Non-life reinsurance
Non-life reinsurance
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| Key figures for non-life reinsurance | ||||||
|---|---|---|---|---|---|---|
| in EUR million | 2013 | +/- previous year |
20121 | 2011 | 2010 | 2009 |
| Gross written premium | 7,817.9 | +1.3% | 7,717.5 | 6,825.5 | 6,339.3 | 5,746.6 |
| Net premium earned | 6,866.3 | +0.2% | 6,854.0 | 5,960.8 | 5,393.9 | 5,229.5 |
| Underwriting result | 335.5 | +23.2% | 272.2 | (268.7) | 82.4 | 143.5 |
| Net investment income | 781.2 | -17.3% | 944.5 | 845.4 | 721.2 | 563.2 |
| Operating result (EBIT) | 1,061.0 | -2.8% | 1,091.4 | 599.3 | 879.6 | 731.4 |
| Group net income | 807.7 | +17.8% | 685.6 | 455.6 | 581.0 | 472.6 |
| Earnings per share in EUR | 6.70 | +17.8% | 5.68 | 3.78 | 4.82 | 3.92 |
| EBIT margin2 | 15.5% | 15.9% | 10.1% | 16.3% | 14.0% | |
| Retention | 89.9% | 90.2% | 91.3% | 88.9% | 94.1% | |
| Combined ratio3 | 94.9% | 95.8% | 104.3% | 98.2% | 96.6% | |
| 1 Adjusted pursuant to IAS 8 (cf. Section 3.1 of the notes) 2 Operating result (EBIT)/net premium earned 3 Including expenses on funds withheld and contract deposits |
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Accounting for 56% of our premium volume, non-life reinsurance is Hannover Re’s largest business group. We continue to pursue unchanged our strategy of active cycle management: we expand our business only in areas where the rate situation is favourable. If prices fail to meet our profitability requirements, we systematically reduce our shares.
We were broadly satisfied with the market development in non-life reinsurance in the year under review, although competition was considerably more intense than in 2012. The primary reason here was the availability of sufficient capacity in the market overall, as a consequence of which the supply of reinsurance protection exceeded demand. A further contributory factor was the increased business carried by our clients in their retention.
The treaty renewals in non-life reinsurance as at 1 January 2013 – the date on which almost two-thirds of our treaties in traditional reinsurance were renegotiated – got off to a thoroughly promising start. The heavy losses incurred by the (re)insurance industry from hurricane “Sandy” had exerted a stabilising effect on rates. Over the year, however, the rate level softened more appreciably than had been initially expected. This was especially true of US natural catastrophe business. Substantial price erosion was observed here, driven in part by additional capacities from alternative markets (catastrophe bonds, collateralised reinsurance). Given that Hannover Re’s exposure to US natural catastrophe business is disproportionately small relative to its market share, the repercussions were nevertheless limited.
Yet in regions or lines that had seen significant losses in 2012, such as marine reinsurance, it was possible to push through sometimes appreciable price increases. In view of the record high loss expenditure associated with the wreck and salvage of the “Costa Concordia” cruise ship as well as with hurricane “Sandy”, rates here climbed sharply; under loss-impacted programmes the increases ranged from 25% to 40%. We were again able to obtain considerable premium increases for non-proportional motor liability covers in the United Kingdom. In markets or lines that had posted good underwriting results in the comparable period owing to minimal losses – for example aviation business – rates declined, but the business was still adequately priced. We were also satisfied with the development of the rest of our property and casualty portfolio in North America. As expected, appreciable growth was booked from the markets of Asia and the Middle East.
Thanks to our selective underwriting approach we were able to achieve a price level in the non-life reinsurance that was at least equivalent in quality to the good 2012 financial year. Against this backdrop, we slightly enlarged our portfolio.
The gross premium volume for our non-life reinsurance business group climbed by 1.3% in the year under review to EUR 7.8 billion (previous year: EUR 7.7 billion). At constant exchange rates, growth would have come in at 3.5%. This means that the growth in our currency-adjusted gross premium was within the expected range of 3% to 5%. The retention decreased slightly to 89.9% (90.2%) on account of an increased volume of fronting business. Net premium earned consequently nudged only slightly higher by 0.2% to EUR 6.9 billion (EUR 6.9 billion). Growth would have been 2.3% at constant exchange rates.
After a very tranquil first quarter we were faced with numerous major losses in the course of 2013. Germany and Canada were impacted especially heavily by losses from natural disasters. The hurricane season in North America and the Caribbean, on the other hand, again passed off unremarkably. For the first time since 1968 no storm exceeded category 1, the weakest of the five categories.
