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Business development

We are thoroughly satisfied with the development of our business in the 2012 financial year. For a financially strong reinsurer such as Hannover Re, the market offered attractive opportunities for profitable growth – both in non-life and life and health reinsurance. Despite a challenging capital market climate we generated very good investment income. The result for the year was also helped by the fact that major loss expenditure – unlike in the previous year – was rather moderate.

Our premium volume in total business showed further pleasing growth in the year under review. Gross premium increased by 13.9% to EUR 13.8 billion (EUR 12.1 billion). At constant exchange rates – especially against the US dollar – the increase would have been 9.5%. Growth thereby actually surpassed our guidance of 7% to 8%, which we had revised upwards during the year. The level of retained premium decreased slightly to 89.8% (91.2%). Net premium earned increased by 14.2% to EUR 12.3 billion (EUR 10.8 billion). At unchanged exchange rates, growth would have come in at 9.9%.

Gross premium by business group

Gross premium by business group (bar chart) enlarge zoom

We are satisfied with the development of our non-life reinsurance business. Demand for reinsurance covers remained brisk in the year under review, driven in part by the increased importance of risk-based models and the requirements placed on the capital resources of primary insurers. Given the heavy loss expenditures from natural catastrophes in the previous year, premium increases – particularly for property catastrophe business – were as expected appreciable. Yet the outcome of the treaty renewals in our domestic market was also gratifying. In US property business it was broadly possible to push through rate increases, while the rate erosion in casualty business was halted. Developments in our specialty lines, under which we include inter alia marine and aviation reinsurance as well as credit and surety business, were satisfactory. The picture in our global reinsurance segment was a mixed one: while the portfolio remained largely stable in developed markets, further substantial growth was recorded in Asia. Total gross premium volume in non-life reinsurance grew by 13.1% (9.3% at constant exchange rates) to EUR 7.7 billion, thereby exceeding our forecast target of 5% to 7%.

As anticipated, our second business group – life and health reinsurance – also fared well in the year under review. It now contributes 44.0% of the total premium volume. Both mature insurance markets, such as the United States and the United Kingdom, and emerging countries in Asia – first and foremost China – offered attractive opportunities for profitable growth. Our reporting structures were adjusted and refined to focus even more closely on our growth markets. We now divide our business into Financial Solutions and Risk Solutions; the latter is further subdivided into Mortality, Longevity and Morbidity.

Hannover Re completed several block assumption transactions for longevity risks in the 2012 financial year, including for example pension obligations for a UK industrial enterprise with a volume in the order of EUR 1 billion. We succeeded in enlarging our gross premium volume in total life and health reinsurance. With an increase of 14.9% (9.8% at constant exchange rates) or EUR 6.1 billion, we surpassed our growth target of 5% to 7%.

We are also highly satisfied with developments on the investment side. Our portfolio of assets under own management grew to EUR 31.9 billion (31 December 2011: EUR 28.3 billion). Ordinary investment income excluding income on funds withheld and contract deposits comfortably surpassed the previous year’s figure to reach EUR 1,088.4 million (EUR 966.2 million), despite the protracted low level of interest rates. This produced an annual return of altogether 3.6% (3.6%).

We also significantly boosted our total net investment income from assets under own management relative to the previous year: it came in at EUR 1.3 billion (EUR 1.0 billion) as at 31 December 2012. Along with the pleasing rise in ordinary income, this increase was driven by realised gains of EUR 227.5 million (EUR 179.6 million). For the most part, these derived from three sources: firstly, strategic shifting of funds to stabilise allocation ratios within our credit portfolio; secondly, the implementation of our Corporate Social Responsibility strategy within our holdings of fixed-income securities; thirdly, our real estate portfolio, in which we partially realised some substantial increases in value in the third quarter. Unrealised gains on our asset holdings recognised at fair value through profit or loss also contributed to the pleasing result in an amount of EUR 89.3 million (-EUR 38.8 million). These resulted primarily from the gratifying fair value development of the ModCo derivatives and inflation swaps.

Once again, only very minimal impairments had to be taken in the reporting period. Income on funds withheld and contract deposits climbed from EUR 338.5 million to EUR 355.5 million.

Thanks to the pleasing developments in non-life and life and health reinsurance as well as on the investment side, the operating profit (EBIT) for the Hannover Re Group surged by 67.2% to EUR 1.4 billion (EUR 0.8 billion) as at 31 December 2012. The increase on the previous year was assisted by substantially lower major loss expenditure of EUR 477.8 million (EUR 980.7 million). Group net income improved significantly to EUR 858.3 million (EUR 606.0 million), a new record result for Hannover Re. Earnings per share amounted to EUR 7.12 (EUR 5.02).

Similarly, the equity attributable to shareholders of Hannover Re developed very favourably in the year under review, climbing from EUR 5.0 billion to EUR 6.1 billion. The book value per share was correspondingly positive at EUR 50.22 (EUR 41.22). The return on equity reached 15.6% (12.8%). The policyholders’ surplus, consisting of shareholders equity, non-controlling interests and hybrid capital, rose sharply to EUR 9.0 billion (EUR 7.3 billion).

In November 2012 Hannover Re issued a subordinated bond with a volume of EUR 500 million through its subsidiary Hannover Finance (Luxembourg) S. A. The purpose of this bond issue was to take advantage of the very attractive interest rate level in order to further optimise the company’s capital structure. Together with this new issue Hannover Re has four outstanding hybrid bonds in the capital markets.

In view of Hannover Re’s very healthy capitalisation and consistently good results, the rating agency A.M. Best upgraded our rating from “A” (Excellent) to “A+” (Superior) in September 2012.

We also received a very special mark of distinction in the month of September. The highly respected UK insurance daily “Insurance Day” crowned Hannover Re “Reinsurance Company of the Year” in recognition of the company’s successful business performance.

In the year under review we merged our two Irish subsidiaries, Hannover Reinsurance (Ireland) Ltd. and Hannover Life Reassurance (Ireland) Ltd., and transformed the resulting entity into a new legal form. All activities in the areas of non-life and life and health reinsurance are now concentrated at the new company Hannover Re (Ireland) Plc. This merger was intended, in particular, to facilitate better use of the available capital base and to streamline business processes such as financial reporting.

In addition, we decided to convert our subsidiary Hannover Life Re UK Ltd. into a branch with effect from 1 January 2013. This step was designed to make more efficient use of the underlying capital as well as to profit from synergistic benefits over the long term.

The resolution adopted by the Executive Board to transform Hannover Re into a European limited company (Societas Europaea, SE) was approved by the Ordinary General Meeting in May 2012. This change is intended to reflect the increasingly international dimensional of Hannover Re’s business operations and workforce. The necessary steps proceeded according to plan in the year under review. The transformation is expected to become legally effective in the first quarter of 2013.

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