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Hannover Rück (Other OTC:HVRRF.PK) Capital market and exchange rate movements dampen profitability for the first half of 2008
* Underwriting business performs well, volume of catastrophe losses below the expected level * Net investment income -24.1% * Operating profit (EBIT) -14.4% * Group net income -13.9% * Combined ratio 98.4% * EBIT margin in non-life and life/health reinsurance in line with target * Return on equity 16.4%
Hannover, 7 August 2008: Hannover Re expressed considerable satisfaction with the development of its underwriting business - in both non-life and life/health reinsurance - as at 30 June 2008. "However, the protracted difficult climate on international capital markets and the restraining effects of exchange rate movements have left an appreciable mark on our company too. It cannot, therefore, come as any surprise that our interim result is not insignificantly lower than in the corresponding period of the previous year", Chief Executive Officer Wilhelm Zeller explained.
The operating profit (EBIT) as at 30 June 2008 contracted by 14.4% year-on-year to 400.2 million euro (467.7 million euro). Had it not been for the write-downs necessitated by turmoil on the capital markets the operating profit would have grown by 13.4% from 468.0 million euro to 530.5 million euro. Thanks to its conservative investment policy Hannover Re was again spared significant write-downs on fixed-income securities or subprime exposures in the second quarter. Group net income nevertheless declined by 13.9% to 252.2 million euro (293.0 million euro), equivalent to earnings of 2.09 euro (2.43 euro) a share; the annualised return on equity amounted to 16.4% (19.9%).
On account of the withdrawal from specialty business and the slide in the value of foreign currencies, especially the US dollar and pound sterling, the gross written premium booked by the Hannover Re Group contracted by 7.7% to 4.1 billion euro (4.5 billion euro). At constant exchange rates the premium volume would have declined by only 2.2%. The level of retained premium increased to 89.5% (85.8%) as a consequence of appreciable savings on the costs of the company's own protection covers as well as reduced proportional cessions; net premium earned fell by 7.8% to 3.4 billion euro (3.7 billion euro).
The development of non-life reinsurance was highly satisfactory for Hannover Re. Although some key markets are already seeing softening tendencies, conditions are still broadly acceptable and prices are for the most part commensurate with the risks. "Guided by our profit-oriented underwriting policy, we focus on those segments that promise the greatest profitability and are further extending our already very good diversification - in terms of both regions and lines - through targeted underwriting", Mr. Zeller emphasised.
In areas that offer attractive business opportunities - such as worldwide credit and surety reinsurance or German business -, Hannover Re enlarged its market share. Furthermore, the company participates in profitable market and product niches, including for example Central and Eastern Europe as well as reinsurance in conformity with Islamic principles; the latter business is successfully transacted by the Bahrain-based subsidiary Hannover ReTakaful. In Latin America, too, Hannover Re now has a local representative office: "In Brazil, the largest insurance market on the South American continent, we have been licensed as an 'admitted reinsurer' since July. This ensures that we have more direct access to clients and puts in place an optimal platform for participating in the emerging Brazilian market", Mr. Zeller explained.
Owing to the restraining effects of exchange rate movements, gross premium in non-life reinsurance as at 30 June 2008 contracted by 10.4% year-on-year to stand at 2.7 billion euro (3.0 billion euro). At constant exchange rates, especially against the US dollar, the decline would have been just half the above (5.2%). The withdrawal from specialty business also curtailed premium income. As a consequence of significant savings on the costs of the company's own protection covers as well as reduced proportional cessions, the level of retained premium climbed from 83.3% to 89.4%. Net premium earned fell by 10.6% to 2.1 billion euro (2.3 billion euro).
Following on from a moderate major loss incidence in the first quarter, the strains incurred by Hannover Re in the second quarter were also below average. Yet the second quarter too was notable for a number of natural catastrophes: the earthquake in the Chinese province of Sichuan was a human tragedy, whilst the devastating economic losses bore no relation to the insured values. The loss for Hannover Re in the order of 20 million euro was therefore rather modest. In Southern Germany hailstorms and heavy rainfall in late May/early June caused considerable damage, costing the company around 30 million euro. The total net burden of major losses for the first half-year stood at 130.0 million euro (214.5 million euro). This figure is equivalent to 6.2% of net premium in non-life reinsurance and hence well below the expected level of 10%. The combined ratio decreased to 98.4% (102.1%).
The underwriting result improved on the corresponding period of the previous year, which had been particularly hard hit by the heavy catastrophe losses associated with winter storm "Kyrill"; it moved back into positive territory from -56.1 million euro to 23.6 million euro. The operating profit (EBIT) in non-life reinsurance slipped by 10.3% to 288.2 million euro (321.5 million euro), a reflection of sharply lower investment income. Group net income fell by 18.9% to 195.7 million euro (241.4 million euro), producing earnings of 1.62 euro (2.00 euro) a share.
