Life & Health reinsurance

• Successful implementations of our automated underwriting systems with thoroughly positive customer feedback
• Charge to income from parts of the US mortality portfolio acquired in 2009
• Financial solutions business delivers another record result (EBIT margin of 25.4%)

Life and health reinsurance contributed a substantial 40% (previous year: 44%) share of Group gross premium in the year under review. The business is characterised by enduring mutual commitments, and we attach great value to a partnership- based approach. Thanks to our global network and our know-how, we are able to drive new developments in the markets on a local basis. We nevertheless consider the profitability and quality of the generated business to be the absolute overriding priority and we act accordingly.

Total business

The numerous positive developments in our international life and health reinsurance portfolio were accompanied in the financial year just ended by individual parts of the business that fell short of our expectations. Essentially, this involved parts of the US mortality portfolio acquired in 2009. With a view to counteracting this development going forward, we are engaged in a dialogue with our customers in order to arrive at a viable solution for both parties. This is also connected with the recapture of a reinsurance treaty, which reduced the result by some EUR 45 million. The commutation was a targeted move since by taking this one-off charge to the balance sheet we will be able to avoid considerably higher economic losses in the future.

One of the positive developments in the year under review was the commencement of business operations in February by our newly established composite branch in India. The book of life and health reinsurance business performed favourably despite exacting regulatory requirements and compliance standards. Numerous new customers have already been acquired and our expectations were more than fulfilled.

Insurers in our domestic German market are increasingly preoccupied with the capital adequacy and solvency ratios prescribed by Solvency II. Reinsurance covers offer one possible solution for meeting the required ratios. On the one hand, they are extremely flexible in their structuring, while at the same time being more cost-effective than a – potentially necessary – capital measure. Serving as a reliable partner, we have supported our customers in an advisory role with our expertise. More pressing than Solvency II issues, however, was the continuing need for financing solutions to fund the additional reserves required for life products promising guaranteed returns in excess of an official reference rate (“Zinszusatzreserve”). Potential covers for solvency relief were therefore dealt with only as a secondary priority. Along with these developments, demand for long-term care insurance and longevity reinsurance solutions remained strong in the international arena. Particularly in capital-intensive longevity business, a growing need for relief was evident among primary insurers.

In addition to risk-oriented (re)insurance topics, we devoted greater attention to the subject of digitalisation. The insurtech sector, in particular, received an enormous development boost in the financial year just ended. In many cases these are small start-up enterprises that are reliant on cooperations with experienced, cash-rich partners. For our company as a reinsurer, the benefits deriving from cooperations of this nature are based on the fact that the focus is normally on direct and uncomplicated contact with the customer / end consumer. Through this type of partnership we are able to optimally assist our customers, especially when it comes to addressing a generation that is not only tech-savvy but also attaches considerable importance to a healthy lifestyle. These groups are now virtually beyond the reach of traditional distribution channels in the life insurance industry and we therefore take an active part in developments in this field. We report on these activities at greater length under the heading “Underwriting services”.

The total gross premium income booked in life and health reinsurance in the year under review amounted to EUR 7,079.6 million (EUR 7,149.0 million). This is equivalent to a decline of 1.0%; adjusted for exchange rate effects, a modest increase of 1.4% would have been recorded. The level of retained premium stood at 91.7% (90.4%). Net premium earned climbed 0.7% to EUR 6,472.8 million (EUR 6,425.0 million), corresponding to growth of 3.0% adjusted for exchange rate effects.

In view of the unchanged low level of interest rates, investment income in life and health reinsurance contracted as expected and totalled EUR 560.6 million (EUR 638.9 million). The share of the income attributable to assets under own management amounted to EUR 343.5 million (EUR 330.8 million), while the contribution made by income from securities deposited with ceding companies came in at EUR 217.1 million (EUR 308.1 million).

The operating result (EBIT) in life and health reinsurance reached a level of EUR 245.2 million (EUR 343.3 million). This decline of 28.6% can be attributed in large measure to the poorer-than-expected performance of the US mortality portfolio and the aforementioned one-off effect. Group net income for life and health reinsurance retreated accordingly to EUR 172.6 million (EUR 252.9 million).