The largest individual losses incurred by Hannover Re in the year under review were the hail event “Andreas” in Germany – with net expenditure of EUR 99.3 million – and the flooding in Germany and other European countries, at a cost of EUR 92.5 million. These and other major losses combined to produce net expenditure for 2013 of altogether EUR 577.6 million (EUR 477.8 million). Although this figure was higher than in the previous year, the burden of major losses nevertheless came in below our expected level of EUR 625 million. At 94.9% (95.8%), our combined ratio again improved on the previous year and remained below our target mark of 96%. Key factors in this pleasing development were the merely partial utilisation of our major loss budget as well as run-off profits. The latter still remained in line with expectations thanks to the conservative initial reserves constituted for recent underwriting years. The confidence level of the loss reserves was nevertheless further increased. The underwriting result improved again markedly to EUR 335.5 million (EUR 272.2 million).
Investment income in the non-life reinsurance business group contracted by 17.3% in the year under review to EUR 781.2 million (EUR 944.5 million). Key drivers here were lower realised gains as well as the elimination of positive effects from the inflation swaps taken out by Hannover Re to partially hedge its loss reserves. These factors were in large measure offset by the very good underwriting result. The operating profit (EBIT) of EUR 1,061.0 million – a decrease of 2.8% – fell only very slightly short of last year’s record level of EUR 1,091.4 million. Assisted by the positive tax effect, Group net income for the non-life reinsurance business group increased by a substantial 17.8% to EUR 807.7 million (EUR 685.6 million). Earnings per share for non-life reinsurance amounted to EUR 6.70 (EUR 5.68).
| Non-life reinsurance: Key figures for individual markets and lines in 2013 | |||||
|---|---|---|---|---|---|
| Gross premium in EUR million | Change in gross premium relative to previous year | EBIT
in EUR million | Combined ratio | Maximum tolerable combined ratio (MtCR) | |
| Target markets | 2,257.6 | +5.9% | 204.9 | 101.8% | 96.1% |
| Germany | 1,080.8 | +7.4% | (30.6) | 111.2% | 97.1% |
| North America | 1,176.8 | +4.7% | 235.5 | 92.9% | 95.3% |
| Specialty lines | 2,594.2 | -7.3% | 299.7 | 94.0% | 97.3% |
| Marine | 290.8 | -5.8% | 71.5 | 76.2% | 94.4% |
| Aviation | 402.5 | -3.2% | 103.6 | 78.4% | 97.5% |
| Credit/surety | 630.5 | +2.2% | 70.0 | 94.2% | 96.2% |
| Structured reinsurance incl. ILS | 612.6 | -15.9% | 55.4 | 97.5% | 99.6% |
| UK, London market & direct business | 657.7 | -9.7% | (0.8) | 107.7% | 96.7% |
| Global reinsurance | 2,966.1 | +6.4% | 556.5 | 90.4% | 95.1% |
| Worldwide treaty reinsurance | 1,691.6 | +7.4% | 268.2 | 94.3% | 97.6% |
| Global catastrophe business | 433.1 | +6.5% | 156.3 | 65.1% | 75.7% |
| Facultative reinsurance | 841.5 | +4.2% | 131.9 | 91.6% | 96.0% |
On the following pages we report in detail on developments in the individual markets and lines of our non-life reinsurance business group, which is split into three segments according to the areas of responsibility on the Executive Board: target markets, specialty lines and global reinsurance.
Target markets
We classify Germany and North America as target markets. The premium volume grew by 5.9% to EUR 2,257.6 million (EUR 2,131.1 million) and was thus within our planned range for 2013. The combined ratio inched slightly higher to 101.8% (101.3 %). The operating profit (EBIT) in the year under review amounted to EUR 204.9 million (EUR 270.4 million).
Germany
Within the Hannover Re Group the German market – the second-largest in the world for non-life reinsurance – is served by our subsidiary E+S Rück. As the “dedicated reinsurer for Germany”, the company is a sought-after partner thanks to its good rating and the continuity of its business relations. E+S Rück is superbly positioned in its domestic German market and one of the market leaders in non-life reinsurance.
The German insurance market recorded further growth in property/casualty business in the year under review. This was driven principally by motor insurance, which enjoyed another year of premium growth in all lines in 2013. Nevertheless, the retail property insurance lines also posted gains. The insurance density in the area of extended coverage for natural perils increased as a consequence of greater risk awareness with respect to natural catastrophe events.