The first half-year was an eventful one in life and health reinsurance. Hannover Re commenced business operations in the high-growth markets of China and South Korea through its newly established branches in Shanghai and Seoul. "With this structure we enjoy the benefits of a local reinsurer and are able to provide our clients with targeted and efficient on-the-spot service", Mr. Zeller stressed. In India, too, Hannover Re has put in place a platform that will enable it to respond quickly to available market opportunities: in June the company signed a cooperation agreement with the leading Indian reinsurer geared to the joint development of a profitable portfolio with the potential for further growth. The service company established in Mumbai will support these plans.
Although premium growth slowed slightly in the reporting period due to the adverse effects of exchange rate movements, Hannover Re - which transacts its life and health reinsurance worldwide under the Hannover Life Re brand - is well positioned to participate disproportionately strongly in the available growth opportunities.
Around a third of the premium volume in life and health reinsurance derives from the United Kingdom - the second-largest reinsurance market in the world. Competition in risk-oriented life insurance is particularly fierce in this market at the moment, prompting Hannover Re to scale back its acceptances. On the other hand, the enhanced annuities market in the UK - an area in which the company ranks as the leading reinsurer - continues to develop favourably. Here, as is also the case with the reinsurance of existing pension funds, the prospects for further profitable expansion are very bright. In the United States, along with its continued focus on health insurance products aimed at senior citizens, Hannover Re attaches considerable importance to financial solutions - an area in which it completed the largest transaction to date in the first half of the year.
Owing to the moderating effects of exchange rate movements - the weakness of the pound sterling and US dollar particularly made themselves felt here - gross written premium in life and health reinsurance declined by 2.8% as at 30 June 2008 to 1.5 billion euro (1.5 billion euro). At constant exchange rates growth of 3.4% would have been recorded. The level of retained premium fell from 90.2% to 89.6%, as a consequence of which net premium earned dropped by a somewhat more appreciable 3.2% to 1.3 billion euro (1.4 billion euro).
The sharp decline of 32.5% in the operating profit (EBIT) as at 30 June 2008 to 87.2 million euro (129.2 million euro) was attributable to non-recurring special effects of 25 million euro in the comparative period of the previous year which had arisen in connection with the release of reserves that were no longer required. The EBIT margin of 6.5% was nevertheless within the target corridor of 6.5% to 7.5%. Group net income contracted by 27.8% to 65.0 million euro (89.9 million euro) on account of the factors discussed above.
The development of Hannover Re's investments as at 30 June 2008 was overshadowed by the protracted upheavals on international capital markets - especially the sharp rise in Eurozone interest rates, the increase in risk premiums on corporate bonds and the significant drop in share prices. In light of the above, and exacerbated by the further downward slide of the US dollar, the portfolio of assets under own management - excluding interest on deposits - contracted to 18.7 billion euro (19.8 billion euro). The marked rise in interest rates led to substantial unrealised losses in the Group's asset portfolio. In the case of the available-for-sale portfolio of fixed-income securities they totalled 315.4 million euro (103.4 million euro) as at the end of the reporting period. Unrealised losses on equities amounted to 101.6 million euro; this contrasted with unrealised gains of 191.0 million euro as at 31 December 2007.
Ordinary income excluding interest on deposits was, however, highly satisfactory. It fell by 1.9% - purely due to exchange rate effects - to 407.9 million euro (415.7 million euro). As part of its proactive approach to portfolio management - especially in the context of tactical shortening of durations in the US portfolio in the first quarter - Hannover Re realised gains on disposals of 171.4 million euro (134.3 million euro), as against realised losses of 69.1 million euro (36.7 million euro). Of the total write-downs on securities of 130.3 million euro (0.3 million euro), an amount of 98.6 million euro (0.3 million euro) was taken on equities.
Overall, net income from assets under own management contracted by a sizeable 29.8% to 342.8 million euro (488.2 million euro). This effect was somewhat cushioned by interest from income on deposits - which rose by 4.4% to 102.3 million euro (98.0 million euro) -, as a consequence of which net income from total investments retreated by 24.1% relative to the comparative period of the previous year to stand at 445.1 million euro (586.2 million euro).
Outlook Based on its strategic orientation and the available market opportunities, Hannover Re anticipates a good underwriting result for the full financial year in both non-life and life/health reinsurance.
The net premium income booked by the Hannover Re Group should come in slightly higher.
