|Key figures for Property & Casualty reinsurance|
|in EUR million||2017||+/- previous year||2016||2015||2014||2013|
|Gross written premium||10,710.9||+16.4%||9,204.6||9,338.0||7,903.4||7,817.9|
|Net premium earned||9,158.7||+14.7%||7,985.0||8,099.7||7,011.3||6,866.3|
|Underwriting result 2||15.5||-96.9%||503.1||452.4||371.9||350.5|
|Net investment income||1,209.3||+34.2%||900.9||945.0||843.6||781.2|
|Operating result (EBIT)||1,120.2||-16.4%||1,340.3||1,341.3||1,190.8||1,061.0|
|Group net income||837.3||-11.8%||949.9||914.7||829.1||807.7|
|Earnings per share in EUR||6.94||-11.8%||7.88||7.58||6.88||6.70|
|EBIT margin 1||12.2%||16.8%||16.6%||17.0%||15.5%|
|Combined ratio 2||99.8%||93.7%||94.4%||94.7%||94.9%|
| 1 Operating result (EBIT) / net premium earned
2 Including expenses on funds withheld and contract deposits
Accounting for 60% of our premium volume, Property
& Casualty reinsurance is Hannover Re’s largest business
group. It is structured according to our Board areas of responsibility,
namely “Target markets”, Specialty lines worldwide” and
The market environment in worldwide property and casualty reinsurance was little changed overall in the year under review compared to the previous year. The prevailing intense competition continued unabated owing to the absence of market-changing large losses in the previous year. Reinsurance capacity clearly outstripped demand, with additional capacities putting prices and conditions under sustained pressure. Stronger demand could, however, be observed in some regions.
All in all, we were satisfied with the outcome of the treaty renewals as at 1 January 2017 – when 64% of our portfolio in property and casualty reinsurance was renegotiated. Despite challenging treaty renewals we benefited from our customer intimacy and our ability to offer tailor-made reinsurance products. Considerably increased demand was evident on the customer side for reinsurance solutions providing solvency relief. Attractive opportunities to expand the portfolio also opened up in North America, most notably in Canada, as well as in credit and surety business and in the area of cyber covers. Yet in this round of renewals it was again the case that we did not renew all our treaties on account of our own profitability requirements. Despite this, we were able to enlarge the premium volume in the 1 January renewal season. We were similarly satisfied with the various treaty renewals that took place during the year, further boosting our premium volume in a number of regions and lines including North America and credit / surety.
Against this backdrop, gross premium in the year under review rose by 16.4% to EUR 10.7 billion (previous year: EUR 9.2 billion). Growth would have reached 18.7% at constant exchange rates. This figure puts us ahead of our expectations. The level of retained premium climbed slightly to 89.7% (88.5%).
Net premium earned increased by 14.7% to EUR 9.2 billion (EUR 8.0 billion); adjusted for exchange rate effects, growth would have amounted to 17.0%.
In contrast to the previous years, the burden of major losses in 2017 was substantially higher than budgeted. After the first six months had passed off very quietly in terms of large losses, the second half of the year was dominated by severe natural catastrophe events – including three major hurricanes in the third quarter alone. Hurricane “Harvey”, which caused heavy damage in Texas and the neighbouring states, was followed by “Irma’s” trail of devastation in Florida and the Caribbean Islands. Hurricane “Maria” caused particularly widespread destruction in Puerto Rico. These three events alone resulted in net loss expenditure of EUR 749.4 million for our account. The two damaging earthquakes that struck Mexico in September cost our company a combined amount of EUR 49.2 million. The forest fires in California also caused considerable losses for our company totalling EUR 101.1 million. These and other events added up to total net major loss expenditure of EUR 1,127.3 million. Not only was the large loss budget of EUR 825 million thereby clearly exceeded, this was also the year with the heaviest burden of large losses in the history of Hannover Re. For a detailed list of these large losses please see page 90. The underwriting result including interest and expenses on funds withheld and contract deposits deteriorated from EUR 503.1 million to EUR 15.5 million owing to the high burden of losses. The combined ratio for the year under review declined from 93.7% to 99.8% and thus exceeded our targeted figure of 96%.
