Development of premium income
The gross premium income booked in the year under review totalled EUR 5.1 billion, an increase of 12.4% 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 6.8%. Net premium earned amounted to EUR 4.7 billion; this represents a slightly higher level of retained premium of 91.7% than in 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 87.6% 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 10.4%, while the modest but highly profitable portfolio of accident business contributed a share of 2.0%.
Our wide-ranging business model and the high degree of diversification of our international portfolio inevitably give rise to a broad spectrum of factors that can influence the operating result (EBIT).
As a general principle, a distinction must be made between the following profit components:
- Biometric risks 1: development of the biometric risks of mortality and morbidity, which are reflected in the area of conventional reinsurance and in bancassurance
- Biometric risks 2: development of the biometric risk of longevity, which has a special influence on results in new markets
- Structural risk associated with the persistency of the business in force, which influences the performance of financial solutions
- Development of the specific client-related counterparty risk, which is of relevance to financial solutions business
- Investment risk 1: investment performance of the assets under own management that cover the shareholders’ equity and our non-deposited reserves
- Investment risk 2: Investment performance of the deposits with ceding companies
- Movements in exchange rates between our reporting currency (EUR) and the most relevant foreign currencies (USD, GBP, AUD and ZAR)
- Cost trend for letters of credit (LOCs) in connection with US mortality contracts
- Development of our own administrative expenses
The experience of the biometric risks of mortality and morbidity was extremely mixed in the year under review and less favourable 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 favourable 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.
We subjected the risk associated with the persistency of the business in force – a risk which for our company was particularly evident in financing arrangements in continental Europe for unit-linked products – to a stress test in the year under review. In the case of some clients we noted substantially increased lapse rates in the reinsured portfolios, which have an influence on repayment of the previously provided pre-financing.
With this in mind, we wrote off an amount in the low double-digit million euros for several European financing arrangements in respect of the deferred acquisition costs.
The client-specific counterparty risk was unremarkable. Based on our insights, none of our ceding companies is in financial difficulties and in no case are regulators expected to intervene.
The portfolio of assets under own management is invested within the scope of the Hannover Re Group’s investment policy and is thus subject to the usual requirements as regards matching (currency, duration), quality and diversification. In the first half of 2010 we made limited use of developments on capital markets for the tactical realisation of investment income.
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 unrealised gains/losses – showed a slightly positive experience, compared with the profit running into the low triple-digit million euros that had been recognised in the previous year.
Total investment income came in at EUR 508.2 million (EUR 520.1 million); of this amount, EUR 204.1 million derived from assets under own management and EUR 304.2 million was attributable to amounts credited on deposits with ceding companies.
Internal administrative expenses in life and health reinsurance amounted to EUR 118.7 million; this corresponds to an expense ratio of 2.3% of gross written premium. 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.
The operating profit (EBIT) for the year under review totalled EUR 284.4 million. The previous year, which produced a record result of EUR 374.7 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. The EBIT margin came in at 6.1% and was thus within the bounds of our expectations.
Our specialty segments of financial solutions and are currently delivering above-average returns; this contrasts with the new markets segment, which for some years to come will tend to generate a below-average return owing to the structural dominance of the longevity risk and the conservative recognition of profit on accounting grounds. From a longer-term perspective, it is nevertheless our assumption that earnings from longevity business will make a significant contribution to profitability.
With an average tax ratio of 21.4% and after allowance for minority interests, consolidated net income in life and health reinsurance amounted to EUR 219.6 million (EUR 298.1 million). This was equivalent to earnings of EUR 1.82 per share.