HANNOVER, Germany, March 14, 2007 (PRIME NEWSWIRE) -- Hannover Re generates best result in the company's history.
* Very good results in property/casualty and life/health
reinsurance
* Group operating profit (EBIT): 819.9 million euro
* Group net income: 514.4 million euro
* Earnings per share: 4.27 euro
* Book value per share: + 11.4%
* Return on equity 18.7%
* Proposed dividend: 1.60 euro
* Very good earnings prospects for 2007
The 2006 financial year passed off very successfully for Hannover Re. "Not only did we meet our targets, we surpassed them and recorded the highest Group net income in our company's history," Chief Executive Officer Wilhelm Zeller announced at this year's press briefing on the annual results in Hannover. In contrast to the previous year, which had been impacted by exceptionally severe hurricanes, catastrophe losses in the year under review were relatively light. With market conditions also remaining favourable, Hannover Re generated an operating profit (EBIT) of 819.9 million euro (91.6 million euro) in 2006. Group net income increased to a very good 514.4 million euro (49.3 million euro), producing earnings of 4.27 euro (41 cents) a share.
The gross premium income of 9.3 billion euro reported by the Hannover Re Group came in on a par with the previous year (9.3 billion euro); in this context it should, however, be borne in mind that unconsolidated gross premium of 1.6 billion euro booked by Praetorian Financial Group, Inc. is not recognised in current business for the full 2006 financial year due to the company's envisaged sale. Marginal growth of 0.3% would have been achieved at constant exchange rates. The level of retained premium retreated by a modest 2.9 percentage points to 76.3% (79.2%). Against this backdrop net premium contracted by a somewhat more marked 5.4% to 7.1 billion euro (7.5 billion euro).
In view of the agreement reached in December 2006 on the sale of Praetorian Financial Group, Inc. and in accordance with the relevant requirements of IFRS, only the post-tax profit or loss of this company is recognised in the statement of income as a separate item under "net income from discontinued operations." The figures for the previous year were duly adjusted in order to preserve comparability.
Hannover Re further reinforced its financial strength in the year under review: shareholders' equity grew by 11.4% to 2.9 billion euro (2.6 billion euro). The policyholders' surplus (including minority interests and hybrid capital) increased by 6.5% to 4.9 billion euro after 4.6 billion euro in the previous year.
The business development in property and casualty reinsurance was distinctly favourable. Almost all segments offered good opportunities to write profitable business. "On balance, rate increases were obtained for the seventh time in succession," Mr. Zeller emphasised. This was made possible by the adjustment of pricing models to reflect the experience of the 2005 hurricane events and by the shortage of reinsurance capacity for catastrophe covers. In this segment rate increases of 100% or more were achieved. Nevertheless, other property business also held stable. Developments in casualty lines were relatively gratifying; here too prices on the reinsurance side - with certain exceptions - were stable. All in all, the prevailing market conditions in property and casualty reinsurance continued to be commensurate with the risks and were therefore attractive.
With rates moving upwards on the traditional retrocession market, risk transfers to the capital market took on even greater importance for reinsurers. In the year under review Hannover Re placed its largest-volume securitisation to date - designated "K5" -, while the "Eurus" transaction marked the first time that the company had used a conventional catastrophe bond.
Despite sharply reduced peak exposures, gross premium in property and casualty reinsurance remained virtually unchanged at 4.6 billion euro. At constant exchange rates, especially against the U.S. dollar, growth would have been 0.1%. The level of retained premium retreated marginally by 1 percentage point to 84.9%. Net premium earned also showed little change at 3.9 billion euro (3.9 billion euro).
In contrast to the two previous years, the incidence of catastrophe losses was significantly below average in the year under review. Although some large losses were recorded, including for example a satellite loss, three fire claims in Germany and cyclone "Larry" in Australia, total net expenditure on major losses came in at a mere 107.3 million euro (1.0 billion euro). This figure corresponded to 2.7% of net premium in property and casualty reinsurance and was thus well below the expected level of 8%.
The combined ratio stood at 98.4% (112.8%). This figure reflects the current portfolio mix as well as a prudent reserving policy in long-tail liability business, especially for more recent years. Given the moderate major loss expenditure, the underwriting result improved considerably on the hurricane-impacted 2005 financial year to reach 63.9 million euro (-500.5 million euro). Net investment income climbed by 27.2% to 693.1 million euro (544.8 million euro) thanks to a strong underwriting cash flow. The property and casualty reinsurance business group generated an exceptionally pleasing operating profit (EBIT) of 670.0 million euro (-28.3 million euro) in the year under review. Net income came in at 382.2 million euro (4.3 million euro), equivalent to earnings of 3.17 euro (4 cents) a share.
