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Property & Casualty reinsurance
| Key figures for Property & Casualty reinsurance | ||||||
|---|---|---|---|---|---|---|
| in EUR million | 2016 | +/– previous year |
2015 | 2014 | 2013 | 20121 |
| Gross written premium | 9,204.6 | -1.4% | 9,338.0 | 7,903.4 | 7,817.9 | 7,717.5 |
| Net premium earned | 7,985.0 | -1.4% | 8,099.7 | 7,011.3 | 6,866.3 | 6,854.0 |
| Underwriting result | 479.1 | +10.8% | 432.2 | 351.5 | 335.5 | 272.2 |
| Net investment income | 900.9 | -4.7% | 945.0 | 843.6 | 781.2 | 944.5 |
| Operating result (EBIT) | 1,340.3 | -0.1% | 1,341.3 | 1,190.8 | 1,061.0 | 1,091.4 |
| Group net income | 949.9 | +3.8% | 914.7 | 829.1 | 807.7 | 685.6 |
| Earnings per share in EUR | 7.88 | +3.8% | 7.58 | 6.88 | 6.70 | 5.68 |
| EBIT margin2 | 16.8% | 16.6% | 17.0% | 15.5% | 15.9% | |
| Retention | 88.5% | 89.3% | 90.6% | 89.9% | 90.2% | |
| Combined ratio3 | 93.7% | 94.4% | 94.7% | 94.9% | 95.8% | |
| 1 Adjusted pursuant to IAS 8 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, Property & Casualty reinsurance is Hannover Re’s largest business group. It is structured according to our Board areas of responsibility, namely “Target markets”, “Specialty lines worldwide” and “Global reinsurance”.
Given the continued absence of market-changing large losses, intense competition once again shaped the development of business in the year under review. Primary insurers remain in a position to carry high retentions thanks to their healthy capital resources. At the same time, capital is increasingly flowing into the reinsurance market from the steadily expanding ILS sector (including catastrophe bonds and collateralised reinsurance) owing to the lack of higher-yield investment alternatives. As a result, the available capacity in the reinsurance market continues to clearly outstrip demand.
These factors again cast a shadow over the treaty renewals as at 1 January 2016. Even though the price decline was considerable in some markets, we were still able to preserve healthy profitability for our portfolio thanks to our broad-based diversification. Business with agricultural risks was relatively divorced from the soft property and casualty reinsurance market. Aviation and marine business, on the other hand, saw sharp rate declines, prompting us to scale back our premium volume here. In the further rounds of renewals during the year the rate trend largely continued along these lines, although indications of a stabilisation in reinsurance prices did emerge in individual lines and markets, including for example in North America.
In this challenging environment it was particularly important for Hannover Re to systematically pursue its margin-oriented underwriting. It remains the case that we expand our business only in areas where the margins are commensurate with the risks. On the other hand, we reduce our involvement in regions and lines where the prices do not meet our profitability standards. We focused heavily on our existing business, and were thus again able in the year under review to benefit from our long-standing customer relationships and our position as one of the world’s leading and most financially robust reinsurance groups.
Gross premium contracted as expected in the year under review by a modest 1.4% to EUR 9.2 billion (previous year: EUR 9.3 billion); at constant exchange rates it would have remained stable. This is in line with our forecast of a slight decline in the currency-adjusted gross premium volume. The level of retained premium retreated to 88.5% (89.3%). Net premium earned fell by 1.4% to EUR 8.0 billion (EUR 8.1 billion); adjusted for exchange rate effects, it would have been unchanged.
The most notable large losses in the 2016 financial year were a number of major earthquakes and windstorm events; various man-made losses were also incurred. All in all, however, the burden of losses for our account was in line with our expectations. The most expensive event for our company was the devastating forest fires in the Canadian province of Alberta, with a net loss of EUR 127.9 million. After several years of rather benign storm seasons in the United States and the Caribbean, the year under review brought a costly event in the shape of Hurricane Matthew: the resulting net strain for Hannover Re amounted to EUR 70.3 million. The earthquakes in Ecuador and New Zealand similarly gave rise to significant losses. Total net major loss expenditure for the year under review amounted to EUR 626.6 million (EUR 572.9 million). While this figure is higher than in the previous year, it is still below our budget of EUR 825 million. For a detailed list of our catastrophe and large losses please see page 85. The underwriting result climbed by 10.8% to EUR 479.1 million (EUR 432.2 million). The combined ratio for the year under review of 93.7% (94.4%) was clearly better than our targeted mark of 96%. Aside from the favourable development of the technical account, this was also partly due to the reversal of reserves from prior years that were no longer required.
