As I reported at the outset, our investment income in the year under review was overshadowed by the upheavals on international capital markets. We were able to sidestep the collapse on equity markets only with limited success. Particularly in the second half of the year, substantially lower share prices necessitated significant write-downs – although losses on fixed-income securities remained within manageable bounds. This was due not least to the broad diversification and high quality of the portfolio. We closed the year under review with a marginally positive return on investment.
Non-Life Treaty Reinsurance Germany, Austria, Switzerland and Italy; Credit, Surety & Political Risk worldwide; Group Legal Services; Compliance; Run Off Solutions
While the Dow Jones ended 2008 down by altogether 34%, the Dax closed the year under review some 40% lower at 4,810 points. The MDax gave back as much as 43% of its value to stand at 5,602 points at year-end.
Last but not least, we remain keenly interested in the Asian growth markets. Hannover Re commenced business operations in China and South Korea in the year under review through its newly established branches in Shanghai and Seoul. In India, too, we have put in place a platform that will enable us to respond rapidly to market opportunities as they present themselves: in June Hannover Re concluded a cooperation agreement with the leading Indian reinsurer GIC Re regarding the joint development of a profitable portfolio with the promise of further growth. These plans are supported by the service company that we established in Mumbai.
We were satisfied on balance with the rate level in general US property business. Property catastrophe business, on the other hand, saw sharp rate cuts following the absence of major claims in 2007. In the casualty sector prices continued to soften on the reinsurance side, prompting us to further scale back our involvement. Our total premium volume in North America contracted as expected. In the second half of the year, however, it was already possible to secure rate increases in some segments as a consequence of the financial market crisis.
Owing to the restraining effects of exchange rate movements, primarily during the first half of the year, the gross premium volume booked in our non-life reinsurance business group in the year under review contracted by 3.9% to EUR 5.0 billion (EUR 5.2 billion). The withdrawal from specialty business was another factor that curbed premium income. At constant exchange rates, especially against the US dollar, growth would have come in at 1.3%. The level of retained premium climbed from 85.2% to 88.9% as a consequence of appreciable savings on our own protection covers and reduced proportional cessions. Net premium earned declined by 4.9% to EUR 4.3 billion (EUR 4.5 billion).
slightly higher than the expected level of 10%, despite the catastrophe losses indicated above. The combined ratio stood at 95.4% (99.7%) in the year under review.
We were thoroughly satisfied with the development of the credit and surety lines in Europe. Business here is traditionally geared to continuity, and loyalty consider-
Our expertise in the Russian market was also honoured by the award of two distinctions as best reinsurance company in the year under review. Hannover Re gained plus points for its undogmatic and quick decision-making as well as for its customer-oriented products.
We were satisfied with the development of business and the underwriting result in South Africa in the year under review: despite poorer investment income as a consequence of the crisis on international financial markets and a higher claims frequency, we generated an acceptable result.
The United Kingdom currently accounts for 27.3% (30.1%) of our premium, followed by the United States – where most notably we consolidated our position in the areas of private health insurance covers for senior citizens and block assumption transactions – with 21.6% (20.8%). Germany and Australia ranked third and fourth with shares of 12.2% (14.0%) and 9.6% (11.6%) respectively. Further key markets are Ireland, France, South Africa, Barbados, Italy, Luxembourg and Asia, with the latter market in particular recording above-average growth of almost 18%. Business in Latin America similarly generated strong growth rates.
For many years we have devoted special attention to the UK market, the most significant European life reinsurance market. We participate not only in traditional risk-oriented business but also in the area of enhanced annuities with a reduced payment period.
The contraction in the premium volume to EUR 502.7 million (EUR 586.8 million) in the year under review was crucially driven by the strength of the euro against our two main currencies – the pound sterling and US dollar. The technical result, especially from UK business, did not quite pick up on the previous year's performance. The
Reinsurance business in these Mediterranean nations is written from Hannover Home Office. Our offices in Milan and Madrid play a vital role in marketing, acquisition and service activities and primarily serve bancassurance clients in their region.
We have successfully taken the first steps towards tapping into the Indian market by concluding a multi-year cooperation agreement with the leading local reinsurer GIC Re. In a parallel move, we established our own service company in Mumbai to support our customer relationships in life and facultative non-life business. This company started doing business on 1 December 2008.
Stock markets around the world were plunged into an unparalleled downward slide in the year under review. The German stock index (Dax) had fallen by around 40% by the end of the year. The EuroStoxx 50 and S&P 500 experienced slumps of similar dimensions. Although equity markets rallied somewhat from their lows of October and November, the Dax stood at just 4,810 points at the end of December – compared to a level in excess of 8,000 at the start of the year.
