Hannover Re Q1 profit rises 23 % as claims costs fall

Hannover, 6 May 2008: Hannover Re expressed satisfaction with its start to the new financial year. "Despite some headwind due to the difficult situation on the global capital markets, our quarterly result puts in place a good foundation for achieving our defined 2008 profit target - namely a return on equity in excess of 15 percent after taxes", Chief Executive Officer Wilhelm Zeller affirmed.

The operating profit (EBIT) as at 31 March 2008 improved on the corresponding period of the previous year by 59.3% to reach 245.6 million euro (154.2 million euro). Group net income climbed 22.6% to 151.5 million euro (123.5 million euro), equivalent to earnings of 1.26 euro (1.02 euro) a share.

The gross written premium booked by the Hannover Re Group contracted as anticipated by 5.5% as at 31 March 2008 to 2.3 billion euro (2.4 billion euro). The decrease was attributable principally to the weakness of the US dollar. At constant exchange rates the premium volume would have remained virtually unchanged. The level of retained premium increased to 88.7% (84.9%) as a consequence of significant savings on the cost of the companys own protection covers, and net premium therefore fell by a mere 3.3% to 1.7 billion euro (1.7 billion euro).

The development of non-life reinsurance gave Hannover Re grounds for satisfaction. "Although many markets are exhibiting unmistakable softening tendencies, we nevertheless obtained prices and conditions largely commensurate with the risks in the 1 January renewals", Mr. Zeller explained. In light of the softening markets the cycle management practised by Hannover Re for many years is taking on growing importance. In areas that offered attractive opportunities, such as worldwide credit and surety reinsurance and German business, Hannover Re enlarged its market share. Participations in particularly cyclical markets such as North America, on the other hand, were scaled back. Instead, the focus is on profitable market and product niches, including for example Central and Eastern Europe as well as reinsurance transacted according to Islamic principles - a segment that has generated pleasing growth to date. Hannover Re also expanded its facultative reinsurance portfolio, principally in the casualty lines.

Gross premium in non-life reinsurance contracted by 9.5% as at 31 March 2008 relative to the comparative period of the previous year to stand at 1.5 billion euro (1.7 billion euro). At constant exchange rates, especially against the US dollar, the decrease would have been only 4.2%. The level of retained premium increased from 83.8% to 88.6% as a consequence of significant savings on the cost of the companys own protection covers. Net premium earned fell by 8.8% to 1.0 billion euro (1.1 billion euro).

The incidence of major losses was below average in the first quarter: the largest single loss event was the European winter storm "Emma" with a net strain of 26.3 million euro. Along with two other natural catastrophe losses a number of fire claims and one marine loss were recorded, although the burden for Hannover Re from these loss events was relatively moderate. Total net expenditure on major losses amounted to 68.1 million euro. This figure is equivalent to 6.8% of net premium and was thus below the expected level of 10%. The combined ratio came in at 99.5% (105.5%).

The underwriting result improved on the comparative quarter of the previous year, which had been impacted by the heavy catastrophe loss expenditure attributable to winter storm "Kyrill", from -66.2 million euro to -3.3 million euro. The operating profit (EBIT) in non-life reinsurance surged sharply by 94.5% to 181.5 million euro (93.3 million euro). Group net income increased by 11.3% to 113.5 million euro (102.0 million euro), producing earnings of 94 cents (85 cents) a share.

Hannover Re was also highly satisfied with the performance of the life and health reinsurance business group. Although premium growth was relatively moderate owing to special effects in the same quarter of the previous year as well as adverse movements in exchange rates, the dynamic pace of growth is likely to be sustained in the course of the financial year. Hannover Re, which operates in this business group under the Hannover Life Re brand, transacts its business on the basis of a five-pillar model. "With this positioning we can assure ourselves of a promising portfolio and sustained organic growth going forward", Mr. Zeller emphasised. In the first quarter the company succeeded in closing its largest transaction to date - a so-called block assumption transaction for US individual life business. In the United Kingdom - the second-largest life reinsurance market in the world - the company is positioned as a specialty provider for enhanced annuities. In this area, as in the reinsurance of pension funds, the company continues to see good business prospects.

Another special focus of Hannover Life Re is on the Asian markets: "In China we expect to commence business operations by the end of May through our newly established Shanghai branch. This will enable us to tap into the advantages enjoyed by a local reinsurer in the vigorously expanding Chinese market", Mr. Zeller noted. In South Korea, Asias largest life reinsurance market, the company had already been granted a provisional business licence back in December 2007; by the middle of 2008 - if everything goes according to plan - it should also be possible to commence business activities through the newly established branch office in Seoul.

Gross written premium in life and health reinsurance climbed by 3.5% as at 31 March 2008 to 770.1 million euro (744.1 million euro); at constant exchange rates growth would have reached 10.0%. The level of retained premium rose from 87.4% to 88.6%. Net premium earned grew by 5.8% to 681.8 million euro (644.2 million euro).

The operating profit (EBIT) totalled 47.9 million euro (51.8 million euro). Whilst this figure was lower than in the comparative period of the previous year, the first quarter of 2007 had been influenced by a positive special effect in excess of 14 million euro. The claims experience for both mortality and morbidity risks in the first quarter was most gratifying at all operating units of the life and health reinsurance business group. The EBIT margin of 7.0% was within the target corridor of 6.5% to 7.5%. Group net income was boosted by 13.0% to 38.3 million euro (33.9 million euro); equivalent to earnings of 32 cents (28 cents) a share, this constitutes a good basis for achieving the targets for the full financial year.

As in the previous year, Hannover Re is also reporting on the European Embedded Value in the context of its first interim report. This consists of a valuation of the life and health reinsurance portfolio as well as of the allocated capital and hence provides a good opportunity to assess its long-term profitability. For the 2007 financial year the EEV for life and health reinsurance was for the first time calculated entirely on the basis of market-consistent assumptions. The Market Consistent Embedded Value determined for the life and health reinsurance portfolio increased by 12.3% to 1.7 billion euro (1.5 billion euro). The Value of New Business improved from 64.2 million euro to 106.4 million euro. The Operating Embedded Value Earnings from both new and in-force business surged by a pleasing 50.9% to 280.0 million euro (185.6 million euro).

Hannover Re was very largely satisfied with the development of its investments, although the protracted turmoil on capital markets of course had repercussions for the portfolio. The continuing slide in the US dollar caused the assets under own management to contract relative to the level of 31 December 2007 to 19.0 billion euro (19.8 billion euro). Ordinary income excluding interest on deposits grew by 6.5% to 211.3 million euro (198.3 million euro). This is attributable to the slightly higher average yield in the portfolios as well as to the marginally increased average portfolio relative to the corresponding quarter of the previous year.

As part of its proactive approach to portfolio management the company used the market upheavals in January and February primarily as an opportunity for tactical shortening of durations in its USD portfolios: in this context profits of 133.8 million euro (40.2 million euro) were realised on the disposal of investments, as against realised losses of 26.1 million euro (11.5 million euro). In view of the difficult situation on capital markets write-downs of 85.6 million euro were taken on securities, thereof 65.1 million euro on equities. Net income from assets under own management decreased slightly by 1.6% to 208.0 million euro (211.5 million euro). This effect was, however, offset by a 16.8% increase in income from interest on deposits, as a consequence of which net income from total investments improved on the same period of the previous year by 1.7% to 262.6 million euro (258.2 million euro).

Outlook

In view of its strategic orientation and the available market opportunities in non-life and especially life/health reinsurance, Hannover Re anticipates another good result in 2008.

Both the gross and net premium should come in on a par with the previous year.

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