Investment income for the Property & Casualty reinsurance business group contracted as expected by 4.7% to EUR 900.9 million (EUR 945.0 million). The operating profit (EBIT) was once again very pleasing at EUR 1,340.3 million; it thus fell fractionally short of the record level in the comparable period (EUR 1,341.3 million). The EBIT margin climbed from 16.6% to 16.8%, hence clearly beating our minimum target of 10%. Group net income came in at EUR 949.9 million, surpassing the previous year’s result of EUR 914.7 million by 3.8%. Earnings per share for this business group amounted to EUR 7.88 (EUR 7.58).
On the following pages we report in detail on developments in the individual markets and lines of our Property & Casualty reinsurance business group, split into the three areas of Board responsibility referred to at the beginning of this section.
| Property & Casualty reinsurance: Key figures for individual markets and lines in 2016 | ||||||
|---|---|---|---|---|---|---|
| Gross premium 2016 in EUR million | Change in gross premium relative to previous year | Gross premium 2015 in EUR million | EBIT in EUR million | Combined ratio | Maximum tolerable combined ratio (MtCR) | |
| Target markets | 3,007.0 | +2.8% | 2,925.5 | 598.2 | 92.5% | 95.4% |
| North America | 1,619.7 | +8.4% | 1,493.8 | 393.3 | 91.0% | 96.9% |
| Continental Europe | 1,387.3 | -3.1% | 1,431.7 | 204.9 | 94.3% | 93.8% |
| Specialty lines worldwide | 2,646.6 | -9.4% | 2,920.4 | 447.8 | 90.9% | 96.7% |
| Marine | 277.5 | -6.6% | 297.1 | 138.1 | 38.5% | 93.3% |
| Aviation | 278.7 | -26.1% | 377.3 | 108.9 | 72.8% | 99.4% |
| Credit, surety and political risks | 613.5 | +1.3% | 605.6 | 8.3 | 104.9% | 94.9% |
| UK, Ireland, London market and direct business | 505.6 | -2.7% | 519.7 | 97.5 | 95.6% | 97.6% |
| Facultative reinsurance | 971.4 | -13.3% | 1,120.7 | 95.0 | 95.6% | 97.2% |
| Global reinsurance | 3,550.9 | +1.7% | 3,492.1 | 294.3 | 97.1% | 95.4% |
| Worldwide treaty reinsurance | 1,885.0 | +4.1% | 1,810.4 | 65.5 | 103.9% | 96.1% |
| Catastrophe XL (Cat XL) | 357.2 | -4.7% | 374.9 | 154.9 | 55.9% | 79.0% |
| Structured reinsurance and insurance-linked securities | 1,308.7 | +0.1% | 1,306.8 | 73.9 | 97.3% | 98.9% |
Target markets
Hannover Re classifies North America and Continental Europe as target markets. The premium volume here increased by 2.8% to EUR 3,007.0 million (EUR 2,925.5 million). Growth lived up to our expectations. The combined ratio improved substantially from 99.0% to 92.5%. The operating profit (EBIT) consequently rose to EUR 598.2 million (EUR 445.1 million).
North America
The North American (re)insurance market is the largest single market both worldwide and for Hannover Re. Our business here is written almost exclusively through brokers.
Even though the US economy paused for breath in 2016 and recorded slower growth than in the comparable year, our clients – primary insurers – booked an increase in premium volume, especially in the loss-prone lines of workers’ compensation and motor business, for which prices improved. The general rate trend, however, remained negative and ceding companies additionally struggled to cope with low investment income. Some market players are no longer able to generate their target return on equity. Against this backdrop, the level of reserves is dropping and at some companies – particularly those with high exposures to the commercial motor line – there is already a need to set aside additional reserves.
Overall, modest reductions in rates were observed; towards the end of the financial year a trend towards stability could be discerned. On the reinsurance side conditions in US casualty business remained broadly stable and an increase in premium was recorded. Non-proportional property business saw slight rate reductions – especially under profitable, loss-free programmes –, but conditions held up rather well.
