Ten years ago property and casualty reinsurance accounted for more than 95% of our total gross premium income. This figure has since decreased to just 41% in the year under review. Yet, in absolute terms this segment has grown sharply in this period and it continues to generate the greatest share of premiums. In property and casualty reinsurance we have no growth targets; rather, our premium volume is guided by the prevailing market conditions. Last year's conditions bottomed out and our premium income consequently declined; in the course of the year under review, selected markets showed a favourable development. We took advantage of these opportunities and expanded our premium volume by a sizeable 30%, around 6% of which derived from movements in exchange rates.

The burden of major claims and catastrophe losses decreased considerably and was lower than expected. On the other hand, an additional burden derived from losses in the previous year, most notably in connection with the winter storms "Lothar" and "Martin" at the end of 1999. The loss ratio and the technical deficit consequently decreased overall, but they were still adversely affected by the scarcely adequate premium level at the beginning of the year under review. In the previous year, expenses had been favourably influenced by performance-related reimbursements from retrocessionaires. Partly because this factor no longer applied, the expense ratio rose in the 2000 financial year. The investment income apportionable to this segment decreased sharply. All in all, the operating result before general expenses deteriorated slightly and was therefore unsatisfactory.

Germany

The German insurance industry was only able to a limited extent to pick up on the positive leads given by the economy as a whole. The premium volume grew by a mere 1.2% in 2000, a figure below the rate of inflation. The favourable effects deriving from a greater demand for insurance and the increase in insured values associated with the stepping up of economic activity were to some extent offset by opposing factors. These included mergers and acquisitions, the marked interest shown by banks in insurers' distribution networks and vice versa and the accelerated cultivation of new, more cost-effective sales channels such as the internet. The internationalisation of the German insurance industry featured prominently in these developments. Some providers believed that size was the key to their business opportunities while others saw their chances in independence or in a targeted niche policy. At the same time, insurance customers are becoming more sophisticated: the demand for products tailored to their individual needs at the right price is increasing. In a largely saturated market, this inevitably led to persistent cut-throat competition.

Competitive pressure thus remained intense and there was little improvement in the inadequate premium level. The negative trend in the claims experience was, however, reversed, with the result that the loss ratio of roughly 86% (87%) was slightly more favourable than in 1999.

The concentration in the insurance markets brought about by mergers and alliances also impacted the reinsurance industry. On the one hand, the number of (potential) clients has decreased, while on the other hand the reinsurance requirements of large, international insurance groups differ from those of small or mediumsized companies with a purely national orientation. Given this state of affairs, reinsurers are obliged to show a high level of adaptability and must offer new products based on a holistic approach to a company's risk situation. In some areas there is also a demand for considerably higher exposures, which have corresponding implications for the potential volatility of technical results and place greater strains on capital resources.

Despite the dramatic decrease in natural catastrophe losses, results in the reinsurance markets were by no means satisfactory. In motor reinsurance it was merely possible to halt the downward trend of the previous years, while industrial fire insurance again produced heavy losses for insurers and reinsurers alike. These insights hardly came as a surprise, however, and we had already scaled back our participation in this market segment to an unavoidable minimum.

This general environment allowed us only limited expansion of our premium volume. In some lines of business, such as industrial fire reinsurance, we withdrew almost entirely from the market or changed over to non-proportional covers, thereby causing premium income to decline here.

In the course of the year under review, however, it became evident that this phase of difficult market conditions was beginning to give way to an upturn. Efforts taken by insurers – in addition to those implemented by reinsurers – to restore business to profitability started to filter through positively to the reinsurance markets from the second half of the year onwards.

Due to the decrease in natural catastrophe losses and the favourable run-off of the loss reserves from previous years, our technical result improved on the 1999 financial year. Motor and liability reinsurance also played a part in this improved result.

In our assessment, the rapidly changing structure of the insurance market poses special risks and challenges for the reinsurance industry. As things currently stand, the German insurance market still shows only a middling degree of concentration. The ten largest insurance groups in the property and casualty segment account for a market share of less than 50%. Yet it would appear to be merely a question of time before the stronger trends towards concentration in neighbouring countries also make themselves felt here. In France and the United Kingdom, for example, the three largest providers alone enjoy market shares in excess of 40%.

