HANNOVER, Germany, Nov. 11, 2004 (PRIMEZONE) -- Hannover Re:
- Strategy of diversification ensures return-on-equity target will be reached - Property and casualty reinsurance generates improved operating profit (EBIT) and net income - Combined ratio in property and casualty reinsurance 97.1 % - Life and health reinsurance as well as financial reinsurance deliver very good profit contributions - Program business hit hardest by windstorm events - Net investment income +9.3%
Against a backdrop of unusually high catastrophe loss expenditure in the third quarter Hannover Re expressed considerable satisfaction with its business performance over the first nine months in its interim report published today.
The development of business in the third quarter was shaped by two extremes: on the one hand, Hannover Re benefited from the unchanged favourable conditions prevailing on the reinsurance markets; on the other hand, the result was overshadowed by an unparalleled major loss burden from natural catastrophes in the amount of 358.6 million euro. The operating profit (EBIT) for the first nine months consequently fell by 18.1% compared to the same period of the previous year to 408.0 million euro (498.2 million euro). Consolidated net income contracted by 25.5% to 191.1 million euro (256.6 million euro), producing reduced earnings of 1.58 euro (2.43 euro) a share. "In view of the extraordinarily large burden of catastrophe losses we are highly satisfied with the result. The impact of the major losses was largely absorbed by the quality of our other business", Wilhelm Zeller, Chairman of the Executive Board, emphasised.
As in the first half-year, gross premium income as at 30 September 2004 was again lower, declining by 19.1% to 7.2 billion euro (8.9 billion euro). At constant euro exchange rates -- especially against the US dollar -- the reduction would have been 14.8%. With the level of retained premiums rising to 77.3% (71.0%), net premiums earned fell by a mere 8.0% to 5.4 billion euro (5.9 billion euro). Adjusted for exchange-rate effects, net premiums would have been almost on a par with the previous year.
Property and casualty reinsurance continued to offer Hannover Re attractive opportunities to write profitable business. "The market remains on a high level. In almost every segment we see good chances of writing profitable business", Mr. Zeller commented. Hannover Re moved forward with the optimisation of its portfolio under its "More from less" initiative, replacing high-volume, low-margin proportional business with profitable non-proportional business. Gross premiums consequently declined by 21.1% to 3.2 billion euro (4.0 billion euro). The premium decrease would have been 18.1% at constant exchange rates. The reorganisation of business with the HDI affiliates was another factor in the reduced premium income. Given the quality of the portfolio the company raised its retention by 13.1 percentage points to 82.6%, as a result of which net premiums earned fell by a mere 6.4% to 2.5 billion euro.
Major loss expenditure totalled 258.5 million euro (68.6 million euro) as at 30 September 2004, equivalent to 10.5% of net premiums earned. It was thus well in excess of the multi-year average of around 5%. In the third quarter alone the loss burden from hurricanes in the United States, typhoons in the Pacific region and other major losses amounted to 222.2 million euro (47.3 million euro) - a figure corresponding to 22.7% of net premiums. Despite these considerable strains, the combined ratio in the first nine months stood at 97.1%, following 97.2% in the same period of the previous year. "This testifies to the further improvement in the quality of our property and casualty reinsurance portfolio. In every segment except natural catastrophe reinsurance our business performed superbly", Mr. Zeller stressed. This offset the drag on profitability caused by the windstorm losses. New business was reserved in accordance with the company's accustomed conservative practice; on balance, there was again no need in the third quarter to establish additional reserves for previous underwriting years.
Against this backdrop the operating profit (EBIT) was boosted by 3.7% to 315.2 million euro (304.0 million euro). With tax expenditure back within normal bounds, net income for the reporting period grew by 5.5% to 144.9 million euro (137.4 million euro). Earnings of 1.20 euro (1.30 euro) a share were generated.
Life and health reinsurance developed very favourably in the first nine months of the year under review. As in the preceding quarters, however, gross premium income contracted relative to the same period of the previous year: it declined by 10.3% to 1.5 billion euro (1.7 billion euro). Adjusted for exchange-rate effects the decrease would have been 7.1%. The discontinuation of a major business relationship in the United Kingdom also continued to be a factor in the reduced gross premium volume. Net premiums earned were a mere 1.3% lower at 1.4 billion euro due to the higher level of retained premiums; they actually increased slightly in the original currency. The operating profit (EBIT) of 59.0 million euro surpassed the previous year (48.9 million euro) by 20.7%. Due to a lower tax expenditure net income as at 30 September 2004 grew by as much as 40.7% to 31.1 million euro (22.1 million euro) or 26 cents (21 cents) a share.
Financial reinsurance developed according to plan in the first nine months of the year under review; following the vigorous growth of recent years it is now experiencing a period of consolidation. Gross premiums contracted as expected by 27.7% to 884.4 million euro (1.2 billion euro). At constant exchange rates the decrease would have been 22.7%. The fall of 26.8 % in net premiums earned to 798.2 million euro (1.1 billion euro) mirrored the reduction in gross premium income.
The operating profit (EBIT) improved by 16.4% to 105.2 million euro (90.3 million euro). Net income after tax totalled 63.8 million euro as at 30 September 2004, an increase of 11.7% on the same period of the previous year (57.1 million euro). Earnings of 52 cents (54 cents) a share were generated.
