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Hannover Re makes a good start to the 2015 financial year

06 May 2015 Hannover Re

• Group net income +20.1%: EUR 279.7 million (EUR 233.0 million) • Gross premium growth beats expectations: +10.3% adjusted for exchange rate effects • Investment income +15.1%: EUR 415.7 million (EUR 361.2 million) • Net major losses lower than planned quarterly budget at EUR 62.0 million • Return on equity: 13.9% • Combined ratio: 95.7% (94.4%)

The first three months of the current year passed off very satisfactorily for Hannover Re; the Group generated a quarterly profit of EUR 279.7 million (EUR 233.0 million). "The fact that we were able to boost our net income by a further 20.1% compared to the previous year's quarter can be attributed in particular to the outstanding contribution from life and health reinsurance and another satisfactory underwriting result in property and casualty reinsurance. Investment income also fully lived up to our expectations", Chief Executive Officer Ulrich Wallin stated. Given this successful start to the year, Hannover Re is confident of achieving its profit guidance in the order of EUR 875 million for the full 2015 financial year.

Gross premium sharply higher

Gross written premium for the Hannover Re Group increased by 21.4% as at 31 March 2015 to EUR 4.4 billion (EUR 3.6 billion). Growth thus surpassed the expectations. At constant exchange rates gross premium would have risen by 10.3%. The level of retained premium was slightly higher than in the comparable period at 88.6% (88.4%). Net premium earned grew by 17.8% to EUR 3.4 billion (EUR 2.9 billion); growth would have totalled 6.9% adjusted for exchange rate effects.

Hannover Re posts pleasing quarterly profit

The operating profit (EBIT) as at 31 March 2015 came in at EUR 429.0 million (EUR 349.6 million), comfortably beating the already good level of the previous year. The gratifying increase of 22.7% was driven in particular by the significantly improved result in life and health reinsurance. Group net income consequently came in at a highly satisfactory EUR 279.7 million (EUR 233.0 million). Earnings per share climbed to EUR 2.32 (EUR 1.93).

Good business development in property and casualty reinsurance

Competition in worldwide property and casualty reinsurance markets remains intense, as was again evident in the treaty renewals as at 1 January 2015. Against this backdrop, Hannover Re continues to practise discipline in maintaining its profit-oriented underwriting policy.

Total gross premium for property and casualty reinsurance nevertheless climbed to EUR 2.6 billion (EUR 2.1 billion) as at 31 March 2015 and thus comfortably beat expectations. Growth was assisted by both the strong US dollar and business opportunities with attractive, large-volume treaties. An additional factor was a non-recurring special effect amounting to EUR 93 million in facultative reinsurance business resulting from enhanced accounting methods for more timely booking of premiums. At constant exchange rates the increase in gross written premium would have totalled 13.0%. If the special effect is eliminated, gross premium would still have risen by 8% adjusted for exchange rate effects. The level of retained premium decreased to 88.9% (91.2%), as a consequence of which net premium earned climbed by a less marked 4.9% (currency-adjusted) to EUR 1.9 billion (EUR 1.6 billion).

As had been the case in the corresponding period of the previous year, major loss expenditure for Hannover Re came in below the envisaged quarterly budget. In addition to the storm "Niklas" and a winter storm in the United States, the crash of a German passenger jet in the French Alps marked another tragic event for the civil aviation industry. The total net expenditure incurred by Hannover Re from these events amounted to EUR 62.0 million (EUR 30.6 million). In accordance with the company's prudent reserving policy, the unused portion of the major loss budget for the first quarter was for the most part allocated to the loss reserves. The underwriting result closed at EUR 76.6 million (EUR 87.6 million). The combined ratio of 95.7% (94.4%) was better than the target figure.

In view of the modestly lower underwriting result and reduced realised gains, the operating profit (EBIT) in property and casualty reinsurance as at 31 March 2015 decreased to EUR 255.2 million (EUR 280.5 million). Group net income reached EUR 171.4 million (EUR 197.9 million). Earnings per share amounted to EUR 1.42 (EUR 1.64).

Life and health reinsurance shows improved result

The first quarter of 2015 was an exceptionally positive one for Hannover Re in life and health reinsurance. Despite the challenges currently facing this business group, expectations were fulfilled both in terms of profitability and premium growth.

Accordingly, gross written premium increased by 17.6% as at 31 March 2015 to EUR 1.8 billion (EUR 1.5 billion). At constant exchange rates growth would have amounted to 6.5%. Reflecting a higher retention, net premium earned soared by an even more appreciable 21.0% to EUR 1.5 billion (EUR 1.3 billion); adjusted for exchange rate effects, the increase would still have reached 9.4%.

The result in life and health reinsurance was favourably influenced by an improved underwriting experience in the first quarter of 2015 and by a special effect. A fee that became payable following a customer-initiated withdrawal from a single US transaction positively affected Hannover Re's ordinary investment income in an amount of some EUR 40 million. The operating profit (EBIT) as at 31 March 2015 was more than double that of the comparable period, closing at EUR 173.3 million (EUR 65.6 million). Furthermore, the significantly increased result shows that the steps taken to improve profitability in Australian disability business and to some extent also in US mortality business are having an effect. Group net income reached a pleasing EUR 127.5 million (EUR 43.4 million); earnings per share stood at EUR 1.06 (EUR 0.36).

