3rd UPDATE: Hannover Re Profit Hit By Claims, Beat Forecasts

Hannover Re AG (HNR1.XE), one of the world's five largest reinsurers, Tuesday reported a 31% decline in first-quarter net profit because of high claims for damage caused by storms, earthquakes and other natural disasters.

Nonetheless, the company said it is still on track to reach its full-year target of an after-tax return on equity of 15%, equivalent to a net profit of around EUR600 million, despite the higher-than-budgeted claims in the first quarter.

Chief Financial Officer Roland Vogel reiterated other 2010 targets, such as a 3.5% return on investment, a dividend payout ratio of 35% to 40% of net profit, and a dividend of around EUR2 a share. Vogel said earnings before interest and tax of around EUR1 billion are still within reach for 2010.

Commerzbank upgraded Hannover Re to add from hold and raised its target price to EUR38 from EUR36 following strong data that were well ahead of consensus and "make us feel more comfortable regarding our 2010 estimates," analyst Roland Pfaender said.

Landesbank Baden-Wuerttemberg analyst Robert Mazzuoli, who rates the share at buy, called the results a "positive surprise." First-quarter earnings were better than forecast, mainly due to high prior-year reserve releases and more resilient than forecast investment income, he said.

First-quarter net profit fell to EUR157.2 million from EUR228.6 million in the same quarter a year ago, substantially beating a EUR98 million average forecast in a Dow Jones Newswires poll of 11 analysts.

"Although the burden of major losses in this quarter was higher than our expected level, the achieved result puts in place a good platform for attaining our 2010 profit target--namely a return on equity of at least 15% after tax," said Chief Executive Officer Ulrich Wallin.

The profit target is not at risk provided claims costs in coming quarters remain within the 2010 budget for large claims, Hannover Re said.

According to Hannover Re's estimates, its total bill for earthquakes in Haiti and Chile, European winter storm Xynthia, a hailstorm in Australia and a storm in Mexico amounted to EUR264.4 million in the first quarter, more than half its EUR500 million budget for large disaster claims over the full year. Including the sunken oil rig in the Gulf of Mexico, which will cost up to EUR40 million, and an earthquake in Mexico, the year-to-date bill was slightly above EUR300 million.

Despite the high claims burden, Hannover Re reported a combined ratio of 99.3% for the quarter, which means the insurer was profitable in its core underwriting business excluding investment income. This was helped by so-called run-off profits from reserves accumulated for prior years that weren't needed and could be used to smooth out the quarter's high claims bill. CFO Vogel told analysts the reinsurer released EUR140 million from such prior-year reserves in the first quarter, which lowered the combined ratio by some 11 percentage points. Analysts Pfaender and Mazzuoli had estimated the reserve releases between EUR100 million and EUR130 million.

Net investment income rose 41% to EUR279.5 million, helped by growth in assets under management, lower write-downs and narrowing credit spreads for corporate bonds, Hannover Re said.

First-quarter gross premiums rose 7% to EUR2.85 billion from EUR2.66 billion a year ago, slightly above the EUR2.83 billion analyst consensus.

Hannover Re competes with peers like Munich Re AG (MUV2.XE), Swiss Reinsurance Co. (RUKN.VX) and Scor SE (SCR.FR) for business with primary insurers seeking to buy cover for risks on their balance sheets.

The share has gained 43% over the past year, valuing the company at EUR4.3 billion.

-By Ulrike Dauer, Dow Jones Newswires; +49 69 29725 500; ulrike.dauer@dowjones.com

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