* Group net income for the quarter +16.8% * Non-life reinsurance satisfactory despite heavy burden of major losses (quarterly net income +3.8%) * Life and health reinsurance records excellent result (quarterly net income more than doubled) * Return on equity 16.6%
HANNOVER, Germany, May 3, 2007 (PRIME NEWSWIRE) -- Hannover Re expressed considerable satisfaction with its opening quarter of the new financial year. "With our quarterly result we have put in place a good foundation for achieving our envisaged profit target for 2007 -- namely a return on equity of at least 15 percent after tax," Chief Executive Officer Wilhelm Zeller affirmed.
Hannover Re's capital base remains strong: shareholders' equity increased by 154.6 million euro compared to the position as at 31 December 2006 to reach 3.1 billion euro, thereby surpassing the three billion euro mark for the first time.
The operating profit (EBIT) as at 31 March 2007 contracted by 17.2% compared to the same period of the previous year to stand at 154.2 million euro (186.3 million euro). This can be attributed principally to the impact of winter storm "Kyrill" in Europe. Group net income as at 31 March 2007 improved by 16.8% to 123.5 million euro (105.7 million euro) thanks to a lower tax burden and reduced minority interests. Earnings of 1.02 euro (88 cents) a share were generated.
The gross premium booked by the Hannover Re Group contracted by 9.4% to 2.4 billion euro (2.7 billion euro). In this context it is particularly important to remember that 295.0 million euro in unconsolidated gross premium of Praetorian Financial Group, Inc. is no longer reported in continuing operations due to the latter's pending sale. The company still anticipates completion of the transaction in the course of the second quarter of 2007. The persistent low demand for structured covers in the United States and the fact that Clarendon Insurance Group, Inc. has very largely withdrawn from active business may be cited as further key factors in the premium decline. These effects were not entirely offset despite the vigorous growth in life and health reinsurance (+22.8%). At constant exchange rates the decrease in gross premium would have amounted to 7.2%. The level of retained premium climbed to 84.9% (78.1%) due to lower retrocessions, as a consequence of which net premium fell by a considerably less marked 3.2% to 1.7 billion euro (1.8 billion euro).
In view of the agreement reached in December 2006 regarding the sale of Praetorian Financial Group, Inc., its after-tax result is reported -- as was already the case in the 2006 annual financial statement -- in a separate line (net income from discontinued operation) within the consolidated statement of income in accordance with IFRS. The previous year's figures have been appropriately adjusted in order to ensure year-on-year comparability with the corresponding period.
As has already been announced, following the sale of its primary insurance subsidiary Praetorian -- active in the area of U.S. specialty business -- Hannover Re will concentrate exclusively on its core business of reinsurance; its reporting will distinguish between the two business groups of non-life reinsurance and life and health reinsurance. Financial reinsurance, as part of the product range in non-life reinsurance, and the remaining portion of specialty business will be included in the non-life reinsurance segment.
Further strategic measures taken in the first quarter were dedicated to forward-looking pro-active risk management: "By way of two capital market innovations we have made further provision to ensure that our capital base is not eroded by exceptionally large losses," Mr. Zeller stressed. Not only that, risks associated with a partial portfolio of reinsurance recoverables were transferred to the capital market, thereby eliminating a potential credit risk.
The state of the market in non-life reinsurance, the company's largest business group, remains positive. Although the treaty renewal season as at 1 January 2007 demonstrated that the hard market has now passed its peak, the rate level was broadly stable with only a few exceptions, and it was therefore still possible to obtain prices and conditions commensurate with the risks. In those areas that did see significant rate reductions, such as aviation business, prices generally retreated from what were still rather high levels. Although the rate increases in catastrophe-exposed U.S. property business fell slightly short of those at the 1 July 2006 mid-year renewal date, they still improved on the previous year's level by around 35%. "It is my assumption that the price increases in this segment will be sustained," Mr. Zeller emphasised.
As anticipated, demand for structured covers in the United States was again muted in the first quarter of 2007. New contracts were, however, written in Europe and Asia.