The loss experience in our domestic market was particularly elevated in the year under review owing to extreme weather events. Following extensive flooding in June with insured losses in the order of EUR 2 billion, (re)insurers found themselves facing further losses of around EUR 3 billion within just a few weeks as a consequence of severe hail events. The enormous scale of damage was caused by the exceptionally large hailstones and the storm track across densely populated areas. Property insurance and motor own damage insurance were especially hard hit by these events. The net losses for the Hannover Re Group from the hail events “Manni” and “Andreas” totalled EUR 137 million. Germany suffered additional heavy losses from windstorms “Christian” and “Xaver”.
In homeowners insurance, which was heavily impacted by these natural catastrophe events, further action was still needed after the unsatisfactory results of prior years and the latest red figures. Industrial property insurance lines remained fiercely competitive; there were no indications of a broad-based improvement in premium levels.
Long-tail liability lines (general liability, motor liability) are sensitive to interest rates; as anticipated, improved rates could be obtained here – especially for motor XL covers. The stubbornly low level of interest rates nevertheless necessitates further technical rate adjustments.
Personal accident business once again fared very well for our company. Along with reinsurance covers, we offer our clients in this line a broad range of services. In the year under review, for example, we completed the project that we had undertaken with other partners to overhaul a product that provides functional disability insurance for adults. A comparable product for children is scheduled to be ready by the beginning of 2014.
Hannover Re also supports covers for sources of renewable energy. Our exposure in this new segment is, however, still modest in view of the continued difficulty of assessing risks and the intense competition.
Although we had anticipated a modest reduction, our premium volume for German business increased by 7.4% to EUR 1,080.8 million (EUR 1,006.7 million). Reflecting the high loss intensity in the year under review, the combined ratio climbed sharply to 111.2% (99.9%). The operating result (EBIT) consequently fell short of expectations at -EUR 30.6 million.
North America
The North American (re)insurance market is the largest single market both worldwide and for Hannover Re. Our business is written through brokers.
The economic climate picked up slightly in the year under review, and with economic growth insured values also rose – hence further boosting the premium volume in the original market. The reinsurance volume also continued to increase in 2013. Given that the US was largely spared significant natural catastrophe losses, the combined ratio for the reinsurance market was considerably better than it was for the primary market. Against this backdrop, our business in the United States developed favourably. Only in our Canadian business were results adversely impacted by record one-off losses due to two major flood events in Calgary and Toronto.
Rate movements on the North American primary insurance market gave grounds for satisfaction. With the exception of a few minor lines such as medical malpractice, rate increases of 5% to 10% were achieved. Overall, the pressure on the rate level was sustained on account of reduced investment income. Hardly any new players entered the US market in 2013, and the reinsurance market – despite a slight increase in equity resources – can therefore still be described as disciplined. However, rates in the catastrophe XL market – which accounts for less than 10% of our total portfolio – came under pressure due to the inflow of capital from alternative markets (ILS).
Thanks to our excellent rating and financial standing we are a valued partner for our clients, especially when it comes to long-tail liability placements. Access to the entire market spectrum enables us to optimally diversify our portfolio. Our business is made up of more than 2,000 treaties spread across almost 600 clients.
Non-life reinsurance: Breakdown of gross written premium in North America by line of business
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Casualty business continued to grow in appeal. Almost all lines saw further rate increases combined with a reduced loss incidence. On the property side, as expected, rates improved on the back of the losses from hurricane “Sandy”, although in the third and fourth quarters a slight softening – especially in industrial lines – could be observed. Given that the overall level was nevertheless highly satisfactory, we continued to expand our property portfolio.
The major loss situation in North America was crucially shaped in the year under review by the flood events in Canada. While Alberta, in particular, suffered flooding as a consequence of heavy rainfall, the US was affected by a series of tornadoes. On the other hand, hurricane events with implications for the reinsurance industry were once again absent in 2013. For further information on losses from natural disasters please see the section entitled “Global catastrophe business”.
We continued to expand our portfolio in the year under review thanks to an improved pricing environment. The premium volume for our business in North America grew as expected by 4.7% to EUR 1,176.8 million, an outcome which we consider satisfactory. The combined ratio for our North American business stood at 92.9% in the year under review after 102.5 % in 2012. The operating profit (EBIT) increased to EUR 235.5 million (EUR 150.8 million).
Specialty lines
The development of our specialty lines was satisfactory. We include in this segment marine and aviation, credit and surety, structured reinsurance products, insurance-linked securities (ILS), the London market and direct business.
The premium volume contracted from EUR 2,797.7 million to EUR 2,594.2 million in the year under review. The combined ratio improved from 96.5% to 94.0%. The operating profit (EBIT) for specialty lines met our target at EUR 299.7 million (EUR 314.3 million).