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United Kingdom and Ireland

The United Kingdom experienced a stable business climate and good rates of economic growth in 2000. The insurance and reinsurance markets have seen an unparalleled wave of consolidation in recent years, causing a drop in the number of insurers and Lloyd's Syndicates. This went hand-in-hand with fierce competition for market shares and technical losses, although the latter were offset by healthy investment income. Initial positive indications were reinforced in the course of 2000, prompting insurers to take drastic action to rehabilitate their portfolios. Large multi-line insurers, for example, reviewed their business strategies and in some cases withdrew from volatile industrial business.

Lloyd's insurance market was similarly swept by a wave of mergers. Numerous Syndicates equipped with limited commercial liability capital changed hands because of poor results or were absorbed into other organisations. At the same time, however, new Syndicates were set up. Overall, approximately 80% of Lloyd's capital now derives from corporations, which are therefore continuing to squeeze out private individuals with unlimited liability.

Particularly in property business, the growing number of mergers in all sectors of the economy is leading to ever-higher sums insured – a trend which runs parallel to an increase in the international exposure of the risks. The failure of the international reinsurance market in Australia also caused clients to attach even greater importance to their reinsurers' quality and credit ratings. Although reinsurance capacity continues to be in ample supply, it was possible to secure improvements in treaty terms and conditions. Many reinsurers, especially in London, were and still are reliant on their own reinsurance (retrocession). However, with capacity of this type in scarce supply, closer attention is being devoted to the profitability of assumed reinsurance business. This also has a favourable impact on terms and conditions.

Increasing reinsurance costs and the reduction in reinsurance capacity have ultimately brought about improved conditions on the insurance market, most notably in industrial fire insurance.

Towards the end of the year the UK market suffered the most severe flood losses in forty years. Numerous towns and villages were partially submerged for days or even weeks on end. Some locations were even hit by repeated flooding. Nevertheless, the insured loss marketwide was in the order of just GBP 500 million, and for the most part insurers therefore carried it in their retention.

Motor insurance performed well, with all insurers recording double-digit percentage increases in premiums. Due to the applicable premium limits in this sector, some Lloyd's Syndicates found that they were no longer able to carry risks on the same scale as had hitherto been the case without the support of reinsurers or co-insurers, as a consequence of which larger premium volumes were ceded to the reinsurers. Competitive pressure nevertheless remained intense, and results were adversely impacted by the so-called "Woolf Reform". This change in the law will sharply accelerate the speed with which liability claims are run off. It is, however, anticipated that in the long term the lost investment income can be offset by lower claims figures. Conditions in liability business remained virtually unchanged and were thus unattractive, despite the fact that here, too, results in previous years were in many cases inadequate.

A further important aspect is the potential extension of the scope of cover to include claims connected with loss of information and computer viruses. The goal here is to precisely define the additional exposure and either exclude it or in-corporate it into the premium calculation.

The premium increases in the insurance market also generated substantially higher premium income for our portfolio, especially in the areas of motor and international property business – in both the proportional and non-proportional sectors. In addition, we were increasingly active as a leading reinsurer in various niche segments, such as international property per-risk business, thereby enabling us to push through our price expectations more frequently than had hitherto been the case. Contrary to the pleasing development of the 2000 financial year, however, we incurred run-off losses on the loss reserves of previous years. Numerous claims and increases in loss reserves were only reported by the ceding companies very belatedly, and these losses from previous years consequently burdened the year under review. Overall, the technical result therefore showed only a slight improvement and was just sufficiently satisfactory.

Although Ireland's almost unparalleled economic boom has of course favourably impacted the insurance industry, opportunities for reinsurers have remained few and far between. The attractive environment led to a wave of take-overs, ultimately leaving just a few domestic insurers in the market. Altogether, the market lost a further three insurers in 2000. As in the United Kingdom, this led to a struggle for market shares with the inevitable consequences for business results.

The vast majority of Irish insurance companies belong to large international groups with only a limited need for reinsurance. Our rather modest Irish portfolio therefore remained virtually unchanged, and results were again hardly adequate.

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France

The French economy continued on its expansionary course in 2000 with growth in gross domestic product of 3.2%. Growth was particularly dynamic in two areas: exports, fostered by strong global demand, and investment activity.

Private household consumption, which had been growing steadily since 1997, was dampened by rising oil prices in the spring of 2000. At 1.2%, inflation was again lower than in most other euro-zone countries.