We are a valued and respected partner in North America thanks to our long-standing experience and robust financial strength. This has been borne out for more than ten years now by the findings of the “Flaspöhler Broker Survey”, in which Hannover Re placed first in the “Best Overall Reinsurer” category. In the year under review we added a very good second place in the corresponding “Cedant Survey”. Particularly bearing in mind that in North America we only operate through brokers, this is a pleasing testimony to our efforts. We further enlarged our customer base in the year under review.
As far as large losses in North America are concerned, mention should be made of two natural disasters: the loss situation in Canada was dominated by the forest fires in the region around Fort McMurray. Hurricane Matthew caused considerable damage in the Bahamas and on the East Coast of the United States between Florida and South Carolina. Details of these losses are provided in the section entitled Natural catastrophe business.
Positive price adjustments are evident in both the United States and Canada. Particularly under loss-impacted programmes and in Canada, we benefited from newly purchased reinstatement covers. In general liability business the rate situation has stabilised somewhat; in the professional indemnity lines we successfully pushed through modest price increases to a limited extent. We are seeing stronger demand for covers in the area of cyber risks, to which we are responding with appropriate capacities.
After exceptionally strong growth in the comparable year, the premium volume for our business in North America rose by a further 8.4% to EUR 1,619.7 million (EUR 1,493.8 million). Mid-single-digit percentage growth was similarly booked after adjustment for exchange rate effects. The combined ratio was lower than in the previous year at a very pleasing 91.0% (99.6%). The operating profit (EBIT) climbed to EUR 393.3 million (EUR 242.0 million), a result with which we are thoroughly satisfied.
Continental Europe
We group together the markets of Northern, Eastern and Central Europe as Continental Europa. The largest single market here is Germany. The premium volume for our business in Continental Europe in the year under review came in at EUR 1,387.3 million (EUR 1,431.7 million). The combined ratio improved to 94.3% (98.4%). The operating profit (EBIT) nudged higher to EUR 204.9 million (EUR 203.2 million).
Germany
The German market – the second-largest in the world for property and casualty reinsurance – is served within the Hannover Re Group by our subsidiary E+S Rück. As the “dedicated reinsurer for Germany”, the company is a sought-after partner thanks to its very good rating and the continuity of its business relationships. E+S Rück is superbly positioned in its domestic market and a market leader in property and casualty reinsurance.
The German insurance market also remains under considerable competitive pressure, especially in commercial and industrial business. New competitors with additional capacities entered the market despite protracted insufficient profitability, as a consequence of which the rehabilitation efforts undertaken by established providers proved partially ineffective.
Owing to the intensely competitive environment, there was no easing in the pressure on conditions in industrial property insurance. Only in general liability business and the engineering insurance lines could adequate rates be obtained. The development of the industrial fire line was once again unsatisfactory on account of heavy losses.
The situation in retail business was also strained. The largest line – motor insurance – offered little scope to cover the cost of capital in view of the higher average claim cost. Homeowners’ comprehensive insurance failed to move back into the black despite the steps taken in recent years to restore business to profitability. The positive results booked in the general liability, householders’ and accident lines nevertheless ensured that – taken together and allowing for run-off profits – all lines of property and casualty insurance closed with a combined ratio of less than 100%.
On the reinsurance side the German market showed significantly greater stability. Scarcely any sharp upward or downward deviations were observed here. Improved conditions were obtained under proportional treaties in various fire and fire loss of profits programmes. Premium income in proportional motor insurance showed modest growth, driven primarily by higher-value motor vehicle equipment – which is pushing up the costs associated with both collision damage and the rapidly rising theft losses.
Two developments are taking on growing significance in the German market: in the first place, the trend towards greater protection against cyber attacks in commercial and industrial insurance lines and, secondly, the technological advances being made in motor insurance. The proliferation of (partially) self-driving vehicles is expected to bring a reduction in claims expenditure and, as a result, a drop in motor premiums. With an eye to the roll-out of telematics tariffs, E+S Rück has entered into a cooperation arrangement with a mobile telephony provider in order to offer its customers support in this new subsegment.
