Hannover, 8 December 2004
With an increase of 20.0 % in the operating profit (EBIT - earnings before interest and taxes) to an expected € 990 million the Talanx Group is again set to comfortably surpass the record result of the previous year. In addition to the favorable development of the Group segments Reinsurance, Life Primary Insurance and Financial Services, the income from the Secondary Public Offering (SPO) of Hannover Re stock in February 2004 played a part in the level of the result. Under this SPO Talanx AG reduced its stake in Hannover Re from 71.8 % to 51.2 %. The most notable adverse impact on the result derived from the claims experience in the Property/Casualty Primary Insurance segment. The unusually high frequency of severe hurricanes in the southern United States had a considerable effect on profitability in this segment. The total net burden before tax from these loss events amounted to roughly € 300 million. Talanx CEO Wolf-Dieter Baumgartl commented: "In 2004 Talanx impressively demonstrated its strong earnings power: if we leave aside the extraordinary income from the Hannover Re SPO, Talanx achieved a result on a par with the previous year despite hurricane losses of € 300 million. And last year's result was already a record." The Group's overall net return on premium will climb to 9.3 (7.9) %.
Projected year-end closing for 2004
Talanx Group overall
The Group's projected annual financial statements for 2004 published today are comprised of estimated rather than final figures. Group reporting is in compliance with US GAAP. The consolidated financial statements will be published in June 2005. The present figures are based on an assumed average US dollar exchange rate of 1.23 euros for the full financial year.
The Group's consolidated gross premium income is expected to be slightly lower than in the previous year at € 14.4 (14.8) billion. This decline of 2.7 % is attributable to two factors: first and foremost, it reflects strategic decisions taken in reinsurance business, including for example the "more from less" initiative, a selective underwriting policy geared to enhancing profitability. Secondly, the continuing downward slide of the US dollar again played a role in the reduced premium volume: at constant US dollar exchange rates year-on-year consolidated gross premiums wold have been slightly higher in 2004. On the other hand, the initial consolidation of Neue Leben, which was acquired in the course of this year, had a favorable effect on premium income.
Net premiums earned will be 2.0 % higher than in 2003 at € 10.6 (10.4) billion. This is due in part to the increase in the level of retained premiums - most notably at HDI Industrie, HDI Privat and Hannover Re. A higher retention in hard market phases reflects the Group's cyclically oriented underwriting policy.
The net investment income of € 1.8 (1.4) billion will surpass the previous year's figure by 31.2 %, influenced in large measure by the SPO of Hannover Re stock. The ordinary income of the Talanx Group will grow by 17.3 %, with the initial consolidation of Neue Leben a major factor here. Had it not been for this effect and excluding the influence of interest on deposits in financial reinsurance, the increase would have been 4.4 %. The investment expenses of € 158 (261) million are almost 40 % lower than in the previous year due to reduced write-downs and losses on disposals. The volume of assets will grow by 38.8 % to € 30.2 (21.8) billion. Without the effect of the initial consolidation of Neue Leben the asset portfolio would have grown by 13.5 %.
The total insurance portfolio of the Talanx Group is set to surpass 10 million policies for the first time. The number of policies has climbed by 10.4 % to 11.3 million. Even without the addition of Neue Leben the Group would have comfortably exceeded the 10 million mark by almost 600,000 policies.
The successful economic development of the Talanx Group again made possible the creation of new jobs in 2004 - for the tenth year in succession. The number of staff will grow by 506 as at year-end to 9,031, a rise of 5.9 %. The increase would have been 2.9 % without the Neue Leben Group, with almost all the jobs being created in Germany.
Property/Casualty Primary Insurance
Total premium income in the Property/Casualty Primary Insurance segment recorded modest growth of 0.9 % to reach € 5,659 (5,611) million. This was based on varying, sometimes opposing developments at the individual companies. The foreign companies grouped together under HDI International Holding AG (HINT) achieved pleasing growth (+9.2 %). The companies in Italy and Poland generated the strongest growth rates. The recently acquired company Tryg Polska is not reflected in the figures presented here since it will not be consolidated until next year. Following growth of almost 30 % in the previous year HDI Industrie AG can anticipate a further increase in 2004. After factoring out the effect of the branches in France, the Czech Republic and Switzerland that were transferred from HDI V.a.G. in 2004, premium income is set to rise by 5.4 %. The premium volume booked by the Clarendon Insurance Group will contract by 8.7 % owing to a more restrictive underwriting policy and the fall in the US dollar.
The underwriting result will deteriorate sharply to -€ 14 (128) million, largely due to the heavy impact of the windstorm losses in the southern United States on Clarendon. This will also have implications for the operating profit (EBIT), which at € 154 (409) million is substantially lower than in the previous year. The combined ratio for the segment has been similarly affected by this development, rising to 100.6 (93.7) %.
Life Primary Insurance
Premium income in the Life Primary Insurance segment will be 72.7 % higher than in 2003 at € 1.8 (1.0) billion. Talanx thus ranks among the ten largest life insurance groups in Germany. The increase is in large measure attributable to the initial consolidation of the Neue Leben Group. Without this acquisition premium income for 2004 would amount to € 1.1 billion. The organic growth of 7.1 % is thus also well above the growth rate for the entire German life insurance industry, which in 2004 is expected to stand at 3.5 %.
The primary driver of growth in the Talanx segment of Life Primary Insurance is the bancassurance sector: CiV Lebensversicherung has boosted its premium income by 9.3 % and PB Lebensversicherung by as much as 30 %. HDI Pensionskasse can also point to significant growth.