For the insurance industry, the generally favourable economic environment was over-shadowed by the effects of the winter storms "Lothar" and "Martin" at the end of 1999. In the course of the year under review, expenditures associated with these loss events increased from an initially estimated EUR 4.5 billion to EUR 7 billion, at the same time bringing to an end the downward slide in the premium level in all lines of business. The strained situation enabled large insurers to secure commensurate premiums not only in property business but also in the liability lines, where prices rose by around 5% on average. Even the consistently highly competitive motor insurance line, which initially suffered under increased motor vehicle repair costs, showed a premium increase of roughly 3% after five years of declining rates.

The treaty negotiations between insurers and reinsurers had been largely completed when the winter storms occurred, and it was therefore too late to factor them into the year under review. For reinsurers, the conditions agreed at the beginning of 2000 thus marked the low point in a phase characterised by wholly inadequate terms and conditions. However, the strong surge in demand as the year progressed – French clients purchased additional windstorm coverage worth around EUR 600 million – subsequently made it possible to push through appropriate reinsurance conditions. Since the demand for covers even surpassed the actual scale of the recent storms, a capacity shortage ensued – thereby enabling reinsurers to secure very attractive prices in the windstorm segment at the end of 2000 and in the 2001 renewals.

Showing a slight increase in gross premium income, our result for 2000 was still adversely affected by the additional reserves constituted for the windstorm losses and the poor conditions prevailing at the beginning of the year; even after allowing for the non-technical result, our French portfolio therefore closed with a deficit.

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The Netherlands

Despite strong economic growth and a generally favourable business climate, the year justended was a disappointing one for Dutch property and casualty insurers. The technical deficit across all non-life lines was 2% of the premium volume. This was primarily attributable to unsatisfactory results in motor insurance and industrial fire business. In addition to the fiercely competitive climate, the year under review was marked by record figures for major fire claims – most notably with a sharp rise in the average loss amount. The largest single event was the explosion in Enschede, which caused an insured loss of EUR 250 million.

While the total reinsurance premium stood at EUR 1.5 billion, fire business continued its traditional dominance, accounting for an overall volume of around EUR 665 million. A trend towards non-proportional covers can be discerned.

As was true of almost all continental European markets, reinsurance terms and conditions bottomed out in the year under review – having deteriorated steadily in previous years. Nevertheless, as the year progressed, the first premium increases ensued in the light of the windstorm losses experienced in France and Germany.

In this environment our business volume remained roughly on a par with the previous year.

Despite a substantial loss burden associated with the Enschede disaster, our Dutch portfolio generated a positive technical result.

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Nordic countries

Against the backdrop of a stable economic environment, the wave of insurance company mergers which had swept through the Nordic countries in recent years slackened in 2000. Scarcely any mergers or acquisitions were recorded. In all the countries of this region – with the exception of Denmark – the five major players now hold more than 80% of the non-life premium. Past international mergers have led to a relatively strict distinction between companies and groups that operate on an exclusively localbasis and those which are active across national borders. The latter consider the entire Nordic and Baltic region as their primary sector of operations. Internationally active insurance groups still have a minimal presence. Due to the formation of ever-larger groups, the overall volume of ceded reinsurance is contracting and competition is constantly intensifying. Nevertheless, a continuing decline in the premium level is not to be expected since the poor results of past years have left no room for further concessions. Particularly in industrial fire business, the rate level was clearly too low and it has not shown any sign of improvement to date.

As a consequence of the losses caused by the storm "Anatol", rates for catastrophe covers rose appreciably in Denmark. However, since some reinsurance programmes were placed as multi-year covers it was not always possible to translate these losses into premium increases. Overall, though, demand for windstorm covers rose sharply and favourably impacted the rate level. These effects also made themselves felt in the neighbouring countries of Norway and Sweden. Rate increases did not, however, spill over into other lines of business.

In view of the inadequate level of rates in industrial fire business, we withdrew to a large extent from proportional treaties – especially surplus treaties. At the same time we substantially expanded the share of the total premium volume deriving from non-proportional business. We also made use of the market conditions in the natural catastrophe sector and slightly expanded our overall business volume in the year under review. The result in the Nordic countries was adversely affected by a high burden of losses in the fire line and, all in all, it was not satisfactory.

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Italy

The Italian national economy grew by 2.9% in the year under review. The generally favourable economic trend was fostered by improved order books in industry and expansion in the service sector.

In this overall economic climate, premium growth in property and casualty reinsurance was slightly lower than in the previous year at 6.5%. While motor third party liability insurance, the largest line of business by volume, grew by 8.7%, increases in the other lines ranged from 2% to 4.5%. Surety insurance, on the other hand, showed a premium decrease of roughly 5% due to legal changes affecting value-added tax risks.

