Q3 profit declines; 2008 targets ‘no longer attainable’.
Hannover Re saw a profit decline as at 30 September 2008 due to sharp fall in equity prices and above-average burden of catastrophe losses.
Profit forecast for full 2008 financial year no longer attainable, however, the company believes there remains a good outlook for reinsurance business in 2009.
Hannover Re had made its profit forecast subject to the reservations that capital markets would recover and the burden of catastrophe losses would not significantly exceed the expected level of 10% of net premium in non-life reinsurance. Neither of these conditions has been met in the second half of the year.
The crisis on international capital markets has intensified still further compared to the first half of 2008, inevitably leaving its mark on Hannover Re's investment income. Despite the financial market crisis write-downs on fixed-income securities - which constitute by far the bulk of the asset portfolio - remained relatively modest; nevertheless, Hannover Re has been impacted by the dramatic slump in equity prices.
For the first nine months of 2008 Hannover Re booked write-downs and unrealised losses of around EUR 466 million, roughly EUR360m of which was taken on equities. This contrasted with a net profit of EUR 77 million from realised gains and losses on investments. Net investment income as at 30 September 2008 will therefore come in sharply lower. As of 30 September 2008 8% of Hannover Re's portfolio was invested in equities. The company reduced this exposure significantly in October. Nevertheless, further charges will have to be taken. Assets under own management increased as at 30 September 2008 thanks to a positive cash flow from the technical account and the recovery of the US dollar. The return on investment for the first nine months stood at 2%.
The burden of catastrophe losses also came in higher than anticipated. Hurricanes "Gustav" and "Ike" will cost the company a total amount in the order of EUR 250m; Hannover Re expects the latter to produce an insured market loss in the region of $15 - 20bn. As a consequence of these events and other major claims, the net burden of catastrophe losses as at 30 September 2008 - at around 14% of net premium in non-life reinsurance - is higher than the expected level of 10%.
Despite the strains discussed above Hannover Re will still report a positive operating result (EBIT) for the first nine months of 2008. Since losses on equities are not tax-deductible in Germany, the tax load amounts to more than EUR100m. After interest and minorities Hannover Re will post a negative group result of some EUR140m. This means that the profit target of a return on equity in excess of 15% is no longer attainable.
Looking to further developments on the reinsurance side, the company is cautiously optimistic. It is Hannover Re's expectation that the capital depletion triggered by the financial market crisis - which has also made itself felt in the insurance industry - will prompt a hardening of the markets. This will be reflected in substantially higher rates in a number of lines. The outcome of the 2009 renewal season is therefore expected to be favourable. Hannover Re is very well placed to profit from these developments.
As planned, Hannover Re will publish its figures for the first nine months as well as the outlook for the full 2008 financial year on 5 November 2008.