Marine
Our marine business fared very well in the year under review. Hannover Re ranks among the market leaders here in a number of regions. The strategy guiding our underwriting policy continues to be geared towards further selective diversification of the portfolio. Thus, for example, we gained additional market shares in Asia, most notably in India and China, as well as in Brazil. In some European countries, on the other hand, we scaled back our involvement in the face of a more pronounced competitive environment. We continue to take a restrictive approach to writing offshore risks in the Gulf of Mexico owing to the considerable potential for natural hazards exposure.
Gross premium for our marine portfolio decreased by 5.8% to EUR 290.8 million (EUR 308.6 million).
In view of the heavy losses incurred by reinsurers from shipping accidents – especially the incident involving the “Costa Concordia” cruise ship in 2012 –, it was possible to secure appreciable price changes for P&I (Protection & Indemnity) reinsurance arrangements under loss-impacted programmes in the renewals at the beginning of 2013. Even in areas that saw increased exposures for primary insurers, such as offshore business, rising prices and structural adjustments were obtained on the reinsurance side. Additional capacities from the ILS market played no significant role in marine reinsurance because, among other things, there are no means of modelling the risks.
In the year under review we incurred a major loss for which we set aside reserves of EUR 20.7 million. The claims situation in marine business was, however, also notable for a deterioration in the run-off of losses from prior years. In particular, the doubling of the salvage costs for the “Costa Concordia” left a mark. This state of affairs had no substantial effect on our net loss expenditure, however, owing to corresponding protection covers that we had purchased.
The underwriting result for our marine business was considerably better than in the previous year of heavy losses. The combined ratio was very good at 76.2% (114.8%). The operating profit (EBIT) climbed appreciably to EUR 71.5 million (EUR 2.5 million).
Aviation
In international aviation reinsurance, too, Hannover Re is one of the market leaders.
In airline fleet business the (re)insurance industry benefited from both the rising insured values of aircraft and higher passenger numbers. General aviation business, on the other hand, was flat in many regions with fewer private aircraft being purchased as economic uncertainties persist.
The loss experience in the aviation market remains very favourable relative to the multi-year historical average. This trend can be attributed above all to technical advances in aviation safety systems.
Although the burden of major losses continued to be below average, the year under review saw a higher frequency of hull losses. This development did not, however, have any significant implications for reinsurers because for the most part the claims remained within the retention carried by primary insurers. Given a moderate loss situation overall and the existing surplus capacities, rates in aviation business continued to soften.
In a market that is not without its challenges on the whole, our goal is to preserve our portfolio and further consolidate it where necessary. We successfully achieved this aim in the year under review. The premium volume for our total aviation portfolio contracted slightly, as forecast, to EUR 402.5 million (EUR 415.7 million).
The largest single loss in 2013 was the crash landing of a passenger plane at San Francisco airport. The resulting net loss for Hannover Re amounted to EUR 20.3 million. We are thoroughly satisfied with the underwriting result. The combined ratio stood at 78.4% (81.8%), a testament to the strong profitability of our aviation portfolio. The operating profit (EBIT) retreated slightly to EUR 103.6 million (EUR 112.6 million).
Credit and surety
In worldwide credit and surety reinsurance Hannover Re ranks among the market leaders.
With the global economy showing tepid growth and in the face of generally difficult economic conditions, the number of insolvencies remained high. Nevertheless, credit insurance largely resisted this trend thanks to a disciplined underwriting policy. Expenditure on basic losses therefore remained on a moderate level; only in terms of the absolute loss amounts was a slight increase recorded. Rates in credit reinsurance remained broadly stable.
An increased number of mid-sized basic losses was observed in surety insurance in 2013. This development was due to the fact that the repercussions of the crisis in the construction industry only made themselves felt after a time delay. Improvements in conditions were possible in some markets in response to the increased claims expenditure. From an overall perspective, surety markets remained stable.
Despite greater risk awareness, the claims burden in the area of political risks remained low. Prices in this line consequently showed a moderate decrease.
In view of a prevailing capacity surplus and the diminishing appeal of treaty conditions in credit and surety reinsurance, further expansion of our market share was not a priority for us. Only in cases where our required margins were met did we undertake measured expansion of our portfolio. This was especially true of business with political risks in the year under review.
Gross premium income increased by 2.2% in 2013 to EUR 630.5 million (EUR 616.7 million). On the whole, we are satisfied with the development of our credit and surety business in the year under review. The increased frequency of mid-sized losses was largely offset by a positive run-off of prior underwriting years. The combined ratio amounted to 94.2% (90.4%). The operating profit (EBIT) came in at EUR 70.0 million (EUR 107.8 million).
