Development of the Group segments

Life/Health Reinsurance

 

2010

2009 1)

2008 1)

2007 2006

Figures in EUR million

         

Gross written premium

5,090

4,529

3,135

3,083

2,794

Net premium earned

4,654

4,078

2,785

2,795

2,374

Net investment income

508

525

371

313

345

Operating result (EBIT)

276

371

114

231

146


1)
Adjusted on the basis of IAS 8

The Group segment of Life/Health Reinsurance brings together our reinsurance activities in the life, annuity and health lines under the worldwide Hannover Life Re brand name. We also write the accident line in this segment, to the extent that it is transacted by life insurers, as well as some Islamic insurance products, the so-called family takaful products.

Tried and trusted business model

In the year under review we moved a significant step closer towards attaining our longer-term goal of becoming the number three in the worldwide life reinsurance market. Outside the US we already rank third by a wide margin.

We are able, on the one hand, to selectively tap into attractive business potential in the traditional market through conventional reinsurance offerings, while at the same time working systematically on the development of special product and sales solutions through our four specialist segments. To a significant extent Hannover Life Re is thus able to decouple itself from developments on the standard reinsurance markets.

In many instances Hannover Life Re has been able to operate as a pioneer for new markets and has played a crucial role in shaping the dynamic growth of these markets – the entry into the UK private annuity sector with enhanced annuities in the years 1994/95 may be cited as a well-known example of this approach.

At the present time conventional reinsurance accounts for the lion’s share of our portfolio. In the medium term, however, we anticipate stronger growth from the pillars of new markets and bancassurance; it should therefore be possible to restore the desired long-term balance between conventional reinsurance (at around 40% of the portfolio) and the other four pillars (at around 60% of the portfolio) in the next few years.

Value contribution through diversification

We devote particularly close attention to optimal risk diversification – something which is also evident in the relevant risk models under Solvency II. The negative correlation between the biometric components of mortality and longevity plays a special role here.

The growth in longevity business diversifies our mortality risk, while the growth on emerging markets in Asia, Africa and Latin America serves to improve the geographical spread of our portfolio from the major markets of the United States, United Kingdom and Germany; financial solutions provide an additional element of structural diversification.

All in all, we consider Hannover Life Re to be a superbly diversified reinsurer that optimally combines the prospects for long-term growth and profitability over the next 20 to 30 years. Certain risks that enjoy occasional demand as growth drivers in the international reinsurance markets have been considered unreinsurable by our company for quite some years. We include here derivative financial options and guarantees deriving from variable annuity products, the longevity risk for affluent socio-economic groups and life-long guarantees for morbidity products.

Our business model is founded on a concept of organic growth, although we are open to acquisitions. Going forward, as in the past, we expect to maintain our growth on an average level of 10 to 12% per year through appropriate portfolio acquisitions, thereby systematically gaining market shares in the global market without this detrimentally impacting the quality of our acceptances.

Business development

As expected, the repercussions of the international financial market crisis continued to reverberate beyond 2009. On the one hand, consumers in many markets showed caution when it came to demand for long-term life insurance products; on the other hand, the persistency of older in-force portfolios deteriorated owing to an increased lapse rate. What is more, in the important US mortality market and in the Australian disability market we noted an increase in the biometric claim frequencies; in some cases they were significantly higher than the comparative historical values. After detailed analysis of the data it is our assumption that these are temporary phenomena. Despite this sometimes difficult environment, we were again able to generate a highly satisfactory result in life/health reinsurance.

Market position extended

We selectively strengthened our position in our relevant focus markets of the United States, United Kingdom, Germany, Australia and France.

In view of the extremely competitive market climate, we wrote new mortality and critical illness/trauma risks in the UK and Australian markets only with considerable restraint. In large parts of these markets we no longer consider the reinsurance conditions to be commensurate with the risks. On the other hand, following on from the acquisition of the ING life reinsurance portfolio in 2009, we again significantly expanded our position in the US mortality market in the course of the year under review. We revived reinsurance relations with several ceding companies and are now well on track in the medium term to becoming a relevant market player in the US mortality market with a 10 to 15% share of new business.

We were similarly able to build on our leading role in the UK longevity market. We have a strong presence in new business involving personal annuities for individuals with a reduced life expectancy; in this area we support a number of particularly dynamic providers through quota share reinsurance models.

