Euler Hermes’ results for the first half of 2009

The Group Management Board submitted the results for the first half of 2009 to the Euler Hermes Supervisory Board on 28 July 2009. The results have been reviewed by the auditors and the Audit Committee.
“Economic conditions continued to deteriorate throughout the second quarter of 2009. Many companies’ sales contracted and their cash positions worsened, resulting in a significant increase in the number of corporate failures since the beginning of the year. The current crisis has also impacted Euler Hermes, with earned premiums eroded by the drop in insured sales linked directly to the very difficult economic conditions and a rise in claims, which weighed on group profitability”, said Wilfried Verstraete, Chairman of the Euler Hermes Group Management Board, adding that “despite this difficult environment, Euler Hermes posted a positive operating income for the first half of 2009.”


A. Key figures – First-half 2009 (limited review)

The first half of 2009 saw a continuation of the marked slowdown in the world economy. Euler Hermes expects the number of corporate failures to increase by a further 35% in 2009, following a 27% rise in 2008.
In this challenging environment, Euler Hermes recorded net income of €0.7 million in the first half of 2009, compared with €122.3 million in the first half of 2008.

B. Turnover

For the six months to 30 June 2009 the group's turnover totalled €1,084.5 million, corresponding to a 1.1% increase over the first half of 2008 at constant scope and exchange rates.
Although turnover continued to rise in new markets, historical markets in Europe and North America saw a sharp contraction in clients’ sales that weighed on earned premium volumes and was reflected in a 1% decline in turnover to end-June 2009.
In most countries, the downturn in clients’ sales, which was of exceptional magnitude in the second quarter of 2009, could not be offset by increases in premium rates or by higher group production levels.

C. Operating income

The technical result, excluding financial income, represents a loss of €59.5 million compared with a profit of €114.2 million in 2008. The loss is attributable mainly to the sharp deterioration in the net cost of claims, which hit the net combined ratio after reinsurance. At 109.1%, this ratio is 26.6 points higher than in the first half of 2008.
The net cost of claims continued to rise sharply, increasing by 23.9%. This increase is due to the severe economic and financial crisis affecting most European countries, resulting in a significant rise in both the number and the value of claims. By contrast, in the first half of 2008 the current crisis started in Southern Europe and in the UK, and Northern European countries were largely unaffected.
For the first six months of 2009, Euler Hermes recognised negative runoff on previous attachment years of €14 million as a result of the high level of claims for the 2008 attachment year, mainly in Eastern Europe and South America. This compares with positive runoff of €14 million for the corresponding period in 2008.
Despite the 1.6% fall in net operating expenses, the net expense ratio deteriorated by 1.9 point (to 20.7% from 18.8% in the first half of 2008) due to the lower level of net earned premiums.
Despite a sharp downturn in interest rates in the first quarter of 2009, financial income in the first six months of the year nevertheless amounted to nearly €95 million, mainly due to the realisation of capital gains totalling €53.9 million on the bond and investment property portfolios.
The group’s financial income more than offset its negative technical result, and operating income for the six months to end-June 2009 was positive at €35.4 million. It was, however, down by a very sharp 82.4% compared with the same period in 2008.

D. Exceptional charges and corporation tax

Euler Hermes recognised exceptional charges in the second quarter of 2009 totalling €7.5 million in connection with its Italian subsidiary’s restructuring plan, as finalised to date.
Net income for the period was hit by the high effective tax rate, of 89.3%, resulting from significant tax rate differentials between the parent company and subsidiaries and from specific tax positions that resulted in the group’s being unable to recognise deferred tax assets.

E. Investment portfolio

With poor visibility on the financial markets, Euler Hermes has maintained its very cautious investment management policy, notably via a reduction in the duration of bond portfolios. The annualised economic performance net of investment portfolio expense reached 5.7%. At the end of June 2009, the fair value of the investment portfolio, including cash and cash equivalents, was virtually unchanged from end-June 2008 at €3,330 million.

F. Outlook

In the first half of 2009, economic indicators of all countries continued to deteriorate. The fragile situation and the slow pace of the expected recovery will prevent any rapid decline in the number of corporate failures. Against this background, Euler Hermes does not foresee any significant improvement in the level of results before 2010.