Non-life reinsurance
Non-life reinsurance is our largest and most important business group. Overall, business developed satisfactorily in the year under review. Although some major markets and lines exhibited softening tendencies (for example North America and marine business), the treaty renewals as at 1 January 2008 - the time of the year when around two-thirds of our treaties are renegotiated - passed off largely favourably. The rate reductions proved to be smaller than had been anticipated, and by and large we continued to obtain prices and conditions that were commensurate with the risks. These tendencies were reaffirmed in the mid-year treaty renewals as at 1 July 2008 in the United States; profitable acceptances were still possible based on the appropriate selection. Similarly, we were broadly satisfied with the renewal of treaties in Australia and New Zealand at the same point in time. Rates in non-proportional property business held stable; price increases were pushed through under programmes that had suffered losses.
Cornerstones of our underwriting continue to be our active cycle management and profit-oriented underwriting policy, according to which we concentrate on those segments that promise the greatest profitability. In the year under review we were able to largely offset more propronounced premium declines in some areas with increases in the German market and in worldwide credit and surety reinsurance.
We were satisfied on balance with the rate level in general US property business. Property catastrophe business, on the other hand, saw sharp rate cuts following the absence of major claims in 2007. In the casualty sector prices continued to soften on the reinsurance side, prompting us to further scale back our involvement. Our total premium volume in North America contracted as expected. In the second half of the year, however, it was already possible to secure rate increases in some segments as a consequence of the financial market crisis.
+++ Focus remains on cycle management +++
Our so-called retakaful business continues to fare well: thanks to the strong economic growth recorded to date in Southeast Asia and the Near East, we were able to substantially enlarge our premium volume in the year under review.
The Latin American insurance market is also developing steadily: following the abolition of the reinsurance monopoly in Brazil we established a representative office in Rio de Janeiro and received a licence as an "admitted reinsurer" in July of the year under review.
Our strategy when it comes to covers for agricultural risks is to acquire additional market shares. We are therefore expanding this business in both Latin America and Asia.
In the field of structured products we are one of the leading providers worldwide. The year under review was notable for the ongoing regional diversification of our portfolio, which in past years had been slanted heavily towards the United States. On the back of the repercussions of the financial market crisis we observed growing demand for such products in Europe and Asia. On the basis of tailored solutions and our long-standing actuarial expertise we are able to offer our clients the best possible service.
Following the withdrawal of Clarendon Insurance Group, Inc. from active specialty business, only International Insurance Company of Hannover Ltd., London, and Compass Insurance Company Ltd., Johannesburg, continue to transact primary insurance. Both companies again significantly boosted their premium income in the year under review. On account of several major loss events, however, the result posted by International Insurance Company of Hannover declined, while Compass Insurance Company's performance was highly gratifying.
In the year under review we again took steps to ensure that our equity base is not strained by exceptionally large losses. On the one hand, for example, we further scaled back our peak exposures, while on the other we topped up our "K5" capital market transaction by an extra USD 10 million.
+++ Further capital market transactions in the year under review +++
As part of our extended activities in the area of insurance-linked securities we completed our first transaction in the year under review. Unlike Hannover Re's previous securitisations, it was not designed for our own protection but rather to directly transfer our clients' business to the capital market. Property catastrophe risks of a number of US cedants were packaged and passed on to the capital market in several tranches. A special purpose entity named "Globe Re", which is capitalised at USD 133 million, was established in Bermuda for this transaction.
Owing to the restraining effects of exchange rate movements, primarily during the first half of the year, the gross premium volume booked in our non-life reinsurance business group in the year under review contracted by 3.9% to EUR 5.0 billion (EUR 5.2 billion). The withdrawal from specialty business was another factor that curbed premium income. At constant exchange rates, especially against the US dollar, growth would have come in at 1.3%. The level of retained premium climbed from 85.2% to 88.9% as a consequence of appreciable savings on our own protection covers and reduced proportional cessions. Net premium earned declined by 4.9% to EUR 4.3 billion (EUR 4.5 billion).
Percentage breakdown of gross premium income in non-life reinsurance by line of business
The most striking feature of the major loss situation in the year under review was a series of devastating natural disasters. These included, most notably, the snow and ice storms in several Chinese provinces, winter storm "Emma" in Europe, the severe earthquake in the Chinese province of Sichuan, hailstorms in Germany as well as the two hurricane events "Gustav" and "Ike". The latter produced a net strain of EUR 222.1 million for Hannover Re's account. A number of other small and mid-sized natural disasters were also recorded.
Total net expenditure on catastrophe losses and major claims in 2008 amounted to EUR 457.8 million (EUR 285.4 million). This figure corresponds to 10.7% of net premium in non-life reinsurance and was thus only slightly higher than the expected level of 10%, despite the catastrophe losses indicated above. The combined ratio stood at 95.4% (99.7%) in the year under review.
The underwriting result improved to EUR 184.7 million, compared with a deficit of EUR 26.7 million in the previous year. Net investment income fell by 98.6% in the year under review to EUR 11.1 million (EUR 783.3 million) owing to the heavy write-downs that had to be taken on equities. It should be mentioned in this context that our equity investments are traditionally allocated to non-life reinsurance, and the strain in this business group was therefore disproportionately higher than in life and health reinsurance. The operating profit (EBIT) in non-life reinsurance consequently fell sharply by 99.7% to EUR 2.3 million (EUR 656.7 million). Group net income contracted by 129.3% to -EUR 160.9 million (EUR 549.5 million); the previous year's result included a positive special effect of EUR 137.8 million associated with the reduction of deferred taxes. Earnings per share amounted to -EUR 1.33 (EUR 4.56).
Geographical breakdown of non-life reinsurance (in % of gross premium income)
Key figures for non-life reinsurance
| Figures in EUR million | 2008 | +/- previous year |
2007 | 2006 | 20051) | 20041) |
|---|---|---|---|---|---|---|
| Gross written premium | 4,987.8 | -3.9% | 5,189.5 | 6,495,7 | 4,639.3 | 4,211.1 |
| Net premium earned | 4,276.7 | -4.9% | 4,497.6 | 4,718,7 | 3,922.9 | 3,456.2 |
| Underwriting result | 184.7 | -792.3% | (26.7) | (71.0) | (500.5) | 98.5 |
| Net investment income | 11.1 | -98.6% | 783.3 | 831.7 | 544.8 | 440.7 |
| Operating result (EBIT) | 2.3 | -99.7% | 656.7 | 670.1 | (28.3) | 463.0 |
| Group net income (loss) | (160.9) | -129.3% | 549.5 | 478.5 | 4.3 | 270.7 |
| Earnings per share in EUR | (1.33) | -129.3% | 4.56 | 3.97 | 0.04 | 2.24 |
| Retention | 88.9% | 85.2% | 72.4% | 85.9% | 83.0% | |
| Combined ratio2) | 95.4% | 99.7% | 100.8% | 112.8% | 97.2% | |
| 1) Figures for 2005 and 2004 before new segmentation | ||||||
| 2) Incl. deposit interests | ||||||
