-appropriate conditions than to grow premium income. Despite this, the company expects its gross premium to show overall growth – based on constant exchange rates – in the low single-digit percentage range.

Hannover Re is targeting a return on investment of 3.2%: given the low level of interest rates for high-quality investments the company anticipates a decrease in the return on assets under own management.

Assuming that major loss expenditure does not significantly exceed the expected level of EUR 670 million and provided there are no unforeseen downturns on capital markets, Hannover Re expects to post Group net income of around EUR 850 million for the 2014 financial year.