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Hannover ups forecast following 3Qs; shares fall

German reinsurer Hannover Re reported a “gratifying” third quarter result in which the group posted net income of EUR123.5mn.

But shares in the company fell more than 2 percent to EUR33.22 on the day (14 November) with investors disappointed about the full-year profit forecast that was upped by a relatively modest EUR30mn to EUR480mn.

Hannover Re was the latest reinsurer to benefit from the low claims environment that has seen industry players post strong quarterly earnings and also increase their full year outlooks.

Nonetheless, at EUR380.1mn, the group’s net income is up over 500 percent from the EUR61.9mn Hannover reported in the prior-year period.

“With our interim result we have put in place a strong platform for revising upwards and framing in more concrete terms our originally envisaged profit target for the full financial year - namely a return on equity of at least 15 percent. Against this backdrop we now anticipate a return on equity comfortably in excess of 15 percent and group net income of around EUR480mn or earnings of roughly EUR4 a share,” explained Hannover CEO Wilhelm Zeller.

The group’s return on equity was 18.3 percent after tax for the third quarter and 18.6 percent for the first nine months of 2006.

The company’s gross written premiums were down 4.1 percent for the quarter at EUR2.4bn and up 4.3 percent for the year to 30 September at EUR7.65bn. Net premiums earned were down 0.8 percent to EUR1.9bn during the third quarter and up 6.4 year for the year at EUR5.95bn.

“All underwriting business groups lived up to or indeed surpassed our expectations and delivered a healthy profit contribution,” added Zeller.

The company said that major losses in property and casualty reinsurance were only 3.1 percent of net premium, which underpinned a quarterly net income of EUR100.6mn, against a loss of EUR160.7mn last year. For the year so far the property and casualty reinsurance segment reported growth of almost 700 percent from EUR33.7mn in 2005 to EUR268.1mn.

However analyst William Hawkins of Keefe, Bruyette & Woods was bearish on the property and casualty division’s result.

He said: “The 97.2 percent 3Q06 combined ratio is slightly lower than expectations and there is a negligible impact from large losses (EUR12.1mn or 1.2 percentage points). We are not surprised that Hannover Re has not changed its much discussed policy of booking its normalised 8 percent catastrophe loading in spite of actual loss experience; however, we expect this to be a further focus of attention today (‘what are you doing with the profits?’)”.

Hawkins continued by pointing to the contributions from investments: “The main driver of the beat in non-life is actually the investment return, which at EUR210mn in 3Q06 is well ahead of our EUR123mn expectation and the run-rate implied by the EUR241mn return in 1H06. We believe that this is attributable to higher-than-expected unrealised capital gains”.

Hawkins was more upbeat about the group’s life reinsurance segment, adding: “EUR30mn of operating profit was in line with expectations and the 6.4 percent margin in 9M06 makes the 5 percent target for the full year look undemanding”.

Hawkins concluded: “We view these results as in line, with raised guidance that should not come as too much of a surprise to close Hannover Re-watchers.”

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