Q4 Rescues Hannover Re 2004 Profits from Hurricanes

March 30, 2005

Germany’s Hannover Re Group reported 309.1 million euros ($400 million) net after tax income for 2004, down 12.9 percent from 2003’s 354.8 million euros ($459.8 million). The company’s earnings report, issued March 29, noted: “The unusually high burden of major losses from natural catastrophe events in the third quarter of 2004 prevented Hannover Re from generating a new record result.”

Neither Standard & Poor’s, nor A.M. Best, saw the results as having a potential effect on Hannover Re’s ratings (See following article).

A strong rebound in the fourth quarter helped modify the losses. For the first nine-months of the year Hannover Re’s net after tax profit was a somewhat anemic 191.1 million euros ($247.7 million). It posted a118 million euro ($153 million) Q4 net profit. Operating profits (EBIT) for the year fell 21.1 percent from 732.1 million euros ($948.8 million) in 2003 to 577.6 million euros ($748.57 million) in 2004.

Other highlights cited by the company in its press release included the following:
— Return-on-equity target surpassed again despite hurricanes: 12.5 percent.
— Sharply higher profitability in property and casualty reinsurance: +54.9 percent.
— Combined ratio in property and casualty reinsurance 97.0 percent.
— Profit contribution and EBIT margin in life and health reinsurance with further marked improvement.
— Program business hardest hit by the hurricanes.
— Proposed dividend: + 5.3 percent to 1.00 euro [$1.296].

Wilhelm Zeller, Chairman of the Executive Board, nevertheless expressed considerable satisfaction with the 2004 financial statement at the press briefing on the annual results: “Despite heavy loss expenditure and the protracted weakness of the US dollar we achieved our return-on-equity target of at least 12 percent,” he noted.

The company indicated that “very good rates and conditions,” especially in P/C reinsurance enabled it to “absorb the exceptionally heavy strains associated with the four severe hurricanes and other major loss events in the year under review.” The world’s fourth largest reinsurer also stated that its program business group had been the hardest hit by the natural catastrophes with major losses amounting to 775.4 million euros (app $1 billion) gross and 377.2 million euros ($488.8 million) for net account. “Gross premium income contracted as expected sharply by 15.7 percent to 9.6 billion euros [$12.44 billion],” compared to 11.3 billion euros ($14.64 billion) in 2003. “This decline was in part attributable to exchange rate effects, although our cycle management in property and casualty reinsurance also made itself felt here,” said the bulletin. “At constant exchange rates, especially as regards the US dollar against the euro, the decrease would have been 11.1 percent.” Net premiums fell by a mere 7.1 percent to 7.6 billion euros ($9.84 billion), compared to 8.2 billion euros ($10.63 billion) in 2003 “due to the higher level of retained premiums.”

The bulletin noted: “In property and casualty reinsurance Hannover Re profited to the fullest extent from the sustained favourable market environment: rates and conditions remained on a high level. This was especially true of the longer-tail casualty lines.” Zeller commented: “We are optimising our portfolio as part of our “More from less” initiative and replacing low-margin proportional business with more profitable non-proportional business.”

The report noted that 2004’s “numerous hurricanes and typhoons” combined with the Indian Ocean tsunamis, had made last year “probably the most expensive year for natural disasters in the history of the insurance industry.” It resulted in a “burden of 287.2 million euros [$372.2 million] for property and casualty reinsurance – following just 51.5 million euros [$66.7 million] in 2003. “All in all, the proportion of catastrophe losses relative to net premiums stood at 8.3 percent, a figure many times higher than in the previous year (1.5 percent). Yet the combined ratio of 97.0 percent moved just a single percentage point higher.” Zeller called the figure “exceptionally satisfactory in light of the unusually heavy loss expenditure. It clearly demonstrates that we were able to further enhance the quality of our property and casualty reinsurance business in the year under review.”

Commenting on the outlook for 2005 Zeller noted that January renewals seemed to demonstrate that the market environment remains very favorable, with “hard market ” conditions probably continuing into 2005. “It is our assumption that we have reached the peak of the hard market cycle, although in the current year we anticipate a virtually unchanged attractive market climate”, Zeller emphasized. He noted some “price erosion” in areas that had generated the strongest increases in past years, including for example aviation business. “Provided the burden of major losses does not exceed the multi-year average of around 5 percent of net premiums, we are looking to a very good profit contribution that should again surpass the previous year,” he continued.

The full report and financial statement may be obtained on the company’s Website at: www.hannover-re.com.

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