Capital market and exchange rate movements dampen profitability
Hannover Re’s profit and income took a tumble in the first half of 2008, according to results released by the company. However, executives at the company said they were pleased with the development of underwriting business – in both non-life and life/health reinsurance.
"The protracted difficult climate on international capital markets and the restraining effects of exchange rate movements have left an appreciable mark on our company too. It cannot, therefore, come as any surprise that our interim result is not insignificantly lower than in the corresponding period of the previous year", chief executive officer Wilhelm Zeller said.
The operating profit (EBIT) as at 30 June 2008 contracted by 14.4% year-on-year to 400.2m euro (467.7m euro). Had it not been for the write-downs necessitated by turmoil on the capital markets the operating profit would have grown by 13.4% from 468.0m euro to 530.5m euro. Thanks to its conservative investment policy Hannover Re was again spared significant write-downs on fixed-income securities or subprime exposures in the second quarter. Group net income nevertheless declined by 13.9% to 252.2m euro (293.0m euro), equivalent to earnings of 2.09 euro (2.43 euro) a share; the annualised return on equity amounted to 16.4% (19.9%).
On account of the withdrawal from specialty business and the slide in the value of foreign currencies, especially the US dollar and pound sterling, the gross written premium booked by the Hannover Re Group contracted by 7.7% to 4.1bn euro (4.5bn euro). At constant exchange rates the premium volume would have declined by only 2.2%. The level of retained premium increased to 89.5% (85.8%) as a consequence of appreciable savings on the costs of the company's own protection covers as well as reduced proportional cessions; net premium earned fell by 7.8% to 3.4bn euro (3.7bn euro).
The development of non-life reinsurance was described as “highly satisfactory” for Hannover Re. Although some key markets are already seeing softening tendencies, conditions are still broadly acceptable and prices are for the most part commensurate with the risks. "Guided by our profit-oriented underwriting policy, we focus on those segments that promise the greatest profitability and are further extending our already very good diversification – in terms of both regions and lines – through targeted underwriting," Zeller said.
In areas that offer attractive business opportunities – such as worldwide credit and surety reinsurance or German business – Hannover Re enlarged its market share. Furthermore, the company participates in profitable market and product niches, including for example Central and Eastern Europe as well as reinsurance in conformity with Islamic principles; the latter business is successfully transacted by the Bahrain-based subsidiary Hannover ReTakaful. In Latin America, too, Hannover Re now has a local representative office: "In Brazil, the largest insurance market on the South American continent, we have been licensed as an ‘admitted reinsurer’ since July. This ensures that we have more direct access to clients and puts in place an optimal platform for participating in the emerging Brazilian market," Zeller said.
The underwriting result improved on the corresponding period of the previous year, which had been particularly hard hit by the heavy catastrophe losses associated with winter storm "Kyrill"; it moved back into positive territory from -56.1m euro to 23.6m euro. The operating profit (EBIT) in non-life reinsurance slipped by 10.3% to 288.2m euro (321.5m euro), a reflection of sharply lower investment income. Group net income fell by 18.9% to 195.7m euro (241.4m euro), producing earnings of 1.62 euro (2.00 euro) a share.
The development of Hannover Re's investments as at 30 June 2008 was overshadowed by the protracted upheavals on international capital markets – especially the sharp rise in Eurozone interest rates, the increase in risk premiums on corporate bonds and the significant drop in share prices. In light of the above, and exacerbated by the further downward slide of the US dollar, the portfolio of assets under own management – excluding interest on deposits – contracted to 18.7bn euro (19.8bn euro). The marked rise in interest rates led to substantial unrealised losses in the Group's asset portfolio. In the case of the available-for-sale portfolio of fixed-income securities they totalled 315.4m euro (103.4m euro) as at the end of the reporting period. Unrealised losses on equities amounted to 101.6m euro; this contrasted with unrealised gains of 191.0m euro as at 31 December 2007.