Specialty business developed very much as anticipated: Praetorian enlarged its premium volume and also generated a good result. Clarendon, on the other hand, is no longer writing any new business, concentrating instead on the professional management and run-off of cancelled programs.
Gross premium income booked in all non-life reinsurance business contracted to 1.7 billion euro (2.1 billion euro) as at 31 March 2007, a fall of 18.9% compared to the same period of the previous year. At constant exchange rates, especially against the U.S. dollar, the decline would have been 16.9%. Owing to the sharply higher retention of 83.8% (75.2%), driven principally by effects in specialty business, net premium earned decreased by a less appreciable 13.9% to 1.1 billion euro (1.3 billion euro).
The major loss incidence in the first quarter was notable for winter storm "Kyrill," which swept across Europe in the middle of January. For Hannover Re this event means a net burden of just under 160 million euro before tax. "The scale of losses was alleviated by our 'K5' capital market transaction," Mr. Zeller pointed out. In addition to "Kyrill," other major losses involved further windstorm damage as well as the crash of a satellite. All in all, net expenditure on catastrophe losses and major claims came in at 174.3 million euro. This was equivalent to 15.9% of net premium in non-life reinsurance, and the multi-year average of 8% was thus substantially exceeded in the first quarter. Nevertheless, fluctuations from quarter to quarter are by no means uncommon. Against this backdrop the combined ratio stood at 105.2% (98.5%).
The net underwriting result slipped from 2.5 million euro to -66.2 million euro as a consequence of the unusually heavy major loss incidence. The operating profit (EBIT) in non-life reinsurance contracted accordingly by 38.1% to 93.3 million euro (150.8 million euro). Group net income climbed by 3.8% to 102.0 million euro (98.3 million euro) due to a lower tax burden and reduced minority interests. Earnings of 85 cents (82 cents) a share were generated.
The development of the life and health reinsurance business group once again proved extremely gratifying in the first quarter of 2007, thus building almost seamlessly on the vigorous pace of growth in the 2006 financial year. The demographic trend in the industrialised nations continues to drive growth in annuity and health insurance. Further stimuli derived inter alia from the bancassurance sector in Europe and from the area of new business financing. "We are positioned across a broad front with our product mix and can profit from a diverse range of market niches. It is already the case that only a minor portion of our portfolio is attributable to traditional mortality-oriented business," Mr. Zeller observed.
Gross premium income in life and health reinsurance climbed by a substantial 22.8% as at 31 March 2007 to 744.1 million euro (605.7 million euro). At constant exchange rates growth would have come in at 25.6%. The retention of 87.4% was on roughly the same level as the corresponding period of the previous year (87.7%). Net premium earned increased by 22.5% to 644.2 million euro (525.8 million euro).
"Although in life and health reinsurance the third and fourth quarters, in particular, are traditionally the strongest in terms of premium volume and profitability, this year's performance was already exceptionally gratifying as at 31 March," Mr. Zeller remarked. Hannover Re, which operates worldwide in this business group under the Hannover Life Re brand name, generated a considerably higher operating profit (EBIT) of 51.8 million euro (25.9 million euro). Group net income was more than doubled to 33.9 million euro (14.0 million euro). Life and health reinsurance thus contributed earnings of 28 cents (12 cents) a share to the Group result.
The European Embedded Value (EEV) also developed very favourably for the life and health reinsurance business group. The EEV consists of a valuation of the portfolio as well as the allocated capital and hence provides a basis for assessing its long-term profitability. As at 31 December 2006 the EEV of Hannover Life Re amounted to 1.5 billion euro (1.3 billion euro), an increase of 16.3%. The value of new business totalled 64.2 million euro (84.7 million euro). The operating embedded value earnings from new business and the in-force portfolio climbed by 65.0% to 185.6 million euro (112.5 million euro). This is equivalent to 14.2% of the EEV.