Losses from natural catastrophes were lower in the year under review than in the previous year. From a long-term perspective, however, it is apparent that the alternation between years of light and heavy losses is shortening in duration. Localised events, in particular, caused significant losses in the 2016 financial year. Storms alone cost insurers some EUR 2 billion in 2016, for example, although this amount was around 20% lower than the average of recent years. Costing around EUR 1 billion, half of the losses were caused by the heavy rainstorm events Elvira and Friederike.
All in all, we are satisfied with the development of our German portfolio. Premium income for the year under review showed moderate growth; we had anticipated a slight contraction in premium volume in our guidance.
Rest of Continental Europe
There was no change in the fierce competition prevailing on European markets; this was especially true of most nature markets such as France and Northern Europe. Along with challenging economic circumstances, surplus capacities continued to adversely impact the insurance industry; the Northern European and French markets consequently saw further rate reductions and deteriorations in conditions. We nevertheless preserved our market share in France by expanding some existing customer relationships and writing more business in less competitive lines. In long-tail liability business, above all in the motor sector, we are continuing to see a challenging environment and participate only selectively.
We successfully asserted our leading position in builder’s risk insurance in France. Another focus of our activities continues to be the accident line, in which we have enlarged our premium volume over recent years.
Developments in the Netherlands, where we expanded our portfolio across all lines of business, were pleasing.
Overall, despite fierce competition in Central and Eastern European markets, growth rates here were above the European average. Over the medium to long term Hannover Re anticipates further growth in the premium volume from these markets. Given the intensely competitive climate, the reinsurance market for the most part saw price reductions. This did not apply, however, to motor business in Poland and Hungary, where rates climbed on the back of increased loss expectancies. On the whole, we obtained rates and conditions that were broadly commensurate with the risks for the region of Central and Eastern Europe in the year under review, hence enabling us – on the back of stable premium volume – to generate satisfactory results. On the claims side the region was impacted by a number of smaller events.
Specialty lines worldwide
Under specialty lines we include marine and aviation reinsurance, credit and surety reinsurance, business written on the London Market as well as direct business and facultative reinsurance.
The premium volume for specialty lines in the year under review amounted to EUR 2,646.6 million (EUR 2,920.3 million). The combined ratio was stable at 90.9%. The operating profit (EBIT) for specialty lines contracted to EUR 447.8 million (EUR 518.5 million), in part also due to reduced investment income.
Marine
As anticipated, the rate decline in marine insurance was sustained in 2016. Underlying factors such as the low oil price, faltering global economy and surplus capacities in the market for the transportation of freight and cargo have left their mark on our customers. In the face of falling prices for commodities and other goods, the premium volume in the market contracted significantly for the first time in years. Combined with a slight increase in the supply of capacity, this has further stepped up the pressure on original rates in both offshore energy and marine insurance business.
In the year under review the market was not confronted with a marine loss on the scale of the explosions at the Port of Tianjin in 2015. Nevertheless, the insurance industry was not spared losses in this year either. The damage to a production facility off the coast of Ghana in combination with the subsequent business interruption resulted in a significant offshore energy loss. In view of the conservatively oriented underwriting policy that we had pursued in prior years, the impact of this loss on our account was disproportionately slight relative to our market share.
The gross premium for our marine portfolio consequently fell by 6.6% to EUR 277.5 million (EUR 297.1 million). Despite the aforementioned loss expenditure and assisted, inter alia, by a positive run-off of loss reserves from old underwriting years, the combined ratio improved to 38.5% (60.0%) and the underwriting result consequently increased. The operating profit (EBIT) rose to EUR 138.1 million (EUR 112.3 million).
Aviation
International aviation (re)insurance remained under strain in 2016, even though at the reporting date – aside from the burden of attritional losses – the market had only incurred two large claims that marginally exceeded a loss amount of USD 100 million.
The aviation line continues to experience a considerable supply of surplus capacity. In the case of the airline sector, this was equally true of the original market and the reinsurance side. The situation in general aviation business was somewhat more stable, although here too an excess supply of insurance capacities and the associated premium reductions were the dominant factors.
We adhered to our disciplined underwriting strategy in this soft market phase and kept a clear focus on non-proportional business. In this segment we operate as one of the market leaders. In proportional reinsurance, on the other hand, we reduced our shares – especially in customer portfolios dominated by airline business.
The premium volume for our total aviation portfolio contracted sharply in the year under review from EUR 377.3 million to EUR 278.7 million. Given that the large loss expenditure was more moderate than in the previous year, the combined ratio improved to 72.8%. The operating profit (EBIT) for our aviation portfolio grew to EUR 108.9 million (EUR 70.5 million).