The investment income for the Property & Casualty reinsurance business group was, however, thoroughly gratifying. Driven by higher ordinary investment income and extraordinary gains generated from the disposal of our portfolio of listed equities, the income from assets under own management surged by 35.9% to EUR 1,191.5 million (EUR 876.9 million). The operating profit (EBIT) retreated to EUR 1,120.2 million (EUR 1,340.3 million) in view of the heavy large loss expenditures. The EBIT margin consequently contracted from 16.8% to 12.2%. We nevertheless achieved our minimum target of 10%. Group net income fell by 11.8% to EUR 837.3 million (EUR 949.9 million). Earnings per share for the Property & Casualty reinsurance business group amounted to EUR 6.94 (EUR 7.88).
On the following pages we report in detail on developments in the individual markets and lines of our Property & Casualty reinsurance business group, split into the three areas of Board responsibility referred to at the beginning of this section.
|Property & Casualty reinsurance: Key figures for individual markets and lines in 2017|
|Gross premium 2017 in EUR million||Change in gross premium relative to previous year||Gross premium 2016 in EUR million||EBIT in EUR million||Combined ratio||Maximum tolerable combined ratio (MtCR)|
|Specialty lines worldwide||2,767.6||+4.6%||2,646.6||349.5||98.8%||96.4%|
|Credit, surety and political risks||666.7||+8.7%||613.5||112.8||91.1%||94.7%|
|UK, Ireland, London market and direct business||791.2||+56.5%||505.6||-106.5||140.9%||97.4%|
|Worldwide treaty reinsurance||1,826.7||-3.1%||1,885.0||237.4||96.3%||96.1%|
|Catastrophe XL (Cat XL)||354.2||-0.8%||357.2||-3.3||121.1%||82.2%|
|Structured reinsurance and insurance-linked securities||2,606.8||+99.2%||1,308.7||94.8||97.7%||98.7%|
Hannover Re classifies North America and Continental Europe as target markets. The premium volume rose by 4.9% to EUR 3,155.6 million (EUR 3,007.0 million). Growth was in line with our expectations. The combined ratio deteriorated sharply from 92.5% to 102.8%. The operating profit (EBIT) consequently fell to EUR 441.8 million (EUR 598.2 million).
The North American (re)insurance market is the largest single market both worldwide and for Hannover Re. Our business here is written almost exclusively through brokers.
After pausing for breath in 2016, the strength of the US economy was on display again in the year under review. The positive momentum was driven above all by the generally stable financial situation as well as increased consumer spending. The move by the Federal Reserve to raise the key interest rate, thereby enabling our cedants to generate higher investment income, was also gratifying. The stronger growth overall in the United States of course also had positive implications for premium growth in the insurance industry. This came in at around 4%.
While modest rate reductions had still been observed on the primary insurance side going into the year, a positive trend towards stable rates set in as the year under review progressed. Towards year-end rates picked up appreciably in view of the catastrophe losses in the US.
On the reinsurance side we booked premium growth in all three areas of US liability business (standard, special and professional liability), with conditions for proportional treaties remaining broadly stable. Most notably, the professional indemnity lines showed modest rate increases, hence enabling us to further enlarge our medical malpractice business, in particular. We grew our premium volume in a number of other areas, too, including cyber covers. We make appropriate capacities available to selected clients in this segment. In US property business the rate level had softened somewhat at the beginning of the year, but prices rose in the course of the year under review on account of the elevated losses from natural catastrophes. Conditions remained largely unchanged.
As a consequence of the three hurricanes “Harvey”, “Irma” and “Maria”, and also owing to the forest fires in California, the year under review was one of exceptionally heavy losses for the US market. The combined ratio for the reinsurance market consequently climbed to well over 100%, as against 95% in the previous year. For our company, too, these events – after years of moderate loss expenditures – resulted in substantial strains. Detailed figures are provided on our large losses. It is gratifying to note that the losses impacted Hannover Re less heavily than our market shares would have suggested – something which can be attributed to a prudent underwriting policy in highly exposed zones and our retrocession strategy.
