We use a system of management ratios to steer and document the growth in our company's value. The earnings per share constitutes a central management ratio and performance indicator. Our strategic objective is to increase this figure by a double-digit percentage margin each year. The record shows that we have consistently achieved and even surpassed this goal.
guidelines which is geared towards responsibility and value enhancement in the interests of shareholders. The goal of the codex is to foster the confidence of international and national investors, clients, employees and the public at large in the management and monitoring of German listed companies.
We strive to assert our position in the international reinsurance markets as an important, optimally diversified reinsurance group of aboveaverage profitability in order to secure our longterm survival as an independent enterprise.
For us, growth means first and foremost an increase in profit, not an expansion of the (gross or net) premium income. Acquisitions are considered inasmuch as they help us to achieve our strategic priorities faster and meet our profit targets and return-on-investment requirements. Equity stakes in primary insurers are, however, not considered a sensible growth vehicle.
%-figures = participation You may find the addresses of our branch offices and subsidiaries on pages 120 to 122
By the end of 2000 it was very clear that the soft market cycle in property and casualty reinsurance had come to an end, and we therefore expanded our premium volume in this segment by 45.9%. In absolute terms this constitutes an increase of EUR 1.6 billion. None of the other business segments generated such vigorous growth in absolute figures. In relative terms, financial reinsurance - as in the previous year - showed the strongest growth of 100.0%.
The other income/expenses shown in the statement of income comprises items such as exchange gains and losses as well as expenses for the company as a whole. The amortisation of goodwill in the amount of EUR 13.4 million related primarily to the Clarendon Insurance Group and E+S Rück. In the future, ordinary amortisation of goodwill will no longer be shown under US GAAP. Should there be a considerable decrease in goodwill, however, a special write-down is to be made in the future. It is our assumption that in subsequent years – provided business develops along normal lines – no special write-downs will be necessary.
Results in 2001 were, however, overshadowed by the explosion at a fertiliser plant in Toulouse. This loss event produced a net burden for our technical account of almost EUR 70 million.
in the wake of the terrorist attacks in the United States. Some Lloyd’s syndicates realigned their underwriting policy or even withdrew from reinsurance business altogether. This behaviour – in combination with the enormous rise in premiums brought about by the experience of the terrorist attacks – enabled us to record sharply increased premium income in the fourth quarter of the year under review. Due to the heavy burden of losses associated with 11 September, our portfolio nevertheless posted a negative result.
However, this development failed to bring about adequate rates in industrial business. It was not until the autumn of 2001 – following the events of 11 September – that serious and substantial modifications were made to terms and conditions.
Due to the contractual arrangements in the US insurance and reinsurance sectors we were already able to reorganise many treaties and write new business shortly after 11 September and hence achieve rate increases – sometimes of sizeable dimensions – in the year under review. We especially profited from this development in property lines. In industrial fire business, for example, rates climbed by 50 to 100%. At the same time deductibles were also increased.
In property and casualty reinsurance we use actuarial methods to check the loss reserves. The IBNR (incurred but not reported) reserve of EUR 965 million additionally constituted for this segment has been built up to a confidence level which is more than sufficient on a US GAAP basis. This reserve is calculated and established according to a regional breakdown for the liability, motor and property lines of business and on an aggregate basis for the marine, aviation and credit lines. The anticipated ultimate loss ratios are calculated in altogether 55 subsegments on the basis of statistical run-off triangles and actuarial methods (chain ladder including tail estimations). The required IBNR reserve is the product of the ultimate loss ratio multiplied by the cumulative earned premium less paid losses and reserves reported by ceding companies.
This is particularly evident in markets, which were heavily affected by the events of 11 September. Our central unit responsible for speciality business (aviation, marine and London Market reinsurance business – all of which suffered enormous losses) is planning to enlarge its premium volume by an average of 150% in 2002. In some subsegments of our aviation business we even anticipate a ten-fold increase in premium income. By reducing the risk in many areas of property and casualty reinsurance and maintaining unchanged or even increasing premium rates, we expect to enhance the profitability of our portfolio.
Furthermore, by way of product partnerships we shall continue to help insurers establish innovative products on the market. We support insurers with the development and financing of such new products. In our assessment, rapidly growing markets offer particularly attractive opportunities to provide such assistance.