What is more, we are expanding activities relating to the reinsurance of sizeable pension funds in the United Kingdom through so-called longevity swaps – under which the reinsurer assumes the biometric risk of longevity associated with a portfolio (normally only the part of the portfolio on which benefits are already being paid) in exchange for payment of a regular fixed premium.

In South Africa we continue to be the leading life reinsurer, based on our extensive support for innovative, customer-oriented insurance companies. In the Indian market, in which we only established a footing in 2008 with a service office in Mumbai, we moved forward with our strategic life cooperation with GIC Re and were able to acquire a number of Indian primary insurers as new clients.

In the Chinese market (Greater China) we are currently represented by three offices: the branch in Hong Kong serves both the market comprised of locally-based life insurers and the regional centers of large multinational insurance groups. It also operates as a regional service center for East Asia. Our service office in Taipei serves the local Taiwanese market. The branch in Shanghai concentrates on business from China, where – in close cooperation with and express approval from the local regulator (CIRC) – we were able to close the first two liquidity-related financing transactions.

The development of our business in the Islamic insurance sector (takaful), which we write through our subsidiary Hannover ReTakaful in Manama/Bahrain, was also highly gratifying. Our retakaful cedants are located predominantly in Saudi Arabia, Bahrain and the United Arab Emirates.

Pleasing premium growth

The gross premium income booked in the year under review totaled EUR 5.1 billion, an increase of 12% relative to the previous year’s figure of EUR 4.5 billion. At constant exchange rates – especially against the US dollar – growth would have come in at 7%. Net premium earned amounted to EUR 4.7 billion; this represents a slightly higher level of retained premium of 91.7% compared to the previous year.

In geographical terms, growth impetus in the year under review derived from the United States, United Kingdom, South Africa, Latin America and East Asia – particularly noteworthy is the rapid growth witnessed in China.

The core of our activities is in the life and annuity lines, which accounted for altogether 87% of worldwide premium income in the year under review.

The various covers associated with the biometric risk segment of morbidity, such as disability covers, critical illness/trauma covers and health covers, accounted for 11%, while the modest but highly profitable portfolio of accident business contributed a share of 2%.

The experience of the biometric risks of mortality and morbidity was extremely mixed in the year under review and less favorable overall than in the two previous years. Irregularities were observed in the mortality risk in some subsegments of the US portfolio, which – especially in the second half of the year – was impacted by an unusually large number of claims with high sums insured. In total, additional expenditure in the mid-double-digit million euro range was incurred. The claims experience in Australian disability annuity business was similarly unusual: the period during which annuity recipients remained in the disability phase was longer by market standards. This prompted a strengthening of the IBNR reserves and the provision for claims already being paid out. Altogether, additional expenditure in the low-double-digit million euros was incurred.

We continued to enjoy very favorable claims experiences in the United Kingdom, Germany and France as well as in the emerging markets of South Africa, Latin America and Asia. The results of the longevity risk, which at the present time we write primarily in the United Kingdom, are inconspicuous and currently in line with our actuarial assumptions.

Investment income almost on a par with the previous year

To a large extent we do not carry any investment risk with respect to the investments that we deposit with ceding companies under reinsurance contracts financed from premiums; this is because the reinsurer is credited with fixed interest income irrespective of whether or not the primary insurer generates this rate of return.

The situation is different in the US reinsurance market, where we are exposed to a volatility risk through the market-oriented measurement of the securities deposited under ModCo reinsurance treaties. For 2010 this risk – the development of which is reflected on the accounting side through unrealized gains/losses – showed a slightly positive experience, compared with the profit running into the low-triple-digit million euros that had been recognized in the previous year.

Total investment income came in at EUR 508 (525) million; of this amount, EUR 204 million derived from assets under own management and EUR 304 million was attributable to amounts credited on deposits with ceding companies. Internal administrative expenses in life/health reinsurance amounted to EUR 119 million.

Results within the bounds of expectations

The operating profit (EBIT) for the year under review totaled EUR 276 million. The previous year, which produced a record result of EUR 371 million, had been influenced by special effects associated with the acquisition of the US ING life reinsurance portfolio as well as fair value adjustments on reinsurance deposits in the US and UK. Our lean processes, quick decision-making structures and our focus on relevant client relationships in the context of a detailed CRM strategy are key factors in the efficiency of our business model.