• Accounting - satisfies internal and external reporting requirements - supports our business processes through provision of transparent and timely information 8. Human resources policy • We offer attractive jobs for - ambitious - performance-minded employees - who identify with our corporate objectives .
vigorous growth generated in life and health reinsurance was not sufficient to offset this effect entirely. At constant exchange rates the decline would have been 8.0%. The Group's retention increased by 11.1 percentage points year-on-year to 87.4% due to reduced spending on retrocessions. Net premium therefore climbed by 2.8% to EUR 7.3 billion (EUR 7.1 billion).
Primary insurance now accounts for just a minimal share of our portfolio following the sale of Praetorian and Clarendon's withdrawal from active specialty business. Only International Insurance Company of Hannover, London, and Compass Insurance Company, Johannesburg, continue to operate in this segment. Both companies boosted their premium income and delivered gratifying results.
In Germany and several other European countries the EU directive on finite reinsurance was implemented in the course of 2007. This explicitly recognises structured products and enables member states to adopt more precise regulations. Through intensive marketing efforts we were able to raise our profile: ceding companies are increasingly incorporating our products into their reinsurance planning. We were similarly satisfied with the development of business involving structured products in Germany.
In offshore and energy business we achieved appreciable price increases, although rate rises were also obtained for the rest of the marine portfolio. As part of our risk management we have now reduced the limit of liability for windstorm-exposed programmes in the Gulf of Mexico by roughly 25%.
The crisis that erupted in the US real estate and credit market in the year under review also had implications for the insurance industry, specifically in directors' and officers' (D&O) and professional indemnity business. The market loss is currently put at more than USD 3 billion; this contrasts with total premium for the financial institutions segment of around USD 3.5 billion. These figures clearly show the extent to which these casualty lines could be impacted by the subprime crisis. In view of the decline in rates – especially in North American D&O business – we have continuously reduced our market share to a level that is now just one quarter of the premium volume generated in the hard market. The strain from the subprime crisis is therefore expected to be only slight. We carefully analysed our portfolios and established conservative reserves of EUR 19.5 million.
These growth prospects had already prompted Hannover Re to establish its own dedicated subsidiary in Bahrain in 2006. We were thus the first international reinsurance group to be able to transact local reinsurance business on the basis of Islamic law. Looking back on the first financial year, our overall assessment is very positive: our premium income totalled around EUR 10 million, and we thus generated stronger growth than planned. More and more takaful companies prefer to place their business with Sharia-compliant reinsurers such as Hannover Re. In the year under review we also established a branch in Bahrain that will concentrate exclusively on traditional reinsurance in the region. It remains our goal to be the partner of choice for these companies over the long term.
Hannover Life Re is organised as a network. The chart below shows the proportion of gross premium written by each of the companies: Equipped with equity resources of EUR 120 million, our subsidiary in Bermuda – which at the beginning of October 2007 received a licence from the local regulator to commence operational business activities – has now been added as another member of this network.
We also paid close attention to the prospects for the Islamic insurance world (so-called takaful business); through the reinsurance company Hannover ReTakaful that was established last year in Manama, Bahrain, we intend to cultivate this emerging market systematically and in full compliance with Islamic principles. We were particularly pleased with the initial rating of "A" with a "stable" outlook awarded to our subsidiary in November 2007 by the highly respected rating agency Standard & Poor's.
+++ Hannover Life Re ranks among the four most important internationally operating life reinsurers +++
As in past years, our cost structures are geared to lean processes, an ability to respond rapidly to market developments and a high level of efficiency. With an expense ratio of 2.0% relative to gross written premium we have ranked as the cost leader among globally operating professional life and health reinsurers for many years.
Again bearing in mind the positive effect of the reduction in deferred taxes, the consolidated net income of Hannover Life Re came in at EUR 188.7 million (EUR 102.6 million) after allowance for minority interests. This was equivalent to earnings of EUR 1.57 (85 cents) a share.
We keep a particularly close eye on the longevity risk associated with enhanced annuities; the results in 2007 were within the actuarially expected bounds.
The company concentrates on individual life business with the risk components of mortality, critical illness and disability. We cooperate first and foremost with dynamic mid-sized players as well as newly established insurers. On the other hand, we also successfully offer financing solutions such as block assumption transactions so as to realise a portfolio's embedded value.