Credit, surety and political risks
Hannover Re ranks among the market leaders in worldwide credit and surety reinsurance.
Economic growth around the world was rather weak on the whole in 2016. To some extent, the trend was downwards in certain emerging markets owing to the decline in commodity prices. Global growth in the primary insurance market therefore remained minimal. Reinsurance cessions rose slightly, in part because the more exacting capital requirements associated with Solvency II led to a greater need to pass on business. We write a large share of our acceptances in credit, surety and political risks in the form of proportional treaties, under which cost reimbursements in the year under review increased only moderately.
Gross premium income in these lines climbed by 1.3% in 2016 to EUR 613.5 million (EUR 605.6 million). Premium growth was boosted by modestly increased reinsurance cessions as well as the acquisition of new clients and the expansion of existing customer relationships.
The claims frequency in credit and surety business increased in the year under review, particularly in emerging markets. In addition, a few sizeable insolvency losses were recorded. The loss ratio in political risk insurance also rose slightly from a low level. The combined ratio of 104.9% for the entire portfolio was thus higher than in the previous year (98.9%). The operating profit (EBIT) shrank by 87.0% to EUR 8.3 million (EUR 63.7 million).
United Kingdom, Ireland, London Market and
direct business
United Kingdom, Ireland and the London Market
The property and casualty business that we reinsure for companies in the United Kingdom and on the London Market developed largely satisfactorily in 2016. The intense competition in the primary sector was sustained in most lines and led to rate reductions. Based on our long-standing experience in the market we are a sought-after partner not only for our existing customers but also for start-ups, most notably Lloyd’s syndicates. This enabled us to offset the premium erosion in existing business with new business. Pleasing double-digit rate increases were recorded in UK and Irish motor insurance business.
On the reinsurance side the rate reductions were not quite as marked overall as they were in original business. In non-proportional UK motor business – following at times appreciable increases in the years 2011 to 2014 – rates remained stable or rose slightly at the beginning of 2016, as in the previous year. Based on the increases in original business, it is pleasing to note that we are also expecting higher premium income through adjustments. In the other property and casualty lines we saw an easing in the pressure on rates compared to the past two years. Coverage extensions were also in demand. In keeping with our cycle management we scaled back our shares in programmes under which the prices or conditions were not considered attractive. No major losses were incurred.
Direct business
We also write primary insurance business through our subsidiary International Insurance Company of Hannover SE (Inter Hannover). This essentially involves tightly defined portfolios of niche or other non-standard business that complements our principal commercial activity as a reinsurer.
We write a large portion of this direct business in the London Market and through our Swedish branch, although it increasingly derives from Canada, Australia and Germany as well. The result from direct business was again substantially boosted in the financial year just ended. This is a very good performance, especially bearing in mind the intensive competition prevailing among the insurers and reinsurers writing business in these markets.
The gross premium booked from the United Kingdom, Ireland, the London Market and direct business retreated by 2.7% from EUR 519.7 million to EUR 505.6 million. The combined ratio stood at 95.6% (86.6%). The operating profit (EBIT) contracted accordingly to EUR 97.5 million (EUR 153.7 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.
Extended coverage concepts and price reductions were observed across all areas in the year under review. In the case of offshore business as well as oil and gas risks, in particular, there was no sign of a trend reversal despite elevated claims activity. In view of this market climate we wrote our business selectively, and the premium income for these lines consequently declined.
The strategy that we put in place in recent years to expand our writing of cyber risks, personal accident / sports covers and renewables has already led to premium growth in these areas. The reorientation in US casualty business also began to bear fruit in 2016. What is more, it ensures that we will be able to generate additional growth in the years ahead.
Despite the protracted soft market we are highly satisfied with the development of our overall facultative portfolio in the year under review. The premium volume remained stable, even after deduction of a one-off special effect recorded in 2015.
The 2016 financial year did not bring any particularly conspicuous developments in facultative reinsurance. Losses were incurred across all regions and lines, however, with an elevated frequency of natural catastrophe losses compared to previous years. Our results benefited from our limited risk appetite with respect to regions with natural hazards exposure. On the other hand, our portfolio was again impacted by losses from heavy industry. Here, too, however, our defensive strategy avoided any disproportionate strain on the total result. The combined ratio came in higher than the previous year (94.1%) at 95.6%. The operating profit (EBIT) decreased to EUR 95.0 million (EUR 118.3 million).
