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Hannover Rück (FRA:HNR1) Capital market crisis and above-average volume of catastrophe losses dominant factors in the result as at 30 September 2008
* Operating profit (EBIT) 32.5 million euro * Group net income -142.8 million euro * Catastrophe losses 444.9 million euro * Stable ordinary investment income, but write-downs of 432.6 million euro on securities * Capital base remains solid * Good business prospects for 2009
Hannover, 5 November 2008: As already announced by Hannover Re on 21 October 2008, the further worsening of the crisis on international financial markets as well as a higher-than-average burden of catastrophe losses have taken an appreciable toll on the company's result. Despite its conservative investment strategy, Hannover Re again had to take significant write-downs - particularly on equity holdings - in the third quarter. "Our core business developed in line with expectations. Unfortunately, as a major institutional investor, we were unable to escape the turmoil on capital markets unscathed", Chief Executive Officer Wilhelm Zeller explained.
That Hannover Re's long-term financial strength remains robust despite the significant drop in profits in the third quarter is also reinforced by Standard & Poor's, which confirmed its "AA-" rating with a stable outlook at the end of October.
The operating profit (EBIT) as at 30 September 2008 contracted from 678.3 million euro to 32.5 million euro. Group net income turned negative to -142.8 million euro, compared to a surplus of 577.3 million euro in the comparable period of the previous year. In this context it should be borne in mind that the third quarter of 2007 had been influenced by a positive special effect in the order of 180 million euro associated with the German corporate tax reform. The result as at 30 September 2008 was also adversely impacted by the fact that losses on equities are not tax-deductible in Germany, as a consequence of which a tax load in excess of 100 million euro was incurred despite posting a pre-tax deficit. This performance was equivalent to earnings of -1.18 euro (4.79 euro) a share. Shareholders' equity totalled 2.6 billion euro, a decline compared to the level as at 31 December 2007 (3.3 billion euro). A key factor here - along with the repercussions of the financial crisis - was the dividend payment for 2007 amounting to 277 million euro. The book value per share stood at 21.67 euro. The policyholders' surplus, comprised of shareholders' equity, minority interests and hybrid capital, totalled 4.5 billion euro.
On account of the withdrawal from specialty business and the downward slide in exchange rates in the first half-year, the gross written premium booked by the Hannover Re Group contracted by 5.0% as at 30 September 2008 to 6.1 billion euro (6.4 billion euro). At constant exchange rates the decline in gross premium volume would have been 1.3%. The level of retained premium rose to 88.8% (86.4%) 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 6.0% to 5.2 billion euro (5.5 billion euro).
The development of non-life reinsurance business was satisfactory. Although softening tendencies were still evident on some major markets, conditions were broadly acceptable overall. In most cases it was possible to obtain prices commensurate with the risks. "We have scaled back business that no longer satisfied our profitability requirements and reshuffled our portfolio in favour of other segments. These include German business, the markets of Central and Eastern Europe and agricultural covers worldwide, an area where demand is growing", Mr. Zeller noted. The company also remains actively involved in reinsurance business transacted according to Islamic principles, which is successfully written by the Bahrain-based subsidiary Hannover ReTakaful.
Gross premium for total non-life reinsurance as at 30 September 2008 contracted by 7.6% year-on-year to stand at 3.8 billion euro (4.1 billion euro). The withdrawal from specialty business and weak exchange rates were key factors in the reduced premium volume. At constant exchange rates, especially against the US dollar, the decline would have been 1.7%. The level of retained premium rose from 83.9% to 88.4%. Net premium earned fell by 8.5% to 3.1 billion euro (3.4 billion euro).
The third quarter was particularly heavily influenced by the effects of hurricane "Ike", which caused an insured market loss put at 15 to 20 billion US dollars. The resulting net strain for Hannover Re is in the region of 220 million euro, while the loss from hurricane "Gustav" is around 30 million euro. Additional expenditure was incurred inter alia from two hailstorms in the summer in Germany - which cost altogether 64.3 million euro -, as a consequence of which the total burden of catastrophe losses and major claims for the first nine months came to 444.9 million euro (259.2 million euro). This figure is equivalent to 14.3% of net premium in non-life reinsurance and hence considerably higher than the calculated expectancy of 10%. The combined ratio thus stood at 103.6% (100.9%).
The underwriting result in non-life reinsurance therefore declined from -50.3 million euro in the comparable period of the previous year to -131.2 million euro. The operating result (EBIT) fell to -86.0 million euro (442.2 million euro) owing to sharply lower investment income. Group net income contracted substantially to -178.0 million euro (382.9 million euro), equivalent to earnings of -1.48 euro (3.17 euro) a share.
The underwriting experience in the life and health reinsurance business group was satisfactory as at 30 September 2008, although the premium volume fell short of expectations, not least on account of the restraining effects of exchange rate movements - especially in the first half of the year. Premium income similarly declined in the area of UK life insurance policies taken out in conjunction with mortgage loans. "In the medium term, however, we stand by our ambitious goal of generating double-digit growth rates since the demographic trend in industrial nations as well the expanding urban middle class in threshold markets offer a good basis for solid growth", Mr. Zeller emphasised.