New business is experiencing a particularly vigorous surge associated with the year-end rally. The segment as a whole expects the total premium from new business taken up to increase by 48.3 % for the full financial year. The impact of the year-end rally on premium income will mainly be felt in 2005. The number of new policies taken out in Germany is set to rise by 52.0 % to 644,000 (423,000).
The domestic companies operating in the segment have enlarged the overall in-force portfolio by 26.0 % to 3.5 million policies; without Neue Leben the German portfolio would have grown by 3.2 %. The segment's in-force portfolio in domestic and foreign business combined will expand by 27.5 % to 3.8 million policies.
Net investment income - also heavily influenced by the addition of Neue Leben - will virtually triple to € 415 (147) million, while the operating profit (EBIT) is expected to grow by 8.6 % to € 49 (45) million.
Property/Casualty Reinsurance
Premium income in the Property/Casualty Reinsurance segment will contract to € 6,191 (7,464) million, a decline of 17.1% compared to 2003. The restrictive, opportunistic underwriting policy geared purely to profitability has resulted in a reduced premium volume. Further factors here are the reorganization of reinsurance relationships within the Group, the continuing emphasis on lower-volume non-proportional business and the progressive weakening of the US dollar (exchange-rate effect of approximately -3.2 percentage points).
On the claims side, the segment was dominated by the hurricanes in the USA and typhoons in Asia. Due to the further improvement in the quality of routine business, however, the combined ratio for the segment - including interest on deposits in financial reinsurance - is nevertheless expected to decrease to 95.4 (97.1) % in 2004. The operating profit (EBIT) will grow by 7.7 % to € 611 (567) million.
Life/Health Reinsurance
The result of the Life/Health Reinsurance segment developed highly favorably in the 2004 financial year. Premiums in the segment will contract by 12.2 % compared to 2003, primarily on account of two factors: the weakness of the US dollar (with an influence of roughly -2.1 percentage points) and the discontinuation of a major treaty. Net premiums earned will decline by a less marked 5.8 % owing to the increased level of retained premiums. However, thanks to sharply higher net investment income the operating profit (EBIT) of € 86 (71) million will surpass the previous year's figure by 22.3 %, causing the net return on premium to rise from 3.5 % to 4.6 %.
Financial Services
Financial Services, the Group's smallest segment, will close the year with some notable successes. The Ampega companies active in this segment perform asset management tasks and supplementary services for the Talanx Group and also operate as investment companies for institutional and retail customers. The product portfolio encompasses specialty funds and retail funds together with financial portfolio management activities for institutional clients. The most notable feature of 2004 was the marketing of a competitive product portfolio for institutional third-party clients. In this area Ampega was able to assume all asset management functions for two health insurance companies, an insurance group and a legal protection insurer - with a total volume in the order of € 1.2 billion.
On the results side, too, the segment enjoyed a very good year in 2004: earnings will be boosted by 51.5 % to € 48 (32) million; the operating profit will more than double from € 9 to 22 million.
Outlook for 2005
In 2005 the Group will continue to pursue its profit-oriented underwriting policy in all segments. Talanx expects the underwriting result, in particular, to show improved profitability.
The planned figures for 2005 are based on a dollar exchange rate of 1.30 euros. For the 2005 financial year the Talanx Group anticipates a gross premium volume of € 14.5 billion, corresponding to growth of 0.7 %. Net premiums earned are expected to increase by 6.3 %.
Growth of 1.3 % in gross premium income is planned in the Property/Casualty Primary Insurance segment. The Group envisages the strongest growth at the foreign companies in Spain, Italy, Austria and Brazil. The segment anticipates improvements in the operating profit (EBIT), combined ratio and net return on premium.
The Life Primary Insurance segment is targeting premium growth of 8.5 % in 2005. The development of business with occupational pension schemes will be crucial to the success of the segment. Talanx also looks to the area of disability products with optimism. The segment plans a further rise in the operating profit (EBIT) for 2005.
Overall, the Property/Casualty Reinsurance segment anticipates sustained attractive market conditions in 2005. Natural catastrophe business is likely to have a positive effect on premium income in 2005, since pressure on rates will ease as a consequence of the recent windstorm losses. In other subsegments, however, rates may show the first signs of softening. While premiums in traditional property/casualty reinsurance business are likely to remain virtually unchanged year-on-year in 2005, they are expected to decline in financial reinsurance. All in all, gross premium volume in the segment will probably contract by 9.1 %. The Property/Casualty Reinsurance segment plans an increase of 6.4 % in the EBIT. Improvements are also anticipated in the combined ratio and net return on premium.
The Life/Health Reinsurance plans substantial premium growth of 8.9 %. The segment is targeting a modestly improved EBIT.
The development of the Financial Services segment is shaped, on the one hand, by the further expansion of the Talanx Group and, on the other, by the increasing volume of business with third-party institutional clients. The company is therefore planning to establish itself as a comprehensive service provider specializing in asset management for insurers and intends to press ahead with the acquisition of outsourcing mandates.
Ampega is positioning itself in institutional business by entering the market with its own "absolute return" products as well as selected products from Putnam Investments. In the retail sector it plans to strengthen the sales network and expand its market shares in business with unit-linked life insurance products.
In the coming year Ampega will set up and manage hedge funds intended purely for the asset portfolios of the Talanx Group. A further increase of 31.8 % to € 29 (22) million is planned for the EBIT in this segment.
Provided there are no exceptional loss events or unusual movements on capital markets, the operating profit of the Talanx Group will record another substantial increase in 2005: despite the extraordinary income reported in 2004, the operating profit (EBIT) is targeted to grow by 9.6 % to € 1.1 billion, thereby surpassing one billion euros for the first time.