Global reinsurance
We combine all markets worldwide under global reinsurance with the exception of our target markets and specialty lines. This segment also encompasses global catastrophe business, the reinsurance of agricultural risks, Sharia-compliant retakaful business as well as structured reinsurance and insurance-linked securities.
The premium volume increased by 1.7% in the year under review to EUR 3,550.9 million (EUR 3,492.1 million). The combined ratio deteriorated from 93.1% to 97.1%. The operating profit (EBIT) declined from EUR 377.7 million to EUR 294.3 million.
Worldwide treaty reinsurance
We are satisfied with the development of our worldwide treaty reinsurance business. The gross premium volume grew in line with our expectations to EUR 1,885.0 million (EUR 1,810.4 million). The combined ratio of 103.9% was higher than in the previous year (95.7%). The operating profit (EBIT) contracted from EUR 165.7 million to EUR 65. million.
Asia-Pacific region
In the year under review Hannover Re again booked profitable growth in a fiercely competitive and strategically significant region.
The development of our business in Japan – one of our most important markets – was thoroughly satisfactory. Thanks to our excellent market position, our share of Japanese property and casualty reinsurance business continued to grow despite consolidation in the domestic market of Japanese cedants. Reinsurance conditions softened further under sustained competitive pressure, making this market, too, a challenge.
On the claims side the year under review was notable for the Kumamoto earthquake in April and a highly active typhoon season. In addition, the result in Japanese liability business was adversely impacted by pharmaceutical losses. Thanks to our broad-based positioning with our core customers in Japan across all lines of business, we were able to generate another positive profit contribution for Hannover Re despite the loss expenditure.
In China we again booked premium growth in the double digits. Working in close cooperation with the specialists back in Hannover, our locally licensed branch in Shanghai successfully expanded the portfolio with a small number of selected clients in our preferred lines and hence put our overall business relationships in China on a broader footing.
Results in the year under review were nevertheless overshadowed by an above-average number of mid-sized natural events, including several months of flooding in areas along the Yangtze River as well as various windstorms. The resulting losses were reflected not only in the reinsurance treaties but also in the books of many of our customers. From an overall perspective, the underlying conditions have not improved sufficiently despite the losses from the explosions at a container terminal in the Port of Tianjin and they are in need of further adjustment.
Primary insurance markets in South and Southeast Asia continue to generate disproportionately strong growth. We have been represented in this region for more than 20 years by a branch in Kuala Lumpur. Even though the underlying market conditions have been detrimentally affected by the underlying market conditions, we have nevertheless succeeded in expanding new and less competitive business segments. Not only has this led to appreciable premium growth, it also improved the balance of the book of business written. The business performance in the year under review was thoroughly gratifying, reflecting the absence of sizeable natural disasters in the region as well as a generally low burden of attritional losses.
Having taken the initial steps in 2015 towards licensing of a branch in India, Hannover Re received final approval from the Indian insurance regulator on 23 December 2016.
In Australia and New Zealand the growth in gross premium was sustained – as in the previous year too – by large individual transactions. There was no change in the extremely competitive state of these markets. The first three quarters of the year under review passed off unusually favourably in this region. This was attributable to the fact that natural catastrophe events largely failed to materialise. The fourth quarter, on the other hand, was impacted by claims associated with the series of earthquakes in New Zealand in November. The area to the north of the city of Christchurch extending as far as the capital Wellington was particularly hard hit. Australia was additionally affected by a number of regional weather events that further increased the loss expenditure prior to year-end.
South Africa
Our property and casualty reinsurance business in South Africa is supported by three companies: our subsidiary Hannover Reinsurance Africa Limited writes reinsurance in all lines. Compass Insurance is responsible for direct business generated through so-called underwriting management agencies (UMAs). The third company, Lireas Holdings, holds interests in several of these UMAs. This enables us to comprehensively steer and control the business. Agency business forms the pillar of our activities in South Africa, although reinsurance business is also written on the open market in South Africa and other African countries.
