Hannover Rueck SE : Annual Report 2013: Hannover Re achieves new record result

• Group net income up 5.4% to EUR 895.5 million (EUR 849.6 million)
• Dividend proposal for 2013: EUR 3.00 per share
• Return on equity: 15.0% (15.4%)
• Non-life reinsurance delivers excellent profit contribution
• Combined ratio: 94.9% (95.8%)
• Currency-adjusted growth in gross premium: + 4.2%
• Major loss expenditure of EUR 577.6 million below the major loss budget

Hannover, 11 March 2014:

Hannover Re comfortably surpassed its year-end profit target for 2013 and posted a new record result of EUR 895.5 million. "This performance was driven by a very good underwriting result in non-life reinsurance, which improved again on the previous year by EUR 63 million. Group net income additionally benefited from a positive tax effect", Chief Executive Officer Ulrich Wallin explained. It is envisaged that Hannover Re's shareholders will also share in this success. The Executive Board and Supervisory Board will therefore propose to the Annual General Meeting that a dividend of EUR 3.00 per share should be paid; this is equivalent to a payout ratio of 40% relative to IFRS Group net income.

Having averaged a double-digit percentage increase in its gross premium since 2009, Hannover Re generated growth of 1.4% in total business for the year under review. Gross written premium climbed to EUR 14.0 billion (EUR 13.8 billion); currency-adjusted growth stood at 4.2%. The level of retained premium was slightly lower at 89.0% (89.8%). Net premium earned remained virtually unchanged at EUR 12.2 billion (EUR 12.3 billion); at constant exchange rates growth would have come in at 2.3%.

The operating profit (EBIT) of the Hannover Re Group decreased to EUR 1,229.1 million (EUR 1,393.9 million). Despite the very good result achieved in non-life reinsurance, the elimination of positive special effects recorded in the previous year from movements in the fair values of so-called ModCo derivatives as well as other negative impacts relating to the inflation swaps made themselves felt here in an amount of altogether EUR 113.4 million. Life and health reinsurance fell short of expectations in the year under review. Group net income nevertheless increased by a pleasing 5.4% to EUR 895.5 million (EUR 849.6 million). The very good performance was assisted by a tax effect of around EUR 90 million resulting from the release of provisions for deferred taxes. Earnings per share rose to EUR 7.43 (EUR 7.04).

In non-life reinsurance competition intensified clearly in the year under review, prompting sizeable rate reductions in some areas. Hannover Re responded by maintaining a highly disciplined focus on business that satisfied its margin requirements. The gross premium volume in non-life reinsurance thus grew by 1.3% - or 3.5% on a currency-adjusted basis - to EUR 7.8 billion (EUR 7.7 billion), an increase within the expected range of 3% to 5%. The retention contracted to 89.9% (90.2%). Net premium earned was slightly higher at EUR 6.9 billion (EUR 6.9 billion); it would have grown by 2.3% at constant exchange rates.

While the major loss expenditure incurred by Hannover Re in the year under review was lower than anticipated, especially Germany and Canada were impacted disproportionately heavily by losses from natural catastrophes. Hailstorm Andreas was the most expensive event for the insurance industry worldwide and also for Hannover Re, with a net cost of EUR 99.3 million. The floods in Germany and other European countries left their mark to the tune of EUR 92.5 million. These and other major losses resulted in total net expenditure for Hannover Re of EUR 577.6 million (EUR 477.8 million).

At 94.9% (95.8%), the combined ratio improved again on the previous year. This pleasing trend was further supported by the merely partial utilisation of the major loss budget totalling EUR 625 million. Given that the underwriting result recorded another significant increase to EUR 335.5 million (EUR 272.2 million), the operating profit (EBIT) of EUR 1,061.0 million (EUR 1,091.4 million) came in on a par with the previous year despite the decline in investment income. Aside from lower ordinary income, the fall in investment income can be attributed to reduced gains on disposals and a loss on the inflation swaps. This contrasted, however, with an inflation-driven decrease in loss expenditure. Group net income surged by an appreciable 17.8% to EUR 807.7 million (EUR 685.6 million), thereby also reaching an all-time high. Earnings per share stood at EUR 6.70 (EUR 5.68).