Hannover Re was similarly thoroughly satisfied with the performance of life and health reinsurance. "Momentum in our second-most important business group is undiminished. We are generating organic growth at highly gratifying double-digit rates of increase," Mr. Zeller explained. "We have surpassed our goals of achieving a triple-digit operating profit (EBIT) and an EBIT margin of at least 5% from 2006 onwards." The increasing size of the upper levels of the age pyramid in developed industrial nations continues to drive growth in annuity and health insurance. Stimuli derived primarily from European markets, including for example the United Kingdom - where the volume of new business written surged particularly vigorously in annuity insurance. Gross premium income in this business group expanded by 15.2% to 2.8 billion euro (2.4 billion euro). At constant exchange rates growth would have come in at 16.0%. The level of retained premium fell by 7.4 percentage points owing to restructuring of our retrocession arrangements and the effect of the "L6" capital market transaction. Net premium earned consequently rose by a less marked 5.1% to 2.4 billion euro (2.3 billion euro).
Hannover Re, which transacts life and health reinsurance business worldwide under the Hannover Life Re brand name, boosted its operating profit (EBIT) by 49.8% to 139.5 million euro (93.1 million euro); this amount does, however, include extraordinary income of some 20 million euro from the commutation of a sizeable U.S. contract. Had it not been for this effect the operating profit would still have been highly gratifying. The EBIT margin of 5.9% reached the targeted 5 percent threshold for the first time and indeed surpassed it by a comfortable margin. Group net income consequently surged by a pleasing 72.2% to 102.6 million euro (59.6 million euro), equivalent to earnings of 85 cents (49 cents) a share.
Financial reinsurance developed in line with our expectations. Following the decline in premium volume over recent years, the year under review saw early signs of resurgent interest in structured covers. "As a result, we were able to generate profitable new business in Eastern Europe and Asia", Mr. Zeller explained. However, purchasing restraint still prevails among some clients - especially in the USA - because of the uncertainty surrounding the assessment of specific contract structures from the standpoint of commercial law and regulatory standards. As a further factor, the classification of Praetorian as a "discontinued operation" means that the premium from a large surplus relief contract written with this company is no longer included in the financial reinsurance business group.
Gross written premium consequently contracted slightly by 4.9% to 878.5 million euro (924.1 million euro). At constant exchange rates the decline would have been 4.6%. The level of retained premium decreased marginally by 0.8 percentage points to 89.8%. Net premium earned fell by 16.2% to 698.3 million euro (833.8 million euro).
Given the fact that numerous existing contracts were commuted or expired over the past two years, the technical provisions and hence the associated interest income were reduced. This was reflected in sharply lower investment income. The operating profit (EBIT) consequently contracted by 6.0% to 72.2 million euro (76.8 million euro). Due to reduced minority interests in the year under review, Group net income nevertheless grew as expected by a double-digit margin, rising by 11.8% to 55.3 million euro (49.4 million euro). This was equivalent to earnings of 46 cents (41 cents) a share.
The most prominent change in the year under review occurred in the specialty insurance business group. With a view to optimising structures here, the specialty business written by Clarendon Insurance Group, Inc. was transferred in the course of the year to the newly established Praetorian Financial Group, Inc., leaving the former to concentrate primarily on the professional management of terminated programs. "The decision to sell Praetorian clearly demonstrated that our strategy of concentrating profitable specialty business in Praetorian's hands was the right one: the price we obtained for the company was 2.1 times its expected shareholders' equity excluding goodwill as at year-end 2006," Mr. Zeller affirmed. On 13 December 2006 Hannover Re announced that agreement had been reached on the sale of the company to an Australian insurer. The transaction is expected to be finally closed in the second quarter of 2007.
Since Praetorian and its results are reported separately in the statement of income as a "discontinued operation," the gross written premium booked by the specialty insurance business group contracted by 28.2% in the year under review to 1.0 billion euro (1.5 billion euro). At constant exchange rates the decline would have been 27.7%. Given the fact that Clarendon itself is no longer writing any new business, the retention decreased from 22.5% in the previous year to -0.6%. Net premium earned retreated more sharply than gross premium due to the effect of unearned premium, falling by 78.1% to 108.6 million euro (496.5 million euro).
The overall performance of the specialty insurance business group was adversely impacted by the expensive programme of protection cover purchased for Clarendon; owing to state-imposed moratoria in 2004 and 2005 Clarendon has not yet been able to scale back its residual portfolio of natural catastrophe business to the desired extent. It was therefore necessary to retain the protection cover arrangements for natural catastrophe risks, albeit at a considerably increased cost. All in all, the operating result (EBIT) recorded for the specialty insurance business group was reduced by 44.4% to -71.7 million euro (-49.7 million euro). Based on the very healthy profit contribution delivered by Praetorian, Group net income nevertheless improved to 41.2 million euro (-2.4 million euro), or earnings of 34 cents (-2 cents) a share.
