Overview

After three consecutive years of low major losses and good results, property and casualty reinsurance is once again seeing intense competition in the current financial year. The healthy capitalisation of ceding companies due to the absence of major losses has resulted in fewer risks being ceded to Reinsurers. Furthermore, the inflow of capital from the market for catastrophe bonds (ILS) continues to create a surplus of capacity.

These factors also shaped the treaty renewals as at 1 January 2015, the date when some 65% of our property and casualty reinsurance portfolio (excluding facultative business and structured reinsurance) was renegotiated. Despite sometimes appreciable price erosion and deteriorations in conditions in certain areas, we were broadly satisfied with the outcome of the renewals – even though the rate quality of the renewed portfolio was somewhat lower than in the previous year. Rate increases were obtained under programmes that had suffered losses in 2014. This was especially true of our German business. The significant losses incurred in the aviation line, on the other hand, did little to boost prices.

The latest round of renewals showed that financially robust reinsurers such as Hannover Re are more highly sought-after by cedants. Based on our excellent ratings, our long-standing customer relationships and our profit-oriented underwriting policy, we are in a good position to adapt to the soft market conditions. Hannover Re continues to practise its systematic cycle management combined with rigorous underwriting discipline and trusts in a broadly diversified portfolio of high-quality existing business, complemented by opportunities that may arise in niche and specialty lines.

Expectations for the development of our property and casualty reinsurance business are described in greater detail below.

Target markets

North America

In tandem with the existing surplus capacities, the trend towards greater consolidation of reinsurance programmes at large clients continued in North America, hence keeping up the pressure on rates. On the reinsurance side this was true of both the property and casualty lines, where the situation is expected to bottom out in the medium term. We are adhering to our strategy of a margin-oriented underwriting policy, even if this compels us to relinquish volume growth. Nevertheless, in view of our long-standing and robust customer relationships, we expect to maintain our presence even in the soft market. Overall, then, we were satisfied with the outcome of the renewals as at 1 January 2015. In part through targeted new business acquisition, we were able to grow the premium volume in North America by around 5%. In this context we expanded our niche business in the professional indemnity line, where rates proved to be firmer. It remains the case that we do not participate in multi-line liability quota share reinsurance arrangements. Slight rate increases were recorded in Canadian property business owing to the losses incurred in 2013 and 2014. Looking ahead to the treaty renewals on 1 June and 1 July 2015 – the time of year when catastrophe XL covers, in particular, are renegotiated – we currently anticipate further intense competition in this segment.

All in all, our North American portfolio is expected to show modest growth in the current financial year.

Continental Europe

In Germany, the largest single market within our Continental Europe segment, Hannover Re was again able to expand its already excellent position. Here, too, competition nevertheless remained keen and the trend towards primary insurers carrying higher retentions was sustained. While the loss situation of past years enabled us to catch up on rate increases or hold prices stable in some lines, such as motor own damage and homeowners comprehensive, the move observed in previous years towards exposure-based rate increases ground to a halt. Particularly in non-proportional motor liability business, the premium increases needed on account of continuously rising long-term care costs in relation to bodily injury claims proved to be unattainable. The strained situation in industrial fire insurance also remained unchanged. Fierce competition and a large number of basic losses put adequate results in this segment out of reach. With this in mind, we wrote our business here selectively. Our total portfolio in the domestic German market closed with a premium gain due to a number of new customer relationships.

In the other markets of Continental Europe the picture was a mixed one: the expansion of existing customer accounts in France enabled us to offset the pressure on prices in loss-free programmes and the effect of discontinued treaties. In Northern European countries we maintained our market-leading position. The markets of Southern and Eastern Europe became considerably more competitive. Broadly speaking, though, we consider reinsurance prices here to be commensurate with the risks. Demand for non-proportional treaties surged sharply with an eye to Solvency II requirements.

All in all, we achieved moderate growth of 1% in the treaty renewals for Continental European markets.

Specialty lines worldwide

Marine

In marine reinsurance we expect to see further softening of insurance and reinsurance rates for the 2015 financial year. The deterioration in reserves for removal of the wrecks of the “Costa Concordia” and “Rena” have nevertheless prevented a substantial price decline. Given the absence of major losses, rates for the reinsurance of offshore energy risks are moving slightly lower despite higher sums insured in the original market. Overall, the trend towards reduced reinsurance cessions driven by large insurance groups is likely to be sustained. This may be offset, at least to some extent, by ceding companies that make the most of the soft market to buy more reinsurance capacity. When it comes to our own portfolio, we anticipate a slightly reduced premium volume in 2015.

Aviation

The significant major losses incurred in aviation reinsurance in 2014 have had only a qualified positive effect on rates. It remains the case that insurance capacities are widely available, and it is therefore our expectation that premiums in conventional aviation reinsurance will tend to stabilise on the existing level. Although we anticipate price increases for war covers, these have not so far been as appreciable as originally anticipated. Based on our long-standing expertise in all lines of aviation reinsurance, we nevertheless see attractive business opportunities in the current financial year. All in all, though, the premium volume is set to contract.

Credit, surety and political risks

The premium volume in the area of credit, surety and political risks is expected to remain stable in 2015. We again slightly boosted the share of our total portfolio deriving from political risks in the context of the 1 January 2015 treaty renewals. In view of the good results posted by insurers, the modest pressure on conditions is likely to be sustained in the current financial year and primary insurers can be expected to further increase their premium retained for own account.