Hannover Re, which operates in this business group under the Hannover Life Re brand, is optimally positioned in its largest market - the United Kingdom - with its orientation towards enhanced annuities. In this subsegment, as with the reinsurance of existing pension funds, the company sees very good opportunities for further profitable expansion.
Gross premium in life and health reinsurance declined by a modest 0.8% as at 30 September 2008 to 2.3 billion euro (2.3 billion euro) due to the restraining effects of exchange rate movements. At constant exchange rates growth of 6.1% would have been recorded. The level of retained premium decreased marginally to 89.3% (90.5%). Net premium earned fell by 2.0% to 2.1 billion euro (2.1 billion euro).
The appreciable drop in the operating profit (EBIT) - which contracted by 55.4% as at 30 September 2008 to 93.2 million euro (208.9 million euro) - can be attributed principally to non-recurring positive special effects in the same period of the previous year, which resulted from the release of reserves that were no longer necessary, as well as to the required fair value measurement of assets deposited with clients.
The EBIT margin of 4.5% fell short of the target corridor of 6.5% to 7.5%. On account of the factors discussed above Group net income contracted by 69.7% to 61.4 million euro (202.6 million euro); this corresponds to earnings of 51 cents (1.68 euro) a share.
The performance of Hannover Re's investment portfolio as at 30 September 2008 was overshadowed by the increasingly dramatic upheavals on international capital markets, especially the abrupt slump in equity prices. The inflow of cash from underwriting nevertheless more than made up for the price declines, as a consequence of which the portfolio of assets under own management improved on the position as at 31 December 2007 to reach 19.9 billion euro (19.8 billion euro). Ordinary income excluding interest on deposits remained virtually unchanged at 627.5 million euro (635.3 million euro), a testament to the fact that Hannover Re is correct in pursuing an investment policy geared to generating stable ordinary income. Although movements on bond markets led to a decrease in unrealised losses in the available-for-sale portfolio of fixed-income securities in the third quarter relative to the first half-year, unrealised losses of 283.9 million euro (103.4 million euro) still remained. Unrealised gains in the equity portfolio stood at 7.3 million euro (191.0 million euro) as at 30 September 2008. The bulk of the realised gains totalling 204.3 million euro (164.3 million euro) resulted from the tactical shortening of durations in the US dollar portfolio in the first quarter. This contrasted with realised losses of 127.2 million euro (60.1 million euro).
Investment income was adversely impacted by the need to take considerable write-downs on equities of 355.3 million euro (8.4 million euro); the hedges put in place in the first quarter on roughly a fifth of the portfolio nevertheless prevented even more extensive value adjustments. Write-downs on fixed-income securities amounted to 77.3 million euro. Net income from total investments consequently deteriorated by 56.7% to 370.4 million euro (855.5 million euro).
Outlook While the treaty renewals that took place as recently as July in the United States had pointed to a softening market in non-life reinsurance, Hannover Re anticipates a trend reversal in view of the present crisis on financial markets. Looking ahead to further developments in non-life reinsurance, Hannover Re is optimistic. "In light of the capital depletion triggered by the financial market crisis - which has also made itself felt throughout the insurance industry - we expect to see stronger demand for reinsurance and hence hardening of the markets", Mr. Zeller explained. This will lead to rate increases - which will be substantial in some areas - and the outcome of the 2009 renewals is therefore expected to be favourable. The October gatherings of reinsurers and their clients held every year in Baden-Baden and the United States also demonstrated that a trend reversal is on the horizon. Hannover Re is very well placed to profit from these developments.
For the full 2008 financial year the net premium volume in non-life reinsurance is likely to be curtailed by movements in exchange rates and should therefore contract slightly.
Hannover Re's assessment of its business prospects in life and health reinsurance remains favourable. In the United Kingdom the company is well diversified: in addition to conventional risk-oriented business and its focus on enhanced annuities, Hannover Re is now also increasingly active in business with pension funds - a subsegment that is likely to become a growth driver in the coming years. Similarly, the company sees very attractive business prospects in the area of health insurance covers for seniors in the United States. Thanks to its good worldwide positioning in life and health reinsurance the company is looking to sustained favourable profitability, while growth in premium volume will be heavily dependent on exchange rate movements affecting the currencies most relevant to our business, such as the pound sterling, US dollar and Australian dollar. With this in mind, Hannover Re anticipates double-digit growth in the original currencies for 2008.
Hannover Re expects the net premium volume booked by the Group in the full financial year to be roughly on the level of the previous year.
In spite of the conservatively oriented asset portfolio investment income will fall significantly short of the previous year due to the protracted crisis on the international markets. In response to the turmoil on stock markets Hannover Re realised losses of around 200 million euro in October so as to reduce its equity exposure. This leaves only a minimal share portfolio, the bulk of which is hedged; as things currently stand, then, Hannover Re can no longer be affected by the historically unprecedented volatility. As far as the volume of investments is concerned, it is Hannover Re's expectation that the level of the previous year can be maintained in view of the continuing positive cash flow from underwriting and the renewed strength of the US dollar.
For the fourth quarter - given a normal catastrophe loss experience - Hannover Re considers a break-even result after tax to be attainable. This assessment makes no allowance for the use of accounting policy options or flexibility with respect to valuation measurements.
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.
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