Hannover, Germany, March 29, 2005 (PRIMEZONE) -- Hannover:
-- Return-on-equity target surpassed again despite hurricanes:
12.5%
-- Sharply higher profitability in property and casualty
reinsurance: +54.9%
-- Combined ratio in property and casualty reinsurance 97.0%
-- Profit contribution and EBIT margin in life and health
reinsurance with further marked improvement
-- Program business hardest hit by the hurricanes
-- Proposed dividend: + 5.3% to 1.00 euro
The unusually high burden of major losses from natural catastrophe events in the third quarter of 2004 prevented Hannover Re from generating a new record result. Wilhelm Zeller, Chairman of the Executive Board, nevertheless expressed considerable satisfaction with the 2004 financial statement at the press briefing on the annual results: "Despite heavy loss expenditure and the protracted weakness of the US dollar we achieved our return-on-equity target of at least 12%". Thanks to very good rates and conditions, property and casualty reinsurance was especially able to absorb the exceptionally heavy strains associated with the four severe hurricanes and other major loss events in the year under review. The business group hardest hit by the natural catastrophes was program business. Hannover Re's total burden of major losses amounted to 775.4 million euro gross and 377.2 million euro for net account. The operating profit (EBIT) consequently contracted by 21.1% to 577.6 million euro (732.1 million euro). Similarly, the net income of 309.1 million euro was 12.9% lower than in the previous year (354.8 million euro), corresponding to earnings of 2.56 euro (3.24 euro) a share.
Gross premium income contracted as expected sharply by 15.7% to 9.6 billion euro (11.3 billion euro). This decline was in part attributable to exchange-rate effects, although our cycle management in property and casualty reinsurance also made itself felt here. At constant exchange rates, especially as regards the US dollar against the euro, the decrease would have been 11.1%. Net premiums fell by a mere 7.1% to 7.6 billion euro (8.2 billion euro) due to the higher level of retained premiums.
Stockholders' equity grew by 6.3% to 2.6 billion euro (2.4 billion euro). The further reinforcement of Hannover Re's financial strength was also confirmed by the key rating agencies for the reinsurance industry: Standard & Poor's and A.M. Best both raised the outlook on their ratings from "negative" to "stable" in the course of the year.
In property and casualty reinsurance Hannover Re profited to the fullest extent from the sustained favourable market environment: rates and conditions remained on a high level. This was especially true of the longer-tail casualty lines. "We are optimising our portfolio as part of our "More from less" initiative and replacing low-margin proportional business with more profitable non-proportional business", Mr. Zeller explained. This regrouping, combined with the restructuring of business with the HDI affiliates and the weak US dollar, caused gross premium income to contract by 14.4% to 4.1 billion euro (4.8 billion euro). At constant exchange rates the decline would have been 11.1%. In view of the quality of the business written Hannover Re increased its retention by an appreciable 13.4 percentage points to 85.6%; net premiums earned held steady at 3.5 billion euro.
The numerous hurricanes and typhoons as well as the severe seaquake in the Indian Ocean were the dominant major loss events of 2004. What was probably the most expensive year for natural disasters in the history of the insurance industry resulted in a burden of 287.2 million euro for property and casualty reinsurance -- following just 51.5 million euro in 2003. All in all, the proportion of catastrophe losses relative to net premiums stood at 8.3%, a figure many times higher than in the previous year (1.5%). Yet the combined ratio of 97.0% moved just a single percentage point higher. "This is nevertheless an exceptionally satisfactory figure in light of the unusually heavy loss expenditure. It clearly demonstrates that we were able to further enhance the quality of our property and casualty reinsurance business in the year under review," Mr. Zeller stressed. New business was reserved conservatively in accordance with our accustomed practice. As in the past, on balance there was no need to constitute additional reserves for previous underwriting years.
Since investment income, in particular, was again in line with expectations, the operating profit (EBIT) was boosted by 3.8% to 483.3 million euro (465.9 million euro) despite the high burden of catastrophe losses. Net income surged by a considerably more vigorous 54.9% to 258.6 million euro (167.0 million euro) as tax expenditure returned to a normal level; this business group thus generated earnings of 2.14 euro (1.52 euro) a share.