Hannover Re booked continued growth in life and health reinsurance, albeit at a less vigorous pace than in previous years. Gross premium increased by a modest 1.4% to EUR 6.1 billion (EUR 6.1 billion). Adjusted for exchange rate effects, growth would have come in at 5.1%. Net premium earned contracted by 1.2% to EUR 5.4 billion (EUR 5.4 billion); growth of 2.4% would have been posted on a currency-adjusted basis.

In terms of results, however, life and health reinsurance did not live up to expectations. This was chiefly a reflection of substantial strengthening of the reserves for Australian disability business. The business in question involves individual disability covers in respect of which the risk experience has deteriorated considerably industry-wide. The total strain on the operating result (EBIT) was in the order of EUR 100 million. A further factor was the absence of positive profit effects from the ModCo derivatives, which in the previous year had amounted to more than EUR 40 million. Against this backdrop the operating result (EBIT) in life and health reinsurance contracted sharply by 46.1% to EUR 150.5 million (EUR 279.0 million). Due to tax income associated with losses in the aforementioned Australian business, Group net income declined by a less appreciable 26.2% to EUR 164.2 million (EUR 222.5 million). Earnings per share amounted to EUR 1.36 (EUR 1.84).

Hannover Re is satisfied with the development of its investments in the face of a market environment that was by no means straightforward: the return on investment for assets under own management (excluding ModCo derivatives and inflation swaps) amounted to 3.4% and thus reached the targeted level. The portfolio of assets under own management was stable at EUR 31.9 billion.

Ordinary investment income excluding income from funds withheld showed a pleasing development despite the persistently low level of interest rates; amounting to EUR 1,041.3 million (EUR 1,088.4 million), it decreased only marginally. Realised gains contracted to EUR 144.2 million (EUR 227.5 million), a reflection of the fact that in the comparable period Hannover Re had acted on opportunities in the real estate sector. Investment income was also adversely affected by the performance of the ModCo derivatives and the inflation swaps. Write-downs of just EUR 19.4 million (EUR 21.7 million) had to be taken. Income from assets under own management contracted to EUR 1,054.5 million (EUR 1,300.2 million) as at 31 December 2013. Income from funds withheld was stable at EUR 357.3 million (EUR 355.5 million). Including income from funds withheld, net investment income closed at EUR 1,411.8 million, as against EUR 1,655.7 million in the previous year.

Shareholders' equity showed a broadly stable development. It amounted to EUR 5.9 billion (EUR 6.0 billion) as at 31 December 2013. The total policyholders' surplus (including non-controlling interests and hybrid capital) stands at EUR 8.8 billion (EUR 8.9 billion). The book value per share amounted to EUR 48.83 (EUR 50.02). The return on equity reached 15.0% (15.4%) and thus comfortably surpassed the minimum target of 9.8%.

"In view of the prolonged period of low interest rates and increasing competition, especially in non-life reinsurance, the general environment remains challenging", Mr. Wallin emphasised. "Thanks to our low cost of capital and administrative expenses, we nevertheless enjoy a tangible competitive advantage that will enable us to generate consistent results even in a softening market."

For the 2014 financial year Hannover Re anticipates - based on constant exchange rates - stable to slightly higher gross premium income. In non-life reinsurance the company is looking to book a broadly stable volume in view of its selective, profit-oriented underwriting policy; in life and health reinsurance an increase in the low to mid-single digit percentage range is expected.

The company is aiming for a return on investment of 3.2%. Assuming that major loss expenditure does not significantly exceed the anticipated level of EUR 670 million and provided there are no unexpectedly adverse movements on capital markets, it remains Hannover Re's assumption that Group net income for the 2014 financial year will be in the order of EUR 850 million.

For the current financial year Hannover Re is targeting a dividend payout ratio in the range of 35% to 40% of its post-tax IFRS Group net income.