We provide below an overview of developments in life and health reinsurance, split into our reporting categories, as well as a description of our extensive range of services under the heading “Underwriting services”. The breakdown of the reporting categories is structured according to our internal risk management system and hence subdivided into the sections “Financial solutions” and “Risk solutions”. The category of risk solutions is further differentiated according to the biometric risks of longevity, mortality and morbidity.

Financial Solutions

In our financial solutions business we concentrate on reinsurance solutions geared to optimising the solvency, liquidity and capital position of our customers. These forms of reinsurance are highly diverse and individually structured because they are always tailored to the customer’s needs. The decisive differentiating feature is that the customer’s primary motivation is not exclusively the coverage of biometric risks, but rather the protection of its financial and balance sheet position.

We can draw on long-standing expertise and we write financial solutions business with considerable success worldwide – particularly in the United States. This was again evident in the financial year just ended: we were exceptionally satisfied with the expansion of our business in the US, which delivered a clearly positive result this year and will continue to do so in the years ahead. Customer surveys rank us among the market leaders in the US and have named us number one in the field of financial solutions.

In Germany a fundamental interest in Solvency II topics was evident on the primary insurance market. The first-time publication of the Solvency and Financial Condition Reports nevertheless attracted only scant attention. It remained the case that demand for financing solutions to help fund the additional interest rate reserves was more pressing than Solvency II issues. We stood by our customers in this regard as a reliable partner, using our expertise to identify possible solutions.

In addition, we observed pleasing business potential in connection with Solvency II in the Scandinavian markets. In the United Kingdom, too, it was evident that the topic of financial solutions has become more important to our primary insurance customers and should generate corresponding demand for reinsurance.

Gross premium income for the financial solutions reporting category fell by 6.9% to EUR 895.1 million (EUR 961.2 million). This corresponds to a share of 12.6% of the total gross premium booked in life and health reinsurance. The operating result (EBIT) came in at a very pleasing EUR 223.8 million (EUR 168.0 million).

Longevity

In the longevity reporting category we group together all reinsurance business where the primary risk covered is the longevity risk. This consists principally of traditional annuity policies, pensions blocks taken out for new business and so-called enhanced annuities, which guarantee annuitants with a pre-existing condition a higher annuity payment for their remaining shortened life expectancy. By far the bulk of our portfolio is made up of business that is already in the pay-out phase.

In terms of volume, the United Kingdom continues to be our most important and by far the most mature market for longevity products. Despite intense competition, we successfully completed reinsurance transactions that provide customers with solvency relief in addition to coverage of the longevity risk and we have also received positive feedback from the market in response to our simply structured, traditional longevity solutions. The uncertainty surrounding the consequences of the United Kingdom leaving the European Union was palpable in the year under review and further complicated the business environment – on top of the already existing pricing and competitive pressures. Most notably, the pressure of competition on the primary insurance and reinsurance side had been growing steadily as a consequence of the change in the legal situation that came into effect in April 2015 (relaxation of the rules on compulsory retirement). On the primary side this has now led to consolidation efforts, which are expected to open up further new business opportunities for our company as a reinsurer.

Internationally, the longevity market has continued to evolve favourably: it is particularly gratifying to report that we have concluded our first large treaty in Scandinavia. Along with deferred pension liabilities this also covers annuities in the pay-out phase. What is more, customers in Australia, Asia and Europe have expressed interest and in some cases signalled a concrete need for protection against longevity risks. A key factor in the increased demand worldwide was the high solvency- based capital requirements imposed on insurers under the various local supervisory regimes. Where longevity risks are involved, it is frequently the case that very high reserves need to be held by primary insurers to cover pension commitments that are often still in the distant future. As a robustly capitalised reinsurer, this is where we can provide the necessary solvency relief.