Since US business still accounts for a dominant share of the total volume, we shall work harder in the future to improve our portfolio diversification. The very rapid premium growth of past years will slow. In the medium- to long-term we are aiming for a profit margin of around 3% of net premiums. This projected higher margin is based on the tendency towards higher-risk transactions –although the degree of risk still cannot be compared to transactions in the property and casualty reinsurance segment. A tendency can also be observed towards products that offer total balance sheet protection. Such products encompass not only the technical result, but also afford protection for the investment risk. We are currently working intensively on the development of these holistic reinsurance solutions.
Net technical and investment income (119 938) 265 578 50 920 82 618
Other foreign government debt securities 2 188 22 – 2 210
Fixed-income securities – available-for-sale 5 085 611 1 618 287 1 058 751 385 980 23 886 98 049 1 800 150 514 8 422 878
The trend towards higher asbestos-related claims and lower pollution damage exposures – especially in the USA – continued. As at year-end 2001 we constituted the following additional provisions on the basis of these projections: Projections and calculations make allowance for all foreseeable risks and are constantly adjusted in line with the latest information. Management believes that the provisions are adequate to cover the ultimate gross cost of losses and loss expenses incurred as at 31 December 2001.
We have identified insurance contracts, which do not satisfy the requirements of SFAS 113 (accounting and reporting for reinsurance of short-duration and long-duration contracts). These involve reinsurance treaties under which the risk transfer between the ceding company and the reinsurer is of merely subordinate importance. Those contracts allocated to the life and health reinsurance segment were merely brought to account in the amount of the fees accruing to the reinsurer from the ceding company. Contracts allocated to the other segments were eliminated in full from the technical account. The profit components were netted under other income/expenses. Technical amounts were shown as contract deposits on the assets and liabilities sides.
Deferred tax assets and liabilities are booked in accordance with SFAS 109 for tax reductions and additional tax charges expected in subsequent financial years, insofar as they result from different valuations of individual balance sheet items. In principle, such valuation differences may arise between the national tax balance sheet and the national commercial balance sheet, the uniform consolidated balance sheet and the national commercial balance sheet as well as from tax loss carry-forwards and tax credits. Deferred taxes are based on the current tax rates. In the event of a change in the tax rates on which the calculation of the deferred taxes is based, appropriate allowance is made in the year in which the change in the tax rate is stipulated by law with sufficient certainty. Deferred taxes at the Group level are booked using the Group tax rate of 40%.
The changes of -EUR 16.1 million in the cumulative comprehensive income in the year under review resulted from the application for the first time of SFAS 133 (accounting for derivative instruments and hedging activities). This development was due to changes in the fair value of interest rate swaps included in a cash flow hedge transaction used to hedge floating-rate loans.
The maximum option period is 10 years. The waiting period prior to first-time exercise of an option is two years following the expiry of the year in which the option was granted.
The fair value of derivatives used in fair value hedges was -EUR 15.3 million. The fair value of derivatives used in cash flow hedges totalled -EUR 26.8 million. Derivatives shown in the trading portfolio had a fair value of EUR 8.9 million.
As part of its deliberations on particularly important individual projects, the Supervisory Board returned repeatedly to the effects of the terrorist attacks on the World Trade Center of 11 September 2001. It also considered the establishment of a reinsurance company in Bermuda, the establishment of a reinsurance broker in London and the establishment of two private equity companies. Due to the impressive growth in premium income the Supervisory Board approved a capital increase at Hannover Re in order to safeguard its rating and enhance its competitiveness. In view of the strong expansion in the volume of business accepted by the underwriting units of the Clarendon Group, the Supervisory Board also approved a capital increase at Hannover Finance Inc., Wilmington/Delaware, USA. The Supervisory Board gave intensive consideration to the issue of corporate governance, and it approved the implementation of various measures recommended by the Deutsche Vereinigung für Finanzanalyse und Asset Management (DVFA). The intention is to implement wherever possible the measures defined in the DVFA Corporate Governance Scorecard.
Canada Hannover Rückversicherungs-AG Canadian Branch - Chief Agency 3650 Victoria Park Avenue, Suite 201 Toronto, Ontario M2H 3P7