United Kingdom, London market and direct business

In the face of more intense competition we expect to see declining rates for our reinsurance business in the United Kingdom this year. We were essentially able to preserve our portfolio in the renewals as at 1 January 2015 thanks to our established customer relationships. In addition, we succeeded in expanding our short-tail business. On the back of the solid rate increases booked in non-proportional motor business over the past three years, prices again moved slightly higher or remained unchanged. In direct business our subsidiary Inter Hannover continues to focus on risk selection in order to further enhance the quality of its portfolio.

Facultative reinsurance

The soft market phase prevailing in facultative reinsurance is likely to continue and hence rates will remain stubbornly low. Nevertheless, by taking a selective approach we also see attractive business opportunities. For example, we anticipate stronger demand in areas such as covers for renewables and cyber-risks. Thanks to our very good rating, we should also be able to profit from the pooling of reinsurance cessions at large primary insurance groups. Our portfolio of facultative risks is expected to deliver a stable premium volume in the current financial year.

Global reinsurance

Worldwide treaty reinsurance

Premium income is expected to increase again for the Asia-Pacific markets. Along with sustained rising demand for insurance products in the expanding middle class of many emerging markets, regulatory changes – above all in China and India – are also having favourable implications for Hannover Re’s positioning. We expect our Chinese reinsurance portfolio to post another appreciable surge in premium volume. Nevertheless, tendencies towards a contraction in the outflow of reinsurance premiums into foreign markets can be anticipated in certain Asian markets.

In Japan there will likely be a consolidation in demand for reinsurance covers: rates for natural catastrophe risks and in other lines will probably come under further pressure in the April round of renewals. Overall, we expect to book slightly lower premium in the original currency for our portfolio in Japan. The region of South and Southeast Asia should again prove to be the engine of growth in the current year. Consequently, our portfolio here should show a further rise in premium volume due to special initiatives that have already been launched. Rates for most markets in South and Southeast Asia are expected to be broadly adequate.

Turning to Australia and New Zealand, thanks to our strong local presence and established customer relationships we expect to be able to preserve our portfolio in these markets on a stable level. Particularly attractive opportunities for growth may open up in niche markets.

The outcome of the treaty renewals as at 1 January 2015 in the Caribbean and Latin America were satisfactory on the whole for our company. We were very successful in defending our market position in the region despite soft conditions and fierce competition over placements. The reinsurance market is notable for an oversupply of capacity, as a consequence of which a reinsurer’s financial strength continues to be crucially important – a state of affairs from which Hannover Re profited. As expected, the renewals on 1 January 2015 for Latin America – the main renewal season here is not until 1 July – provided to be competitive, but prices were still commensurate with the risks. In Brazil we were able to write new treaties and enlarge existing relationships. Despite the difficult state of the market we succeeded in holding our portfolio stable thanks to our focus on Latin America as a whole. Premium income from Venezuela and Ecuador may be curtailed in future by restrictive regulatory regimes as well as inflation and negative exchange rate effects. Nevertheless, even as we continue to adhere to our selective underwriting policy we remain confident of generating further profitable growth for our portfolio from Latin American markets in the current financial year.

In Spain and Portugal conditions for proportional treaties were mostly unchanged at the main renewal date – i. e. 1 January 2015 –, while they deteriorated somewhat for non-proportional programmes. Broadly speaking, we are satisfied with the development of our business despite the ongoing economic challenges faced by both countries. We improved our market share in Spain and booked modest premium growth in Portugal.

In South Africa we expect to record slightly higher premium income and an improved result for 2015 in our reinsurance portfolio and specialty business.

Hannover Re expects demand to continue rising in the area of agricultural risks. This can be attributed to the increased demand for food and a greater need to protect against extreme weather events. Not only that, we also see further growth potential for index-linked microinsurance products in emerging markets, not least bearing in mind that the G8 nations have defined agricultural insurance as a tool for fighting poverty. Hannover Re expects its premium to come in higher for the current financial year.

We expect to write further profitable business for our retakaful portfolio in the current financial year. Rising prices are anticipated above all under loss-impacted programmes.

Catastrophe XL (Cat XL)

An oversupply of reinsurance capacity continues to be the hallmark of natural catastrophe markets. In the first place the influence of ILS markets is still rising, while at the same time primary insurers have more capital at their disposal, as a consequence of which fewer risks are being passed on to reinsurers. As a further factor, the absence of major losses in 2014 prompted additional rate reductions in the 1 January 2015 renewals, including for example in US property catastrophe business. Despite this, price increases were also attainable in a variety of regions and segments. In Europe, and especially in Germany, higher prices were obtained under programmes that had been impacted by various hail and windstorm events. Further developments in catastrophe business will depend on the loss situation going forward, particularly in the US market. Given the prevailing market climate the strategy pursued by our subsidiary in Bermuda is to further expand in specialty lines.

Structured reinsurance and insurance-linked securities

Further healthy demand is anticipated for our Advanced Solutions business and structured reinsurance in the current financial year. The key driver here is the growing integration of reinsurance into companies’ risk management. This development has been prompted by the increasingly exacting capital requirements placed on insurers: with a growing number of countries adopting risk-based solvency systems and the implementation of Solvency II soon to become a reality, demand for products that deliver capital relief is likely to remain brisk in 2015.

In the area of insurance-linked securities (ILS) it is our expectation that demand will continue to grow. Along with protecting our own peak exposures, we make use of the broad range of opportunities available here, particularly in collateralised reinsurance business. Over the coming years we expect to see a positive and steadily rising profit contribution. We succeeded in renewing our “K cession”, a collateralised modelled quota share cession of non-proportional reinsurance treaties that we have placed on the ILS market for many years – with an increased capacity of USD 400 million for 2015.