Hannover Re has turned more wary about the outlook for capital markets this year, making its annual earnings goal tougher to reach despite forecast-beating profit in the first quarter. The world's fourth-biggest reinsurer on Tuesday said quarterly operating profit rose 25 percent to more than $400 million, defying analysts' predictions of a 10 percent drop.
The result was boosted by the recent acquisition of a portfolio of business in life reinsurance, which helped mask a drop of nearly a fourth in net income from investments. The company's new chief financial officer, Roland Vogel, told Reuters it was still possible to reach its net profit goal of nearly 700 million euros ($927 million) this year but the outlook for the financial markets was not helping.
"We have become a bit more cautious because we see the capital markets more pessimistically than before," Vogel said, adding Hannover Re was unlikely to start investing again in the equity markets in the second half as it had initially expected.
Analysts polled by Reuters had on average expected 2009 net profit of 535 million euros, up from a 2008 loss of 127 million. The company said it expected to earn at least 5 euros per share this year including the new life reinsurance business. Its previous EPS target of 4.75 to 5.25 had excluded the acquisition. "The new target can therefore be considered a well-communicated profit warning," DZ Bank Thorsten Wenzel said in a note to clients.
Hannover Re shares gave up early gains to trade down 2.03 percent at 27.15 euros by 1027 GMT, lagging a 1 percent gain by the DJ Stoxx European insurance index. Hannover Re cut its equity holdings to near zero in an effort to dampen the impact of the financial crisis on earnings. Vogel said he expected little in the way of writedowns in the company's fixed-income investments ahead, though small writedowns in private equity investments were possible.
The second quarter was going about as well as the first so far, he added. Operating profit rose to 305.8 million euros in the first quarter from 245.6 million a year earlier, near the top of the range of 14 analyst forecasts in a Reuters poll, which on average had foreseen a decline to 222 million euros. Quarterly net profit rose 43 percent to 216.1 million euros, outstripping analyts' predictions for a 5 percent gain.
"Our quarterly result puts in place a good platform for achieving our ambitious profit target for 2009 - namely a return on equity of at least 18 percent after tax", Chief Executive Wilhelm Zeller said in a statement.
Hannover Re's shares are up 17 percent this year, bolstered by the company's prediction of 20 percent premium growth, while rival Munich Re's shares have fallen around 8 percent. But analysts worry that even big premium gains in areas like credit reinsurance may be insufficient as a wave of losses from corporate defaults and insolvencies washes through the economy.