Interim Report 1/2014: Hannover Re makes a good start to the 2014 financial year

Hannover, 7 May 2014:

Hannover Re is satisfied with the development of its business in the first three months of 2014. "The quarterly profit of EUR 233 million was driven by a very pleasing underwriting result in non-life reinsurance and good investment income. This shows that we have adjusted well to the challenging business environment", Chief Executive Officer Ulrich Wallin commented. On the basis of this successful start to 2014, Hannover Re reaffirms its net income guidance in the order of EUR 850 million for the full financial year.

Slight decline in gross premium

Gross written premium for the Hannover Re Group contracted by 3.6% as at 31 March 2014 to EUR 3.6 billion (EUR 3.8 billion). At constant exchange rates the decrease would have been just 0.7%. The level of retained premium fell slightly to 88.4% (89.9%). Net premium earned consequently declined by a somewhat more marked 5.5% to EUR 2.9 billion (EUR 3.1 billion). The decrease amounted to 2.6% after adjustment for exchange rate effects.

Pleasing Group net income

The operating profit (EBIT) of EUR 349.6 million as at 31 March 2014 was on a similarly high level to the previous year (EUR 366.5 million). Group net income improved further on the comparable period of the previous year by a modest 0.7% to EUR 233.0 million (EUR 231.2 million). Earnings per share amounted to EUR 1.93 (EUR 1.92).

Non-life reinsurance delivers very satisfactory profit contribution

Non-life reinsurance continues to be fiercely competitive; this was also evident in the treaty renewals as at 1 January 2014. Hannover Re showed discipline in maintaining its profit-oriented underwriting policy and in so doing accepted modest declines in premium volume.

Total gross premium for non-life reinsurance contracted by 4.1% as at 31 March 2014 relative to the comparable period to stand at EUR 2.1 billion (EUR 2.2 billion). At constant exchange rates the decrease would have been just 1.7%. The retention increased to 91.2% (89.8%), as a consequence of which net premium earned fell less sharply by 3.6% – or 1.0% adjusted for exchange rate effects – to EUR 1.6 billion (EUR 1.7 billion).

Major loss expenditure was below average in the first three months of 2014, just as it had been in the corresponding quarter of the previous year. The only major loss resulted from the crash of the Malaysian passenger plane, wreckage of which had still to be located at time of going to press. Hannover Re has set aside reserves of EUR 30.6 million for this event; net major loss expenditure in the comparable quarter had amounted to EUR 13.4 million. "As in the past, the unused portion of the major loss budget was not released to income, but was allocated to the corresponding loss reserves – leaving us very well equipped to cope with any major losses in the remaining quarters of 2014", Mr. Wallin emphasised. The underwriting result again closed at a thoroughly pleasing EUR 87.6 million (EUR 98.1 million). Another very good combined ratio of 94.4% (94.0%) was recorded.

In view of the very healthy underwriting result and a good contribution from the investment side, the operating profit (EBIT) in non-life reinsurance moved substantially higher by 8.4% to EUR 280.5 million (EUR 258.7 million). Group net income climbed a further 13.1% to EUR 197.9 million, building on the very good figure of EUR 174.9 million reported in the comparable period. Earnings per share stood at EUR 1.64 (EUR 1.45).

Life and health reinsurance in line with expectations

Life and health reinsurance is also the scene of increasingly intense competition. Although the targeted growth consequently failed to materialise in the first quarter, Hannover Re sees promising growth impulses for the rest of the year. This continues to be the case with emerging markets such as China, Brazil and India. Developments in Sharia-compliant retakaful business were particularly pleasing in the quarter just ended. In this segment Hannover Re focuses on Middle and Far Eastern markets and now ranks among the largest providers in the world.

Gross premium for life and health reinsurance fell by 2.8% as at 31 March 2014 to EUR 1.5 billion (EUR 1.6 billion). At constant exchange rates, on the other hand, growth of 0.7% would have been booked. Reflecting a reduced level of retained premium, net premium earned retreated by 7.8% to EUR 1.3 billion (EUR 1.4 million); this is equivalent to a reduction of 4.5% after adjustment for exchange rate effects.

In terms of profitability, life and health reinsurance fell short of the aperiodic high comparable figure of the previous year but still posted a satisfactory result. The operating profit (EBIT) in life and health reinsurance as at 31 March 2014 totalled EUR 65.6 million (EUR 102.4 million). Group net income came in at EUR 43.4 million (EUR 75.1 million); earnings per share amounted to EUR 0.36 (EUR 0.62).