In March 2000 the Italian government caused a stir at home and abroad when it accused market players of price collusion in the motor insurance sector, prohibited rate adjustments in the discounted categories for a period of one year and thus interfered in the companies' freedom to set prices. It is unanimously believed that this 12-month tariff freeze violates EU law and will bring about a further deterioration in the already negative technical performance of this line. The deficit posted by Italian insurers in this line of business totalled approximately EUR 2.5 billion in 2000.

In other respects, the development of property and casualty insurance began the year on a bright note. In October, however, parts of northern Italy were hit by severe storms accompanied by prolonged rainfall. The heavy precipitation resulted in major flooding, which caused considerable property damage in numerous densely populated areas and metropolitan centres with high concentrations of values. Despite total economic losses of around EUR 12.5 billion, the insured losses from this event were in the region of just EUR 300 million.

This catastrophic event caused ceding companies to adjust conditions according to market requirements – especially in industrial business – and hence the demand for reinsurance capacity also rose. Towards the end of the year it was thus possible on a large scale to implement both long overdue premium increases and benefit restrictions, which we also exploited in order to expand our portfolio.

Since we had already largely withdrawn from the industrial insurance segment in the preceding years due to the inadequate terms and conditions prevailing in the market, the flooding in northern Italy placed only a minimal strain on our result. In motor third party liability insurance we have long pursued a restrictive underwriting policy. Due to the inadequate level of original premiums, we accept almost exclusively non-proportional business in order to divorce ourselves from the original terms and conditions.

Overall, our Italian portfolio contracted slightly. Nevertheless, our selective underwriting policy enabled us to achieve an almost balanced business result in a year of heavy losses.

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Eastern Europe

Ten years after the opening up of the markets, the implementation of economic reforms and the accompanying deregulation of the insurance industry, it is still the case that the basic political and economic conditions differ widely in the various countries of eastern Europe. Particularly in the CIS states, numerous reforms continue to be necessary for the establishment of a functioning insurance market.

Nevertheless, the general state of the economy as a whole can be assessed increasingly favourably. The markets have experienced a broadly based acceleration in economic growth. The countries in the eastern part of central Europe (Poland, Czech Republic, Slovenia, Slovakia and Hungary) recorded growth of between 3% and 5% in gross domestic product. Bulgaria and Romania also reverted to GDP growth in real terms. Given that crude oil and other mineral resources can currently be sold at adequate prices on the global market, the Russian crisis of 1998 would appear to have been overcome.

The business development in the insurance markets is largely founded on the expansion of obligatory motor insurance. Adjusted for inflation, the average annual growth in the non-life sector in recent years was a gratifying 7.6%. Measured as a percentage of gross domestic product, the premium volume now stands at around 1. 7% – a level which is already roughly half that of western Europe.

First and foremost due to the entry into the market of foreign insurance companies, a properly functioning competitive environment has emerged. This could clearly be observed, for example, in the Czech Republic when the motor third party liability monopoly was abolished. The former holder of the monopoly lost business appreciably to its rivals, but still enjoys comfortable market shares of between 30% and 50%. In those countries seeking to join the European Union, the reforms implemented by the insurance supervisory authorities are aimed at rapid alignment with EU standards, i.e. the introduction of solvency requirements, the abolition of price and product controls and the tightening of capital adequacy requirements.

Against this backdrop, we were successful – especially in the Czech Republic, Poland and Slovenia – in writing attractive new business. In Romania and Bulgaria, on the other hand, we were unable to expand our position as planned. Overall, however, we recorded gratifying growth. Results were burdened by proportional motor business, most notably in Bulgaria, as well as by two major losses, as a consequence of which our account closed with a slight technical deficit.

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North America

The US economy was clearly overshadowed by an impending downturn in the year under review, although its effects had not yet left a mark on the insurance and reinsurance industries. A greater impact derived from the collapse of the stock markets, thereby causing a drop in the investment income, which in previous years had partially offset the technical deficits. With the decline in the valuation reserves in investment portfolios, stockholders' equity in the insurance industry also fell by a sizeable 2.5%.

Furthermore, the scarcely adequate results gave additional impetus to the trend towards concentration among insurers and led to another substantial number of mergers and acquisitions. Most notably, many small and medium-sized companies disappeared from the market.

