North America
The North American (re)insurance market is the world's largest single market and currently the second-most important for Hannover Re's portfolio. It accounted for 27.0% of our premium volume in non-life reinsurance.
The economic climate in North America was stretched to breaking point in the year under review. Consumers exercised considerable restraint in the face of the financial market crisis, and the economy slipped into recession. The real estate sector continued to be particularly heavily overshadowed by the crisis. Yet a number of the market's largest ceding companies also found themselves in financial difficulties – most strikingly the market leader in the United States. As a consequence of a reduced capital base, not all insurers were able to run retentions on their customary level.
The economic downturn prompted a contraction in demand on the original market, especially in commercial business – including for example covers for craft enterprises, construction firms and haulage companies.
+++ No significant implications of the crisis on financial markets for North American business +++
Of special relevance here is the contraction in equity resources on the primary insurance side. The situation as at the end of the year under review was almost back on a par with the starting point in 2005. What this means is de facto zero growth in equity capital opposed by four years of exposure increases. Surplus capital has been largely exhausted, and the excess reserves of the hard market have been released; declining investment income is another factor. All these considerations will serve to push up prices in 2009. On the reinsurance side too a significant surge in demand and hence more attractive rates can therefore be expected, especially in the area of catastrophe reinsurance.
With a view to optimising the diversification of our portfolio we again scaled back larger shares with some cedants in the year under review, while at the same time expanding our business relationships with mid-sized regional players and mutual insurers. This business segment has been progressively enlarged over the past five years and now accounts for around 20% of our total portfolio. Going forward, the focus of our activities in North America will be on systematic adherence to our client segmentation, with greater weight attached to strategically oriented customer relationships.
For marketing purposes we further strengthened our partnerships with selected brokerage firms in the year under review, a helpful move which gives us extensive access to a cedant's entire portfolio. The positive effects of these initiatives will make themselves felt in the upcoming market hardening and will serve to further optimise our portfolio mix.
Our long-established, tried and trusted anticyclical business policy lends itself to consolidating our profitability in the North American market across various cyclical phases. Consequently, we did not seek to enlarge our market shares in 2008. Instead, for example, we scaled back our market shares in property and casualty business – which at the end of the harder market cycle in 2004 and 2005 had still been in excess of 3% – to the current levels of around 2.5%. We nevertheless continue to form part of the small group of reinsurers that are approached for placement and pricing.
Given the cyclical nature of the North American market, it is absolutely essential to play such an active role even in softer market phases so as to safeguard our capability for renewed expansion of the portfolio in the coming hard market years. In this respect market surveys confirm that we continue to be ranked first in qualitative terms on the broker market.
Percentage breakdown of gross written premium in the US by line of business
+++ Premium volume in US D&O business further reduced+++
In most casualty segments – such as directors' and officers' (D&O) covers – rates showed further single-digit declines in the first nine months of the year under review. In the shadow of the financial market crisis, however, they stabilised in the fourth quarter. We purposefully relinquished market shares and reduced our volume in casualty business, especially in the professional indemnity and special liability lines.
The combined ratio climbed markedly in the year under review, creeping close to the maximum level that we are prepared to tolerate. Only in routine casualty business did we maintain our volume, since conditions here were relatively favourable and we were again able to generate a breakeven result.
While rate reductions in double digits were still the norm in property business in the first half of the year under review, the onset of the hurricane season heralded a trend reversal. In particular, the repercussions of hurricane "Ike", which with a market loss of around USD 20 billion came in as the third most expensive hurricane of all time, halted the price decline.
We are one of the market leaders in credit and surety reinsurance in North America. The protracted crisis on financial markets led to a drop in the solvency level of businesses and hence to a rising number of bankruptcies in the year under review. The claims frequency in the credit line consequently increased. Losses in surety business, on the other hand, rose only marginally. Nor has the crisis on the real estate market had any significant implications for this line to date, whether in the primary sector or on the reinsurance side.
Rates in credit reinsurance climbed in the year under review in the face of a growing number of claims; the rate level in the surety line remained virtually unchanged.
+++ No negative repercussions of US mortgage market meltdown for credit and surety business +++
In view of the general economic environment we scaled back our involvement, albeit without relinquishing our place as the third-largest reinsurer. We selectively expanded our market position in the political risks segment.
The meltdown on the US mortgage market did not have any repercussions for our credit and surety portfolio. Our underwriting guidelines preclude the writing of credit derivatives, i.e. including mortgage guarantee business.
We were satisfied with our performance in North American credit and surety reinsurance, although it did not match up to the record result generated in the previous year.