Thoroughly satisfactory investment income

The investment environment remained challenging in the period under review. Although the portfolio of investments under own management declined slightly to EUR 31.7 billion (31 December 2013: EUR 31.9 million), this reflected the repurchase of the EUR 750 million bond issued in 2004 as well as exchange rate effects. Had it not been for these factors, assets under own management would have increased on the back of the continued clearly positive operating cash flow and rising valuation reserves. Despite the sustained low level of interest rates, ordinary investment income excluding interest on funds withheld and contract deposits was on a par with the previous year at EUR 241.4 million (EUR 246.1 million). Interest on funds withheld and contract deposits retreated slightly to EUR 88.6 million (EUR 93.8 million).

The realised gains of EUR 54.1 million came in higher than in the comparable period (EUR 34.8 million). This increase can be attributed to the bond repurchase as well as to portfolio regrouping measures connected with the changeover in reporting currency from EUR to USD at the subsidiary in Bermuda. Changes in the fair values of financial instruments measured at profit or loss – the so-called ModCo derivatives and the inflation swaps are included here – totalled EUR 7.4 million (EUR 3.3 million) in the first quarter. Only very minimal write-downs had to be taken in the period under review. Income from assets under own management climbed by a very pleasing 4.5% as at 31 March 2014 to EUR 272.5 million (EUR 260.9 million). The resulting annualised return on investment came in above expectations at 3.4% (3.2%). Net investment income including interest on funds withheld and contract deposits closed higher than in the comparable quarter at EUR 361.2 million (EUR 354.7 million).

Shareholders' equity remains robust

Hannover Re's shareholders' equity grew by 7.0% to EUR 6.3 billion (31 December 2013: EUR 5.9 billion). The annualised return on equity increased to 15.3% (15.0%) despite the higher shareholders' equity and thus comfortably surpassed the minimum target of 750 basis points above the risk-free interest rate. The book value per share reached a new all-time high of EUR 52.26 (EUR 48.83).

Outlook 2014

With the results reported as at 31 March 2014 Hannover Re has put in place a good initial foundation for attainment of its 2014 annual targets. Based on constant exchange rates, the company continues to expect stable to slightly higher gross premium and net income after tax in the order of EUR 850 million for the full 2014 financial year. This is conditional on major loss expenditure not significantly exceeding the anticipated level of EUR 670 million and assumes that there are no unforeseen adverse developments on capital markets.

The continued challenging state of the general business environment was further evidenced by the renewals as at 1 April 2014, the traditional date for treaty renewals in Japan along with smaller markets in Korea, Australia, New Zealand as well as parts of US property catastrophe business. After the appreciable rate increases of recent years in Japan following the severe earthquake of 2011, initial rate erosion – albeit from a high level – was observed for catastrophe covers. Prices also declined in personal accident insurance. Rates for per-risk property covers, on the other hand, remained stable; in casualty business it was even possible to obtain modest increases. Overall, the premium volume in Japan contracted slightly, although Hannover Re was able to hold its market position thank to its long-standing client relationships. The company was similarly broadly satisfied with the outcome of its renewals in Australia and New Zealand. Treaties in Korea are shifting from a 1 April to a 1 January renewal date, as a consequence of which only a small part of the business was renewed. Faced with difficult market conditions Hannover Re consolidated its portfolio here.

Broadly speaking, Hannover Re will continue to focus on preserving the profitability of its business in non-life reinsurance, even if this means a modest decrease in premium volume. "We take the view that this is the only way to ensure a profitable non-life reinsurance portfolio in the prevailing soft market", Mr. Wallin emphasised. Nevertheless, Hannover Re also sees growth opportunities in non-life reinsurance. Particularly noteworthy here are the Asia-Pacific markets, the countries of Central and Eastern Europe, marine lines as well as facultative business and structured reinsurance products. Adjusted for exchange rate effects, the premium volume for 2014 in non-life reinsurance should remain largely stable.

Hannover Re expects to see an improved business development in life and health reinsurance. Growth prospects are especially evident in the emerging economies of Eastern Europe, Asia and Latin America, where stronger demand for protection products is being driven by a consistently expanding middle class. Gross premium for the full 2014 financial year is expected to show currency-adjusted growth in the low- to mid-single-digit percentage range.

Hannover Re's targeted full-year return on investment remains unchanged at 3.2%. The company is not currently planning to make any significant adjustments to the allocation of its investments to individual asset classes.

As for the dividend, the company continues to aim for a payout ratio in the range of 35% to 40% of its IFRS Group net income after tax.