The crash on the US real estate sector snowballed into a crisis on global credit and financial markets as the year progressed. After our investments had been only marginally impacted by subprime losses, the value adjustments prompted by loan defaults and write-downs on financial securities also remained within bounds. It was thanks to our broad diversification and tight issuer limits that losses on other individual instruments were within the singledigit million euro range. What is more, not only is the counterparty risk limited, the portfolio is also diversified by sectors and product types. This was another reason why write-downs on fixed-income securities were restricted to altogether EUR 96.9 million (EUR 26.6 million).
System of value-based management: Performance Excellence (PE) combines the strategic and operational levels
When seeking to identify these value drivers, it is first necessary to break the IVC down into individual decision fields. Even in the case of performance measurements, e.g. in connection with Management by Objectives, this approach makes it possible to take as a basis only those IVC components whose value drivers the manager in question can influence. Thus, for example, an underwriter at Hannover Home Office will only be accountable for the "Underwriting" decision field, whereas the manager of a subsidiary will also bear responsibility for all other decision fields. With regard to the operational units the IVC consists of six levels; its degree of detail varies according to Home Office and our foreign companies as well as between non-life and life/health reinsurance: 1. IVC from gross underwriting (current business)
<20 ye ars 20–29 ye ars 30–39 ye ars 40–49 ye ars 50–59 ye ars >–6 0 y ea rs
Successful implementation at Hannover Home Office prompted initial inquiries in early 2008 from our permanent establishments abroad with regard to the possibilities for deploying management feedback on a local basis. Once the necessary organisational adjustments had been made, the first run at an office abroad was completed before the end of the year under review.
• Near complete reduction of unhedged holdings of listed equities in October 2008.
The countries of Central and Eastern Europe are strategic growth markets for our company, insofar as we continue to be able to write profitable business going forward. At the time of the 2009 treaty renewals, as expected, we observed an appreciable surge in demand among insurers for high-quality reinsurance protection. As a result, we were able to acquire new clients and enlarge our shares in existing business, especially in Russia and other successor states of the former Soviet Union. Our premium volume was substantially expanded. The profitability of the written portfolio continues to be more than satisfactory.
The retakaful segment continues to develop very well: here, too, the financial market crisis has positively impacted demand for Sharia-compliant products. Both our subsidiary in Bahrain and our branch in Malaysia enjoyed appreciable increases in premium income.
Income and expense directly recognised in equity (22,526) (17,285) (17,182) (1,632) (21,821) (80,446)
Change in cash and cash equivalents according to cash flow statement 94,803 (16,354)
This grouping into classes was not, however, solely determinative for the type and structure of each disclosure in the notes. Rather, guided by the underlying business model of reinsurance, the disclosures were made on the basis of the facts and circumstances existing in the financial year and in light of the principle of materiality.
Hannover America Private Equity Partners II GmbH & Co. KG, Hannover/Germany 4) 95.3 EUR 139,331 EUR 666
Under a transaction designated "K5" Hannover Re uses the capital market to securitise reinsurance risks. The transaction was increased to USD 540.0 million in January 2008 and had a volume of EUR 386.3 million (EUR 360.2 million) as at the balance sheet date. The securitisation was placed with institutional investors in North America, Europe and Asia. The portfolio assembled for the securitisation consists of non-proportional reinsurance treaties in the natural catastrophe, aviation and marine lines, including offshore business. Kaith Re Ltd., a special purpose entity domiciled in Bermuda, is used for the transaction. The planned term of the transaction runs until 31 December 2008. In accordance with SIC 12 Kaith Re Ltd. is included in the consolidated financial statement.
Notes 5.2 Disposals and discontinued operations 5. Major acquisitions, new formations and other corporate changes 5.1 Acquisitions and new formations
On 19 May 2008 the Shanghai-based Hannover Rückversicherung AG Shanghai Branch commenced business operations as a permanent establishment of Hannover Re. The business object of the branch is the writing of life and health reinsurance business.
The profit or loss and net cash flows of the discontinued operations for the comparative period of the previous year are presented in the following tables and broken down into their major components.
Listed equities (direct holdings and investment funds) At most 17.5 0.1 10.1
The carrying amount of the loans and receivables is arrived at from the cost or amortised cost plus accrued interest.
We additionally use an internal rating method to back up this analysis. Our internal rating system is based on the corresponding credit ratings of securities assigned by the agencies Standard & Poor's and Moody's and in each case reflects the lowest of the available ratings.
Equity securities – available-for-sale 1,916 1,266 15,393 2,855 – 602 557 – 22,589
Fixed-income securities – at fair value through profit or loss – – 39,821 – – 118,919 – – 158,740
The "Merlin" transaction also gives rise to a derivative, the fair value of which as at the balance sheet date was EUR 29.6 million (EUR 5.8 million) and which we recognised under other financial assets at fair value through profit or loss. Measurement of this derivative resulted in an increase in investment income of EUR 23.8 million (EUR 5.8 million) in the year under review. We would refer the reader to the explanatory remarks in Section 4 "Consolidated companies and consolidation principles" regarding the securitisation of reinsurance risks.