Structured reinsurance
Hannover Re is one of the largest providers in the world of structured reinsurance solutions. These products are designed, among other things, to optimise the cost of capital for our ceding companies.
As forecast, demand for bespoke alternative reinsurance solutions continued to grow in the year under review. This trend also includes aggregate excess of loss covers, which protect the net retention of our clients against significant loss scenarios with a low probability of occurrence.
Growth impetus for structured reinsurance is deriving in particular from preparations for the adoption of Solvency II in the European Union as well as from the implementation of risk-based capital requirements in various countries.
In keeping with our objective we pressed ahead with the enlargement of our customer base and further improved the regional diversification of our portfolio in the year under review. We also stepped up our involvement in the area of aggregate excess of loss covers. Quota share arrangements in motor business designed to deliver solvency relief continued to enjoy brisk demand.
The premium volume for structured reinsurance contracted in the year under review. Results fell slightly short of our expectations owing to an increased loss frequency and the strengthening of reserves for a medical malpractice programme.
Insurance-Linked Securities (ILS)
Demand for ILS products not only on the capital market but also among investors from the traditional reinsurance and primary insurance market showed no signs of easing. Thus, for example, we were able to renew our “K” quota share – a modelled quota share cession consisting of non-proportional reinsurance treaties in the property, catastrophe, aviation and marine (including offshore) lines that we have placed inter alia on the ILS market for almost 20 years – on a virtually unchanged level of around USD 320 million for 2013.
In addition to using the capital market to protect our own property catastrophe risks, we transfer risks to it in a structured and packaged form on behalf of our cedants. We also take the role of investor ourselves by investing in catastrophe bonds.
The year under review, just like the previous year, brought another strong inflow of cash into the ILS market. On the one hand, investors value the low correlation with other financial assets and the associated diversification, while at the same time they also find the market for insurance risks relatively appealing in comparison with other investments. As a result, catastrophe bonds have enjoyed lively demand among the investor community. Prices for these bonds have consequently fallen considerably. Yet the issuance of catastrophe bonds has also become a more attractive proposition. The volume of new issues in the market was once again higher.
The available funds currently exceed by far the opportunities for new investments in catastrophe bonds. This has prompted investors to look for other means of investing in the reinsurance sector. So-called collateralised reinsurance programmes enjoyed particularly strong growth in the year under review and have now surpassed the volume of funds invested in catastrophe bonds. Under collateralised reinsurance business the investor assumes reinsurance risks that are normally collateralised in the amount of the limit of liability.
Hannover Re’s product range encompasses the entire spectrum of activities typically associated with the ILS market. We thereby offer investors optimised and customised access to the capital market. In the year under review we further expanded our cooperation with selected managers of investor funds in the area of collateralised reinsurance business and were able to generate attractive margins. When it comes to investing in catastrophe bonds, on the other hand, we showed restraint on account of the sharp decline in prices.
United Kingdom, London market and direct business
Traditional reinsurance We are satisfied with the reinsurance business that we write in the United Kingdom and on the London market. The rate level remained stable overall. Building on the very favourable market conditions in non-proportional motor reinsurance in 2012, we secured further appreciable rate increases in the year under review. Against this backdrop we doubled our premium volume in this area. As anticipated, we were able to expand our UK portfolio in 2013.
Direct business We write our direct business through two subsidiaries, International Insurance Company of Hannover Plc (Inter Hannover) in the United Kingdom and the South African company Compass Insurance Company Limited, a subsidiary of Hannover Reinsurance Africa Limited. This essentially involves tightly defined portfolios of niche or other non-standard business that complements our principal commercial activity as a reinsurer.
The state of the UK economy showed no significant improvement compared to 2012. Fierce competition continued to prevail among the insurers and reinsurers writing business in this market. In many lines this was inevitably reflected in a deteriorating rate level. In contrast to the non-proportional reinsurance sector, rates in motor primary business retreated after short-lived rallies. Private homeowners insurance as well as covers for small and mid-sized businesses were also impacted by rate erosion. We responded by significantly scaling back our exposures in these areas from agency acceptances.
Inter Hannover’s business written in Sweden continued to perform highly satisfactorily. The focus there is on the marine and aviation lines. The development of business at the branches in Australia and Canada – markets which are highly competitive – was in line with expectations.