On the whole, though, we are satisfied with our results in North America. We are a valued partner based on our expertise and robust financial strength. Thanks to our long-standing good customer relationships, we were able to further extend our market footprint and boost our premium volume. In the year under review we entered into a partnership with a major client from which we expect to generate substantial additional premium.
In the year under review we continued to cautiously expand our volume of so-called program business, a form of primary insurance that we write through managing agents in North America.
The “Covered Agreement” between the United States and European Union that was signed in September 2017 will have pleasing implications for future results. The reinsurance collateral that we are required to furnish to our customers for business written in the US will be reduced or entirely eliminated over the coming years.
Despite the already healthy growth recorded in 2016, the premium volume increased again in the year under review by a further 5.5% to EUR 1,708.3 million (EUR 1,619.7 million). Reflecting the loss situation, the combined ratio climbed to 111.3% (91.0%). Against this backdrop the operating profit (EBIT) declined to EUR 177.5 million (EUR 393.3 million).
We group together the markets of Northern, Eastern and Central Europe as Continental Europe. The largest single market here is Germany. The premium volume for our business in Continental Europe in the year under review came in at EUR 1,447.3 million (EUR 1,387.3 million). The combined ratio improved to 93.1% (94.3%). The operating profit (EBIT) climbed to EUR 264.3 million (EUR 204.9 million).
The German market is served within the Hannover Re Group by our subsidiary E+S Rück. As the “dedicated reinsurer for Germany”, the company is a sought-after partner thanks to its very good rating and the continuity of its business relationships. E+S Rück is superbly positioned in its domestic market and a market leader in property and casualty reinsurance.
The German insurance market was stable in the year under review and recorded modest premium growth. The increases derived in particular from motor and homeowners’ insurance.
In view of the healthy capital position enjoyed by German insurers, we observed a trend towards increases in retentions that were substantial in some instances. So-called alternative capital, i. e. risk transfer to the capital markets, does not play a significant role in the German (re)insurance market.
In property and casualty insurance prices in original business moved higher. This was especially true of homeowners’ comprehensive and motor insurance in view of the continued strained claims situation in these lines. In motor insurance higher prices for automotive parts also made themselves felt. The costs of personal injury claims also remained stubbornly high.
On the reinsurance side the German market was stable in terms of both rates and conditions. Significant adjustments were seen only in the case of treaties that were particularly heavily impacted by losses. Driver assistance systems are emerging as a new factor in motor insurance. With this in mind E+S Rück is cooperating with a major mobile communications provider under a pilot project. Our goal is to offer German motor insurers the possibility of easy access to the field of telematics, while at the same time adding to the existing range of services for our customers.
Industrial fire business was still problematic: high losses were again incurred in this line. Although premium income showed an increase in the low single-digit percentage range, the premium level is only sufficient to cover attritional and mid-sized claims, not large losses. There is no prospect of a change in the situation because competition remains intense.
Positive results were, however, booked in the general liability, householders and accident lines.
In natural catastrophe business a number of local flood events caused by heavy rainfall resulted in losses, although for the most part these remained within the retentions run by primary insurers. Given the increasing prevalence of natural disasters, covers for extended natural perils are likely to become ever more important.
Cyber insurance is another area of growing significance in Germany. We lost no time in responding to this rising demand and are cooperating with a service provider to offers small and mid-sized enterprises a service platform for cyber security solutions and risk management.
We have actively fostered the trend towards new digital insurance start-ups and enabled various players to enter the market by providing their reinsurance protection.
All in all, we are satisfied with the development of our property and casualty reinsurance portfolio in the German market. Premium income contracted marginally in the year under review; we had anticipated a virtually stable premium volume in our guidance.
European insurance markets were once again fiercely competitive in the year under review on account of surplus capacities; this was especially true of mature markets such as France and Northern Europe. The situation was particularly competitive in the fire / industrial lines and in motor business. On the reinsurance side, too, there was no easing in the intense competition. Demand for tailored reinsurance solutions was nevertheless brisk. In long-tail liability lines – and here primarily in the motor sector – conditions remained challenging, promoting us to write this business only on a highly selective basis. Overall, we are satisfied with the development of the accident line and hence further expanded our premium volume here. The performance of our portfolio in the Netherlands, which grew across all lines of business, was pleasing.