Hannover Re expressed satisfaction with its net investment income. Thanks to the strong inflow of cash from the technical account, the portfolio of assets under own management - excluding Praetorian's investment portfolio - grew by 0.9% to 19.2 billion euro (19.1 billion euro). Total assets including funds held by ceding companies increased from 27.5 billion euro to 28.5 billion euro. A positive effect of the rise in average yields was the increase of 19.9% in ordinary income to 784.8 million euro (654.6 million euro). Profits of altogether 305.1 million euro (269.4 million euro) were generated on disposals in the year under review, as against losses of 87.7 million euro (107.2 million euro). The positive balance therefore came in higher than in the previous year at 217.4 million euro (162.2 million euro). Deposit interest and expenses contributed 221.9 million euro (351.6 million euro) on balance to net investment income, which improved 5.9% year-on-year to 1,181.2 million euro (1,115.8 million euro); this was equivalent to a return of 5.0% on the average investment portfolio.
All in all, Hannover Re was highly satisfied with the 2006 financial year. The operating profit (EBIT) increased to 819.9 million euro after 91.6 million euro in the year under review. Group net income totalled a gratifying 514.4 million euro (49.3 million euro), producing earnings of 4.27 euro (41 cents) a share.
"In view of this business performance and our dividend policy, under which we distribute 35% to 40% of net income, the Executive Board and Supervisory Board will propose to the Annual General Meeting that a dividend of 1.60 euro be paid," Mr. Zeller added.
Outlook for 2007
The prospects for the current financial year also give Hannover Re considerable grounds for satisfaction. The treaty renewals in property and casualty reinsurance as at 1 January 2007 showed that for the most part market conditions continue to be commensurate with the risks: "Early repercussions of incipient market softening will not make themselves felt in our results before 2008/2009," Mr. Zeller affirmed. "By way of compensation, however, the effects of winter storm 'Kyrill' should by that time have a favourable influence on rates in European catastrophe business."
In addition to the advantageous market climate, further improvements in Hannover Re's risk management will also have a positive effect on the development of business in the current year. At the outset of 2007 the company had already transferred various risks to the capital market, thereby protecting its portfolio even more securely.
Following the sale of Praetorian Financial Group, Inc., the company's US primary insurance subsidiary transacting specialty lines, Hannover Re will concentrate exclusively on its core business of reinsurance. "We have identified opportunities for exceptionally profitable growth here - for example in US catastrophe business, life reinsurance and in the German market. We are also active on other fronts, however, including the cultivation of new markets in Central and Eastern Europe and the development of the highly promising retakaful market,", Mr. Zeller emphasised.
As a consequence of the sale of Praetorian, Hannover Re will now be limiting its segmentation to two strategic business groups: non-life and life and health reinsurance. Non-life reinsurance will encompass not only property and casualty lines but also structured covers and the residual specialty business. The important diversification benefits for our portfolio will remain untouched by this change.
Hannover Re is looking for total non-life reinsurance to deliver a very healthy profit contribution, provided the burden of major losses remains in line with the expected value of 8% of net premium. Along with winter storm "Kyrill', other large losses incurred to date were more modest storm damage in Northern Europe, flooding in Indonesia and the crash of a satellite. Overall, though, the net loss expenditure is still within the anticipated parameters.
In life and health reinsurance Hannover Re anticipates another significant rise in both premium income and the operating profit (EBIT) in 2007.
The expected positive cash flow should lead to further growth in our asset portfolio over the full financial year. Given a normal market environment, ordinary income from investments under own management is also likely to rise again. All in all, Hannover Re is looking to a stable profit contribution from this segment.
In view of the favourable conditions on the reinsurance market and its broad array of risk management tools, Hannover Re anticipates a good 2007 financial year. Assuming that major loss expenditure does not significantly exceed the expected value of 8% of net premium in non-life reinsurance and provided there are no unforeseen downturns on the capital markets, another very good result should be achievable for the current year: "Although the year got off to a stormy start with 'Kyrill', we expect a return on equity of at least 15% for 2007", Mr. Zeller noted. As for the dividend, in this scenario the company is targeting an unchanged payout ratio of 35% to 40%.
For further information please contact:
Press and Public Relations / Investor Relations: Eric Schuh, CFA (tel. +49 / 511 / 56 04-15 00 e-mail: eric.schuh@hannover-re.com) Press and Public Relations: Gabriele Handrick (tel. +49 / 511 / 56 04-15 02 e-mail: gabriele.handrick@hannover-re.com) Investor Relations: Gabriele Bodeker (tel. +49 / 511 / 56 04-17 36 e-mail: gabriele.boedeker@hannover-re.com)
Hannover Re, with a gross premium of 9.3 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 2,000. 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.