UPDATE: Hannover Re Profit Hit by Lower Investments, Higher Tax

-- Hannover Re posts 13% decline in second-quarter net profit

-- Shares down as investors focus on worse-than-forecast hit from derivatives development

-- No profit guidance due to parent's potential IPO plans; Analyst estimates not denied

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  By Ulrike Dauer 
 

FRANKFURT--Germany's Hannover Re AG (HNR1.XE) Friday reported a 13% decline in net profit for the second quarter, as a lower contribution from investments and a substantially higher tax rate more than offset moderate disaster claims and higher premium volume.

The shares fell in early trade as investors focused on the net and operating profit and the investment-income miss compared with forecasts. This, however, was attributed to a higher-than-forecast EUR79 million fair-value hit from two derivatives--inflation swaps and so-called "modified coinsurance derivatives"--due to changed inflation expectations and widened corporate bond spreads.

At 1030 GMT, the shares were down 1.3%, or EUR2.68, at EUR48.16, off intraday lows, but still underperforming the wider market. The shares have gained 60% over the past year.

The company, which is one of the three biggest reinsurers in the world by gross premium income, still didn't provide full-year net profit guidance, though it reiterated it expects "a good result for the full 2012 financial year," considering "continuing attractive market opportunities" and "the gratifying" net profit after the first six months.

Since the beginning of the year, Hannover Re's 50.2% parent Talanx AG has requested that the reinsurer refrain from giving a net profit forecast ahead of a decision by Talanx as to whether it will conduct an initial public offering of itself later this year.

Chief Financial Officer Roland Vogel, in a conference call, declined to give a concrete profit guidance, but also said he "wouldn't deny analyst estimates of a full-year net profit between EUR700 million and EUR750 million," considering EUR405.3 million reached after the first six months.

He also said if Talanx were ready for an IPO in the first half, "why wouldn't it be similarly ready in the second half if markets stabilize and investor appetite" returns.

A Talanx spokesman said that "we're monitoring the markets," but declined to comment further. Talanx, which will report second-quarter earnings Tuesday, in March mandated JP Morgan Chase and Citigroup Inc. (C) to help with the planned IPO, people close to the matter said. Initially, investment bank Rothschild was appointed to advise on a potential IPO, and Deutsche Bank AG (DB) was named to lead manage it, signaling progress in plans that Talanx has been discussing for more than a decade.

Hannover Re did confirm all its other 2012 earnings targets, saying it aims for a 5%-7% rise in gross premium revenue, a 3.5% return on investments and a dividend payout ratio of 35%-40%.

Net profit fell to EUR144.0 million from EUR166.2 million a year earlier, shy of the EUR157 million average consensus in a Dow Jones Newswires poll. Gross premium revenue was up 16% at EUR3.38 billion, above the forecast EUR3.22 billion.

Quarterly tax rate was 18.1%, up from 2.5% a year ago, when it benefited from a tax-free profit at the Bermuda operations and a tax refund, among others.

Several analysts pointed out that Hannover Re was able to push for higher rate rises than peers in the July contract renewals, where it achieved average 4% rate increases, compared with Munich Re AG's (MUV2.XE) 2%, and the 3% achieved by Swiss Re AG (SREN.VX) and Scor SE (SCR.FR). Mr. Vogel conceded, however, that rate rise have slowed, in line with comments Munich Re made this week when it said that rate hikes are limited to disaster-hit areas, while the overall "hardening of the market" across all sectors shouldn't be expected any more.

Reinsurers have been spared high costs for major disasters, as the few midsize weather events this year are predominantly covered by primary insurers, rather than the big reinsurers, which insurers use as a backstop for higher risks.

In the quarter, Hannover Re's costs for major claims were ERU73.6 million, of which EUR60.6 million went for the earthquakes in Italy in May, and EUR13 million for a fire in Japan. To date, Hannover Re has used up EUR132 million of its EUR560 million 2012 budget for major claims. Last year at this time, reinsurers' annual claims budgets had already been used up after the first quarter.

-Write to Ulrike Dauer at [e-mail]

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