All in all, we further boosted our shares under long-standing client relationships in the countries of Continental Europe; this was true of both larger and smaller customer accounts.
Growth rates in the countries of Central and Eastern Europe – for both the primary and reinsurance market – were still stronger than the European average overall. For the most part, however, prices for reinsurance covers declined in the face of intense competition. This was not the case in Polish motor business, though, where rates moved higher. This was driven by the negative loss experience as a consequence of new case law under which accident victims are entitled to higher liability claims.
Despite the competition, the lively demand for reinsurance solutions continued unabated. A key driver here was the more demanding requirements placed on the capital resources of insurance companies under Solvency II. On the whole, we were able to secure broadly risk-adequate rates and conditions for the region of Central and Eastern Europe in the year under review and hence generated satisfactory results on the back of an increased premium volume. On the claims side the territory of the Russian Federation was notable principally for two sizeable losses as well as a number of smaller events.
Under specialty lines we include marine and aviation reinsurance, credit and surety reinsurance, business written on the London Market as well as direct business and facultative reinsurance.
The premium volume for specialty lines in the year under review amounted to EUR 2,767.6 million (EUR 2,646.6 million). The combined ratio deteriorated to 98.8% (90.9%). The operating profit (EBIT) for specialty lines contracted to EUR 349.5 million (EUR 447.8 million).
The rate decline in marine insurance continued in 2017, although it was less marked. Underlying factors such as the low oil price, the merely faltering growth of the global economy and excess capacities in the market for transportation of freight and cargo meant that there was no appreciable change in demand for marine insurance solutions. In the face of falling prices for commodities and other goods, the premium volume in the market continued to contract. Combined with a modest rise in the available capacity, the pressure on original rates increased again slightly in both offshore energy and marine insurance business.
Claims expenditure in the first half of the year was gratifyingly light. The third and to some extent also the fourth quarter, however, were impacted by significant losses from the hurricanes in the United States and Caribbean. Clients who wrote yacht insurance were especially hard hit by the windstorm events. Providers of insurance solutions for inland transportation in the US market also incurred substantial losses. As one of the world’s leading marine reinsurers, the aforementioned losses from natural perils also left their mark on our books.
The gross premium for our marine portfolio contracted by 6.2% to EUR 260.1 million (EUR 277.5 million). The loss expenditure led to a deterioration in the combined ratio, which slipped to 96.0% (38.5%), and hence also in the underwriting result. The operating profit (EBIT) fell to EUR 35.7 million (EUR 138.1 million).
International aviation (re)insurance remained under strain in 2017: the line continues to see a significant oversupply of capacity. This is true of both the original market and the reinsurance side.
While expenditure on large losses in the airline sector was minimal in the year under review, a significant part of the market premium again had to be allocated to small and midsized losses that were not widely reported in the media. In non-airline (general aviation) business and in the area of product liability the market was impacted not only by normal claims activity but also by individual larger events. We incurred one sizeable loss from a typhoon in China.
Given the strained state of the market, especially in the aftermath of the hurricane events, initial signs of stabilisation in the aviation market could be detected both on the primary and reinsurance side.
During this phase of potential market upturn we kept our disciplined underwriting strategy unchanged and focused especially on non-proportional business. In this segment we operate as one of the market leaders.
The premium volume for our total aviation portfolio contracted in the year under review from EUR 278.7 million to EUR 247.9 million. Given the elevated level of large losses compared to the previous year, the combined ratio from regular business operations increased slightly. However, the operating profit (EBIT) for our aviation portfolio increased to EUR 267.8 million (EUR 108.9 million) on account of the release of reserves set aside for prior underwriting years that were no longer required.
Growth in the global primary insurance market remained relatively soft. Reinsurance cessions, on the other hand, were slightly higher. This was especially true of the credit and political risks lines; they were stable in surety business.
The claims frequency was lower than in previous years, especially as regards mid-sized claims. Rates on both the primary and reinsurance side consequently moved slightly lower or remained unchanged.
Hannover Re writes the bulk of its business in the form of proportional treaties. It ranks among the market leaders in worldwide credit and surety reinsurance and in the reinsurance of political risks. New clients were added in the year under review, thereby further diversifying the portfolio.