The South African non-life reinsurance market reached the lowest point of the soft market in 2013. In common with most insurers in South Africa, Compass Insurance Company Limited, our second company writing specialty lines, failed to achieve its profit targets on account of heavy losses. The market losses did, however, put a stop to rate reductions and virtually all market players have announced or in some cases already implemented significant increases for 2014. Compass Insurance Company Limited and the local partner underwriting managers belonging to the Hannover Re Group are ideally placed to profit from these rate improvements.
Global reinsurance
We combine all markets worldwide under global reinsurance with the exception of our target markets of Germany and North America and the specialty lines. This segment also encompasses global catastrophe business, facultative reinsurance, the reinsurance of agricultural risks and Sharia-compliant retakaful business.
The premium volume grew by 6.4% in the year under review to EUR 2,966.1 million (EUR 2,788.7 million). This is in line with our forecast of stable growth. The combined ratio decreased from 90.9% to 90.4%. The operating profit (EBIT) improved from EUR 507.1 million to EUR 556.5 million.
Worldwide treaty reinsurance
Non-life reinsurance: Breakdown of gross written premium in worldwide treaty reinsurance by line of business
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We were satisfied with the development of our worldwide treaty reinsurance portfolio. The gross premium volume grew by 7.4% to EUR 1,691.6 million and was thus in line with our expectations. The combined ratio improved from 96.3% to 94.3%. The operating profit (EBIT) came in as planned, rising to EUR 268.2 million.
Europe European markets continue to be fiercely competitive; this is true both of countries in Central and Eastern Europe and of mature markets such as France. On the whole, market conditions here are still very soft. As anticipated, prices retreated slightly in most lines of business. In builder’s risk insurance the challenging economic circumstances led to sharply lower premiums. No significant loss events occurred in France in 2013. The premium volume for Hannover Re remained stable in the year under review.
Despite very tight margins, we were able to enlarge our market share in Spain and Portugal thanks to regrouping of the portfolio. While industrial fire business recorded further losses, the situation in Spain was dominated by the devastating accident near Santiago de Compostela involving a high-speed passenger train, which caused numerous fatalities. This incident did not result in a major loss for Hannover Re.
The markets of Northern Europe are served by our branch in Stockholm. Although large industrial programmes continued to be highly competitive, the situation in retail insurance lines was considerably more relaxed. Rates in general remained broadly stable. No major loss events were recorded.
Compared with the primary insurance markets of Western Europe, growth rates in the countries of Central and Eastern Europe continue to be above average. As a result, competition remains intense and original rates in most countries are under pressure. On the reinsurance side, by contrast, prices and conditions in the year under review were again broadly commensurate with the risks, thereby enabling us to boost our premium volume as forecast. We have defined the markets of Central and Eastern Europe as strategic growth markets and it remains our assumption – based on a selective underwriting policy – that we can generate further strong profitability going forward. In terms of losses, various Central and Eastern European countries were impacted by severe flooding in the summer of 2013; we also incurred a number of basic losses. Despite this, we were thoroughly satisfied with the development of our business in the markets of Central and Eastern Europe.
Latin America Hannover Re is well positioned in Latin America and a market leader in some countries. The most important markets for our company are Brazil – where a survey found us to be one of the three most highly regarded reinsurers –, Mexico, Argentina, Colombia and Ecuador.
Latin American markets have enjoyed very vigorous growth in recent years. In Brazil further programmes were launched to stimulate the economy. The country is investing heavily in infrastructure and power generation as it prepares for two major sporting events, the FIFA World Cup in 2014 and the 2016 Olympic Games. These growth incentives continued to foster rising demand for (re)insurance covers in the year under review.
In Brazil, a market in which we operate as an “admitted reinsurer”, we ensure close business ties with our clients through a representative office. Although competition here is intensifying, we are very well positioned in the market and a valued partner thanks to our excellent financial standing.
In view of the competitive climate, rising loss ratios and major losses in property business, we wrote our business highly selectively. We increased our shares in areas where we considered business to be attractive, for example by further enlarging our casualty and motor portfolio in the year under review.
In Argentina we succeeded in slightly expanding our portfolio despite the restrictions placed on foreign reinsurers. In Chile, Peru and Panama we boosted our market share while staying firmly focused on the profitability of the business written. Losses were incurred from several hurricanes in Mexico, although these did not result in a major loss for Hannover Re. These events did, however, have a favourable effect on reinsurance prices. Double-digit percentage increases in rates were pushed through for treaties that had been impacted by losses.
Asia-Pacific region The Asia-Pacific countries are considered a growth region by Hannover Re. In the year under review we again extended our position here. Developments in the individual markets – in common with the markets themselves – were very mixed. On the whole, the region was shaped by intense competition coupled with heavy losses in previous years as well as by losses in the year under review.
