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Hannover Re Net Falls 13% on Derivative Losses; Shares Drop

Hannover Re, the world’s fourth-biggest reinsurer, reported a 13 percent second-quarter profit decline on losses from hedging derivatives, sending the shares down the most in almost a year.

Net income fell to 144 million euros ($177 million) from 166.2 million euros a year earlier, the Hanover, Germany-based reinsurer said in a statement today. That missed the 170.5 million-euro average estimate of 15 analysts surveyed by Bloomberg.

Hannover Re booked losses on instruments it uses to hedge against inflation and risk associated with some securities deposits held by U.S. life-insurance clients. Analysts were expecting a profit increase due to a decline in natural-disaster claims.

“Segment results in property and catastrophe and life and health are also below consensus, but this is mainly driven by the derivatives impact,” resulting in an “unspectacular set of figures,” said Frank Kopfinger, a CA Cheuvreux analyst with an underperform recommendation on the stock.

Hannover Re fell as much as 6.2 percent, the most since Aug. 26 last year. The shares were down 3.7 percent to 47.65 euros at 11:15 a.m. Frankfurt time, trimming their increase this year to 25 percent and valuing the company at about 5.8 billion euros. The 26-company Bloomberg Europe 500 Insurance Index has risen 13 percent in the same period. German insurer Talanx AG holds 50.2 percent of the company’s shares.

‘Broad’ Miss

Earnings before interest and tax rose 1.2 percent to 204 million euros in the second quarter, missing the 281.3 million-euro average estimate of analysts surveyed by Bloomberg.

“The miss was pretty broad,” said Christian Hamann, an analyst with Hamburger Sparkasse who recommends investors buy the stock. “Ebit in both the company’s segments was weaker than expected. The damages weren’t as low as the market was anticipating.”

Europe’s biggest insurers and the reinsurers who help them shoulder risks for clients used last year’s catastrophes to push through higher prices for coverage. Natural disasters caused an estimated $5.48 billion of insured losses for insurers and re-insurers in the second quarter, down from more than $27 billion a year earlier, according to estimates from Aon Benfield, the world’s biggest reinsurance broker.

Derivative Values

Hannover Re said it booked 82 million euros of losses in the second quarter after 85 million euros of gains in the preceding three months. The loss was driven by swings in the fair value of inflation swaps and a derivative the company uses to offset credit risk associated with some securities deposits held for the reinsurer’s account by U.S. life insurance clients.

“We assume a neutral development for these two items over time, and hence the volatility that can occur in specific quarters has no bearing on the actual business performance,” Chief Executive Officer Ulrich Wallin said in the statement.

First-half net income jumped to 405.3 million euros from 218.5 million euros a year earlier, according to the statement.

The company’s non-life reinsurance combined ratio improved to 96.8 percent in the second quarter from 97.7 percent a year ago. A ratio above 100 percent means claims and costs exceed premium income, leaving a loss from underwriting.

Munich Re, the world’s biggest reinsurer, said Aug. 7 that it expects to exceed its full-year profit target after higher investment income boosted second-quarter earnings to 808 million euros.

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