The gross premium for longevity business contracted by 15.2% in the year under review to EUR 1,256.9 million (EUR 1,482.4 million). The operating result (EBIT) reached a level of EUR 20.0 million (EUR 25.7 million).

Mortality and Morbidity

In the global (re)insurance industry it is standard practice for the mortality and morbidity risk to form a common element of one and the same business relationship, and in some cases both risks are even covered under one reinsurance treaty. In our reporting we therefore consolidate the profit contributions of these two reporting categories and provide below merely an overview of specific significant developments of the past year affecting our mortality and morbidity business.

Mortality

Mortality-exposed business forms the core of traditional life and health reinsurance and, in terms of premium volume, still accounts for the lion’s share of our total premiums in this business group. We offer our customers reinsurance protection for the risk that the actually observed mortality may diverge negatively from the originally expected mortality, i. e. that people do not live as long as anticipated.

The life (re)insurance market in Germany was characterised in the financial year just ended by the protracted low interest rate level and especially the associated discussion around the future viability of traditional life insurance products. In the context of these developments even larger insurers have contemplated the possible disposal of their life insurance portfolios. With a view to enabling them to offer policyholders innovative new insurance solutions compared to traditional life insurance products, we are engaged in a dialogue with our customers and are willing to provide crucial support with this development.

In the rest of Europe the situation varied from market to market. Heavy pricing pressure and competition were the dominant factors in the United Kingdom, giving rise to an extremely competitive environment in which no appreciable changes could be pushed through. In the Scandinavian markets, on the other hand, we were able to preserve the robust positon that we have enjoyed in recent years. Business developed favourably overall. Customer feedback was thoroughly positive, especially in connection with the implementation of our automated underwriting system hr | ReFlex. We were similarly satisfied with the development of our business in Southern Europe and Latin America. In Asia and Australia our expectations were satisfied in equal measure. Even though competition has intensified and market requirements have become more exacting – particularly in Australia, for example, following mandatory adoption of the Code of Practice to improve protection for end customers –, we were satisfied on the whole with the achieved growth.

Another important and large market for our company is US mortality business. We have systematically expanded this business since 2009 and offer the entire spectrum of mortality-oriented reinsurance solutions. In the year under review part of our in-force portfolio fared more poorly than expected, significantly impacting the result. These losses are based in part on reserve increases and business recaptures, which will ensure an improved experience going forward and thereby prevent losses over the long term. Detached from this development, the volume of new US business performed in line with our expectations, although this was not sufficient to offset the adverse effects associated with the in-force portfolio – as reflected in the results.

Gross premium for mortality business rose by 3.9% to EUR 3,200.1 million (EUR 3,080.9 million). Altogether, it contributed 45.2% of the total gross premium income booked in life and health reinsurance (EUR 7.1 billion).

Morbidity

Within the morbidity reporting category we cover business centred around the risk of deterioration in a person’s state of health due to disease, injury or infirmity. A hallmark of this business is the wide range of possible combinations of different covered risks, including for example strict (any occupation) disability, occupational disability and various forms of longterm care insurance. A dedicated team of staff equipped with both specialist expertise and access to our network of business centres stands ready to assist with transactions of this type. In this way, our customers are able to optimally benefit from our global know-how on a local basis.

In Germany, the adoption at the beginning of 2017 of a revised benefit trigger in long-term care (LTC) insurance as part of the statutory social security scheme failed to bring about any appreciable market upturn. On the contrary, the market for LTC covers – which was already very small – contracted. It is therefore all the more pleasing that one of our largest customers – which uses our own LTC tables – was one of the few market players to express considerable satisfaction with the development of its new business. We see this as confirmation that we took the right decision when we moved to refine our LTC tables.

In principle, we are satisfied with the development of our portfolio in the countries of Southern and Eastern Europe, given that for the most part they fared positively as anticipated. In Northern Europe, too, we preserved our strong market position. The markets of the Middle East proved to be highly competitive, although in this region we were successful in rolling out our automated underwriting system hr | ReFlex with a number of customers. This delivered a crucial competitive advantage by enabling our customers to expand their product range to include risk-oriented covers such as strict (any occupation) disability and critical illness insurance.

