Other international markets
Latin America
The most important Latin American markets for our company are Mexico, Columbia, Venezuela, Ecuador and Argentina. Both Mexico and Central America are regions with a marked natural catastrophe exposure. Hannover Re is highly active in this segment. In these markets too - with the exception of the Caribbean - we stepped up our involvement.
Particularly in the first half of the year most lines saw rate reductions, although slight improvements were recorded thereafter. All in all, prices were commensurate with the risks.
+++ Hannover Re is an "admitted reinsurer" in Brazil+++
Following the abolition of Brazil's reinsurance monopoly in 2008, we opened a representative office in Rio de Janeiro and are now able to operate in the Brazilian market as an "admitted reinsurer". This gives us an optimal platform for acquiring a satisfactory market share in Latin America's largest market. The business written in Brazil encompasses both obligatory and facultative acceptances in all lines, including motor, aviation, credit and surety, agricultural risks, structured products and life reinsurance.
Our strategy in the agricultural risks segment is to acquire additional market shares. State-run premium subsidy programmes in the primary sector and the promotion of plant-based energy sources continued to stimulate demand for agricultural insurance - and hence led to a greater need for reinsurance capacities.
Our premium volume from Latin American markets grew slightly in the year under review. On the claims side the severe hurricanes "Ike" and "Gustav" were the most notable events in the year just-ended, causing the loss ratio to rise somewhat.
Africa
Our most important market on the African continent is South Africa, where we are represented by our Johannesburg- based subsidiary, Hannover Re Africa.
The South African insurance and reinsurance markets were again notable in the year under review for fierce competition among foreign providers. The technical results posted by ceding companies came under appreciable pressure on account of a number of sizeable fire claims, and prices in this area climbed. Insurers nevertheless again raised their retentions and demand for facultative covers fell.
Faced with regulations governing a revised risk-weighted capital calculation, which are expected to enter into force from 2011 onwards, insurers currently find themselves needing either to develop an internal model or to turn to external providers for assistance. In future, risk capital is to be geared to a reinsurer's size and the underlying risks; the guideline for measuring risk capital has hitherto been 25% of net premium. We expect these more exacting capital requirements and the repercussions of the financial market crisis to deliver fresh impetus for business - especially in the area of structured products.
In Africa Hannover Re predominantly reinsures specialty risks - such as building insurance for thatched homes - written by managing general agents. A portion of this specialty portfolio is assumed from our subsidiary Compass Insurance Company.
Our strategic objective in South Africa is to expand our business accepted through underwriting agencies. We accomplished this goal in the year under review and were able to significantly boost our premium volume. In addition to setting up a new MGA in the year under review we acquired MUA Insurance Company, in which we already held a 49% stake. It is envisaged that the company – which has hitherto focused on the insurance of luxury automobiles – will be transformed into a managing general agent.
We were satisfied with the development of business and the underwriting result in South Africa in the year under review: despite poorer investment income as a consequence of the crisis on international financial markets and a higher claims frequency, we generated an acceptable result.
Given the increased strategic importance of Hannover Re Africa within the Group, Standard & Poor's upgraded its rating in the autumn from "BBB+" to "A" with a stable outlook. This reflects our subsidiary's very good capitalisation as well as the favourable development of its operational business.
+++Standard & Poor’s upgrades Hannover Re Africa+++
In Africa, too, Hannover Re is distinguished by the very high quality of its management team: within the scope of the Group-wide Performance Excellence assessment conducted in accordance with the model of the European Foundation for Quality Management, our South African subsidiary delivered an outstanding performance and thus demonstrated the particularly impressive quality of its enterprise management and supervision – something from which our clients profit.
Asia
Japan, where we support our clients through a local service company in Tokyo, is by far our largest Asian market. Hannover Re transacts business here across all segments – although natural catastrophe covers, which we write predominantly on a non-proportional basis, constitute the most important single line in Japan.
Business relations with our Japanese clients traditionally emphasise continuity, and thanks to our very good rating we are a sought-after partner for reinsurance covers.
We therefore enjoy the status of "core reinsurer" with most major primary insurers.
In the year under review the Japanese insurance market recorded negative growth as automobile and real estate sales declined. Although the financial market crisis did not affect Japanese insurers as severely as it did providers in other countries, investment portfolios were nevertheless adversely impacted by the volatility on stock markets.
Overall, original rates remained on a stable, albeit low, level.
On the reinsurance side the picture in the various segments was a mixed one. In property business, for example, stable prices prompted us to modestly enlarge our portfolio in this market. Windstorm and earthquake covers, on the other hand, saw sharp rate cuts as expected owing to the absence of losses – although reinsurance commissions for earthquake risks remained unchanged or even increased slightly. Personal accident business – a line that has been spared major claims in recent years – inevitably witnessed substantial price declines. In Japanese casualty business, however, prices held stable; true to our strategy of further optimising the diversification of our business, we therefore not only maintained the casualty portfolio on a par with the previous year's volume, but actually stepped up our involvement in the year under review.
Despite the generally difficult environment, our premium income in Japan remained virtually unchanged in the year under review. All in all, we were thoroughly satisfied with the development of our business in this market.
Further rate reductions were recorded throughout Southeast Asia in 2008 in both the insurance and reinsurance sectors. Our main markets in this region are Malaysia, India, the Philippines and Indonesia.