In 1998 and 1999 almost the entire US insurance industry suffered under wholly insufficient premiums and high loss burdens. In many instances positive annual results could only be shown by massively cutting reserving levels. In the year under review this trend could no longer be sustained. More due to the lack of profitability than any shortage of capacity, a significant turnaround began to occur. This manifested itself initially in workers' compensation insurance and commercial motor insurance as well as industrial property business and some casualty segments. US property and casualty insurance business consequently showed overall premium growth in excess of 5%. Yet it should not be overlooked in this context that the amount of the covered risks also increased sharply. The costs of medical care, for example, have climbed by more than 50% in recent years, the concentration of values in catastrophe-exposed coastal regions has risen particularly sharply and the loss-of-profits risk in industrial property business has increased considerably. It was more by chance that the 2000 financial year was almost entirely spared any significant natural catastrophes.

The positive developments, which in some sub-sectors are by no means adequate, also made themselves felt in the reinsurance market. Most notably, the trend towards multi-year covers was stopped and increased deductibles from ground up were implemented almost across the board. The necessity of securing further improvements derives, inter alia, from the need to restore reserves to the former levels.

Declining premiums and increasing loss amounts were the hallmark of liability (re-)insurance in recent years. We had therefore heavily scaled back our participation in this segment. In the course of the year under review, however, the basic environment improved appreciably – a trend which was supported by the fact that clients are attaching greater importance to the financial strength of their reinsurers.

We took advantage of various opportunities and systematically increased our acceptances in the areas of workers' compensation, commercial motor and professional indemnity. Now that conditions on some insurance markets have also become more attractive and commissions could be reduced, we began to expand our proportional portfolio. In previous years we had withdrawn to a large extent from this segment too. Overall, our casualty portfolio in the USA recorded substantial growth. In the short term, this always goes hand-in-hand with a deterioration in the combined ratio. However, since long-tail casualty business accounts for disproportionately large shares of the investment income, the profit contributions are positive.

Although conditions in the insurance markets languished at a low level in property business during the first two quarters of the year under review, the second half of 2000 witnessed a marked improvement in this area too. Insurers were then able to demand adequate prices much more systematically and to factor claims experiences and risks into the pricing process. In this segment, however, there is a particularly acute need to supplement proportional reinsurance cessions with additional non-proportional cover for risks. Although these segments were not unusually burdened by sizeable losses in the previous year, reinsurance prices developed favourably and we were therefore able to step up our participation in this business.

The rate level in (natural) catastrophe business had already been largely sufficient in previous years due to the heavy demand. Windstorm and tornado risks in the Midwest of the USA were an exception in this regard. Inadequate terms and conditions combined with an increased number of losses produced unsatisfactory results in this business, although these were taken into consideration at year-end and during the renewal season. On balance, our business again recorded profitable growth.

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Latin and South America

Following the general economic crisis of 1999 the situation has largely stabilised. The gross domestic product – spread across altogether 17 countries – grew by 0.1% overall to approximately 4%, while the inflation rate fell from 8.5% to around 7.1%. The balance of trade showed a surplus, and even foreign debt was reduced from USD 756 billion to USD 741 billion. Interest rate cuts in the USA also positively impacted the level of foreign debt, which in some countries was still high.

This trend was fostered not only by US interest rate movements but also by stable growth in Europe, although the differences between individual countries were sometimes pronounced. Mexico, for example, conducts 90% of its foreign trade with the USA, whereas the proportion in Argentina's case is just 10%.

Motor insurance continues to be the most important line of business for the insurance industry in Latin America. One after another, almost all the countries have introduced obligatory motor third party liability insurance. It should be noted, however, that the required insured limits are sometimes very low. With the exception of Argentina, Brazil and Mexico, the same is therefore true of the premium volumes. In some instances, motor own damage insurance included natural catastrophe claims without reflecting this in the tariffs, and premium levels were consequently inadequate. What is more, this line of insurance is generally transacted with very high expense ratios – both for acquisition and internal administration – and the business performance was therefore again highly unsatisfactory.

In Argentina court decisions placed an additional enormous strain on the situation. Judges awarded amounts of compensation on a par with US practice, causing alarm especially among reinsurers. If this trend continues, it is to be anticipated that reinsurers will withdraw entirely from this market. In this connection, the modest premium increases at the end of the year under review will scarcely have any positive implications.