Against this backdrop, coupled with the expansion of existing customer relationships, gross premium increased in the year under review by a very pleasing 8.7% to EUR 666.7 million (EUR 613.5 million).
The combined ratio for the entire segment improved to 91.1% on the back of reduced loss ratios; it had stood at 104.9% in the comparable period. The operating profit (EBIT) rose to EUR 112.8 million (EUR 8.3 million).
The result of the property and casualty business that we reinsure for companies in the United Kingdom and on the London Market was not entirely satisfactory in 2017.
Primary insurance rates in most lines stabilised in the financial year just ended and the fierce competition of the previous years abated somewhat. However, the reduction of the Ogden rate – the discount rate used in the UK to calculate lump-sum compensation payments for personal injuries – from 2.5% to -0.75% compelled all insurers writing personal injury lines to set aside additional reserves, in some cases in a significant amount.
The prices of reinsurance programmes with exposures to these lines hardened appreciably in the course of 2017. Most notably, the cost of motor reinsurance covers went up considerably. Compared to the previous two years, some easing in the pressure on rates in the other property and casualty lines could already be observed as the year progressed. Prices ultimately began to harden following the hurricane losses in the third quarter.
We also write primary insurance business through our subsidiary International Insurance Company of Hannover SE (Inter Hannover). This essentially involves tightly defined portfolios of niche or other non-standard business that complements our principal commercial activity as a reinsurer.
We write a large portion of this direct business in the London Market and through our Swedish branch, although it increasingly derives from Canada, Australia and Germany as well. The result from direct business was satisfactory despite the prevailing intense competition. In the first quarter of 2017 the change in the Ogden rate in the United Kingdom necessitated a not inconsiderable increase in the reserves for serious personal injuries under liability policies, with implications for our account too in the year under review. As a consequence of this change rates for motor business surged sharply higher. Other than this, rates declined overall by between 5% and 10% – until the hurricane events in the second half of the year. Since then, however, property insurance has recorded rate increases substantially in excess of 10% in the hurricane-impacted regions. We were able to act on promising business opportunities in the year under review and enlarged our premium volume.
The gross premium booked from the United Kingdom, Ireland, the London Market and direct business rose from EUR 505.6 million to EUR 791.2 million. The vigorous growth derived in part from the aforementioned effects and was also due to a portfolio transfer from the area of facultative reinsurance. Reflecting above all the increase of almost EUR 300 million in the loss reserves for our acceptances of non-proportional UK motor business, the combined ratio for the segment United Kingdom, Ireland, London Market and direct business rose to 140.9% (95.6%). The operating profit (EBIT) declined to EUR -106.5 million (EUR 97.5 million).
In contrast to obligatory reinsurance, a reinsurer underwrites primarily individual risks in facultative business. The general environment for both types of reinsurance in the various markets is, however, for the most part comparable.
In the first six months of the year under review it remained the case that extended coverage concepts and price reductions were observed in many areas. Faced with this market environment, we wrote our business selectively and premium income in the first half of the year was consequently slightly lower.
The exceptionally heavy incidence of natural disasters in the third quarter triggered stronger demand for natural catastrophe covers, accompanied by a correspondingly favourable pricing trend. This turnaround generated business opportunities to which we responded by moderately expanding our acceptances.
Our focus on our core business and the associated closer orientation towards regional entities have been very well received by our clients. This will likely open up potential avenues for new business and hence additional premium income. Early successes are already evident in Latin America, the United States and Europe. Similarly, the investments that we had made in past years in the areas of cyber risks and renewables were rewarded with attractive premium growth in the year under review.
Despite the heavy losses incurred from natural disasters around the world, we are thoroughly satisfied with the development of our overall facultative portfolio in the 2017 financial year. In addition to the considerable expenditures on catastrophe losses, substantial losses were again recorded in industrial fire insurance across all regions. Despite these significant strains, our highly diversified portfolio – both geographically and in terms of lines of business – and our limited risk appetite for natural perils covers enabled us to post a merely modest underwriting deficit. The premium volume contracted owing to a portfolio transfer. The combined ratio of 103.7% was higher than in the previous year (95.6%). The operating profit (EBIT) retreated to EUR 39.7 million (EUR 95.0 million).