Balance at 1 January of the year under review 1,706,220 1,885,668
Reserve at 1 January of the year under review 5,660,078 251,970 5,408,108 5,785,018 443,774 5,341,244
Net book value at 31 December of the year under review 5,913,075 159,151 5,753,924 6,143,460 255,076 5,888,384
In addition, conditional capital of up to EUR 60,299 thousand is available. It can be used to grant shares to holders of convertible bonds and bonds with warrants as well as to holders of participating bonds with conversion rights and warrants and has a time limit of 11 May 2011.
As at the balance sheet date the item included EUR 7.9 million (EUR 0.1 million) for self-provided software and EUR 39.9 million (EUR 11.7 million) for purchased software. Scheduled depreciation is taken over useful lives of three to ten years.
Changes in consolidated group Additions Utilisation Release Currency translation at 31 December Balance at
Period 10 years 10 years 10 years 10 years 10 years 10 years
The Balance Sheet Committee considered inter alia the consolidated financial statement drawn up in accordance with IFRS and the individual financial statement of the parent company Hannover Re drawn up in accordance with the German Commercial Code (HGB) and discussed with the auditors the reports submitted by the independent auditor on these financial statements. As in the previous year, an expert opinion on the adequacy of the loss reserves in non-life reinsurance, a review of the accumulated prefinancing volume in life reinsurance including a comparison of the expected return flows with the repayments actually made as well as the risk report pursuant to the Act on Control and Transparency (KonTraG), the report on compliance with Corporate Governance principles and reports on the major subsidiaries were received and discussed. In addition, the Committee examined the investment structure and investment income – including stress tests with regard to the investments and their implications for net income and the equity base – and defined the audit concentrations for the 2008 financial year as well as the auditors' fee. The criteria used for equity allocation within the Group, a comparison of target returns with the actual returns delivered by the individual business groups as well as the equity resources and rating implications constituted further key areas of deliberation.
The Supervisory Board once again devoted considerable attention to the issue of Corporate Governance and closely examined, inter alia, the company's business principles, which were thoroughly revised against the backdrop of various changes in legislation and the amended version of the German Corporate Gover?nance Code (DCGK). A good deal of time was also spent on the debate surrounding the recommendations of the German Corporate Governance Code Government Commission as amended 6 June 2008 published by the Federal Ministry of Justice. In particular, the redefined Code Items 4.2.3 Para. 4 (cap on severance payments in management board contracts) and 4.2.2 Para.1 (responsibility of the full supervisory board for the system of remuneration paid to the management board) were discussed at length. Despite the high importance that the Supervisory Board attaches to the standards of good and responsible enterprise management defined in the German Corporate Gover?nance Code, the Supervisory Board decided not to comply with the recommendation concerning a cap on severance payments in management board contracts. The justification in this respect is provided in the Declaration of Conformity pursuant to § 161 German Stock Corporation Act regarding compliance with the German Corporate Governance Code, which is reproduced in this Annual Report in the Corporate Governance report together with further information on this topic. The reader is further referred to the company's publications in the Internet in relation to this topic.
As at 31 December 2008 the members of the Executive Board had at their disposal a total of 484,232 (319,444) granted, but not yet exercised stock appreciation rights with a fair value of EUR 1.4 million (EUR 2.2 million).
Bermuda Hannover Life Re (Bermuda) Ltd. Unit 2, 45 Ballast Point Road St. David's DD 02
India Hannover Re Consulting Services India Private Limited Executive Centre Level 2, Kalpataru Synergy Opposite Grand Hyatt Santacruz (East) Mumbai 400055
European embedded value (EEV): present value of shareholders' interests in the earnings distributable from assets allocated to the covered business after sufficient allowance for the aggregate risks in the covered business.
Financial Solutions: targeted provision of financial support for primary insurers through reinsurance arrangements under which the reinsurer participates in the original costs of an insurance portfolio and receives as a consideration a share of the future profits of the said portfolio. This approach is used primarily for long-term products in personal lines, such as life, annuity and personal accident insurance.
Priority: direct insurer's loss amount stipulated under ➞ non-proportional reinsurance treaties; if this amount is exceeded, the reinsurer becomes liable to pay. The priority may refer to an individual loss, an ➞ accumulation loss or the total of all annual losses.
Structured product: reinsurance with limited potential for profits and losses; the primary objective is to strive for risk equalisation over time and to stabilise the ➞ cedant's balance sheet.
We are pleased to provide you also with the individual Annual Report of Hannover Rückversicherung AG