Hannover Re similarly expressed considerable satisfaction with the performance of its investments. Compared to the position as at 31 December 2006, the inflow of cash into the technical account combined with offsetting market movements and especially a weaker U.S. dollar left the overall portfolio of assets under own management virtually unchanged at 19.2 billion euro. Ordinary income excluding interest on deposits rose by 4.3% to 195.2 million euro, as against 187.2 million euro in the comparative period of the previous year. This can be attributed primarily to a higher average yield in the asset portfolios. Profits on disposals amounted to 40.2 million euro (21.1 million euro), contrasting with realised losses of 11.5 million euro (13.0 million euro). Interest on deposits declined owing to the planned reduction of funds held by ceding companies -- especially under old structured covers. This effect was offset by the increase in ordinary income, as a consequence of which net investment income improved on the corresponding period of the previous year by 6.3% to reach 255.1 million euro (239.9 million euro).
Outlook
In view of the attractive market opportunities available in both non-life reinsurance and life and health reinsurance, Hannover Re is looking forward to a very good result for the full 2007 financial year. "As a further positive factor, the reallocation of the risk capital released by the sale of U.S. primary insurance subsidiary Praetorian will open up new avenues for boosting profitability," Mr. Zeller explained. By way of example, profitable growth opportunities can be tapped into by running a higher retention in the still profitable property catastrophe sector, through acceptance of additional U.S. catastrophe business, in life and health reinsurance, and indeed through the cultivation of new markets such as those in Central and Eastern Europe and in the Islamic world. "In order to enable our shareholders to enjoy more of the profit from the German market going forward, we increased our share in E+S Ruck -- which bears sole responsibility for the Group's lucrative German business -- by 10% as at 1 April 2007 to 65.8%," Mr. Zeller explained.
Market conditions in non-life reinsurance remain good on balance. This was evidenced by the outcome of the treaty renewals as at 1 January 2007. The situation in U.S. catastrophe business is still favourable despite the moderate hurricane season in 2006. Even in those areas that did see rate decreases, such as aviation business, prices are still largely commensurate with the risks. The renewal season for Japan and South Korea as at 1 April 2007 also passed off satisfactorily. In Japan Hannover Re was able to defy the general trend and boost its premium. This is all the more remarkable inasmuch as the company scaled back its peak exposures under windstorm and earthquake covers in Japan. It successfully stepped up its activities in the so-called Kyosai market (business transacted with small mutual aid societies). Prices in Japanese casualty business ranged from rising to stable, enabling Hannover Re to enlarge its portfolio.
"Although the market climate is currently favourable almost everywhere, we by no means lose sight of promising markets for the future. Bearing in mind the enormous growth potential inherent in the worldwide Islamic insurance market, we are striving to expand our Sharia-compliant reinsurance business through our newly established Bahrain-based subsidiary," Mr. Zeller affirmed. "Hannover ReTakaful got off to a good start and lived up to our expectations."
In the area of structured products Hannover Re anticipates further growth in demand, particularly in Europe and Asia.
All in all, net premium volume for the entire non-life reinsurance business group should come in on roughly the same level as the previous year. Provided the burden of major losses for the full financial year remains within the bounds of the expected level of around 8% of net premium, a very healthy profit contribution can be anticipated.
The market opportunities offered by life and health reinsurance should facilitate double-digit organic growth and a similar increase in the result. Growth stimuli are expected from European markets as well as from various Asian countries and South Africa. Pilot projects in the U.S. market aimed at opening up alternative distribution channels with the aid of system-supported underwriting are also bearing fruit. It is therefore to be expected that the marketing of simple, transparent life insurance products will inject fresh growth impetus into the U.S. life market.
As far as the investment portfolio is concerned, the anticipated positive cash flow as well as the proceeds expected to accrue from the sale of Praetorian in the second quarter will serve to boost the volume of assets in the course of the year. Given a normal market environment, the income from assets under own management should continue to grow.
In view of the developments described above, Hannover Re is looking forward to a very good result for the full 2007 financial year. "Assuming that the burden of major losses comes in around the expected level and as long as there are no adverse movements on capital markets, we expect to generate a return on equity of at least 15% and Group net income in excess of the previous year," Mr. Zeller concluded. It remains the company's intention to pay out a dividend in the range of 35% to 40% of Group net income.
Hannover Re, with a gross premium of around 9 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.