Results in program business were heavily overshadowed by substantial losses associated with the four severe hurricanes in Florida: Clarendon Insurance Group, New York, suffered a burden of around 120 million US dollars for net account. In addition, it incurred premiums payable for the reinstatement of reinsurance covers. In contrast to property and casualty reinsurance, the other business written was only able to alleviate - but not offset - the effect of these loss events. Therefore, program business recorded a deficit in the third quarter and for the first nine months as a whole.
Gross written premiums contracted by 17.0% in the first nine months of the year under review to 1.6 billion euro (1.9 billion euro). With 90 % of the portfolio deriving from the USA, the weakness of the US dollar was particularly pronounced here: at constant exchange rates the decline would have been just 9.3%. The level of retained premiums was slightly lower at 44.1% (46.4%). The net premiums earned of 797.5 million euro were roughly on a par with the previous year (789.9 million euro). As a consequence of the enormous loss expenditure incurred in the third quarter the combined ratio for the first nine months climbed to 111.5% (96.3%). The operating result (EBIT) took a correspondingly negative turn: after a profit of 54.9 million euro in the same period of the previous year it showed a deficit of 71.4 million euro. The net loss after tax amounted to 48.6 million euro, contrasting with a profit of 40.0 million euro in the previous year. Program business thus eroded consolidated net income by 40 cents a share (previous year: earnings of 38 cents a share).
The investment income generated by Hannover Re after nine months was entirely within the planned parameters. Write-downs on securities of 22.7 million euro (89.1 million euro) were scarcely a factor. Profits of altogether 123.6 million euro (149.0 million euro) were realised on the disposal of investments, predominantly in the first quarter. This amount contrasted with realised losses of 29.2 million euro (72.5 million euro). The enlarged asset volume of 24.5 billion euro (22.5 billion euro) did not entirely offset the fall in interest rates, and ordinary income therefore declined by 3.8% to 742.1 million euro (771.8 million euro). Net investment income increased to 783.1 million euro, growth of 9.3 % compared to the previous year's figure of 716.8 million euro.
Outlook
Although Hannover Re was compelled in October to revise its profit forecast for the full financial year owing to the strain of the severe windstorm events, the company is highly satisfied with the development of its business. Its largest business group, property and casualty reinsurance, continues to show strong profitability. "Despite the once-in-a-century burden resulting from the windstorm events in the USA and Asia, even our worldwide catastrophe portfolio will post a breakeven result for the year. In other words, the hurricane losses have simply cost us the earnings that we would have generated from this otherwise highly profitable business", Mr. Zeller emphasised. The excellent quality of the business written in property and casualty reinsurance should again be sustained in the fourth quarter with a favourable effect on the result, provided the major loss burden remains within the bounds of the multi-year average. The company anticipates a combined ratio of 95 - 97 %, a remarkable achievement in view of the major loss expenditure incurred in the third quarter alone. The 2004/2005 treaty renewals should again preserve very adequate rates and conditions in virtually all segments of property and casualty reinsurance in the coming year; this expectation was reinforced by the general tone of the meetings between international reinsurers and their clients held in Monte Carlo, Baden Baden and Washington, D.C. The price erosion that many market players had anticipated in natural catastrophe reinsurance has in all likelihood been halted.
Gross written premiums as at 31 December 2004 will be significantly lower than in the previous year, not least due to the adverse impact of currency movements. Adjusted for exchange-rate effects, net premiums earned are likely to be on a par with the previous year. Despite the extraordinary burden of major losses incurred in the third quarter, property and casualty reinsurance is expected to generate substantially increased net income for the year.
Adjusted for exchange-rate effects and allowing for new treaties written in the fourth quarter, gross premium income in life and health reinsurance will at most fall slightly short of the previous year's level. Both the operating profit (EBIT) and net income for the full 2004 financial year are expected to show appreciable double-digit growth.
In financial reinsurance Hannover Re expects the premium volume to be lower than in the previous year, although profitability will still be highly gratifying.
Program business will close with a loss for the full financial year on account of the exceptionally heavy strain caused by the four hurricanes in Florida. Subject to a normal major loss incidence, however, the fourth quarter should make a renewed positive contribution to the overall Group result.
Provided there are no unusual movements on the capital markets, Hannover Re expects investment income for the full financial year to surpass the level of the previous year. The continuing highly positive cash flow is likely to more than offset the low return on securities.
Overall, Hannover Re anticipates net income of approximately EUR 300 million in 2004 -- provided the major loss expenditure in the fourth quarter remains within the multi-year average and there are no unforeseen downturns on the capital markets. "Despite the exceptionally heavy loss burden in the third quarter this is nevertheless a very good performance. We shall thus still achieve our ambitious return-on-equity target of currently around 12% after tax", Mr. Zeller confirmed. The overall business climate for a globally operating, well diversified reinsurer remains highly favourable. For the 2005 financial year - subject to a major loss experience within normal bounds and a strong capital market - Hannover Re stands by its projection of net income in the order of 430 to 470 million euro or 3.60 euro to 3.90 euro a share.
Hannover Re, with gross premiums of approximately EUR 11 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 3,000 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").
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