We combine all markets worldwide under global reinsurance with the exception of our target markets and specialty lines. This segment also encompasses global catastrophe business, the reinsurance of agricultural risks, Sharia-compliant retakaful business as well as structured reinsurance and insurance-linked securities.
The premium volume increased by 34.8% in the year under review to EUR 4,787.7 million (EUR 3,550.9 million). The combined ratio deteriorated from 97.1% to 98.2%. The operating profit (EBIT) improved from EUR 294.3 million to EUR 328.9 million.
We are satisfied with the development of our worldwide treaty reinsurance. Gross premium income contracted to EUR 1,826.7 million (EUR 1,885.0 million). The combined ratio was lower than in the previous year at 96.3% (103.9%). The operating profit (EBIT) surged from EUR 65.5 million to EUR 237.4 million.
Despite the fiercely competitive business climate Hannover Re maintained its stable positioning in the Asia-Pacific region in the financial year just ended.
In Japan we consolidated our market position with modest premium erosion. Results were more pleasing than in 2016 because fewer natural catastrophe losses were reported in the year under review. Due to the absence of earthquake losses as well as moderate loss expenditure from the typhoon season, our Japanese business delivered a successful profit contribution. Although local reinsurance conditions again softened slightly, the reductions were less of a factor than they had been in the previous year.
In China we further cemented our market position as a local reinsurer. Thanks to our very good customer relationships and an innovative market presence, we were able to put our portfolio on a broader product basis despite increased competitive pressure. In terms of results, we improved significantly on 2016 owing to a lower incidence of natural perils events.
Along with China, the regions of Southeast and South Asia again proved to be the growth engines of the Asia-Pacific and delivered good results. At the same time, though, margins continue to be very squeezed – a state of affairs that is unlikely to improve in the coming years given the absence of significant large losses in 2017.
Following final approval of a branch licence for India at the end of 2016, our local permanent establishment commenced regular business operations with the Indian renewal season on 1 April 2017. The first financial year passed off in line with expectations. As a local reinsurer, Hannover Re is now very well positioned in the market to share in the opportunities offered by the Indian growth market. No significant loss events were recorded in the year under review.
We have had a presence in the markets of Australia and New Zealand for more than three decades and are positioned as the number three among Australian property and casualty reinsurers. Cyclone “Debbie”, which hit the coastline of Queensland in the first quarter of 2017, brought stability to reinsurance prices in Australia. As a further factor, the after-effects of the earthquake on the South Island of New Zealand in November 2016 helped to keep prices on a good level in that market too in the year under review, with price increases even recorded in some instances.
Australia and New Zealand continue to be attractive natural catastrophe markets for global reinsurance capacities, and competition therefore remains fierce. We nevertheless succeeded in generating further premium growth at adequate conditions, in part also by expanding the primary insurance activities of our Inter Hannover branch.
Our property and casualty reinsurance business in South Africa is produced by three companies: our subsidiary Hannover Reinsurance Africa Limited writes reinsurance in all lines. Compass Insurance is responsible for direct business generated through so-called underwriting management agencies (UMAs). Our third company, Lireas Holdings, holds interests in several of these UMAs. This enables us to comprehensively steer and control the business. Agency business forms the pillar of our activities in South Africa, although traditional reinsurance is also written in South Africa and other African nations.
As the year under review got underway the insurance market was still characterised by prevailing soft rates and conditions. In the course of the year, however, the region saw an increased claims incidence and hence appreciable losses for the (re)insurance industry. Special mention should be made here of the wildfires along the Garden Route. This development, combined with the large loss situation around the world, led to significant market hardening that already made itself felt in the renewals as at 1 July and 1 October 2017. We maintained the premium volume on a stable level overall.
In response to progressive digitalisation and the associated change in customer habits, we took various steps in the year under review with a view to supporting the development of insurtechs. We also participate as a reinsurer in further insurtech activities in the market. The purpose of our involvement in this area is to develop innovative products that are tailored to the mobile, networked world and offer consumers the option of a digital customer experience.
