Hannover Re expressed considerable satisfaction with its results for the first quarter of 2012. “We generated exceptionally good Group net income of EUR 261 million in the first three months of the year and have thus put in place a solid platform for a successful 2012 financial year”, Chief Executive Officer Ulrich Wallin commented. “Key drivers here were the highly satisfactory underwriting results in non-life and life/health reinsurance as well as a very good investment performance.”
Vigorous organic growth
Gross written premium for the Hannover Re Group surged by an appreciable 11.7% to EUR 3.5 billion (EUR 3.1 billion) as at 31 March 2012. At constant exchange rates growth would have amounted to 9.5%. The level of retained premium moved slightly higher to 91.0% (89.3%). Net premium earned consequently rose even more strongly by 13.1% to EUR 2.8 billion (EUR 2.5 billion). Growth of 10.8% would have been recorded at constant exchange rates.
Exceptionally good quarterly Group net income
The operating profit (EBIT) as at 31 March 2012 climbed appreciably to EUR 393.2 million on the back of a moderate major loss incidence and very good investment income. The EBIT of EUR 47.4 million booked in the corresponding quarter of the previous year had been impacted by heavy losses from natural catastrophes. Group net income came in around five times higher at EUR 261.3 million (EUR 52.3 million). Earnings per share stood at EUR 2.17 (EUR 0.43).
Non-life reinsurance delivers very pleasing profit contribution
The treaty renewals in non-life reinsurance as at 1 January 2012 passed off favourably for Hannover Re, enabling the company to make the most of opportunities to write profitable business. As anticipated, rate increases were especially marked for property catastrophe business owing to the heavy losses incurred in 2011. The renewals in Germany also produced a pleasing outcome. Developments in specialty lines were similarly satisfactory.
Gross premium in non-life reinsurance increased by a substantial 10.0% relative to the comparable quarter to reach EUR 2.1 billion (EUR 1.9 billion). At constant exchange rates, especially against the US dollar, growth would have come in at 8.1%. The level of retained premium rose to 91.2% (87.8%). Net premium earned climbed 13.0% to EUR 1.6 billion (EUR 1.4 billion), equivalent to growth of 11.0% after adjustment for exchange rate effects.
In the first quarter of 2012 Hannover Re incurred only a few major losses, leaving the net burden of major losses well below the expected level at EUR 60.6 million (EUR 572.1 million). The largest single event was the partial sinking of the Costa Concordia cruise ship in the Mediterranean, which resulted in a net strain of EUR 45.0 million.
In view of the favourable major loss experience, the underwriting result in total non-life reinsurance closed at an extremely pleasing EUR 46.8 million (-EUR 330.9 million), after the comparable quarter had been affected by an extraordinarily large burden of major losses. The combined ratio improved substantially to 96.8% (123.8%).
The operating result (EBIT) for non-life reinsurance improved to a very good EUR 263.2 million (-EUR 24.5 million) as at 31 March 2012 thanks to the positive influencing factors. Group net income soared to EUR 173.2 million (EUR 17.3 million). Earnings per share stood at EUR 1.44 (EUR 0.14).
Very good underwriting result in life and health reinsurance
Hannover Re is thoroughly satisfied with its life and health reinsurance portfolio. “Our risk-oriented life reinsurance business in the United States fared especially well”, Mr. Wallin emphasised. “Building on the platform acquired three years ago with the ING transaction, we have been increasingly successful in writing attractive new business that assures us a growing profit stream over the long term.”
Gross premium income for life and health reinsurance showed a very pleasing increase of 14.3% to reach EUR 1.4 billion (EUR 1.2 billion) as at 31 March 2012. At constant exchange rates growth would amounted to 11.6%. Net premium earned climbed 13.2% to EUR 1.3 billion (EUR 1.1 billion), equivalent to growth of 10.5% on a currency-adjusted basis.
The increased Group net income in life and health reinsurance relative to the previous year was crucially driven by an improved biometric risk experience, especially in the United States and United Kingdom. As a further factor, the narrowing in credit spreads on bond markets favourably affected the derivative recognised for securities deposits held for the account of Hannover Re by US cedants (ModCo). This gave rise to unrealised gains of EUR 36.8 million.