Despite palpable softening in some non-life reinsurance lines and markets, prices and conditions are for the most part still acceptable. The treaty renewals that take place within the year in the United States as at 1 July - during which around one-third of this portfolio is renegotiated - confirmed the prevailing trend. Premiums in casualty business retreated by up to 10%, although conditions largely held stable. In non-proportional property business rate increases were obtained under programmes that had incurred losses, while in catastrophe business the pressure on rates was sustained. The achieved margins were nevertheless still comfortably adequate.
All in all, Hannover Re was satisfied with the treaty renewals in Australia and New Zealand: rates in non-proportional business remained stable, and here too it was possible to push through increases under loss-affected programmes. In Latin American catastrophe business rates moved higher in some markets, while in others they softened.
"Net premium in non-life reinsurance is expected to contract slightly due to the weak US dollar. Provided the burden of catastrophe losses and major claims remains within the bounds of the expected level of 10% of net premium, a very healthy profit contribution can nevertheless be anticipated", Mr. Zeller stated.
Business prospects in life and health reinsurance remain favourable. The increasing size of the upper levels of the age pyramid in industrial nations will continue to drive growth in annuity and health insurance for many years to come. In the United States Hannover Re anticipates positive stimuli in the areas of health insurance for seniors and block assumption transactions. The UK market looks set for intense competition over the coming 12 to 18 months in traditional life reinsurance business; on the other hand, opportunities can be tapped into through innovative morbidity products such as critical illness covers with a graduated benefit. UK annuity policies, a core business for Hannover Re, continue to offer growth potential.
"For the full financial year we expect our life and health reinsurance business to deliver unchanged healthy profitability and growth of around 10% in premium volume", Mr. Zeller affirmed.
On the investments side, the asset volume is likely to fall short of the previous year's level - despite the expected positive cash flow from the technical account - due to the protracted weakness of the US dollar. Ordinary income in the second half of the year should come in roughly on a par with the favourable level of the first six months. Movements on equity markets, however, are subject to considerable uncertainty.
"Within the scope of our conservative and risk-conscious investment policy, however, we have invested just 9% of our asset holdings in equities", Mr. Zeller explained. "Nevertheless, if stock markets do not normalise our company too will have to anticipate further write-downs in the third quarter." If share prices were to recover significantly, as has been forecast by some market players, the outlook for net investment income would also improve substantially. In the area of fixed-income securities the focus continues to be on high quality and good diversification of the portfolio. The company has therefore not been particularly affected by the difficulties on the US mortgage market.
With conditions on reinsurance markets that are still adequate and given the company's broad diversification - and subject to the premise that the burden of catastrophe losses and major claims does not significantly exceed the expected level of 10% of net premium in non-life reinsurance - Hannover Re is looking to generate a good underwriting result for the full 2008 financial year.
"Bearing in mind the prevailing uncertainties on international capital markets, it is not possible to make a reliable statement concerning investment income", Mr. Zeller added. "The longer the turmoil on equity markets continues, the more difficult it will be to achieve our targeted earnings per share of 5 euro for the full financial year." Hannover Re nevertheless still considers a return on equity in excess of 15% to be realistic.
For further information please contact:
Press and Public Relations / Investor Relations: Stefan Schulz (tel. +49 / 511 / 56 04-15 00, e-mail: stefan.schulz@hannover-re.com)
Press and Public Relations: Gabriele Handrick (tel. +49 / 511 / 56 04-15 02, e-mail: gabriele.handrick@hannover-re.com)
Hannover Re, with a gross premium of around 8 billion euro, is one of the leading reinsurance groups in the world. It transacts all lines of non-life and life and health reinsurance. It maintains business relations with more than 5,000 insurance companies in about 150 countries. Its worldwide network consists of more than 100 subsidiaries, branch and representative offices in around 20 countries with a total staff of roughly 1,800. The rating agencies most relevant to the insurance industry have awarded Hannover Re very strong insurer financial strength ratings (Standard & Poor's AA- "Very Strong" and A.M. Best A "Excellent").
Disclaimer: Some of the statements in this press release may be forward-looking statements or statements of future expectations based on currently available information. Such statements are naturally subject to risks and uncertainties. Factors such as the development of general economic conditions, future market conditions, unusual catastrophic loss events, changes in the capital markets and other circumstances may cause the actual events or results to be materially different from those anticipated by such statements. Hannover Re does not make any representation or warranty, express or implied, as to the accuracy, completeness or updated status of such statements. Therefore, in no case whatsoever will Hannover Re and its affiliate companies be liable to anyone for any decision made or action taken in conjunction with the information and/or statements in this press release or for any related damages.