Hannover Re is aware of its role as an employer and contractor in the city of Hannover and the surrounding region. Where possible, we prefer to award contracts locally so as to foster businesses based here. Not only that, we also support events in and around Hannover that are important for our company, including for example in the year under review the "Tag der Retter" or-
Museum Hannover. The interest earned on the foundation 's capital is regularly used to acquire new artworks that we loan to the Sprengel Museum Hannover. By way of specially organised art tours the collection is opened up to interested sections of the broader public.
• standard and ad hoc reports appropriate to the various risks
A key tool for risk limitation is retrocession; the business that we accept is not always fully retained, but instead portions are retroceded as necessary. Our retrocessions conserve our capital, stabilise and optimise our results and enable us to derive maximum benefit from a "hard" market (e.g. following a catastrophe loss event). Alongside traditional retrocession we also transfer risks to the capital market. In 1994 Hannover Re pioneered the securitisation of natural catastrophe risks with its "Kover" transaction, followed by further such transactions in subsequent years ("K2" to "K5"). Overall, these tools support diversification within the total portfolio and promote risk reduction. The default risk on reinsurance recoverables has a bearing on our retrocessions. It is for this reason that the credit status of our retrocessionaires is a criterion of paramount importance in the selection process. As a further risk reduction measure, some of our reinsurance recoverables are secured by cash or securities deposits or by letters of credit.
The technological dependency of our core processes on information technology is rapidly increasing, with corresponding implications for the potential risk. It is therefore of fundamental economic importance that we ensure the high availability of applications and integrity of mission -critical data and of our infrastructure. In the year under review, with an eye to preserving the existing high level of security going forward, we began to further optimise our existing plans and safeguards on both the technical and organisational sides (e.g. pandemic contingency plans, crisis communication, back-up computer centre) to deal with the failure of fundamental business processes. The Business Continuity Management (BCM) project launched in the year under review is an indispensable element of the proactive management of operational risks at our company and will serve to further enhance our preventive mechanisms.
IFRS 7 "Financial Instruments: Disclosures", which is mandatory for financial years beginning on or after 1 January 2007, combines the disclosure requirements for financial instruments previously contained in IAS 30 "Disclosures in the Financial Statements of Banks and Similar Financial Institutions" and IAS 32 "Financial Instruments: Disclosure and Presentation". In this connection certain disclosure requirements were modified or extended. First-time adoption of this standard led to extended disclosures on financial instruments as well as on the type and extent of the risks associated with such financial instruments.
Assumptions concerning the appropriate applicability criteria are necessary when determining the need for impairments on non-monetary financial assets held as available for sale. In this regard we would again refer the reader to our explanatory remarks in Section 3.2 "Summary of major accounting policies".
Hannover Euro Private Equity Partners IV GmbH & Co. KG, Hannover/Germany 3) 60.2 EUR 39,519 EUR (1)
HANNOVER Finanz GmbH Beteiligungen und Kapitalanlagen, Hannover/Germany 8) 25.0 EUR 77,255 EUR 7,634
Pursuant to IFRS 5 "Non-current Assets Held for Sale and Discontinued Operations", a company component is deemed to be a discontinued operation if it has been sold or is classified as held for sale as at the balance sheet date and represents a separate major line of business, whose activities and cash flows can be clearly distinguished from continuing activities both operationally and for accounting purposes. The assets of discontinued operations classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.
In the previous year Hannover Re reached agreement on the sale of its American subgroup Praetorian Financial Group, Inc., New York (PFG), to an Australian insurance group. Effective 31 May 2007 beneficial ownership of the assets and liabilities belonging to the subgroup classified in the previous periods as discontinued operations was transferred. They were therefore no longer recognised as at the balance sheet date. In accordance with the structure of the transaction, the purchase price was finally determined in the fourth quarter of 2007 and amounted to USD 810.9 million. In compliance with IFRS 5 we recognise the profit or loss of PFG in the consolidated statement of income for all presented periods after tax in a separate line.
The profit or loss, assets and liabilities and net cash flows of the discontinued operations are presented in the following tables and broken down into their major components. The reported amounts for the year under review only cover transactions until the deconsolidation date of 31 May 2007.