Life and health reinsurance once again developed well in the year under review. Gross premium income contracted slightly as expected by 4.4% to 2.2 billion euro (2.3 billion euro); adjusted for exchange-rate effects premiums were on a par with the previous year. An additional reason for the premium reduction was the temporary discontinuation of a major account in the United Kingdom, although this business relationship had already been reactivated by the end of the year. Net premiums earned climbed by 1.0% to 2.0 billion euro due to a higher level of retained premiums. The portfolio composition shifted further in favour of the preferred lines of life, annuity and personal accident business in the year under review; these now account for 85% (80%) of the total premium volume. The operating profit (EBIT) of 90.9 million euro surpassed the previous year's figure (61.0 million euro) by 49.1%, thus reaching a new record level. The EBIT margin amounted to 4.7%, following 3.2% in the previous year; the life and health reinsurance business group thus moved a significant step closer to achieving its goal of improving this ratio to 5% by 2006. Net income was boosted by 7.4% to 50.0 million euro, or 41 cents (43 cents) a share.
Financial reinsurance is experiencing a period of consolidation following the vigorous growth of recent years. Gross premium income contracted as anticipated by 27.6% to 1.2 billion euro (1.6 billion euro). This reduction was attributable principally to the non-renewal of a number of major accounts. At constant exchange rates the decrease would have been 22.6%. Net premiums earned consequently fell by 22.9% to 1.2 billion euro (1.5 billion euro); the retention remained largely unchanged at 93.3%. The operating profit (EBIT) was 10.5% lower at 132.6 million euro (148.2 million euro). Although the exceptionally good net income of the previous year could not be repeated, the reduction of 10.1% to 89.0 million euro in the year under review was disproportionately low relative to the premium decline. With an increased EBIT margin of 11.0% profitability in this business group again improved sharply, producing earnings of 74 cents (90 cents) a share.
Results in program business were heavily impacted by the high burden of losses from the four severe hurricanes in Florida: Clarendon Insurance Group, New York, reported a loss for the first time since its acquisition by Hannover Re. Unlike in property and casualty reinsurance, the considerable net burden of 90.0 million euro was not offset by other business. What is more, contributions to the loss and loss adjustment expense reserve -- which serve to increase the confidence level of the reserves -- placed a further strain on the results. Gross written premiums contracted by 20.3% to 2.1 billion euro (2.6 billion euro). The weakness of the US dollar is particularly noticeable here since 90% of the business derives from the USA: at constant exchange rates the decline would have been just 13.0%. Retained premiums were slightly lower at 40.3% (46.4%) following Clarendon's move to marginally raise the level of business reinsured as part of its capital management activities. Net premiums earned consequently fell by 18.4% to 942.7 million euro (1.2 billion euro). The combined ratio increased to 114.4% (98.3%) due to the enormous loss expenditure incurred in the third quarter. The operating result (EBIT) was correspondingly negative: following a profit of 57.1 million euro in the previous year a loss of 129.3 million euro was reported in the year under review. The net loss for the year amounted to 88.5 million euro, as against net income of 42.2 million euro in the previous year. Program business therefore reduced consolidated net income by 73 cents a share, contrasting with a contribution of 39 cents a share in the previous year.
Hannover Re is satisfied with its investment income below the line. Since the growth of 12.3% in the asset volume to 24.7 billion euro (22.0 billion euro) did not fully offset the decline in interest rates, the ordinary income of 1.0 billion euro fell slightly short of the previous year (1.1 billion euro). Net investment income increased by a modest 4.2% to 1.1 billion euro (1.1 billion euro). Since large portions of the asset portfolio are held in US dollars for the purposes of matching currency coverage, here too dollar weakness was an inhibiting factor. The write-downs on securities of 24.7 million euro (99.3 million euro) were of greatly reduced significance, thereby helping to improve the investment performance. Total profits of 217.6 million euro were realised on the disposal of assets in the year under review, contrasting with realised losses on disposals of 56.4 million euro. The positive balance of EUR 161.2 million thus improved somewhat on the previous year's figure of EUR 140.7 million. "In view of the unchanged defensive posture of our bond portfolio and the volatile state of the markets, we are thoroughly satisfied with this performance", Mr. Zeller affirmed.