Despite the competitive landscape, Hannover Re is very well positioned in Latin America and a market leader in some countries. The most important markets for our company are Brazil, where we are also present with a representative office, as well as Mexico, Argentina, Colombia and Ecuador. In view of the significant natural disasters in the year under review, it is our expectation that the soft market phase for Latin America and the Caribbean is now over.
Most Latin American markets showed very vigorous growth in the financial year just ended. Premiums in the primary sector are currently rising here on an annual basis – depending on the market – by between 5% and 15%. This is driven not only by the high inflation rates but also by the growing purchasing power of the middle class. The strongest demand for reinsurance covers is in the area of natural catastrophe risks, not only within individual markets but also increasingly across national borders.
The natural disasters in Latin America and the Caribbean resulted in significant losses, including for our company; see also the list of large losses. It is entirely possible that the frequency and severity of Caribbean hurricanes will increase in the future. With this mind, Hannover Re will pay closer attention to ensuring that sufficient coverage is purchased in these regions for natural catastrophe events and also that potential gaps in coverage, such as the flood risk, are closed. The aim here is to protect policyholders against possible insolvencies among primary insurers, which could throw a region’s entire insurance system out of balance.
A large part of our premium volume nevertheless still derives from territories that are less affected by natural perils events, such as Argentina and Brazil. Both these markets are currently turning away from their previous restrictive approach to reinsurance regulation, and newly elected governments are also bringing an economic revival. We therefore expect to see an improved business environment in these countries.
Broadly speaking, we are satisfied with the development of our business in Latin America and the Caribbean.
We rank among our clients’ preferred partners for agricultural covers and were therefore able to continue expanding our market position in the financial year just ended. In addition, we are increasingly involved in the development of original products. We entered into further cooperative arrangements with governments, development banks and international organisations in the year under review with a view to expanding protection for agricultural risks.
Rates and conditions largely held stable on the primary insurance side. Conditions in reinsurance business came under pressure in the established markets due to new players entering the sector.
We were successful in our efforts to further diversify our portfolio mix both geographically and in terms of lines of business. A contributory factor here, for example, was an enlarged share of business with insurance products for small farmers, predominantly in emerging and developing countries.
The performance of our agricultural risks business was satisfactory. The largest loss events in 2017 included the catastrophic forest fires in Chile at the start of the year and a drought in southern India. The continued improvement in the diversification of our portfolio adequately alleviated or offset the adverse effect of these losses.
We write retakaful business, i. e. reinsurance transacted in accordance with Islamic law, worldwide. Our focus is currently on the Middle East, North Africa and Southeast Asia. We are represented by a subsidiary in Bahrain that writes this business. We also maintain a branch there with responsibility for traditional reinsurance in the Middle East. Our retakaful business has grown vigorously since we entered the sector in 2006 and we now enjoy a strong position in the market. Overall, we are satisfied with the development of business in the year under review. The insurance markets of the Middle East and North Africa are still posting healthy growth rates. The largest markets continue to be Turkey, the United Arab Emirates and Saudi Arabia.
The takaful and retakaful markets remained highly competitive – in part also owing to the entry of new market players. A further factor was the sustained low oil price and an associated slowdown in economic growth and in the willingness to invest in infrastructure projects. Rates therefore remained under pressure in 2017, as was particularly evident for treaties which had been spared any losses: we booked a decline of 10% to 15% in rates for loss-free treaties in property business; the rate level fell by 10% for energy treaties that had not incurred any losses. The (re)insurance of construction risks was also notable for predatory pricing and an excess supply of capacity.
In light of the soft state of the market we again wrote our business selectively in the year under review. Attractive business opportunities nevertheless opened up to us; by way of example, we received a growing number of requests for coverage of cyber risks. Overall, we booked single-digit percentage growth in our premium volume.
Hannover Re writes the bulk of its catastrophe business out of Bermuda, the worldwide centre of competence for this segment. In the interest of diversifying the portfolio, our subsidiary Hannover Re (Bermuda) Ltd. has also written risks in some of the specialty lines since 2013.