The market for group business proved to be comparatively competitive, especially in Hong Kong. Despite this, we successfully renewed our portfolio thanks to our disciplined underwriting approach and thereby consolidated our market position. In other areas of Asia and Latin America we similarly recorded a positive development and booked growth in line with our expectations.

Morbidity business grew by 6.3% in the financial year just ended to EUR 1,727.5 million (EUR 1,624.6 million).

Gross premium for our total mortality and morbidity portfolio increased by 4.7% to EUR 4,927.6 million (EUR 4,705.5 million). The operating result (EBIT) for the two reporting categories was sharply lower at EUR 1.4 million (EUR 149.5 million).

Underwriting Services

A core focus of our underwriting services is on our automated underwriting systems and providing the associated support for our customers that goes beyond pure risk transfer. In the year under review it was again evident that these services, in particular, cement our long-term business relationships with our customers and deliver a competitive advantage.

Process automation was a dominant topic throughout the entire (re) insurance industry. With the aid of our underwriting systems, our customers are able to automate and structure the underwriting process so as to ensure that their end customers immediately receive an offer tailored to their needs and can at once arrive at a decision. We were thoroughly satisfied with the development of our underwriting system hr | Quirc, which customer surveys carried out last year in South Africa crowned as the most widely used system in the market and the one with the highest satisfaction rates. In addition to South Africa, we successfully launched the system in other African countries as well as the Middle East. Not only that, customers from Asia and Australia increasingly expressed their interest as well. Similarly, we are exceptionally satisfied with the development and progressive international roll-out of our new and even more state-of-the-art system hr | ReFlex. The number of implementations rose sharply in the year under review, enabling us to boost our market penetration throughout Europe, in particular, and in the United States as well as to improve our name recognition in other markets such as those of Latin America. We enjoyed a consistently positive response from customers; what is more, customer surveys showed that hr | ReFlex is generating extraordinarily high rates of satisfaction, especially in the US and Northern Europe.

Along with these activities, we intensified the dialogue and interaction with (online) platforms specialised in insurance solutions as part of our drive towards digitalisation. Those policyholders who value their health and quality of life and would like to always keep track of their medical and biological data with the aid of wearables (smart electronic devices such as a watch that can be worn on the user’s arm) constitute the ideal target group for insurance products combined with lifestyle and wellness elements. Cooperative ventures in the so-called insurtech sector establish a solid starting point for addressing the needs of these (mostly) younger generations and raising their awareness of insurance offerings. With a view to adding impetus to this trend, we have – among other things – participated in a South African company specialising in the storage and analysis of vital signs (such as pulse, blood pressure, etc.) that are captured and transmitted by a wearable. Our partner also has the medical know-how needed to analyse these data. Sound assessments and analyses of this type can be superbly combined with insurance products and are therefore of particular interest to health-conscious policyholders.

Furthermore, we were highly successful in implementing our underwriting system hr | ReFlex in the US market in cooperation with a US insurtech partner. Online and mobile distribution channels are used to sell life insurance directly to end consumers. In the US life insurance market policies have hitherto generally tended to be sold by traditional means through agents. As a result, the broad middle class does not have sufficient insurance protection because they are not addressed by agents. The innovative combination of online insurance sales with our automated underwriting system hr | ReFlex delivers a cost-efficient and flexible solution for end consumer and provider alike.

All in all, the focus of all our activities – taking into consideration our corporate objectives – is on the needs of our customers. We aspire to be a long-term and expert partner in every situation. Consequently, along with the developments already discussed, we have also explored the more exacting capital requirements associated with, for example, Solvency II in Europe and C-ROSS in China, which are proving to be an ever greater strain for primary insurers. As a reinsurer, we traditionally assume the biometric risks of mortality, longevity and morbidity. With minority interests in two companies specialising in the assumption of capital market risks, we have closed this gap and thereby ensured that we are also able to meet this need on the part of primary insurers. In the year under review we were already able to realise some initial solutions in this area.