Results

The main factors with a bearing on the results of Hannover Life Re are derived from our business model and encompass the three components

• 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.

In this context developments on international financial markets – especially with respect to the valuation of fixed-income securities in the US and UK – took on a particular relevance in the year under review.

These developments had a bearing principally on our benefit reserves deposited with ceding companies. They also significantly affected the additional assets of USD 1.3 billion assumed in February 2009 in connection with the US portfolio acquisition.

The risk situation as regards the three biometric risk categories of mortality, morbidity and longevity was satisfactory overall, although we did observe increased mortality rates in some sub-portfolios in the United Kingdom and a higher claims frequency in disability annuity business in Australia.

The mortality in the portfolio assumed under our US life portfolio acquisition was in line with our expectations for gross account, while it was slightly higher than projected for the retention.

The structural risks associated with the persistency of the business in force as well as the counterparty risk were subjected to a stress test in the context of the worldwide financial market crisis. Especially in German-speaking markets, in which we operate as a leading reinsurer of unit-linked life and annuity products, we observed sharply higher lapse rates in the first half of 2009, in particular, although they stabilised towards year-end. Our actuarial analyses in this regard showed that moderate additional reductions in the deferred acquisition costs were advisable under certain contracts.

Of relevance to the financial solutions pillar is the counterparty risk, which would manifest itself in the inability of a specific client to amortise the prefinancing that it had received; this has not had any impact to date on our worldwide portfolio of ceding companies.

It should, however, be borne in mind that many life insurers have been downgraded by the rating agencies or assigned a poorer outlook – overall, then, the credit quality of the life insurance market has deteriorated. Our clients typically have a very respectable Standard & Poor's rating of A+/AA–.

Developments on financial markets had far-reaching implications in the year under review, especially with respect to fair value adjustments for securities deposits furnished to US cedants under certain contracts (so-called ModCo derivatives). Unlike in the previous year, however, the effects on the income statement were very positive this time with an overall amount of EUR 121.8 million recognised in the operating result.

Total investment income came in at EUR 520.1 million; this was equivalent to an increase of 111.8%. Of this amount, EUR 280.2 million was generated by assets under own management and EUR 239.9 million derived from amounts credited on deposits with ceding companies.

We traditionally devote particular attention to lean processes, an efficient personnel structure and short lines of decision-making. Internal administrative expenses totalled EUR 98.3 million in the year under review, corresponding to 2.2% of gross written premium. Our administrative expense ratio is thus significantly lower than that of our major competitors.

The operating profit (EBIT) climbed to a new record high of EUR 372.2 million, generating an EBIT margin of 9.1%.

If we factor out the non-recurring special effects associated with assumption of the ING life reinsurance portfolio as well as with the fair value adjustments taken on reinsurance deposits furnished to cedants in the United States and United Kingdom, the ordinary operating profit stands at EUR 230.0 million, a figure in line with our expectations.

With a tax ratio of 19.7% and after allowance for minority interests, consolidated net income after tax thus came in at EUR 295.5 million (EUR 78.3 million), an all-time record for Hannover Life Re. This was equivalent to earnings of EUR 2.45 per share.