Due to the high natural catastrophe exposure in Latin America, the fire line of insurance together with its allied natural hazards risks is heavily reinsured – especially given the relatively low capital resources of insurers and hence their correspondingly limited capacity to run business in their retention. Accordingly, this segment is of paramount importance to reinsurers. Following a phase characterised by massive pressure on reinsurance terms and conditions with correspondingly poor results, a series of loss events has turned the market around. The considerable losses of the previous years associated with the storms "Mitch" and "Georges" as well as the flooding in Venezuela and the Colombian earthquake pushed original premiums higher and made possible improvements in reinsurance conditions. In Latin America, however, these positive developments only commenced in the course of the year and thus had little influence on results in the year under review. Particularly in the industrial fire segment, results were therefore unsatisfactory.

It was generally noticeable that the Brazilian reinsurance market failed to open up in the year under review, and indeed it remained firmly entrenched in its existing monopoly structure. We remain ready to utilise the opportunities which will present themselves after the expected de-regulation. As things currently stand, however, it is scarcely possible to foresee just when this will happen on a comprehensive scale.

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Asia

At the beginning of the year under review, it appeared that most of the national economies in Asia had finally recovered from the dramatic slumps of 1998. Stimulated by exports, especially to the United States, some countries recorded double-digit growth rates. China even achieved a 30% rise in exports. Japan, on the other hand, scarcely showed any increase and posted a mere 1.9% rate of real growth.

Due to the different systems of government and the associated degree of state control, the political and economic environments confronted insurers and reinsurers with widely differing tasks.

In Japan the effects of the far-reaching process of deregulation have currently reached a high point. Fierce competition has ensued and a hitherto unparalleled wave of consolidation has been set in motion among insurers, with the result that here, too, the number of reinsurance clients is decreasing dramatically. It remains to be seen how this development will impact the demand for reinsurance capacity.

Unlike the dynamic processes at work in the insurance sector, the tone of the reinsurance market remained stable, and only in isolated cases did considerations of market share and prestige give rise to unjustifiable price reductions.

Supply and demand for natural catastrophe covers continue to be the dominating feature of the Japanese insurance market. Whereas in surers tended to extend the scope of cover for earthquake risks due to the competitive climate, reinsurers only made capacity available at improved terms and conditions, therefore causing a shortage in the market. Our company similarly reduced its participation in various proportional treaties in this sector, preferring instead non-proportional concepts, and initially our premium volume therefore declined slightly. Windstorm risks experienced sharp rate rises due to developments around the world, and in part as a con-sequence of the major storm event in 1999 (typhoon "Bart").

Marine business also performed well. In contrast to many other world markets, marine cargo business in Japan was adequately priced and correspondingly profitable.

The portfolio of risks with natural hazards exposure produced generally favourable results, and the overall result of our Japanese business was therefore highly satisfactory. Nevertheless, it should be borne in mind that this was in large measure due to the fortuitous non-occurrence of major losses. Considering the potential losses and their statistical probability of occurrence, we regard the rate level as insufficient.

The renewal season in Korea was very sluggish at the beginning of the year under review. In this market we systematically adhered to our strategy of no longer supporting underrated treaties – especially in non-proportional property business. We counterbalanced this restraint by writing business in segments with little or no catastrophe exposure. Our approach proved justified and generated positive results with a virtually unchanged premium volume. In the course of the year additional opportunities emerged, which we shall monitor in future via a representative office which we opened in Seoul in the year under review.

Due to continued positive growth, especially in its coastal regions, China has enjoyed an extraordinary economic upturn. The strong competitive pressure, which resulted from an excessive number of reinsurers with overly high expectations was clearly to the benefit of clients. We nevertheless posted a balanced result. The total business volume – with regard to both the insurance and reinsurance sectors – is still very low.

A number of competitors sharply scaled back their involvement in the Taiwanese reinsurance market. The ensuing decline in supply, which actually encountered a rise in demand for natural catastrophe cover following the severe earthquake in September 1999, thus enabled reinsurers to push through appreciable improvements in terms and conditions. We ensured compliance with minimum conditions for natural hazards under proportional treaties and secured appropriate reductions in commission on our participations. The premium volume in this line of business climbed sharply. We succeeded in assuming the role of leading reinsurer under a number of non-proportional programmes. This pleasing and likely highly profitable growth unfortunately contrasted with a number of losses in industrial fire insurance, as a consequence of which we showed a deficit for the year under review.

Motor insurance continues to be one of the most significant business segments in Taiwan. Premium income from this line accounts for almost half of our total premium volume. These participations posted satisfactory results. Overall, therefore, our Taiwanese portfolio closed with a slight technical deficit.

