We shall no longer be reporting on financial reinsurance as a separate business group. Instead, as is now common practice among all our major competitors, it will be included as part of property and casualty reinsurance. In the year under review I expect growing demand for structured covers and a pleasing profit contribution.
The leading European benchmark, the DJ EuroStoxx50, lagged behind the Dax with a rise of 15.1%. Germany was thus the favourite among European equity markets. Although the Dow Jones ended the 2006 stock market year close to its all-time high, its performance of 16.3% on the year left movements in the USA well short of the gains seen in Germany.
The German insurance industry can look back on a successful 2006 financial year. Following the heavy losses of 2004 and 2005, 2006 went down as one of the insurance periods with the lightest losses in the past 20 years. For reinsurers, in particular, the year under review was 2006: A very good year for equity markets …
As an international reinsurer with more than 80% of its premium income from foreign markets and an international investor structure, Hannover Re does not, however, measure its stock
As an optimally diversified and economically independent reinsurance group of aboveaverage profitability, our overriding strategic objective is to generate value-oriented growth. All other goals are derived from and subordinate to this overriding objective.
Economic independence: For us this means: • financing growth with self-generated profits and • avoiding imbalances that would necessitate contributions by shareholders.
With the aid of IVC we steer the Group as a whole, its four business groups and the individual operating units. This comparability enables us to identify value creators and value destroyers and thereby optimise the allocation of capital and resources.
In view of the overriding importance of a very good rating for a reinsurer's business in today's market environment, we are pleased to report that the rating agencies Standard & Poor's and A.M. Best confirmed Hannover Re's strong ratings.
Key figures for property and casualty reinsurance 1) On a US GAAP basis
Overall, we were satisfied with the development of business in our domestic market.
The Italian non-life market again produced very weak growth in the year under review owing to the sluggish state of the economy – albeit without significant implications for our business. The period of consolidation, which probably reached its peak in 2006, similarly had no effects on Hannover Re's portfolio thanks to our clear client and market segmentation. Our focus is on small and mid-sized ceding companies. In addition to enjoying professional reinsurance protection, special target clients can look forward to additional services such as training activities and consulting support.
Property business with no natural catastrophe exposure was for the most part characterised by premium erosion in the year under review. For this reason we write this business opportunistically and with the aid of systematic cross-marketing: when we accept our clients' catastrophe covers, we expect them to cede other attractive business to us at the same time. What is more, we continuously strive to identify sectors where profitability is no longer satisfactory – and in such cases we reduce our shares and/or stop writing new business. In light of the softening market we are instead turning to special segments in which rate movements are less volatile, for example regionally based mutual insurers.
Our most important single line in Japan is natural catastrophe reinsurance, which we write predominantly on a non-proportional basis. In the year under review we obtained rate rises of up to 10% for both windstorm and earthquake covers. This increase was made possible primarily by the recalibration of simulation models following the severe hurricanes of 2005 in the USA. Against this backdrop we modestly expanded our windstorm and earthquake portfolio.
The product mix shifted markedly in favour of annuity insurance in 2006. State-subsidised "Riester" pensions, which are available in numerous variants – both the conventional form with the customary interest rate guarantees and in the form of unit-linked products –, are now playing the central role. Sales of risk-oriented covers for individual provision or surviving dependants also remain brisk.
In the international arena we have not seen any let-up in the pace of growth in personal lines year-on-year, hence establishing a promising platform for a reinsurer such as ourselves.
Re Australasia is responsible for business in the markets of Australia, New Zealand and Oceania. We have been market leader in this region for many years.
In Eastern Europe and Asia we generated profitable new business. The portfolio in Latin America also developed favourably, and here too we were able to renew all important contracts.
The Hannover Re Group employed 2,002 (1,989) staff as at 31 December 2006. The turnover ratio at Home Office in Hannover of 3.7% (3.2%) – measured in relation to the average workforce of 881 – was on a par with previous years. The rate of absenteeism fell to its lowest level since 2000 at just 2.5%.
As a large employer in the Hannover area, Hannover Re creates a high-calibre environment for its employees that facilitates a harmonious balance between work and leisure and makes the company one of Germany's best employers. Hannover Re offers ambitious and performanceminded people attractive jobs, combined with continuous skills enhancement, motivation and an entrepreneurial mindset on every level.
Management report risk report are systematically re-examined. Members of staff from various levels of the Group as a whole participate in the strategy review. In addition, within the framework of the annually held Global Management Forum – attended by all senior executives of the Hannover Re Group in Germany and abroad – strategic issues are explored and available courses of action discussed. In the year under review the risk management of the Hannover Re Group was one of the key topics under consideration.
• Definition of our investment guidelines on the basis of our asset/liability management approach.
In our understanding, this category encompasses the risk of losses occurring directly or indirectly because of inadequacy or failure of internal procedures, human error or system failure, organisational shortcomings and external events. The most significant operational risks include those of business interruption and system failure (e.g. due to a pandemic). As part of our examination of the consequences of a possible pandemic we have drawn up, inter alia, special contingency plans intended to minimise the effects of a disruption in our business.