6. Management of technical and financial risks 6.1 General risk management
Interest rate risks refer to an unfavourable change in the value of financial assets held in the portfolio due to changes in the market interest rate level. Declining market yields lead to increases and rising market yields to decreases in the fair value of fixed-income securities portfolios. One of the central objectives of our strategy in this regard is to match cash flows on the assets and liabilities sides as closely as possible. Quantitative support for this strategy is provided by our dynamic financial analysis model as well as a broad diversity of value at risk calculations. In addition, tightly defined tactical duration ranges are in place, within which asset managers can position themselves opportunistically according to their market expectations. The parameters for these ranges are directly linked to the risk-carrying capacity of the Hannover Re Group.
Credit risks may arise out of a failure to pay (interest and/or capital repayment) or change in the credit status (rating downgrade) of issuers of securities. We attach vital importance to credit assessment conducted on the basis of the quality criteria set out in the investment guidelines.
Available for sale due after one through two years 1,407,784 1,403,733 1,700,790 1,692,481 due after two through three years 1,214,907 1,196,631 1,678,241 1,637,918 due after three through four years 1,273,380 1,276,467 1,566,342 1,562,701 due after four through five years 1,377,471 1,372,244 1,187,735 1,176,674 due after five through ten years 3,854,813 3,813,167 4,543,454 4,472,663 due after ten years 1,796,485 1,763,484 1,123,275 1,139,366
Debt securities issued by semi-governmental entities 426,857 9,617 2,887 8,694 442,281
The fair values of the derivative financial instruments were determined on the basis of the market information available at the balance sheet date and using the effective interest rate method. If the underlying transaction and the derivative are not carried as one unit, the derivative is recognised under other financial assets at fair value through profit or loss or under the other liabilities.
Net book value at 31 December of the year under review 16,962 17,979
Gross book value of accounts receivable at 31 December of the year under review 2,653,604
The table below shows the net loss reserve (loss and loss adjustment expense reserve) for non-life reinsurance in the years 1997 to 2007 as well as the run-off of the reserve (so-called run-off triangle).
Net book value at 31 December of the previous year 6,109,154 447,537 5,661,617 5,779,169 94,089 5,685,080
Staff The average number of staff at the companies included in the consolidated financial statement of the Hannover Re
Pension commitments are given in accordance with the relevant version of the pension plan as amended. The 1968 pension plan provides for retirement, disability, widows' and orphans' benefits. The pension entitlement is dependent on length of service; entitlements under the statutory pension insurance scheme are taken into account. The pension plan was closed to new participants with effect from 31 January 1981.
Net provisions for pensions at 31 December of the year under review 67,101 64,559
Effective 1 July 2003 Hannover Re took out insurance for pension commitments. The commitments involve deferred annuities with regular premium payment under a group insurance policy. In accordance with IAS 19 they were carried as a separate asset at fair value as at the balance sheet date in an amount of EUR 43.6 million (EUR 39.7 million).
HDI Haftpflichtverband der Deutschen Industrie V.a.G. (HDI) indirectly held a majority interest in Hannover Re as at the balance sheet date through the subsidiaries Talanx AG, HDI Verwaltungs-Service GmbH and Zweite HDI Beteiligungsgesellschaft mbH, all based in Hannover. With regard to the change in the ownership structure of Hannover Re on 10 January 2008 please see Section 9.7 "Events after the balance sheet date".
The maximum period of the stock appreciation rights is ten years, commencing at the end of the year in which they are awarded. Stock appreciation rights which are not exercised by the end of the 10-year period lapse. Stock appreciation rights may only be exercised after a waiting period and then only within four exercise periods each year. For 40% of the stock appreciation rights (first tranche of each allocation year) the waiting period is two years, for each additional 20% (tranches two to four of each allocation year) of the stock appreciation rights the waiting period is extended by one year. Each exercise period lasts for ten trading days, in each case commencing on the sixth trading day after the date of publication of the quarterly report of Hannover Rückversicherung AG.
Rental income totalled EUR 1.7 million (EUR 9.8 million) in the year under review.
Sweden Hannover Rückversicherung AG Tyskland filial Hantverkargatan 25 P. O. Box 22085
Non-proportional reinsurance: reinsurance treaty under which the reinsurer assumes the loss expenditure in excess of a particular amount ( ➞ priority) (e.g. under an excess of loss treaty). This is in contrast to ➞ proportional reinsurance.