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Hannover Re generates new record result

10 March 2015 Ulrich Wallin, Hannover Re

• Group net income boosted by 10.1% to EUR 985.6 million (EUR 895.5 million) • Increased dividend proposed for 2014: EUR 3.00 per share plus special dividend of EUR 1.25 per share • Book value per share: EUR 62.61 (EUR 48.83) • Return on equity: 14.7% (15.0%) • Combined ratio: 94.7% (94.9%) • Currency-adjusted growth in gross premium: +2.8% • Major loss expenditure of EUR 425.7 million substantially lower than budgeted

With Group net income of EUR 985.6 million for the 2014 financial year Hannover Re comfortably surpassed the record result of the previous year and its targeted year-end profit in the order of EUR 850 million. "The successful financial year was based on a 25 percent rise in net income in life and health reinsurance and the continued good underwriting result in property and casualty reinsurance. Furthermore, we were able to slightly improve our investment income despite the challenging market environment", Chief Executive Officer Ulrich Wallin explained.

It is envisaged that Hannover Re's shareholders should also benefit from this pleasing business development. The Executive Board and Supervisory Board will therefore propose to the Annual General Meeting that a dividend of altogether EUR 4.25 per share (EUR 3.00 per share) should be paid for the 2014 financial year: the payout will take the form of a dividend of EUR 3.00 per share plus a special dividend of EUR 1.25 per share. "We are thereby recognising that Hannover Re's capitalisation now significantly exceeds its required capital. In so far, the special dividend should be seen as a capital management measure", Mr. Wallin noted. The payout ratio of 52% of IFRS Group net income is above the range of 35% to 40% set for the strategic target ratio.

2014 best financial year in the company's history

Hannover Re is exceptionally pleased with the development of its business in 2014. Although the general environment facing reinsurers became even more challenging in the year under review, the company was able to grow its gross premium by 2.9% to EUR 14.4 billion (EUR 14.0 billion); currency-adjusted growth stood at 2.8%. The level of retained premium decreased to 87.6% (89.0%). Net premium earned rose to EUR 12.4 billion (EUR 12.2 billion); at unchanged exchange rates growth would have come in at 1.5%.

The operating profit (EBIT) of the Hannover Re Group improved by a further 19.3% on the already very good level of the previous year to reach EUR 1.5 billion (EUR 1.2 billion). Both business groups, namely property & casualty and life & health reinsurance, as well as the investment income played a part in this good result. Group net income surged by 10.1% to EUR 985.6 million (EUR 895.5 million). This is the highest figure in the company's history. Earnings per share amounted to EUR 8.17 (EUR 7.43).

Property and casualty reinsurance posts further rise in profit

In worldwide property and casualty reinsurance the sometimes considerable surplus capacities available in many markets led to further rate cuts. Hannover Re continues to practise a profit-oriented, selective underwriting policy in response to these difficult market conditions. In 2014, for example, reduced shares in Europe and in catastrophe business were offset by more attractive new business written primarily in the Asia-Pacific region. The gross premium volume in property and casualty reinsurance increased slightly by 1.1%, or by 1.2% adjusted for exchange rate effects, to EUR 7.9 billion (EUR 7.8 billion). The level of retained premium climbed to 90.6% (89.9%). Net premium earned grew to EUR 7.0 billion (EUR 6.9 billion); at constant exchange rates it would have risen by 2.1%.

As in the previous year, Hannover Re's major loss expenditure was considerably lower than anticipated. This was due to the absence of sizeable natural catastrophe events and in particular a benign hurricane season. The aviation line was, however, impacted by an exceptional accumulation of losses. In addition, storm "Ela" in Western Europe caused heavy damage. These and other major losses resulted in total net expenditure for Hannover Re of EUR 425.7 million (EUR 577.6 million). At 94.7% (94.9%), the combined ratio once again improved on the previous year. Against this backdrop, and also thanks to higher investment income in property and casualty reinsurance, the operating profit (EBIT) soared by 12.2% to EUR 1.2 billion. Group net income increased by a less appreciable 2.7% to EUR 829.1 million (EUR 807.7 million) owing to the elimination of a positive tax effect that had been recognised in the previous year. This level nevertheless marks a new all-time best. Earnings per share stood at EUR 6.88 (EUR 6.70).

