Business development

We are thoroughly satisfied with the development of our business in the year under review. Market conditions for financially strong reinsurers such as Hannover Re were good in both non-life and life/health reinsurance. Gross premium in total business grew to EUR 11.4 billion (EUR 10.3 billion). The operating profit (EBIT) climbed to EUR 1.2 billion (EUR 1.1 billion), while the Group net income of EUR 748.9 million (EUR 733.7 million) surpassed both our forecast and the record profit reported in the previous year.

Even though a trend towards softening reinsurance conditions could be observed in some non-life reinsurance markets, not all lines were affected in the same way. Overall, prices were still very much commensurate with the risks. The 2010 financial year was impacted by the large number of (natural) catastrophe losses; for our company too, the burden of major losses significantly exceeded our expectations. Nevertheless, these strains were offset by the otherwise good performance of our non-life reinsurance portfolio. For further details of developments in non-life reinsurance in the year under review please see here.

Our second business group, life and health reinsurance, delivered particularly vigorous growth. Its contribution to the total premium volume now stands at 44.5%. Given the low volatility of results we have set ourselves premium growth targets here – unlike in non-life reinsurance. In the year under review we achieved in full not only these goals but also our profit targets. For detailed comments on the development of business in life and health reinsurance please see here.

Gross premium by business group (pie chart)

premium by business group (pie chart) enlarge zoom

We are also highly satisfied with the development of our investments. Thanks to positive cash inflows from the technical account and improvements in fair values, our portfolio of assets under own management grew appreciably to EUR 25.4 billion (EUR 22.5 billion). Despite the overall decline in interest rate levels ordinary income consequently surpassed the comparable figure for the previous year at EUR 880.5 million (EUR 810.5 million). Income on funds withheld and contract deposits climbed to EUR 316.4 million (EUR 276.8 million).

The impairments of EUR 16.5 million taken on securities (excluding real estate) were considerably lower than in the previous year (EUR 141.3 million). Of this amount, EUR 7.7 million (EUR 92.6 million) was attributable to alternative investments – primarily private equity funds. Write-downs of just EUR 0.6 million (EUR 3.2 million) had to be taken on equities, while on fixed-income assets they contracted sharply to EUR 7.9 million (EUR 45.4 million). In view of increased fair values, the writedowns were opposed by write-ups of EUR 24.1 million (EUR 9.3 million) on fixed-income securities written down in previous periods as well as write-ups of EUR 3.0 million (EUR 10.8 million) on alternative investments.

The unrealised losses on our assets recognised at fair value through profit or loss amounted to EUR 39.9 million, as against unrealised gains of EUR 100.6 million in the previous year. The losses derived predominantly (EUR 31.2 million) from changes in the value of inflation swaps taken out to hedge inflation risks associated with the loss reserves in our technical account. Particularly in light of the attractive market environment for fixed-income securities, we realised amounts of altogether EUR 162.0 million (EUR 113.0 million). In the second half of the year we began to move back into listed equities; our equity allocation at year-end was 2.1%.

Compared to the previous year, we were again able to boost our net investment income from assets under own management – it totalled EUR 942.5 million (EUR 843.6 million) in the financial year just-ended. Net investment income including income on funds withheld and contract deposits amounted to EUR 1.3 billion (EUR 1.1 billion).

Demand for reliable reinsurance protection remained strong in the year under review. Premium income consequently grew more vigorously than anticipated: gross premium in total business increased by 11.2% to EUR 11.4 billion (EUR 10.3 billion). At constant exchange rates – especially against the US dollar – growth would have come in at 6.8%. The level of retained premium retreated to 90.1% (92.6%). Net premium earned climbed 7.9% to EUR 10.0 billion (EUR 9.3 billion).

Group net income for the year under review substantially exceeded our expectations. A very good profit on ordinary activities was assisted by a special effect associated with a decision of the Federal Fiscal Court (BFH) which had a bearing on our company. After the BFH had confirmed in its ruling of 13 October 2010 that taxation of foreign sourced investment income recorded by Irish subsidiaries was not permissible, we were able to release provisions that had been constituted in this regard. The core of the legal dispute revolved around the question of whether investment income generated by a reinsurance subsidiary based in Ireland was subject to taxation at the parent company in Germany. The ruling of the BFH confirmed the decision in the first instance of the Lower Saxony Fiscal Court in Hannover. Against this backdrop, all tax risks were reassessed. This resulted in an increase of altogether EUR 112.2 million in Group net income.

In December 2010 we reached agreement on the sale of all operational companies of our US subsidiary Clarendon Insurance Group, Inc., New York, to the Bermuda-based Enstar Group Ltd., Hamilton. The transaction, which is still subject to the customary foreign regulatory approvals, is expected to close in the second quarter of 2011. The purchase price of Clarendon, which has been in run-off since 2005, is equivalent to EUR 162.5 million before final price determination. The sale enables us to reduce material risks for our company, including for example those connected with reinsurance recoverables on unpaid claims. We are also able to eliminate operational risks associated with the run-off of a US primary insurer as well as considerable administrative expenses that would have been incurred in subsequent years. In accordance with IFRS accounting practice, the sale of Clarendon produces a charge of EUR 69.2 million to our Group net income in the year under review, which is recognised in the non-life reinsurance business group.

The operating profit (EBIT) booked by Hannover Re increased to EUR 1.2 billion (EUR 1.1 billion) in 2010. The previous year had been influenced by positive special effects in life and health reinsurance amounting to EUR 144.7 million. These derived from the acquisition of the ING life reinsurance portfolio as well as the reversal of unrealised losses on deposits held by US cedants on behalf of Hannover Re (ModCo). The Group net income of EUR 748.9 million once again surpassed the outstanding level of the previous year (EUR 733.7 million). A very healthy underlying operating profit and favourable nonrecurring effects associated with the decision of the Federal Fiscal Court were both factors in this positive performance. Earnings per share amounted to EUR 6.21 (EUR 6.08).

Our shareholders’ equity excluding minority interests also developed particularly favourably, rising in the year under review from EUR 3.7 billion to EUR 4.5 billion. The policyholders’ surplus increased from EUR 5.6 billion to EUR 7.0 billion. The return on equity for 2010 came in at 18.2%.

In September 2010 we used the relatively low interest rate level to place subordinated hybrid debt of EUR 500 million on the European capital market. The bond, which has a term of 30 years, serves to further optimise our capital structure as well as to back future growth with the necessary capital resources.

We use retrocession, i.e. the passing on of portions of our covered risks to other reinsurers, as a means of risk reduction. In the course of the year the reinsurance recoverables on unpaid claims – i.e. receivables due to us from our retrocessionaires – decreased to EUR 1.0 billion (EUR 1.7 billion). Of this total reduction, an amount of EUR 0.8 billion results from the sale of Clarendon. We continue to attach considerable importance to the quality of our retrocessionaires: 92.4% of the companies with which we maintain such business relations have an investment grade rating of “BBB” or better from Standard & Poor’s.

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