Investments (incl. funds held by ceding companies) 24 735.8 +12.3% 22 031.1 20 305.8 19 278.0 14 196.2
I would now like to describe the development of our portfolio broken down into our four strategic business groups:
Following its vigorous growth of recent years our third business group, financial reinsurance, is now experiencing a period of consolidation. We strengthened our market position as one of the world’s three leading providers. Overall, the year under review developed satisfactorily for this business group. In view of the softer demand for capital-replacing proportional quota share arrangements and the continuing weakness of the US dollar, our premium income is sharply lower.
2. Capital management • The target is a Standard & Poor's rating of AA (A.M. Best: A) • Debt before equity in order to keep capital costs as low as possible • Optimal use of equity substitutes
• Constant nurturing of skills and motivation • Fostering of entrepreneurial thinking by delegating tasks, authorities and responsibility wherever possible 9. Risk management • Ongoing monitoring of all risks that could jeopardise the continued existence of the Group or individual parts thereof
In the first three months of the year under review the global economy experienced a vigorous upturn, only to lose impetus again as early as the second quarter. There were three factors in this slowdown: firstly, the sharp rise in crude oil prices; secondly, the flagging stimuli from US monetary policy, and thirdly, the restrictive fiscal measures taking hold in China, the world's other economic powerhouse. The latter instituted a set of administrative rules intended to slow down the overheating economy. The skyrocketing price of oil – which peaked at record levels in late October – was reflected in modest levels of private consumption around the world, thereby depressing economic activity.
Economic activity in the Eurozone got off to a brisk start in the year under review, but lost considerable impetus as the year progressed. Corporate spending was slow to pick up, and private demand also failed to support the economy.
On the capital markets 2004 was a largely satisfactory year. In particular, write-downs on equities were considerably lower than in the previous year (EUR 65.3 million) at EUR 13.3 million. The ordinary investment income of EUR 1.0 billion fell slightly short of the previous year. Positive underwriting cash flows failed to fully offset the lower level of interest rates throughout the portfolio. Interest on our premium deposits accounted for a disproportionately large share of the income. In the past the interest rates on these premium deposits had often been fixed on a relatively high level by today's standards. Extraordinary income, i.e. the balance of profits and losses on disposals, improved somewhat on the previous year to EUR 161.2 million (EUR 140.7 million). Overall, net investment income was a modest 4.2% higher than in the previous year at EUR 1.1 billion (EUR 1.1 billion). We raised our equity allocation in the course of the
Italian primary insurance market around a decade ago is slowly drawing to an end. In the year under review only a few companies were taken over by larger – usually foreign – insurance groups. In the future, therefore, insurers will tend to run higher retentions and the demand for reinsurance protection will decline.
On the claims side the year under review was overshadowed by the damaging hurricanes in Florida, which caused a market loss of USD 23.3 billion and thus became the most costly natural catastrophe losses in the history of the insurance industry. Despite these strains, US property lines still showed a profit overall.
Japan by far. We enjoy the status of a so-called "core reinsurer" with most of the major insurers. For these and other clients we wrote both proportional business and excess of loss covers. Natural catastrophe reinsurance, which is written primarily on a non-proportional basis, is our most important single line here and was further expanded in the year under review.
In Japan the bulk of commercial business is reinsured by the private sector, whereas private natural perils business is reinsured by a government -run consortium. Since the typhoons predominantly affected less industrialised regions, the strains incurred by reinsurers were correspondingly modest. Only typhoon "Songda" caused a significant loss of EUR 11.6 million for our account.
All in all, it is our expectation that life insurance is set to become a worldwide growth industry uniquely equipped to master the biometric factors of mortality, morbidity and – increasingly – longevity.
We live up to our clients' expectations regarding local service and short chains of communication by means of our decentralised corporate structure. With 18 subsidiaries, branches and service offices we are present on all five continents with a staff of 380.
We further scaled back our retrocessions in the year under review. The level of premiums retained by Hannover Life Re consequently climbed to 90.2% (85.1%) in 2004, and the net premiums earned of EUR 2.0 billion were slightly higher than in the previous year.
The hallmark of Hannover Life Re's cost situation is a lean infrastructure in Hannover and at the local offices abroad. The expense ratio amounted to 2.8% of gross premiums earned – a figure substantially below that of comparable competitors.
The key assumptions underlying the value of in-force business were reviewed, but they are consistent with the corresponding assumptions made in previous years.
• Focus will increasingly be on analyses of the risk associated with future payment flows from the various transactions
The table below summarises the key figures determined for each business center: Currencies
Hannover Life Re Germany (E+S Rück), Hannover 18.6 (10.8) (18.5) 18.1 (14.3) 2.0 (5.2) 5.4
Gross premiums amounted to EUR 367.8 million; the risk experience for mortality and morbidity was highly satisfactory. The run-off of the former market leader's terminated portfolio of enhanced annuities is progressing profitably and according to plan.
The premium volume from these regions amounted to EUR 204.8 million. Against the backdrop of another favourable claims experience results were most attractive.
We stood by our cautious underwriting policy of the previous years and declined to accept unit-linked annuities with derivative components.
The illustration shows the geographical breakdown of the gross premiums written by the three Irish companies.
We were able to slightly improve the average quality of our fixed-income securities as the year progressed. The proportion of securities rated "A" or better – at 92.5% – was marginally higher than in the previous year (91.1%). This high quality was also reflected in the markedly lower write-downs of EUR 4.1 million taken on fixed-income securities in the year under review.