The insurance markets in the ASEAN countries were slow to recover from the latest financial crisis and lagged somewhat behind the general economic upswing. Competition for market shares remained intense and overshadowed initial signs of improved conditions for reinsurers. The rate level thus continued to decline, and the worldwide turnaround has yet to materialise in this region. Positive exceptions were Thailand and Singapore, where it was at least possible to halt the decline in premiums.

Our results in the year under review were adversely affected by several instances of flood damage, which impacted the performance of our property account. Thailand suffered the most severe flooding in its history, and the Malaysian capital Kuala Lumpur experienced its firstever major flooding.

In motor business, too, results in all the ASEAN countries deteriorated. On the one hand, this was attributable to increases in benefits awarded by the courts in motor third party liability insurance. On the other hand, the faltering economic recovery in the second half of the year had an adverse impact on this segment.

Notwithstanding the aforementioned negative factors, the overall business performance in the ASEAN region was satisfactory – a result primarily made possible by our regional diversification and the favourable loss experience in fire material damage insurance.

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Australia and New Zealand

In Australia, despite initial uncertainties associated with the tax reform implemented in July 2000, the positive economic growth of recent years on a scale unparalleled in the country's history was sustained. In addition to several company mergers – most notably in the financial and insurance sectors – the business climate was characterised by the strong Australian dollar and rising interest rates. Our point of departure in the year under review was therefore determined by the progressive concentration in the insurance market and the continuing excessively low level of premiums. The disappearance from the market of a number of domestic reinsurers had few positive implications for the competitive environment, since international players forced their way into the market and competition therefore remained fierce.

This situation was exacerbated by the fact that the number of (re-)insurance brokers also diminished, leaving the remaining brokers to fight over a similarly reduced number of insurers. Thorough technical analysis of risks sometimes suffered under the competitive pressure thereby unleashed; in many instances it proved impossible to obtain remuneration which was more commensurate with the risk, and the premium development fell short of expectations.

This was all the more disappointing because in 1999 Australia had suffered the largest insurance loss in the history of the continent – the Sydney hailstorm with an estimated market loss of AUD 1.9 billion. Even in natural catastrophe business the reaction to this event was restrained, especially because many customers had arranged multi-year policies which do not come up for renewal until the middle of 2001. At least in our proportional portfolio, however, we observed the first hopeful trends inasmuch as our clients were able to raise rates in the second half-year – in some cases by double-digit margins.

By contrast, the liability line needs to be considered in a more differentiated light. While personal liability business continued its stable development and facilitated moderate premium increases, industrial liability business still suffered under inadequate tariffs. On the other hand, the reform of privatised workers' compensation business in western Australia – which was initiated in 1999 – showed its first appreciable positive effects in the year under review. The reform not only made it more difficult to take legal action, but also led to a marked rise in original premiums. We were thus able to improve the hitherto negative results of our proportional participations in this line of business. Owing to the fact that the run-off of the reserves for older occurrence years also proved better than originally anticipated, the result for the reporting period was very pleasing.

Overall, in the course of the year under review we cautiously and selectively stepped up proportional acceptances again after scaling them back substantially a few years ago. With the exception of storms and flooding on a minor to moderate scale, natural catastrophe business was spared any major loss events, and we therefore generated a very good result in this segment.

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Africa

The general economic situation through-out Africa was difficult. Economic activity in central Africa was adversely influenced by political flashpoints. Hence, the growth achieved by the insurance industry in East Africa, Kenya, Tanzania and Uganda remained minimal.

Against the backdrop of economic growth of around 3.1% in 2000, the most significant insurance market on the continent – South Africa – was characterised by meagre growth and intense competition. In the year under review, as in previous years, it was difficult to secure adequate premiums in southern Africa. What is more, the high overall burden of losses hampered profitable operations. This state of affairs was exacerbated by extensive structural changes. The number of medium-sized insurance companies fell sharply. Four property and casualty insurers ceased trading or were taken over in the last year. This steady reduction in the number of potential clients had a detrimental impact on property and casualty reinsurance. The previously large number of insurers who ceded their premiums to the reinsurers also had a positive effect on risk spreading. Concentration undermined this balance of risks and made the reinsurers' results more volatile. Particularly through its co-operation arrangements with South African insurance companies, our subsidiary Hannover Re Africa successfully adjusted to these new circumstances, thereby alleviating potential declines in premium income.