Our portfolio here is composed principally of property business, which we further diversified in the year under review. Lines such as personal accident, crop and livestock insurance, motor with limited liability as well as structured covers were systematically expanded. Overall, we observed sustained demand in the year under review for structured products in Asian markets, including for example in India, Indonesia, Thailand, South Korea and the Philippines. In China the global financial market crisis was a key driver of our business opportunities in the area of structured covers.
In facultative reinsurance we are a sought-after partner in Southeast Asia for non-proportional property business and liability covers.
The number of primary insurers in the Philippines and Pakistan decreased in the year under review in the face of new solvency regulations (risk capital requirements). In Malaysia, too, a number of providers have disappeared from the market – in this case due to mergers and acquisitions. The situation was quite different in India, where new competitors entered the arena.
Our premium volume contracted in light of the devaluation of most local currencies. On the claims side, however, the year under review passed off relatively unremarkably; only in South Korea did we incur a major loss, which produced a moderate strain of around EUR 5 million for Hannover Re.
+++ Development of retakaful business highly satisfactory +++
Retakaful business – that is to say, insurance business transacted in accordance with Islamic law – once again generated dynamic growth for our portfolio both in Southeast Asia and on the Arabian peninsula: this can be attributed to the favourable state of the economy in the Gulf States, which was supported by high oil prices – at least until the autumn – as well as a boom in public and private investment. The effect of the financial market crisis on economic growth in the Gulf States has hitherto been at most marginal.
Since 2006 Hannover Re has maintained a Bahrain-based subsidiary, Hannover ReTakaful, which bears exclusive responsibility for transacting our retakaful business; we also have a local branch that writes traditional reinsurance in the region. Hannover ReTakaful serves a global customer base. Along with the Gulf States, Malaysia is one of our largest markets. In the year under review we established relationships with clients in Syria, Egypt and Libya, and we currently do business with 66 takaful insurers. It remains our goal to be the first and preferred partner for these companies over the long term.
We considerably enlarged our premium volume in this sector in the year under review.
+++ Competition remains fierce in China +++
China continues to rank as the most prominent growth market in Asia. While there was little movement yearon- year in the established primary insurance markets of Hong Kong and Taiwan, the Chinese market once again recorded disproportionately strong growth.
This expansion spanned all lines, although it was particularly noticeable in motor business and the casualty lines. China continues to be a target market for international insurers and reinsurers, and competition is correspondingly fierce. The number of insurers is consistently rising, while at the same time an oversupply of reinsurance capacity prevails on the market. Accounting for over 65% of total volume, motor business is the dominant line in China. Hong Kong and Taiwan are markets heavily slanted towards non-proportional covers – with property lines dominant for our company in Taiwan and casualty business generating the bulk of our premium volume in Hong Kong.
Both regions saw appreciable rate reductions in the year under review. In China, however, reinsurance rates held stable in view of the inadequate results recorded in 2007; conditions improved slightly.
Hannover Re pursues an opportunistic underwriting policy in the aforementioned markets. We accept primarily non-proportional business that meets our profitability standards; this is especially true of China, where the market is dominated by proportional treaties. We stood by this strategy in the year under review and enlarged our non-proportional portfolio, while at the same time stepping up our involvement in casualty lines. Our premium volume consequently showed modest growth.
+++ Natural disasters are the dominant feature of the financial year in China +++
The business development in China was crucially shaped by a tense catastrophe loss situation in 2008, which led to highly unsatisfactory results on the reinsurance side: snow- and ice-storms between mid-January and mid-February left a trail of severe destruction and hence caused the most expensive insured losses in the history of China. The net burden of these events for Hannover Re was in the order of EUR 16.2 million. In May a severe earthquake in Sichuan Province resulted in a human tragedy, although the devastating economic losses bore no relation to the insured values. Hannover Re's loss expenditure was therefore rather modest at around EUR 8.3 million.
The loss scenario was more favourable in Hong Kong and Taiwan, where our account incurred only small and mid-sized claims.
Australia
Hannover Re still ranks third in the Australian non-life reinsurance market. For more than 20 years we have been represented by a branch office in Sydney. Our clients value us as a reliable and attractive partner on account of this local presence as well as our very good rating.
In accordance with a decision of the Australian insurance regulator, from 31 December 2008 onwards non-local reinsurers are required to furnish collateral for their contracts; as a locally based provider we therefore enjoy an edge over some market players.
A competitive climate prevailed on the Australian primary insurance market in the year under review. Since listed companies are under special pressure to deliver profits, indications of market hardening could nevertheless be discerned. On the reinsurance side, however, rate reductions were for the most part the order of the day. Workers' compensation insurance came under heavy price pressure, and markdowns also had to be taken for catastrophe covers. Rates in non-proportional casualty business, on the other hand, remained stable.
On the Australian continent, too, the overriding principle guiding our business strategy is adherence to our profitability targets: leaving aside a very small number of proportional treaties, we therefore concentrate entirely on non-proportional business. We make exceptions only for customer relationships that have already existed for some years – provided they generate sustained profits. We are a leading provider for the upper layers of catastrophe programmes and for medical malpractice covers.
Following a very strained claims situation in Australia in the previous year, the losses incurred by Hannover Re in 2008 were moderate. A number of flood losses occurred in Queensland, although none of these developed into a major claim for our company. In addition, a gas explosion resulted in a business interruption claim, the effects of which for Hannover Re were, however, only minimal.
We were satisfied with the result generated on the Australian continent in the year under review.