Favourable development in life and health reinsurance

Life and health reinsurance enjoyed a pleasing business development in 2014. Although the international market climate was difficult due to the protracted period of low interest rates, Hannover Re's partnership-based relationships and global presence nevertheless enabled the company to act on sufficient opportunities for sustainable growth, including for example in the area of longevity risks. The company was also successful in expanding its business in China, Australia and the United States. Gross premium consequently increased by 5.1% to EUR 6.5 billion (EUR 6.1 billion). Adjusted for exchange rate effects, growth would have come in at 4.9%. Net premium earned increased by 1.0% to EUR 5.4 billion (EUR 5.4 billion); growth of 0.7% would have been posted on a currency-adjusted basis.

The premium growth was outpaced by the improvement in the operating result (EBIT) in life and health reinsurance. EBIT surged by a substantial 75.3% to EUR 263.8 million (EUR 150.5 million). The improved result compared to the previous year, which had been overshadowed by losses in the Australian disability portfolio and to some extent also in US mortality business, demonstrates the effectiveness of the steps taken to boost profitability. Group net income in life and health reinsurance reached EUR 205.0 million (EUR 164.2 million). Earnings per share amounted to EUR 1.70 (EUR 1.36).

Highly satisfactory investment income

Hannover Re is thoroughly satisfied with the development of its investments in light of the low level of interest rates: the return on investment for assets under own management (excluding ModCo derivatives and inflation swaps) stood at 3.3% and was thus slightly higher than the targeted level of 3.2%. The portfolio of assets under own management grew substantially to reach EUR 36.2 billion (EUR 31.9 billion) as at year-end 2014. This increase resulted from a continued very positive operating cash flow, the substantial rise in hidden reserves - especially for fixed-income securities - as well as from exchange rate effects.

Ordinary investment income excluding income from funds withheld and contract deposits improved by 2.6% to EUR 1.1 billion (EUR 1.0 billion) despite persistently low interest rates. Income from funds withheld and contract deposits increased year-on-year to EUR 376.1 million (EUR 357.3 million). The realised gains of EUR 182.5 million (EUR 144.2 million) were necessarily higher than in the previous year due to portfolio regrouping moves. The primary factors here were redemption of a bond issued in 2004, the change in reporting currency at two subsidiaries and opportunities to realise gains in the real estate sector. Changes in the fair values of financial assets recognised at fair value through profit or loss amounted to altogether EUR -33.3 million (EUR -27.1 million). Write-downs totalling just EUR 27.7 million (EUR 19.4 million) were taken. The increase relative to the previous year is attributable largely to scheduled depreciation that reflects Hannover Re's higher real estate exposure.

All in all, income from investments under own management grew by 3.9% as at 31 December 2014 to EUR 1.1 billion (EUR 1.1 billion). Including income from funds withheld and contract deposits, net investment income closed 4.3% higher at EUR 1.5 billion, as against EUR 1.4 billion in the previous year.

Shareholders' equity further strengthened

Hannover Re's shareholders' equity continued to develop very favourably, reaching EUR 7.6 billion as at 31 December 2014 (EUR 5.9 billion). The key drivers here were a substantial rise in retained earnings due to the good result and an increase of more than EUR 1 billion in the valuation reserves. Despite the sharply higher shareholders' equity, the return on equity of 14.7% was virtually on a par with the previous year (15.0%). The total policyholders' surplus (including non-controlling interests and hybrid capital) stood at EUR 10.2 billion (EUR 8.8 billion). The book value per share reached EUR 62.61 (EUR 48.83) and thus surpassed the EUR 60 mark for the first time.

Outlook for 2015

The general climate is likely to remain challenging in the current financial year. Hannover Re anticipates little change in the intense competitive pressure in property and casualty reinsurance or in the low level of interest rates. "Our good market position as a broadly diversified reinsurer, our excellent financial strength and our low administrative expense ratio relative to our competitors should nevertheless enable us to achieve another good result in 2015", Mr. Wallin stated.

Hannover Re continues to expect Group net income in the order of EUR 875 million. This is based on the premise that major loss expenditure does not significantly exceed the budgeted level of EUR 690 million and that there are no exceptionally adverse movements on capital markets.

The company expects its gross premium volume for total business - adjusted for exchange rate effects - to remain stable or show low single-digit percentage growth in 2015.

The asset portfolios should continue to grow - at constant exchange rates - in view of the anticipated positive cash flow. The company is aiming for a return on investment of 3.0%.

In terms of the dividend for the current financial year, Hannover Re envisages a payout ratio in the range of 35% to 40% of its IFRS Group net income. This ratio may increase in light of capital management considerations if the present comfortable level of capitalisation remains unchanged.

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