Forecast

• Profit guidance for the current year of more than EUR 1 billion confirmed
• Considerable strains anticipated in life and health reinsurance in the second half-year owing to treaty recaptures in US mortality business
• Double-digit growth forecast in property and casualty reinsurance with a combined ratio of less than 96%
• Targeted return on investment of at least 2.7% for assets under own management confirmed

Despite the continued challenging general conditions facing the international (re)insurance industry and – especially in Europe – the protracted low level of interest rates, Hannover Re expects to be able to continue operating profitably on a sustained basis even in this environment. For the current financial year we expect to grow gross premium for the Group – based on constant exchange rates – by more than 10%, hence beating the figure of around 5% targeted at the beginning of the year. A large part of the growth in excess of our original expectations derives from property and casualty reinsurance and here especially from contracts in the area of structured reinsurance.

Following the good results in the first six months, we expect growth and earnings figures in property and casualty reinsurance to develop favourably for the full financial year as well. Allowing for loss expectancies, especially in relation to large events, we anticipate a combined ratio of less than 96%. Furthermore, we also expect to beat our target EBIT margin of at least 10%.

Building on the positive outcome of the renewals as at 1 January and 1 April 2018 for our company, we also enjoyed thoroughly successful rounds of renewals on 1 June and 1 July 2018. This is all the more pleasing because market conditions continue to be intensely competitive. This was especially true of the 1 June renewals. When it came to the renegotiation of reinsurance treaties in Florida, which primarily cover natural catastrophe losses from windstorm events and had suffered in some instances considerable losses in the previous year, we maintained our profit-oriented underwriting policy – as a consequence of which our exposure to natural catastrophe risks remained comfortably within our risk appetite, which was unchanged from the previous year. On the other hand, we were able to significantly improve our position with a number of larger accounts, particularly in North America and Europe. The premium volume from the portfolio up for renewal on 1 June and 1 July 2018 consequently grew by 16%.

In life and health reinsurance we expect to incur a substantial strain on our result in the second half of the year due to anticipated treaty recaptures in US mortality business. The reason here is the very poor performance of a large block of business that we acquired at the beginning of 2009 and have already reported on regularly in the past. In the second quarter of 2018 we exercised our right to raise the reinsurance rates for all similar treaties that form part of this business. In this connection the ceding companies have the right to recapture the treaties. Nevertheless, these recaptures will have positive effects in the long run because we thereby avoid future losses that would have occurred without the rate increases.

At this stage we have already been given notice of treaty recaptures that will trigger a pre-tax strain of USD 264 million – notifications that were received after the balance sheet date. It should, however, be assumed that this amount will increase further during the second half of the year. In the unlikely event that all treaties were to be recaptured, the resulting strain could be in the region of USD 500 million to USD 600 million. In this case, the EBIT of around EUR 200 million expected for 2018 in life and health reinsurance would no longer be attainable. On the other hand, the charge to earnings from US mortality business in subsequent years would be extensively eliminated, and we could therefore anticipate a substantial surge in profitability.

For life and health reinsurance excluding US mortality business we expect the favourable development of the first six months to be sustained in the second half of the year, especially in relation to the earnings figures. What is more, we see good opportunities here for further profitable expansion of our portfolio. In the Scandinavian markets, for example, we are recording stronger demand for risk-oriented products and customised financial solutions arrangements. Rising demand for reinsurance solutions in longevity business is also evident. In view of changes in framework conditions we are engaged in promising talks in this area with several Australian business partners, for example.

In life and health reinsurance it is our expectation that gross premium income – adjusted for exchange rate effects – will come in higher than in the previous reporting year. In addition, the value of new business is expected to exceed our target of EUR 220 million.

The expected positive cash flow that we generate from the technical account and our investments should – subject to stable exchange rates and yield levels – lead to further growth in our asset portfolio. In the area of fixed-income securities we continue to emphasise the high quality and diversification of the portfolio. For 2018 we anticipate a return on investment of at least 2.7%.

Bearing in mind the development of business to date, we expect to generate Group net income of more than EUR 1 billion in 2018 despite strains that will be incurred in the second half of the year from our portfolio management actions in connection with our US mortality business. This is subject to the premise that the burden of major losses does not significantly exceed the budgeted level of EUR 825 million and that there are no exceptional distortions on capital markets. It should also be borne in mind that this target will be more difficult to achieve in the event of a very heavy strain from treaty recaptures in US mortality business.

In view of our healthy capital base, we have expanded the target range of our payout ratio for the basic dividend to 35% to 45% of IFRS Group net income. Until recently, the range had been set at 35% to 40%. The reason for this move is that it gives us more scope to increase the basic dividend. In light of capital management considerations we shall, however, also continue to pay special dividends if the comfortable level of capitalisation remains unchanged. Irrespective of the level of strains incurred from the aforementioned treaty recaptures, it is our expectation – based on the information currently available to us – that we shall be able to distribute a total dividend at least on a par with the previous year.