The economy on the African continent generated minimal growth in the year under review, in part owing to protracted political uncertainties. The planned solvency regime SAM (Solvency Assessment and Management) did not have any effects on our South African portfolio in the year under review, with implementation postponed to mid-2017.
In the face of unchanged heavy competition, results in direct insurance improved only slightly in the year under review. The major loss situation remained moderate.
Against this backdrop both Compass Insurance and Hannover Reinsurance Africa performed satisfactorily in the 2016 financial year. The premium volume remained stable.
Latin America
Despite the sustained competitive environment, Hannover Re is very well positioned in Latin America and a market leader in some countries. The most important markets for our company are Brazil, where we are present with a representative office, as well as Mexico, Argentina, Colombia and Ecuador.
Most Latin American markets are continuing to enjoy very dynamic growth. Primary insurance premiums are increasing by between 5% and 15% a year depending on the market. Growth is even stronger in Argentina and Venezuela, although high inflation rates are the principal driver here. The strongest demand for reinsurance covers is in the area of natural catastrophe risks, not only within individual markets but also increasingly across national boundaries.
The severe earthquake in Ecuador gave rise to net loss expenditure of EUR 58.3 million for Hannover Re’s account; see also the list of major losses. Treaty conditions consequently improved appreciably in the subsequent round of renewals.
In the year under review, as had been the case in 2015, reinsurance premiums declined. The downward trend can be attributed to the devaluation of some Latin American currencies and to the higher retentions carried by primary insurers.
In Argentina we took an increasingly selective approach to writing our business in order to ensure that we met our margin requirements. We maintained our position in Brazil despite ongoing concentration on the primary insurance side. The primary market here is progressively stabilising, albeit on a low level. At the same time a tendency towards consolidation can be discerned.
Broadly speaking, we are satisfied with the development of our business in Latin America.
Agricultural risks
The insurance of agricultural risks was one of Hannover Re’s fastest growing segments in the year under review. We further expanded our market position and rank among the preferred partners for agricultural covers. In addition, we have been taking on an increasingly active role in the development of original products. We entered into cooperative arrangements with governments, development banks and international organisations in the year under review with a view to expanding protection for agricultural risks.
Rates and conditions largely held stable on the primary insurance side. Conditions in reinsurance business came under pressure in the established markets due to new market players.
We were successful in our efforts to further diversify our portfolio mix in terms of both countries and lines of business. A contributory factor here, for example, was an enlarged share of business involving insurance products for small farmers, predominantly in emerging and developing countries.
We are satisfied with the development of our agricultural risks business. Particularly in the southern hemisphere, the loss situation in 2016 was influenced by the prevailing, exceptionally intense El Niño phenomenon: this was associated with, among other things, algae blooms in the Pacific as well as heavy rainfall and hail events in South America. There were also periods of drought in Australia and bushfires exacerbated by the dry weather. Leaving aside hail and outwintering losses, results for multi-risk insurance in the northern hemisphere were satisfactory. To this extent, the continued improvement in the diversification of our portfolio adequately alleviated and offset the extent of the negative results.
Retakaful business
We write retakaful business, i. e. reinsurance transacted in accordance with Islamic law, worldwide. Our focus is currently on the Middle East, North Africa and Southeast Asia. This business is written by our subsidiary in Bahrain. We also maintain a branch there with responsibility for traditional reinsurance in the Middle East. Our retakaful business has been growing very vigorously for some years now and we enjoy a strong position in the market. Overall, we are satisfied with the development of business in the year under review.
As we had already observed in the previous year, the takaful and retakaful markets have now become extremely competitive – in part also owing to the entry of new market players. Rates continued to be under pressure – as we had anticipated –, with the exception of a few areas. The most notable decline in the year under review was for construction risks written on a facultative basis. This was also a reflection of the slowing pace of economic growth in the region and the fall in oil prices.
We responded to this soft market environment by writing our business highly selectively. This led to a moderate contraction in the premium booked in the year under review.
Catastrophe XL (Cat XL)
Hannover Re writes the bulk of its catastrophe business out of Bermuda, the worldwide centre of competence for this segment. In the interest of diversifying the portfolio, our subsidiary Hannover Re (Bermuda) Ltd. has also written risks in some of the specialty lines since 2013. Furthermore, the company has established itself as a provider of reinsurance products in the area of cyber risks.
Given that large losses again came in below expectations – with the associated good results for insurers and reinsurers – and in view of considerable surplus capacities, catastrophe business continues to be intensely competitive.