The overall result is clearly influenced by the exceptionally heavy burden of catastrophe losses caused by the four hurricanes in the Caribbean and the USA. It was thus impossible to repeat the previous year's excellent operating profit (EBIT) of 732.1 million euro. In the year under review EBIT fell by 21.1% to 577.6 million euro. Net income for the year retreated by 12.9% to 309.1 million euro (354.8 million euro), a figure slightly in excess of the adjusted profit target. The return on equity after tax - at 12.5% - similarly surpassed the minimum target of 750 basis points above the risk-free interest rate (currently: 12.1%). The net income produced earnings of 2.56 euro (3.24 euro) a share.
In accordance with its dividend policy of distributing 35% to 40% of net income, the Executive Board and Supervisory Board will propose to the Annual General Meeting that an increased dividend of 1.00 euro (95 cents) per share be distributed. This currently corresponds to a dividend yield of 3.3%.
Outlook for 2005
The treaty renewals in property and casualty reinsurance on 1 January 2005 -- the date when roughly two-thirds of the portfolio is renewed - demonstrated that the market environment remains very favourable. The so-called hard market will be sustained in 2005. Highly satisfactory rates and conditions were again negotiated in almost all segments. Indeed, in some areas -- most notably long-tail casualty lines - further modest improvements were obtained. "It is our assumption that we have reached the peak of the hard market cycle, although in the current year we anticipate a virtually unchanged attractive market climate", Mr. Zeller emphasised. Price erosion could be detected in those areas that had generated the strongest increases in past years, including for example aviation business. In light of this situation Hannover Re wrote its business here very selectively and scaled back its share accordingly. Despite a certain tendency towards softening markets property and casualty reinsurance should continue to develop well in the current year, and premium income is therefore expected to rise. "Provided the burden of major losses does not exceed the multi-year average of around 5% of net premiums, we are looking to a very good profit contribution that should again surpass the previous year", Mr. Zeller stated.
Life and health reinsurance should also develop favourably in the current year. In light of the demographic trends the demand for solutions offering risk protection and retirement provision will grow steadily in almost all markets. Particularly in European markets, Hannover Re anticipates vigorous new business -- most notably in the area of unit-linked annuity insurance in Germany and with the traditional products of term life and critical illness in the United Kingdom. Overall, Hannover Re expects life and health reinsurance to generate double-digit increases in premium and net income in the current year.
Hannover Re anticipates a further contraction in the premium volume in financial reinsurance. The company intends to press ahead with the enlargement of its portfolio outside the USA, and to selectively pursue further growth there. What is more, the hurricanes in the USA as well as other natural disasters will likely prompt an expansion of natural catastrophe business within the financial reinsurance segment. Demand for surplus relief covers is expected to continue to decline. Reflecting the development of the portfolio, net income after tax will probably be somewhat lower.
Program business should pick up again in the course of the current year. Overall, it is to be expected that rates in North American program business will come under some pressure as competition intensifies. Although Hannover Re therefore anticipates stable gross premium income and only slightly higher net premiums, it is looking for this business to move back into positive territory, subject to a normal major loss experience.
As long as there are no downturns on the capital markets, Hannover Re expects net investment income to surpass the previous year: the anticipated positive underwriting cash flow is likely to further enlarge the asset volume. As interest rates rise slightly ordinary investment income should also improve somewhat.
Overall, then, all the conditions are right for a successful 2005 financial year. Subject to major loss expenditure in line with the multi-year average and provided there are no unforeseen adverse movements on capital markets, it should be possible to substantially improve both the net income and the dividend. "It is our assumption that net income of 430 to 470 million euro, or earnings of 3.60 to 3.90 euro a share, can be achieved in 2005", Mr. Zeller concluded.
Hannover Re, with gross premiums of approximately EUR 10 billion, is one of the five largest reinsurance groups in the world. It transacts all lines of property/casualty, life/health and financial/finite-risk reinsurance as well as program business. 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 18 countries. 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").