Very satisfactory investment income

The investment climate was once again challenging in the period under review due to the sustained low level of interest rates and relatively modest risk premiums on corporate bonds.

The portfolio of investments under own management surged higher in the first three months of the year to reach EUR 39.7 billion (31 December 2014: EUR 36.2 billion). This can be attributed principally to the effects of currency appreciation – especially the US dollar – against the euro, although higher valuation reserves due to a further decline in interest rate levels also played a part. Another very positive cash flow was also a factor here.

Owing to the sharply higher income from fixed-income securities and real estate as well as the special effect in life and health reinsurance, ordinary investment income excluding interest on funds withheld and contract deposits was clearly higher than in the previous year's quarter at EUR 312.2 million (EUR 241.4 million). Interest on funds withheld and contract deposits also rose to EUR 99.0 million (EUR 88.6 million).

The realised gains of EUR 45.0 million (EUR 54.1 million) were attributable largely to regrouping activities as part of regular portfolio maintenance. Changes in the fair values of financial assets measured at profit or loss – the so-called ModCo derivatives and inflation swaps are included here – totalled EUR -10.6 million (EUR 7.4 million) in the first quarter of 2015. Write-downs of just EUR 8.2 million (EUR 5.5 million) had to be taken in the reporting period.

Income from assets under own management climbed by a very pleasing 16.2% as at 31 March 2015 to EUR 316.6 million (EUR 272.5 million). The resulting annualised return on investment (excluding effects from ModCo derivatives and inflation swaps) stood at 3.5% and thus beat the full-year target of 3.0%. Net investment income including interest on funds withheld and contract deposits closed higher than in the corresponding quarter at EUR 415.7 million (EUR 361.2 million).

Shareholders' equity records further very strong growth

Hannover Re's shareholders' equity surged by a vigorous 12.9% to EUR 8.5 billion (31 December 2014: EUR 7.6 billion) on the back of strong earnings, positive exchange rate effects and sharply higher valuation reserves. The annualised return on equity nevertheless remained on a very good level at 13.9% (31 December 2014: 14.7%). "As things stand today, share-holders' equity is expected to continue growing in 2015 despite the proposed dividend of EUR 4.25 including a special dividend of EUR 1.25. The company's earnings level therefore needs to be kept on a high level if the attractive return on equity is to be sustained. We achieved this goal in the first quarter of 2015", Mr. Wallin emphasised. The book value per share climbed to a new record high of EUR 70.68 (31 December 2014: EUR 62.61).

Outlook for 2015

With the results reported as at 31 March 2015 Hannover Re has taken a first step towards accomplishment of its full-year targets. Based on constant exchange rates, the company expects to book higher gross premium and net income after tax in the order of EUR 875 million for the full 2015 financial year. This is conditional on major loss expenditure not significantly exceeding the anticipated level of EUR 690 million and assumes that there are no unforeseen adverse developments on capital markets.

The continued challenging business environment in property and casualty reinsurance was further underscored by the treaty renewals as at 1 April 2015, the traditional date on which business in Japan and on a smaller scale treaties in Korea, Australia and New Zealand as well as parts of the US property catastrophe portfolio are renewed. All in all, Hannover Re is satisfied with the outcome of this round of renewals.

Hannover Re booked modest premium growth in its Japanese portfolio. The company successfully maintained its good market position thanks to its long-standing relationships with ceding companies. Although the pressure on rates for Japanese natural catastrophe covers increased as expected, they were still commensurate with the risks. Merely modest premium declines were recorded in personal accident insurance and in the area of per-risk property covers; in casualty business, on the other hand, further increases were obtained. Market conditions in Korea were once again difficult, prompting Hannover Re to further consolidate its portfolio here. As anticipated, US property catastrophe business saw renewed rate erosion in the range of 5% to 10%, although no additional softening in conditions was observed. The premium volume in the United States rose as the company wrote more business with a number of sizeable accounts.

In view of the favourable development in the first quarter, Hannover Re sees further improvement in the growth prospects for property and casualty reinsurance. Special mention should be made here of the Asia-Pacific markets, North America and marine business as well as facultative and structured reinsurance.

In life and health reinsurance the company expects its business momentum to gather further pace. Growth here should be particularly evident in emerging markets, although it will also be driven by the implementation of Solvency II and business with longevity risks.

Hannover Re's targeted return on investment for the full financial year remains unchanged at 3.0%. The company is not currently planning to make any significant adjustments to the allocation of its investments to individual asset classes.

As for the dividend, the company continues to aim for a payout ratio in the range of 35% to 40% of its IFRS Group net income after tax. This ratio may increase in light of capital management considerations if the company's comfortable level of capitalisation remains unchanged.

 

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