In Japan, a key market for our company, we were able to slightly expand our premium volume as planned. After the heavy losses incurred in 2011 conditions remained stable on a good level. Our broadly diversified product range and proven long-standing loyalty to our Japanese cedants enabled us to successfully set ourselves apart from our competitors. At the same time, though, the market consolidation and associated synergistic effects at our clients as well as adverse movements in the exchange rate presented a challenge.
Catastrophe covers, an important area of business in Japan, did not suffer any notable loss events in the year under review. Nor were there any appreciable losses in property, casualty and accident insurance – lines in which we often take the role of lead reinsurer –, as a consequence of which we were highly satisfied with the results of our Japanese portfolio.
While the Chinese insurance market failed to expand quite as vigorously in the year under review as it had in prior years, the growth was nevertheless considerably stronger than in mature insurance markets. Having scaled back our portfolio at the outset of 2013 in the face of soft conditions and hence insufficient profit expectations, we successfully intensified our business relations with selected clients as the year progressed. All in all, the market remained fiercely competitive, as was evident not only in original business but also in conditions for reinsurance treaties. With this in mind, we wrote our portfolio extremely selectively. Despite this, we were able to slightly enlarge the premium volume. Our underwriting result was adversely impacted in the year under review by a major loss at a semiconductor memory fabrication plant and two typhoons.
The aforementioned semiconductor fire also had repercussions on the Korean market, since the operator of the Chinese factory was a Korean company. In what is in any case a highly competitive market – we write exclusively non-proportional covers in the property and casualty insurance segment – this led to a sharply poorer result.
In South and Southeast Asia we were again able to substantially improve our market position. Driven first and foremost by rising insurance densities, almost all insurance markets in this region posted disproportionately strong growth. Yet the tragic effects of typhoon “Haiyan”, which devastated parts of the Philippines and claimed thousands of lives, showed just how far many countries in this region still are from an area-wide and sustainable insurance density. Against this backdrop, the losses for the insurance industry were rather moderate; the cost of this event for our company, at EUR 18.5 million, was also comparatively slight.
In many parts of this region our portfolio consists predominantly of property and motor business. We reduced the proportion of catastrophe-exposed business in the year under review because we did not consider conditions to be commensurate with the risks.
In India we established a service company that concentrates exclusively on the growing segment of microinsurance. Provincial governments and local insurers are advised on products that can provide insurance protection for low-income individuals.
We are thoroughly satisfied with the development of our business and our results in South and Southeast Asian markets. Our premium volume surged more strongly in the financial year than had been forecast. Growth was driven inter alia by niche lines. The burden of major losses in 2013 came in below expectations.
Unlike in the previous years, the loss situation in Australia and New Zealand was relatively untroubled in terms of natural disasters. Adverse effects on our portfolio were therefore minimal. Even the bushfires close to Sydney failed to reach the scale that had been feared. Taken in conjunction with very low claims activity in the other lines, this prompted initial concessions over terms and conditions.
Thanks to our strong market position we benefited from an increased need for capacity driven by the more exacting capital requirements imposed by local insurance regulators.
On the whole, the development of our portfolio in Australia and New Zealand was satisfactory. As expected, our premium volume increased slightly in the year under review..
Retakaful business We write retakaful business – that is to say, reinsurance transacted in accordance with Islamic law – both on the Arabian Peninsula and in Southeast Asia. We maintain a dedicated subsidiary for this business in Bahrain (Hannover ReTakaful) as well as a branch that bears responsibility for writing traditional reinsurance in the Arab world.
The economy in this region continues to develop satisfactorily. Growth is driven in particular by government spending on infrastructure as well as oil and gas projects. The primary insurance market remains highly competitive, thereby adding to the pressure on rates. On the reinsurance side new providers with additional capacities forced their way into the markets.
Hannover Re is strongly placed in retakaful business. Our largest single market continues to be Saudi Arabia, followed by Malaysia. Our strategy is geared to further profitable growth. We maintained the lead position in our most important markets without neglecting our profitability requirements.
The premium volume increased by around 10% in the year under review. Retakaful business can be expected to show further dynamic growth over the coming years.
The largest loss events were fires at a sugar factory in Saudi Arabia and at a Dubai airport building under construction in the United Arab Emirates. The resulting strains for our account were each in the mid-single-digit million euro range.
Agricultural risks Demand for the insurance of agricultural land and livestock continued to grow, driven by a steadily rising need for food and increasing extremes of weather as a consequence of climate change. This was especially true of developing countries.
