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Business development

Very heavy major loss expenditure and a challenging capital market climate were the hallmarks of the 2011 financial year. Yet for our company, as a financially strong reinsurer, the opportunities offered by the market for profitable growth were good – in both non-life and life/health reinsurance. We were therefore able to enlarge our premium volume in the year under review. Gross premium in total business grew by 5.8% to EUR 12.1 billion (EUR 11.4 billion). At constant exchange rates – especially against the US dollar – the increase would have been 7.5%; this is within the range of our growth forecast of 7% to 8%. The level of retained premium nudged slightly higher to 91.2% (90.1%). Net premium earned grew by 7.0% to EUR 10.8 billion (EUR 10.0 billion).

Non-life reinsurance markets developed more favourably in the year under review than initially expected: in the treaty renewals as at 1 January 2011 prices and conditions essentially remained stable. The severe natural disasters that occurred in the first quarter ushered in a trend reversal. The earthquakes in Japan and New Zealand as well as the flooding in Australia led to significant rate increases – at least in the regions that were impacted by losses. Whilst it is true that the enormous strains imposed by these major losses curtailed our profit in non-life reinsurance, they did not diminish our business prospects. Quite the contrary, since demand for reinsurance covers has since increased. The equity requirements arising out of “Solvency II” will also cause our clients to attach even greater importance to the tool of reinsurance. For further details of developments in our non-life reinsurance business group please see in section non-life reinsurance.

Gross premium by business group

Gross premium by business group (pie chart) enlarge zoom

Our second business group, life and health reinsurance, did not grow quite as rapidly as in previous years. It now contributes 43.6% of the total premium volume. Given the lower volatility of results, we have set ourselves premium growth targets here – unlike in non-life reinsurance. In the year under review we again succeeded in enlarging our premium volume. Growth came in at 3.5%, or 5.2% at constant exchange rates.

With a view to strengthening our traditional US life insurance business – and following on the heels of a large transaction in 2009 – we assumed another portfolio in the United States that covers the mortality risk under term and endowment policies. We were also able to conclude a further block assumption transaction for longevity risks in the United Kingdom. For detailed comments on the development of business in life and health reinsurance please see in section life and health reinsurance.

We are thoroughly 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 28.3 billion (EUR 25.4 billion). Despite the overall decline in interest rate levels, ordinary income consequently surpassed the comparable figure for the previous year at EUR 966.2 million (EUR 880.5 million). Income on funds withheld and contract deposits climbed to EUR 338.5 million (EUR 316.4 million).

In March we sold our portfolio of listed equities with virtually no gain or loss on disposal. We decided to take this step because of the uncertain extended implications for capital and reinsurance markets of the still ongoing Fukushima nuclear disaster. The decision had become necessary in the context of our systematic approach to risk management. Since then we have only retained a minimal holding of listed equities as part of strategic participations. In the area of bonds our policy continues to be geared towards maintaining a well-diversified portfolio. The regional spread of our government bonds was largely unchanged in the reporting period. It remains the case that our exposure to countries on the Eurozone periphery (Ireland, Italy, Portugal and Spain) is relatively low at 1.3% of the total investment portfolio. Our portfolio does not contain any bonds of Greek issuers.

The hedging effect of the inflation swaps taken out in 2010 to hedge part of the inflation risks associated with the loss reserves in our technical account diminishes over time owing to their fixed maturity. In order to restore the original protective effect we therefore took out further inflation swaps to the extent necessary in the first quarter of the year under review.

In the context of portfolio reallocations from government to corporate bonds Hannover Re generated profits that accounted for a significant portion of the total net realised gains. The inflows from the operating cash flow were invested primarily in corporate bonds, asset-backed securities and real estate. The balance of net realised gains improved by 10.8% to EUR 179.6 million (EUR 162.0 million).

We were again able to boost our net investment income from assets under management relative to the previous year: it totalled EUR 1,045.5 million (EUR 942.5 million) in the year under review. Net investment income including income on funds withheld and contract deposits amounted to EUR 1.4 billion (EUR 1.3 billion).

Although the operating profit (EBIT) booked by Hannover Re fell short of the previous year’s result owing to the heavy burden of major losses, it still gave grounds for satisfaction. It amounted to EUR 841.4 million (EUR 1,177.9 million) as at 31 December 2011.

In the aftermath of the severe natural disasters in the first quarter we reduced our profit estimate in March from around EUR 650 million to roughly EUR 500 million. Despite further heavy loss expenditure incurred in the course of the year underreview we maintained this guidance. The fact that we were able to generate Group net income of EUR 606.0 million (EUR 748.9 million) despite a burden of major losses totalling EUR 980.7 million – the second-highest strain of all time for our company – can be attributed both to the quality of the underlying business and the very healthy investment income. The result additionally profited from the refund of excess taxes paid and interest paid thereon in an amount of EUR 128.0 million. Run-off profits on loss reserves established in prior years were also booked – a reflection of the fact that the development of paid and reported claims from prior years was more favourable than anticipated. The run-off profits did not give rise to a reduction in the confidence level of our loss reserves. The result was curtailed by effects in life and health reinsurance. Earnings per share stood at EUR 5.02 (EUR 6.21).

Despite the enormous strains from major losses our shareholders’ equity attributable to shareholders of Hannover Re developed very favourably, rising in the year under review from EUR 4.5 billion to EUR 5.0 billion. The policyholders’ surplus increased to EUR 7.3 billion (EUR 7.0 billion). The return on equity came in at 12.8% (18.2%).

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 – climbed to EUR 1.6 billion (EUR 1.0 billion) owing to the heavy major loss expenditure incurred in 2011. We continue to attach considerable importance to the quality of our retrocessionaires: 90.9% of the companies with which we maintain such business relations have an investment grade rating of “BBB” or better from Standard & Poor’s.

After Hannover Re had reached agreement on the sale of the operational companies of its US subsidiary Clarendon Insurance Group, Inc. in December 2010, the transaction received the customary regulatory approvals and closed in July 2011.

A special mark of distinction was bestowed upon Hannover Re in April 2011. Readers of the highly regarded international trade magazine “Reactions” crowned us “Reinsurance Company of the Year” on the occasion of the London Market Awards.

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