Key features of the 2000 financial year in the business segment of life and health reinsurance (Hannover Life Re) were the further expansion of international activities in our core markets and the launch of the global brand "Hannover Life Re – A Somewhat Different Reassurer". We also commenced business operations at our branch offices in Kuala Lumpur and Hong Kong and successfully established our Irish life and health reinsurance company in Dublin.

Certain premium components in life and health reinsurance (e.g. savings elements under unit-linked life insurance policies) are not reported as premium under US GAAP. In order to reflect our business development as realistically as possible, the premium income shown below always includes such "premium deposits". Defined in these terms, our consolidated gross premium income grew to EUR 2,494 million. Nominally, this constitutes an increase of 12% compared to the previous year's figure of EUR 2,220 million. However, this latter amount includes a special transaction in Australia with a single premium of approximately EUR 200 million. Once this aspect is factored out, the actual growth amounted to 23%.

Key figures for life and health insurance

Particularly significant growth impetus derived from our preferred financing transactions for life, annuity and personal accident portfolios in German-speaking markets, the United Kingdom, South Africa and the Far East.

For refinancing purposes we again retroceded sizeable parts of our business. Consolidated net premiums (again including premium deposits) therefore increased to EUR 1,723 million – a rise of 16% compared to the previous year's figure of EUR 1,485 million. The retention rate thus stood at 69% in 2000 (as against 66% in the previous year).

On account of our positioning as a financing reinsurer, financial factors have a greater influence on our result than on that of other life and health reinsurers. The following aspects, for example, have a major impact on our portfolio and are documented by means of extensive actuarial analyses and sensitivity studies:

This applies particularly to our portfolio in Europe – especially in German-speaking markets – as well as to the USA, which accounted for approximately 43% of the total premium income.

By contrast, in many of our markets the influence of the traditional risk segments of life, personal accident and disability insurance as well as of critical illness covers is limited. The results of our health reinsurance portfolio improved markedly over previous years – particularly in the USA – but overall they were still unsatisfactory.

In the year under review we devoted special attention to the longevity risk. Our greatest involvement here is in the United Kingdom through our product partnerships in the area of annuity policies for aggravated risks and other enhanced annuities. On the basis of our analyses and in close co-operation with our clients, we significantly raised the conditions applicable to certain risk groups for acceptance of these risks.

The USA again witnessed a substantial number of take-overs of reinsurers in 2000. We too participated in several auctions; however, in no instance did our price expectations correspond with those of the sellers, with the result that none of these acquisition opportunities came to fruition.

The operating result before tax on income, minority interests and other general expenses totalled EUR 83 million in the year under review, an increase of 80% on the previous year's figure of EUR 46 million.

A long-term assessment of the value added should take into account not only the US GAAP result but also the development of the net embedded value of the portfolio. Reflecting the present value of our portfolio of in-force contracts, the present value of future profits rose by 43% from EUR 609 million to EUR 874 million. Of this present value of future profits, an amount of EUR 597 million (EUR 374 million) was already capitalised in the US GAAP balance sheet as at 31 December 2000 as acquisition costs or the present value of future profits (PVFP).

Development of net embedded values

These values are audited and certified separately for each Hannover Life Re company by an internationally renowned firm of actuaries.

Hannover Life Re – the network reinsurer

The business model of Hannover Life Re is based on a network approach, under which seven reinsurance companies currently work together on an equal footing as independent risk carriers.
In this context, the companies in Hannover,London,Dublin,Orlando,Johannesburg and Sydney pool their financial resources, risk capacities, expertise and knowledge base as well as their system structures.

Home office in Hannover has assumed a number of general tasks within this network. It draws up the planning on a centralised basis and assumes responsibility for controlling, the management of external retrocessions and capacity refinancing via the capital markets.

Refinancing through securitisation transactions

The organisation is structured in such a way that in future local competence centres within the network will be accessible to our clients. They will thus be able to draw on our expertise and experience at any time. We believe that this organisational form – that of the network reinsurer – marks the way ahead. It facilitates flexible adjustment to future, still-to-be-defined market requirements.

As at year-end 2000 our clients around the world could draw on the services of roughly 270 Hannover Life Re staff, around 220 of them stationed abroad.

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Block assumption transactions

Since the mid-nineties, especially in the USA, we have concentrated on a speciality product. We assume entire portfolios of new business by way of proportional reinsurance treaties – so-called block assumption transactions (BATs).

In the year under review clients continued to use this method and the specialist expertise of Hannover Life Re in order to optimise their financial results and hence enhance their liquidity or solvency/tax position.

