Results
As in previous years, the main factors with a bearing on the performance of our life and health reinsurance business group remained unchanged as follows:
- development of the three biometric risks of mortality, morbidity and longevity, the structural risk associated with the persistency of the business in force as well as the specific client-related counterparty risk in connection with financing transactions,
- developments on international capital markets and movements in exchange rates, especially in our most relevant currencies of EUR, GBP, USD, AUD and ZAR,
- development of our own administrative expenses.
The trends on international capital markets – against the backdrop of the already familiar turmoil and upheavals – took on particular relevance in the year under review and had a considerable impact on our results.
The situation as regards the biometric risk of mortality, to which we are exposed principally through our acceptances in the United Kingdom, South Africa, Australia and the Asian markets, was highly satisfactory overall, although we did observe a slightly increased loss ratio at some UK cedants in connection with the "Treating Customers Fairly" initiative.
+++ Results influenced by turmoil on capital markets+++
The morbidity factor is constituted by a combination of different risk profiles from critical illness covers, US senior health medicare supplement plans, long-term care annuities and the usual occupational disability riders from the German and French markets as well as Australian disability covers. Involuntary unemployment insurance, which is offered in many markets in conjunction with protection for consumer loans, also belongs in this category. The claims experience here varied widely: it was very good under critical illness covers and long-term care annuities, slightly poorer for US supplementary health products and less favourable for disability annuities on the Australian market.
Geographical breakdown of life and health reinsurance (as % of gross premium)
The longevity factor has been of special relevance to our company for many years due to our market leadership in the UK; working closely together with our clients, we continuously analyse the short-, medium- and long-term trends of this risk category using an extensive range of actuarial methods. The claims experience in the year under review was in line with our projections.
The risk associated with the persistency of the in-force reinsured portfolios and the counterparty risk did not exhibit any peculiarities in the year under review – although a large international account based in the United States, under which we reinsure more than 40 individual life insurers, was heavily downgraded by the rating agencies in connection with financial difficulties affecting the holding company. This downgrade did not have any noticeable effect on the performance of the reinsurance treaties.
The impact of the risks associated with movements on capital markets and fluctuations in exchange rates was, however, severe in the year under review. With respect to the capital market risk, it should be borne in mind that the various operations of Hannover Life Re scarcely hold any equity securities or shares in their asset portfolios. We do, however, hold a high-quality portfolio of fixed-income securities – including corporate bonds – that optimally satisfies actuarial standards with respect to the mix of durations and currencies.
The total investment income generated for the life and health reinsurance business group amounted to EUR 245.5 million (EUR 293.9 million); this was equivalent to a decline of 16.4%.
As in the past, we attach considerable importance to lean processes and a flat management structure at all our operating units. With internal administrative expenses of EUR 70 million – corresponding to an expense ratio of 2.2% relative to gross written premium – we were again the cost leader among highly reputed international life and health reinsurers in the year under review.
The operating profit (EBIT) generated for the life and health reinsurance business group amounted to EUR 120.7 million (EUR 229.8 million); in this context, unlike in the previous year, allowance must be made for the negative special effect totalling EUR 72.1 million. Had it not been for this influencing factor, the operating profit would have reached EUR 192.8 million. The EBIT margin stood at 4.3%; it thus fell short of the previous year and our target range of 6.5% to 7.5% (excluding the negative special effect it would have reached 6.9%).
In the year under review we transferred a portfolio of life and annuity reinsurance to the capital market. Designated "L7", the transaction converts a future earnings stream into a current liquidity position and monetises an embedded value of EUR 100 million.
With a tax ratio of 29.4% and after allowance for minority interests, the consolidated net income of the life and health reinsurance business group came in at EUR 78.3 million (EUR 187.7 million). This was equivalent to earnings of EUR 0.65 (EUR 1.57) per share.