With this in mind, the pressure on rates in US property catastrophe business was sustained, although increases were only in the single-digit percentage range at a pace that was clearly slowing. As anticipated, rates similarly declined in the mature markets of Europe, in Japan and in Australia. Only in isolated cases, primarily under loss-impacted programmes, did rates move higher.
Although more natural catastrophe events were recorded in the year under review than in the previous year, losses were for the most part moderate for insurers and reinsurers alike and they remained within the modelled claims expectations. Nevertheless, our company was impacted by three sizeable events. In the first place, the forest fires in the area around Fort McMurray in the Canadian province of Alberta resulted in a net strain of EUR 127.9 million for our account. Secondly, the United States and the Caribbean suffered their first fairly costly windstorm event for some time in the shape of Hurricane Matthew. This storm did not, however, prove to be as destructive as originally anticipated. The net loss incurred by Hannover Re from Hurricane Matthew amounted to EUR 70.3 million. In addition, the serious earthquake in New Zealand gave rise to loss expenditure of EUR 56.3 million.
The gross premium volume for our global catastrophe business decreased from EUR 374.9 million to EUR 357.2 million. The combined ratio deteriorated to 55.9% (50.2%). The operating profit (EBIT) was stable at EUR 154.9 million (EUR 154.6 million).
Structured reinsurance and insurance-linked securities
Structured reinsurance
Operating under its Advanced Solutions brand, Hannover Re is one of the largest providers in the world for structured and tailor- made reinsurance solutions, the purpose of which – among other things – is to optimise the cost of capital for our ceding companies. In this area we also offer alternative reinsurance solutions that provide solvency relief or protect our clients against frequency losses. The implementation of Solvency II in Europe and other risk-based solvency regimes in various countries has altered the risk-awareness of our customers, as a result of which we enjoyed further growth in demand in the 2016 financial year.
In keeping with our objective we continued to enlarge our customer base and further improved the regional diversification of our portfolio in the year under review. The adoption of new capital requirements (C-ROSS) in China prompted the discontinuation of large-volume quota share arrangements on motor business. This decrease was, however, offset by new quota share cessions for capital management purposes in North America and Europe. The premium volume in structured reinsurance therefore remained stable in the year under review while the number of contracts increased.
Insurance-linked securities (ILS)
The strong demand on the capital market for (re)insurance risks remains undiminished, particularly given the diversifying nature of such investments. The worldwide volume of risks transferred to the capital market continued to grow in the year under review.
Through our activities we leverage the entire spectrum of opportunities offered by the so-called insurance-linked securities market. On the one hand we take out reinsurance with ILS investors, while at the same time we transfer risks for our customers to the capital market as a service. This is done in the form of catastrophe bonds or through collateralised reinsurance. We are also active ourselves as an investor in catastrophe bonds.
Thus, for example, we were able to renew the protection cover for Hannover Re known as the “K cession” – a modelled quota share cession consisting of non-proportional reinsurance treaties in the property, catastrophe, aviation and marine (including offshore) lines that has been placed inter alia on the ILS market for more than 20 years now – at an increased level of roughly USD 520 million for 2016. In addition to the K cession we use the ILS market for other protection covers as well. In this regard, we attach special significance to the fact that ILS investors must furnish collateral for their liabilities to us.
It remains the case that the currently available capital exceeds the available opportunities for making new investments in catastrophe bonds. This has prompted investors to look for other means of investing in the reinsurance sector. Collateralised reinsurance, in particular, grew market-wide in the year under review and surpasses by far the volume of funds invested in catastrophe bonds. A modest decline in the area of catastrophe bonds was more than offset by collateralised reinsurance business.
Under collateralised reinsurance programmes the investor assumes reinsurance risks that are normally collateralised in the amount of the limit of liability. In this business Hannover Re assists its clients with the transfer of reinsurance risks to the capital market; the company maintained its cooperation with selected fund managers on a consistently high level in the year under review and generated attractive margins.
In addition, we successfully transferred further life reinsurance risks to the capital market.
The gross premium volume in structured reinsurance and from ILS activities was stable at EUR 1,308.7 million. The combined ratio stood at 97.3% (98.4%). The operating profit (EBIT) increased to EUR 73.9 million (EUR 57.4 million).