In 2000 we concluded eight new transactions of this type in the USA, France, Luxembourg and Japan, generating gross premiums of around EUR 310 million for 2001. Five transactions related to life and annuity portfolios, and in three instances health insurance portfolios were reinsured. On two occasions we retroceded the lion's share (75%) to the international capital markets using our securitisation instruments.

The following sections describe activities in our most important markets and highlight the relevant areas of concentration.

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North America

The US life insurance market is served by Hannover Life Re of America. In this market we have specialised almost exclusively in the aforementioned "block assumption transactions". We continued to conclude such financing arrangements on an ongoing basis. Five new transactions, primarily consisting of life and annuity insurance portfolios, were completed in the year under review.

With effect from 31 December 2000, following two years of preparatory work, we concluded the largest life BAT in our history with a renowned life insurer from the US state of Oklahoma. From 2001 onwards it will bring in an annual premium of more than USD 80 million over the long term.

The performance of our conventional life reinsurance was also highly gratifying. In this context, we have focused on niche products offered by small US insurers; with new business of USD 5.4 billion, the total sum insured of the business in force reached USD 21.2 billion as at 31 December 2000.

The total assets of Hannover Life Re of America amounted to USD 3,560 million as at 31 December 2000. This represents growth of 30.2% compared to the corresponding previous year's figure of USD 2,734 million. Gross premium income, on the other hand, showed only modest growth of USD 819 million (4.8%).

The reported annual operating result after tax of minus USD 2.5 million fails to adequately reflect the true added value of the company due to the special features of our block assumption transactions. These transactions substantially increase the non-capitalised value of our portfolio.

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Australasia

Our operations in Australasia are conducted by our subsidiary Hannover Life Re of Australasia Ltd. In a fiercely competitive business climate, we maintained our market leadership among locally active life reinsurers in Australia with a market share of more than 35%.

Gross premiums amounted to AUD 266 million. The claims experience with life and disability annuity risks was appreciably better than in the previous years, and Hannover Life Re of Australasia consequently generated a very pleasing operating profit of AUD 11 million.

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Africa

At the beginning of 2000 we concentrated our Group-wide southern African business in the hands of the Hannover Re Africa Group in Johannesburg; since that date our client relationships in southern Africa have been served exclusively by Hannover Life Re Africa. South African cedents account for 95% of its business, while the remainder derives from Mauritius, Kenya and Zambia.

With premium income of ZAR 604 million (equivalent to approximately EUR 93 million), an increase of 42% in gross business was achieved.

Results were burdened especially by certain segments of South African health reinsurance, and with an operating deficit of ZAR 12 million the performance of the portfolio as a whole was therefore unsatisfactory.

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United Kingdom and Ireland

We are represented by two operational risk carriers in the United Kingdom and Ireland. Hannover Life Reassurance (UK) Ltd. in London handles the conventional, more risk-orientated reinsurance market in the UK and Ireland. Hannover Life Reassurance (Ireland) Ltd., on the other hand, which we established in Dublin in the second half of 1999, has been assigned a core strategic task within Hannover Life Re. Equipped with a small, highly skilled team, it is able to make use of the favourable supervisory and solvency framework in Ireland in order to implement bespoke reinsurance solutions for our international clientele.

The gross premium income of Hannover Life Reassurance (UK) grew to GBP 42.2 million in the year under review, an increase of 35% compared to the previous year.

Particularly gratifying was the strong increase in new life business and critical illness policies with regular premiums, which now account for almost 60% of total premiums. We acquired a number of new client relationships in this area and took over the position of market leader in the United Kingdom. A further speciality is the design and administration of annuity policies sold to private customers through the marketing channels of major banks. This single-premium business now generates more than 40% of premium income. The claims experience in life business and with critical illness covers was again highly satisfactory, as a consequence of which Hannover Life Reassurance (UK) generated an operating profit of GBP 3 million.

Hannover Life Reassurance (Ireland) develops and markets its financially orientated reinsurance solutions both directly for clients of Hannover Life Re and through the retrocessions of other Hannover Life Re companies. Gross premium income in the company’s first full financial year totalled EUR 77 million; of this amount, 86% stemmed directly from external clients, while the remaining 14% derived from other Hannover Life Re companies. As anticipated, the business accepted performed very favourably and generated an operating profit of EUR 4 million.

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Germany

The gross premium income of the home office in Germany showed a marked increase in 2000. A sizeable portion of this business (almost 50%) was attributable to retrocessions of foreign subsidiaries to Hannover Life Re International. This office is also responsible for performance controlling within Hannover Life Re in the light of both risk and financial considerations. As part of this brief, further financing arrangements were retroceded to the international capital markets in the year under review by way of securitisations.