In view of the growing premium volume written by primary insurers, the volume for reinsurance covers also increased worldwide. Hannover Re, one of the largest reinsurers of agricultural risks, expanded its portfolio as planned in the year under review.
We successfully pursued our strategy of diversifying our portfolio both in terms of its geographical spread and the breakdown by lines of business; a larger share of livestock covers, for example, played a part here.
After the heavy losses incurred in 2012 the loss situation in the year under review was moderate. Argentina recorded an elevated intensity and frequency of hail events, the expenditures on which have already had positive implications for rates. Hannover Re did not incur any major losses from agricultural risks in the year under review.
Global catastrophe business
We write the bulk of our catastrophe business out of Bermuda, which has established itself as the worldwide centre of competence for this line. In the year under review our subsidiary Hannover Re (Bermuda) Ltd. also began to write some of the specialty lines with a view to diversifying the portfolio.
The environment was more competitive in 2013, especially in US catastrophe business. Although hurricane “Sandy” had served to stabilise rates in the renewals as at 1 January 2013, appreciable rate erosion was observed over the course of the year. The additional capacities from the market for catastrophe bonds (ILS) was a particularly important factor here. However, the reduced margins in US catastrophe business have merely limited implications for Hannover Re because this only accounts for a small part of our portfolio.
After an uneventful first three months, the subsequent quarters of 2013 – especially in Europe – witnessed a series of natural disasters. These did not, however, usher in a more favourable rate trend for the catastrophe covers market as a whole. The sometimes substantial losses merely prompted rate adjustments on a regional basis. Germany was especially heavily impacted by natural disasters in the year under review. Along with severe flooding, the German (re)insurance industry also had to absorb losses from several hailstorms. In addition, further windstorm events caused heavy losses in other European countries, including the United Kingdom.
The hurricane season in the United States and the Caribbean, by contrast, passed off very quietly. No storm of hurricane strength reached the US mainland. Nevertheless, tornado events left a trail of devastation in the United States with corresponding insured losses. In Canada two flood events resulted in unprecedented losses, with a combined net cost for Hannover Re of EUR 60.9 million.
The development of our catastrophe-exposed business in the Asia-Pacific region was satisfactory: the price level in Japan remained comparatively high owing to major losses from previous years. This was also true of the Australian and New Zealand markets. We did not incur any major losses here.
The gross premium volume in our global catastrophe business increased by 6.5% in the year under review to EUR 433.1 million (EUR 406.7 million). The combined ratio deteriorated slightly year-on-year as we had anticipated to stand at 65.1% (50.9%). The operating profit (EBIT) moved modestly lower to EUR 156.3 million (EUR 167.1 million).
Facultative reinsurance
In contrast to obligatory reinsurance, a reinsurer underwrites primarily individual risks in facultative business. The general environment for both types of reinsurance in the various markets is, however, for the most part comparable.
Building on strong growth in the United States in 2012 our premium volume continued to expand in the year under review, albeit at a more moderate pace. We enlarged our motor liability portfolio and – as in the previous year – the share of agency business. We also extended our exposure to niche lines, such as event cancellation covers and special accident insurance solutions, e.g. for sports professionals. Our participation in the property line also grew, although the increase was moderate because our involvement in regions with natural catastrophe exposure is restricted and hence our risk appetite is limited. The flood events in Canada had no effects on our facultative portfolio.
In worldwide energy business we further enlarged our market share as planned in 2013. Faced with a relatively unfavourable environment, however, our growth was limited. We stepped up our exposure to the offshore construction sector, thereby boosting our energy portfolio, while our participation in mining insurance was scaled back slightly. In Germany, too, we moved forward with our involvement in construction covers for wind farms.
In cooperation with an external partner we developed and launched on the market an energy-saving insurance solution for industrial enterprises. Not only that, we also stepped up our underwriting of construction all risk (CAR)/advance loss of profits (ALOP) business in our domestic German market.
Growth was also booked in Central Europe and in Latin America, where most notably we expanded our non-proportional property and engineering portfolio.
With attractive opportunities opening up not only in the United Kingdom but also internationally, we made the most of 2013 to stabilise the professional indemnity line.
We are broadly satisfied with the development of our total facultative portfolio in the year under review: we further diversified our business and generated profitable growth, while at the same time suffering a sizeable accumulation of mid-sized losses in 2013. Our premium volume increased by 4.2% to EUR 841.5 million and thus lived up to the forecast growth. The combined ratio was slightly below the level of the previous year at 91.6%. The operating profit (EBIT) remained stable as expected at EUR 131.9 million (EUR 130.5 million).