In marine reinsurance the market environment in the current financial year is stable. The hard market of recent years in catastrophe-exposed business should continue. We expect some cedants to raise their retentions in an attempt to scale back their increasingly expensive reinsurance protection. In offshore and energy business we similarly anticipate further attractive market conditions. What is more, the modelling of natural catastrophe exposures is likely to become more clearly and firmly established in marine (re-)insurance business; compared to the property lines, its use has hitherto been relatively underdeveloped. All in all, we anticipate a slight contraction in gross premium volume here.
Since 1 January 2007 we have written structured covers in Ireland solely through Hannover Re Ireland. This company has taken over the business written by E+S Re Ireland and Hannover Re Dublin, our two other providers previously active in this field.
In Europe we anticipate significant stimuli from the United Kingdom (enhanced annuities) and France (bancassurance), while in the USA new opportunities will open up in the area of pri-
Overall, we expect 2007 to bring a further significant increase in our premium income and operating profit (EBIT), even allowing for the strong foundation that we already have in place following the above-average growth achieved in
Tax effects on income and expense directly recognised in equity 12,870 37,888 (18) – 7,559 58,299
Cash and cash equivalents at the end of the period 351,776 465,161
Hannover Life Re of Australasia Ltd., Sydney, Australia 77.9 AUD 165,095 23,715
Since May 1994 Hannover Re has participated in a number of special purpose entities for the securitisation of catastrophe risks by taking up certain capital market securities known as "disaster bonds" (or "CAT bonds"). Since Hannover Re does not exercise a controlling influence in any of these transactions either there is no consolidation requirement.
The profit or loss, assets and liabilities and net cash flows of the discontinued operation are presented in the following tables and broken down into their major components.
Major items in the statement of income of the discontinued operation
Fixed-income securities – available-for-sale 8,435,903 2,456,396 2,401,855 666,605 46,082 274,791 8,403 93,141 14,383,176
As at 31 December 2006 the portfolio contained 538 short call option contracts on the S&P 500 index. The underlying volume of these contracts amounted to EUR 57.1 million (EUR 58.2 million) and accounted for 48% (50%) of our holding of USD equities. The fair value of this position totalled EUR 3.2 million (EUR 1.2 million) as at 31 December 2006 and was recognised under the other liabilities. The change in the fair value of these contracts in 2006 amounted to EUR 0.1 million (EUR 0.6 million) and was recognised under unrealised gains in the net investment income. In total, gains of EUR 1.2 million and losses of EUR 4.1 million were realised from option contracts taken out in 2006 on the S&P 500 index.
Net book value at 31 December of the previous year 5,779,169 94,089 5,685,080 5,277,529 101,634 5,175,895
The PVFP, the period of amortisation of which varies between 5.5 and 15 years, is recognised under other assets. For further information please refer to our explanatory notes on intangible assets in Section 3.2 "Summary of major accounting policies."
In addition, facilities exist with various financial institutions in the form of letters of credit, including two syndicated guarantee facilities each in the amount of USD 2.0 billion from 2005 and 2006. 50% of the first of these lines matures in December 2009 and the other 50% in December 2011, while the second line matures in December 2012. For further explanation please see Section 9.2 "Contingent liabilities."
Commissions and brokerage, change in deferred acquisition costs (net) 1,932,565 1,876,720
HDI Haftpflichtverband der Deutschen Industrie V.a.G. (HDI) indirectly holds a majority interest in Hannover Re through the subsidiaries Talanx AG, HDI Verwaltungs-Service AG and Zweite HDI Beteiligungsgesellschaft mbH, all based in Hannover.
The underwriting deficit booked by HDI Industrie Versicherung AG resulted from a change in the processing of reported and estimated reserve levels compared to the previous year.
Exchange differences from the translation of monetary assets and liabilities are recognised directly in the statement of income. Exceptions involve financial instruments that are defined as qualified cash flow hedges for non-monetary balance sheet items.
Total fees of EUR 7.3 million (EUR 7.6 million) were incurred for accountants' services throughout the Hannover Re Group worldwide in the year under review. They were principally comprised of auditing and tax consultancy fees.
In November 2006 Hannover Re received a licence from the China Insurance Regulatory Commission (CIRC) to transact life reinsurance business in the People's Republic of China. On 7 February 2007 we reported that Hannover Re's permanent establishment in Shanghai, which is currently in the process of formation, is expected to commence business activities by the end of 2007.
REPORT OF THE SUPERVISORY BOARD of Hannover Re for the Hannover Re Group
Amount of remuneration received by the Executive Board The total remuneration received by the Executive Board of Hannover Re is calculated from the sum of all compensation accruing in cash as well as in pecuniary advantages from non-cash compensation. It can be broken down as follows in the year under review:
The Annual General Meeting of Hannover Re held on 12 May 2006 resolved by a voting majority of 85.5 % to avail itself of the option contained in the Act on the Disclosure of Management Remuneration (VorstOG) not to specify the remuneration of the Executive Board on an individualised basis by name.
Dr. Klaus Sturany Member of the – Supervisory Board – Standing Committee 17.2
Members of the Supervisory Board and Executive Board of Hannover Re as well as their spouses or registered partners and first-degree relatives hold less than 1.0% of the issued shares. As at 31 December 2006 the total holding amounted to 0.024 % of the issued shares, i.e. 29,110 shares.