Worldwide natural catastrophe business continued to be driven by an excess supply of reinsurance capacity in the financial year just ended. For this reason, and due to the inflow of additional capacities from the ILS market, the business was fiercely competitive. The declining results posted by many reinsurers in the first quarter failed to bring about the trend reversal in rates that had been anticipated for the renewals as at 1 July 2017; the deterioration already observed in the renewals as at 1 January and 1 April 2017 was sustained. Particularly when it came to the renewals for catastrophe risks in Florida, the pressure on rates was ratcheted up still further.
On the claims side the most notable events in the first half of the year were Cyclone “Debbie” in Australia and a number of tornados in the United States. Yet these events merely prompted price adjustments on a local basis under the loss-impacted programmes. The second half of the year, by contrast, was dominated by a high incidence of natural disasters and massive losses. After a below-average hurricane season by multi-year standards in the United States and Caribbean, three events in quick succession – hurricanes “Harvey”, “Irma” and “Maria” – inflicted an exceptionally heavy burden of losses on the insurance industry. The hurricanes caused an insured market loss of some EUR 100 billion. The total net strain for Hannover Re from these events was EUR 749.4 million. What is more, the two severe earthquakes in Mexico and forest fires in California also resulted in considerable loss expenditure. Against this backdrop we obtained appreciable rate increases for the treaty renewals as at 1 January 2018 that were not limited exclusively to the loss-impacted programmes.
The gross premium volume for our global catastrophe business was stable at EUR 354.2 million (EUR 357.2 million). The combined ratio deteriorated sharply to 121.1% (55.9%) on account of the large loss incidence. The operating profit (EBIT) came in at EUR -3.3 million (EUR 154.9 million).
In this business transacted under the name Advanced Solutions, Hannover Re is one of the largest providers in the world for structured and tailor-made reinsurance solutions, the purpose of which – among other things – is to optimise the cost of capital for our ceding companies. In this area we also offer alternative reinsurance solutions that provide solvency relief or protect our clients against frequency losses. The modified purchasing habits of our customers led to rising demand in many countries for individually tailored reinsurance solutions. Both the number of contracts and the premium volume in structured reinsurance consequently rose sharply.
In keeping with our objective we continued to enlarge our customer base and acted on available opportunities in the year under review. We were able to further expand the quota share cessions already initiated in 2016 for capital management purposes in North America and Europe.
The strong demand on the capital market for (re)insurance risks remains undiminished, particularly given the diversifying nature of such investments. The worldwide volume of newly issued catastrophe bonds reached a new record level of around USD 12 billion in 2017. The same is true of the entire ILS market, the volume of which is roughly USD 90 billion.
The ILS market shouldered a substantial portion of the catastrophe losses incurred in 2017, thereby underscoring the importance of ILS investors for disaster scenarios.
Hannover Re leverages the entire spectrum of opportunities offered by the insurance-linked securities market. On the one hand we take out reinsurance with ILS investors, while at the same time we transfer risks for our customers to the capital market as a service. This is done in the form of catastrophe bonds or through collateralised reinsurance, in the context of which our business partners on the investment side are principally specialised ILS funds. We are also active ourselves as an investor in catastrophe bonds.
In 2017 the volume of new exposures that we transferred to the capital market in the form of catastrophe bonds was in the order of USD 1 billion.
Under collateralised reinsurance programmes the investor assumes reinsurance risks that are normally collateralised in the amount of the limit of liability. Hannover Re stepped up its cooperation with selected fund managers in the year under review and generated attractive margins. It is also pleasing to note that we were able to further expand the transfer of life reinsurance risks to the capital market.
The key role played by the capital market in our purchasing of retrocession protection remains unchanged. Thus, for example, we were able to renew the protection cover for Hannover Re known as the “K cession” – a modelled quota share cession consisting of non-proportional reinsurance treaties in the property, catastrophe, aviation and marine (including offshore) lines that has been placed inter alia on the ILS market for 25 years now – at an increased level of roughly USD 600 million for 2017. In addition to the K cession we use the ILS market for other protection covers as well.
The gross premium volume in structured reinsurance and from ILS activities grew by 99.2% to EUR 2,606.8 million (EUR 1,308.7 million). The combined ratio stood at 97.7% (97.3%). The operating profit (EBIT) increased to EUR 94.8 million (EUR 73.9 million).