The operating result (EBIT) increased appreciably as at 31 March 2012 to EUR 122.2 million (EUR 58.4 million). The EBIT margin of 9.7% comfortably surpassed the strategic target of 6%. Group net income for life and health reinsurance as at 31 March 2012 climbed to EUR 100.1 million (EUR 41.5 million). Earnings per share amounted to EUR 0.83 (EUR 0.34).
As in previous years, Hannover Re is also reporting on the Market Consistent Embedded Value (MCEV) in the context of its first interim report. This consists of a valuation of the entire life and health reinsurance portfolio. It also encompasses the discounted expected future profits as well as the allocated capital, and hence provides a good basis for assessing long-term profitability. The development of the MCEV was again very pleasing in 2011. As at 31 December 2011 it stood at EUR 3.1 billion (EUR 2.6 billion). This corresponds to growth of 19.4%. The value of new business (excluding non-controlling interests) showed another sharp increase of 61.2% and totalled EUR 240.6 million (EUR 149.3 million).
Very pleasing investment income
Investments developed highly satisfactorily even though market conditions were still difficult. The portfolio of investments under own management showed further growth relative to the level as at 31 December 2011 to reach EUR 29.0 billion (EUR 28.3 billion). Ordinary income from assets under own management improved on the corresponding period of the previous year, climbing by 15.9% to EUR 258.2 million (EUR 222.7 million) despite the prevailing very low level of interest rates; the resulting annualised return of 3.6% was on a par with the previous year. Interest on funds withheld and contract deposits increased to EUR 83.7 million (EUR 75.9 million). The unrealised gains on assets recognised at fair value through profit or loss totalled EUR 84.6 million (EUR 69.0 million). This figure was influenced chiefly by the positive development of the inflation swaps at EUR 42.6 million (EUR 60.2 million) as well as of the ModCo derivatives at EUR 36.8 million (-EUR 1.9 million). Investment income from assets under own management rose to EUR 356.9 million (EUR 316.1 million) as at 31 March 2012, corresponding to an annualised average return of around 5%. Including interest on funds withheld and contract deposits, Hannover Re generated net investment income of EUR 440.6 million (EUR 392.0 million).
Shareholders’ equity reaches new record high
Hannover Re’s equity base was further strengthened. Shareholders’ equity increased by EUR 390.0 million relative to the level as at 31 December 2011 to stand at EUR 5.4 billion (EUR 5.0 billion). The total policyholders’ surplus (including non-controlling interests and hybrid capital) grew by 5.0% to EUR 7.7 billion (EUR 7.3 billion). The book value per share amounted to EUR 44.45 (EUR 41.22). The annualised return on equity reached 20.2% (4.7%).
Outlook
In light of the attractive market opportunities in non-life and life/health reinsurance, Hannover Re anticipates a good 2012 financial year. With this in mind, gross premium should show growth of 5% to 7%.
Market conditions in non-life reinsurance are highly advantageous. The favourable outcome of the 1 January treaty renewals was reinforced by the 1 April renewals and in some areas even surpassed. Particularly in Japan, the rate increases – following on from the rises in the previous year – were again appreciable. Korea similarly saw substantial rate increases. US catastrophe business was also notable for rate rises, which were particularly sizeable for programmes that had been impacted by the series of tornadoes.
Hannover Re also expects the upcoming renewal rounds within the year to pass off favourably overall, with the resulting price increases set to hold firm over the medium term too. For 2012 the company anticipates growth of 5% to 7% in gross premium income from total non-life reinsurance.
The prospects in life and health reinsurance are also very good. In light of attractive business opportunities Hannover Re is looking to grow its gross premium organically by 5% to 7% in the 2012 financial year.
A return on investment of 3.5% is targeted for the asset portfolio in 2012. This is well below the return on investment in the first quarter in view of the fact that the unrealised gains in subsequent quarters cannot be expected to be as positive as in the first quarter.
Based on the good business prospects overall as well as its strategic orientation, Hannover Re is looking forward to a good 2012 financial year. This is conditional on the burden of major losses not significantly exceeding the expected level of EUR 560 million for the full year and assumes that there are no drastic downturns on capital markets.
As for the dividend, Hannover Re continues to aim for a payout ratio in the range of 35% to 40% of its IFRS Group net income after tax.