In Germany we observed increased demand among our clients for liquidity relief as a consequence of the explosive growth in unit-linked life insurance (27% market share of new business in 2000). Against this backdrop, we succeeded in further expanding our leading position as a reinsurer of unit-linked life insurance policies.

Many of our activities in the German market are carried out with an eye to the future and are intended to establish the basis for a sustained improvement in our market position in the years to come. This was particularly true in the light of the strong demand anticipated for financing arrangements as a consequence of the introduction of additional old-age provision encouraged as part of the Pension Reform Act.

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Other countries

Activities conducted in other countries are grouped together under Hannover Life Re International and encompass a network of three branch offices in Stockholm, Kuala Lumpur and Hong Kong as well as service and marketing centres in Paris, Milan, London, Madrid, Mexico City, Shanghai, Taipei and Tokyo. We are thus in a position to provide our clients with technical support and expert advice on a local basis.

The office in Hannover not only serves Germany but also, most notably, Austria, Switzerland, Luxembourg, Liechtenstein and the Netherlands as well as South American markets and selected clients in the United Kingdom. An outstanding feature of 2000 was the conclusion of a large-volume reinsurance treaty with a major financial group in the United Kingdom, which we provided with extensive support for the establishment of a company specialising in the senior citizens' segment. Our assistance included product development, systems for risk selection and underwriting as well as the necessary financing arrangements.

With 17 staff, our service centre in Paris is one of the larger offices abroad. The French market underwent further consolidation in 2000, which also impacted the demand for reinsurance. Contrary to the general market trend, however, we were highly successful in enhancing our market penetration and further enlarging our leading position in the French market. Particularly close contacts with marketing and consulting firms helped us to generate some business "at grass-roots level". In addition, we have already succeeded in paving the way for several transactions, on the basis of which – in combination with changes in the law which are expected in France, e.g. in the areas of unemployment and long-term care insurance – we believe that this market offers favourable general prospects.

Whereas in former years we had principally concentrated on financing transactions from our Milan-based Italian office, in the past two to three years we have established ourselves in the market through joint product development activities with various ceding companies. In addition to disability and long-term care policies, our clients were especially interested in coverage for the unemployment risk as part of credit life insurance. Owing to changes in tax legislation in the year under review, the demand for financing arrangements for traditional insurance products will tend to decline in the coming years. On the other hand, segments such as unit-linked life insurance and the reinsurance of capital market risks now offer promising opportunities.

The Spanish life insurance market, responsibility for which rests with our service centre in Madrid, is currently heavily dominated by a number of savings products sold over the counter at banks. Purely from the risk perspective the reinsurance requirement associated with these savings products is relatively low, and the pressure of competition is correspondingly high. We nevertheless succeeded in asserting our position as one of the leading life reinsurers in the client segment consisting of banks and savings institutions.

A team of 16 staff in Stockholm is responsible for the markets of Scandinavia, central and eastern Europe as well as the south-eastern Mediterranean region. In Scandinavia we observed increasing merger activity among our clients, and their total number therefore decreased. Nevertheless, the year also saw the formation of a number of new companies, with which we established reinsurance relations. Our business activities in the south-eastern Mediterranean region were concentrated on Israel and Cyprus.

Our office in Mexico City enjoyed great success in the year under review, acquiring twelve new clients in various parts of Central America. This achievement was founded in large measure on our local presence and the offer of training resources, especially in the areas of underwriting and reinsurance administration.

We have long had a presence in Kuala Lumpur, and with effect from 1 January 2000 we were the first foreign reinsurer to acquire the status of a branch office for life as well as non-life business. In Hong Kong too we were granted a licence with effect from 1 January 2000 to operate a branch office, having previously maintained a representative office for marketing purposes. The geographical scope of responsibility assigned to this branch office extends from Korea through China (including Hong Kong) and Taiwan as far as Japan. The sales activities of the ten local staff are supported by life specialists at our Shanghai, Tokyo and Taipei locations.

The most notable event in the year under review was the conclusion of a large-volume financing transaction with a medium-sized Japanese life insurer. This arrangement offered our client the desired solvency relief and has since been terminated as agreed. In Japan we also succeeded in establishing business relations with additional primary insurers. Consequently, we are now well positioned in what is – after the USA – the second-largest life insurance market in the world.

As the most heavily populated country in the world, we devote special attention to China. Through the use of our worldwide network we offer Chinese life insurers extensive technical support as well as specially tailored training measures for their staff.

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