Risk management at Hannover Re is characterised by central process coordination and local risk responsibility in the various areas of business: • Local staff bear primary responsibility for the monitoring of risks and risk-policy measures within their specific areas.
Currency exposures are largely avoided because we adhere systematically to the principle of matching currency cover. We use short-call and long-put options as well as swaps to partially hedge portfolios against price, exchange and interest rate risks. The contracts are concluded solely with first-class counterparties and compliance with the standards defined in the investment guidelines is strictly controlled in order to avoid risks associated with such transactions.
The economic picture in Germany will probably improve only hesitantly. Although capital spending will rise, the increase will be far less marked than was the case in previous upswings.
For Hannover Re, this means stable or slightly lower gross and net premiums in this business group for the current year. Net income after tax will probably contract somewhat due to portfolio shifts towards European and nonUS business with a reduced risk exposure, but it should still be highly gratifying.
Changes in other assets and liabilities (net) (354) (30 865) (27 388)
Cash and cash equivalents at the beginning of the period 386 134 671 866 672 844
Notes accounting principles 2. Accounting principles including reporting and valuation methods
Hannover Life Reassurance (Ireland) Ltd., Dublin/Ireland 100.00 EUR 110 872 10 731
Lireas Holdings (Pty) Ltd., Johannesburg/South Africa 2) 100.0 ZAR 25 708 17 225
The residual assets of the special purpose entity as at 31 December 2004 remained unchanged from the previous year at EUR 1.3 million and thus do not constitute a significant risk of loss for Hannover Re.
Net run-off result of the loss reserve 825.4 769.1 1 344.4 1 541.2 1 090.3 1 300.2 962.5 1 055.2 399.3 264.5
Contract deposits increased by EUR 1,028.5 million in the 2004 financial year from EUR 474.5 million to EUR 1,503.0 million. The rise was due in large measure to the enlarged volume of new business in the area of non-traditional life reinsurance.
Additional similar obligations based upon length of service exist at some Group companies. Expenditures for these commitments in the financial year totalled EUR 2,642 thousand (EUR 2,903 thousand).
In the year under review the vesting period expired for 60% of the stock appreciation rights awarded in 2000. In the first exercise period (6 to 21 April 2004) 58,276 stock appreciation rights were exercised at an amount payable of EUR 2.29 per SAR and in the second exercise period (25 May to 7 June 2004) 21,861 stock appreciation rights were exercised at an amount payable of EUR 2.23 per SAR. No stock appreciation rights were exercised in the third exercise period (20 August to 2 September 2004) or in the fourth exercise period (19 November to 2 December 2004). The amounts payable per SAR for these two exercise periods stood at EUR 0.35 and EUR 0.57 respectively.
Hannover Re has secured by subordinated guarantee a surplus note in the amount of USD 400.0 million issued in the 1999 financial year by Hannover Finance, Inc., Wilmington/USA. In February 2004 Hannover Re bought back USD 370.0 million of the surplus note, leaving an amount of USD 30.0 million still secured by the guarantee.
As security for our technical liabilities to our US clients, we have established a master trust in the USA. As at the balance sheet date this master trust amounted to EUR 1,748.7 million (EUR 1,664.2 million). The securities held in the master trust are shown as available-for-sale investments.
We regularly supervised the management of Hannover Rückversicherung AG (Hannover Re), the parent company of the Hannover Re Group, during 2004 on the basis of detailed written and verbal reports from the Executive Board. The Supervisory Board held a total of four meetings – each lasting several hours – in order to adopt the necessary resolutions. The Standing Committee and the Balance Sheet Committee, both committees formed by the Supervisory Board within the meaning of § 107 Para. 3 German Stock Corporation Act, met on three and two occasions, respectively. The Chairman of the Supervisory Board kept the full Supervisory Board regularly updated on the work of the Committees. Furthermore, we received quarterly written reports from the Executive Board on the course of business and the position of the Group pursuant to § 90 German Stock Corporation Act. These reports contain, inter alia, up-to-date details of the current planned and expected figures for the individual business groups. The reporting also covers strains from major losses as well as the investment portfolio, investment income, current developments in connection with the ratings of the various Group companies and the increase in the Group's global workforce. The quarterly reports with the quarterly financial statements and key figures for the Hannover Re Group constitute a further important source of information for the Supervisory Board. In addition, the Chairman of the Supervisory Board was continuously advised of major developments and impending decisions by the Chairman of the Executive Board. All in all, we were involved in decisions taken by the Executive Board as required by our statutory responsibilities and those placed upon us by the company's Articles of Association.
priate response to more exacting market requirements (clients and brokers are demanding increased capital resources from their business partners in the interests of better risk protection) and hence with an eye to opening up further attractive business opportunities for the company. In addition, the Supervisory Board approved the sale of a participating interest held in Willy Vogel AG through Willy Vogel Beteiligungsgesellschaft mbH.
Hannover Rückversicherung AG Hong Kong Branch 2008 Sun Hung Kai Centre 30 Harbour Road Wanchai, Hong Kong
Hannover Rückversicherung AG Succursale française pour la Réassurance Vie 7 rue Montalivet, 4th Floor, 75008 Paris
Loss, economic: total loss incurred by the affected economy as a whole following the occurrence of a loss. The economic loss must be distinguished from the ➞ insured loss.