Despite depressed market prices and considerable flood damage in the north-eastern part of South Africa and in Mozambique as well as various fire losses, the technical deficit posted by Hannover Re Africa decreased appreciably. The portfolio of fire business was burdened by altogether 46 major claims with a loss amount in excess of ZAR 1 billion. Total premium income in this market was no more than ZAR 3 billion. Compared to 1990, the rate level in the year under review was thus down more than 60% over a ten-year period. This prompted us to drastically scale back this segment until prices recover to an acceptable level. Results in motor business were not satisfactory and placed a strain on the technical account.

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Marine and aviation reinsurance worldwide

In view of the special features of these lines, we transact marine and aviation reinsurance in a central department with worldwide responsibility, thereby concentrating our expertise and services in a single competence centre.

The expansion of the global economy has generally had a positive impact on the marine insurance market. In Asia, for example, the turnover of goods picked up substantially as part of the general turnaround in the economic crisis. Ship owners worldwide saw an increase in the level of freight rates. Developments on the oil markets led to the increased building of production facilities and greater capacity utilisation of the worldwide tanker fleet.

Due to fierce competition and overcapacity, however, the marine insurance market again failed to achieve any general improvement in the rate level in 2000. As a consequence of the poor results in recent years, various players withdrew from the market; efforts to restore business to profitability were therefore assisted by more restricted capacities. Certain lines, such as offshore business, recorded marked improvements in terms and conditions including premium increases and limitations on the scope of cover.

The favourable trend was even more pronounced in the reinsurance market, for example in non-proportional business written on the London Market. It was possible here to increase ceding companies' retentions and achieve average rate increases of 25 - 30%. In other countries, however, premium increases were more moderate and the scope of coverage remained largely unchanged.

We accept the predominant share of our marine business from the London Market and the USA. Since premiums in these markets are for the most part booked in US dollars, our growth in this sector is also attributable to the appreciation of the dollar against the euro.

Owing to the unsatisfactory result in previous years, we exercised great restraint in our proportional acceptances. The focus of our obligatory acceptances was on non-proportional reinsurance. In facultative reinsurance our risk acceptances were concentrated on offshore business as well as on types of coverage in the hull and cargo lines where the only exposure is to major losses.

With slight overall growth the technical result showed a modest improvement.

In aviation and space reinsurance high rates of increase continued to be recorded in the areas of tourism and goods-in-transit. In space business the demand for new telecommunications and science satellites continued unabated.

Although the year under review again witnessed a number of plane crashes, the total burden of losses was average. In both aviation and space business the insurance markets continued to suffer under insufficient rates and considerable overcapacity. Despite the fact that sizeable reinsurance capacity was still available, the deficits of previous years gave rise to rate increases averaging between 25% and 30%. Combined with greater airline activity and increased fleet values, the market premium for aviation fleets climbed from roughly USD 850 million to USD 1.2 billion. This level is nevertheless scarcely commensurate with the accepted risk.

In aviation and space business, as in marine insurance, the reinsurance market was able to some extent to divorce itself from these developments. Rate increases in the non-proportional sector averaged 30 - 40%, albeit with some major divergences depending on the individual claims experience of specific programmes.

The bulk of our aviation and space business similarly derives from the London Market and the USA. By purchasing the portfolio of the Swedish company Atlantica we were able to further expand our market share in Scandinavian general aviation business. Our underwriting policy also concentrates on niche markets as well as non-proportional and facultative business. Thanks to this selective approach, the inadequate conditions prevailing in the primary insurance sector had only a very limited influence on our result, which was satisfactory overall.

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Credit and surety reinsurance worldwide

As in marine and aviation reinsurance, owing to the special features of these lines we transact credit and surety business in a central department with worldwide responsibility, thereby concentrating our expertise and services in a single competence centre.

Extremely fierce competition continued to be a hallmark of the credit and surety lines in the insurance markets. The very high level of concentration on global groups – which hold around 70% of the world market – and the progressive internationalisation of national markets continued unabated. In this climate reinsurance conditions came under further pressure, especially with respect to the globally operating major cedent groups. This development was based primarily on the very modest loss ratios in Europe.

In the USA, on the other hand, the dramatic claims experience brought about sometimes drastic rate increases and a marked tightening of the underwriting criteria applied to the surety market. The construction boom had led to inadequate rates at a number of leading surety companies and resulted in serious negligence in contract execution by their building customers. The consequence was an increased number of major claims.

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