"We believe HDI's expressed intention to raise liquidity in Hannover Re from 25% to 50% will ease liquidity concerns that have previously deterred investors."
The developing markets again provided substantial impetus for global economic growth. The brisk pace of economic development in Asia was sustained. In Latin America, too, the national economies recovered in the year under review following a sluggish performance in 1999.
The United Kingdom experienced a stable business climate and good rates of economic growth in 2000. The insurance and reinsurance markets have seen an unparalleled wave of consolidation in recent years, causing a drop in the number of insurers and Lloyd's Syndicates. This went hand-in-hand with fierce competition for market shares and technical losses, although the latter were offset by healthy investment income. Initial positive indications were reinforced in the course of 2000, prompting insurers to take drastic action to rehabilitate their portfolios. Large multi-line insurers, for example, reviewed their business strategies and in some cases withdrew from volatile industrial business.
The vast majority of Irish insurance companies belong to large international groups with only a limited need for reinsurance. Our rather modest Irish portfolio therefore remained virtually unchanged, and results were again hardly adequate.
Motor insurance continues to be the most important line of business for the insurance industry in Latin America. One after another, al-
Unlike the dynamic processes at work in the insurance sector, the tone of the reinsurance market remained stable, and only in isolated cases did considerations of market share and prestige give rise to unjustifiable price reductions.
Supply and demand for natural catastrophe covers continue to be the dominating feature of the Japanese insurance market. Whereas in-
surers tended to extend the scope of cover for earthquake risks due to the competitive climate, reinsurers only made capacity available at improved terms and conditions, therefore causing a shortage in the market. Our company similarly reduced its participation in various proportional treaties in this sector, preferring instead nonproportional concepts, and initially our premium volume therefore declined slightly. Windstorm risks experienced sharp rate rises due to developments around the world, and in part as a consequence of the major storm event in 1999 (typhoon "Bart").
The total business volume – with regard to both the insurance and reinsurance sectors – is still very low.
The insurance markets in the ASEAN countries were slow to recover from the latest financial crisis and lagged somewhat behind the general economic upswing. Competition for market shares remained intense and overshadowed initial signs of improved conditions for reinsurers. The rate level thus continued to decline, and the worldwide turnaround has yet to materialise in this region. Positive exceptions were Thailand and Singapore, where it was at least possible to halt the decline in premiums.
In Australia, despite initial uncertainties associated with the tax reform implemented in July 2000, the positive economic growth of recent years on a scale unparalleled in the country 's history was sustained. In addition to several company mergers – most notably in the financial and insurance sectors – the business climate was characterised by the strong Australian dollar and rising interest rates. Our point of departure in the year under review was therefore determined by the progressive concentration in the insurance market and the continuing excessively low level of premiums. The disappearance from the market of a number of domestic reinsurers had few positive implications for the competitive environment, since international players forced their way into the market and competition therefore remained fierce.
In view of the special features of these lines, we transact marine and aviation reinsurance in a central department with worldwide responsibility, thereby concentrating our expertise and services in a single competence centre.
The bulk of our aviation and space business similarly derives from the London Market and the USA. By purchasing the portfolio of the Swedish company Atlantica we were able to further expand our market share in Scandinavian general aviation business. Our underwriting policy also concentrates on niche markets as well as non-proportional and facultative business. Thanks to this selective approach, the inadequate conditions prevailing in the primary insurance sector had only a very limited influence on our result, which was satisfactory overall.
Extremely fierce competition continued to be a hallmark of the credit and surety lines in the insurance markets. The very high level of concentration on global groups – which hold around 70% of the world market – and the progressive internationalisation of national markets continued unabated. In this climate reinsurance conditions came under further pressure, especially with respect to the globally operating major cedent groups. This development was based primarily on the very modest loss ratios in Europe.
A long-term assessment of the value added should take into account not only the US GAAP result but also the development of the net embedded value of the portfolio. Reflecting the present value of our portfolio of in-force contracts, the present value of future profits rose by 43% from EUR 609 million to EUR 874 million. Of this present value of future profits, an amount of EUR 597 million (EUR 374 million) was already capitalised in the US GAAP balance sheet as at 31 December 2000 as acquisition costs or the present value of future profits (PVFP).
Home office in Hannover has assumed a number of general tasks within this network. It draws up the planning on a centralised basis and assumes responsibility for controlling, the management of external retrocessions and capacity refinancing via the capital markets.
As the most heavily populated country in the world, we devote special attention to China. Through the use of our worldwide network we offer Chinese life insurers extensive technical support as well as specially tailored training measures for their staff.
The result posted by Clarendon reflects a difficult year. Some business relationships could not be continued because of the losses they produced. On the other hand, the core business that was not cancelled recorded the expected profitable performance. Controlled expansion of these programs was a factor in this success, as was the well-balanced and diversified portfolio structure. No single line of business accounts for more than 20% of the total premium volume.
Accounting for around two-thirds of total premium volume in this segment, North America – and in particular the USA – remains by far our most important market. We have concentrated here primarily on products that enable our clients to realise profits, which in economic terms have already been achieved, more quickly. Thanks to our balance sheet capacities, we are a sought-after contact especially among major US insurers and reinsurers. Furthermore, US clients are frequently obliged by supervisory regulations to require bank guarantees from their reinsurers. Since such capacities are available to us at reasonable terms on the basis of our excellent rating, we are therefore able to satisfy these requirements.
In the coming years we anticipate significant growth in our German portfolio, both as regards the number of treaties and the premium volume.
Although we substantially expanded our reinsurance portfolio, our self-managed assets (i.e. excluding funds held by ceding companies) grew only slightly by 3.5% to EUR 10.2 billion (EUR 9.8 billion). In life and health reinsurance business, treaties frequently make provision for the benefit reserves for which the reinsurer is responsible to be deposited with the ceding company. The high premium growth in this segment consequently does not lead to corresponding additions to our self-managed assets. The situation is similar in program business due to the low retention rate and in financial reinsurance, where the contracting parties often dispense with a real exchange of assets. Although property and casualty reinsurance generated very strong growth in the year under review, this has not as yet been significantly reflected in increases in the investment portfolio because the natural catastrophes which occurred in the 1999 calendar year – especially the winter storms – caused considerable cash outflows in the 2000 calendar year in the form of claims payments.
Despite the mere slight increase in selfmanaged investments, ordinary investment income surged by 28% to EUR 799 million. This increase was in large part attributable to significantly higher deposit interest credited – especially in financial reinsurance – as well as to higher interest credited on the benefit reserves in life reinsurance.
Global risks may arise as a result of changes in the legal framework (including changes in the general regulatory or tax situation), through social and demographic trends or developments in the insurance industry and also as a consequence of environmental and climate factors. We counter these risks by constantly monitoring claims trends, analysing claims and major losses and applying precise models in order to control results. It is hardly possible to reduce – let alone avoid – such risks. Risk management measures must therefore be geared to the early identifica-
proportion of equities), the quality of the investments (e.g. issuer's credit rating), the limits per issuer, etc. Not only that, the entire portfolio as well as the associated profit and loss items pending settlement are evaluated on a daily basis.
Cumulative foreign currency conversion adjustment, 5.10 net of deferred taxes (8 800) 19 137
Commission and brokerage and other technical expenses 625 844 401 296 424 602 391 054
A complete list of shares in affiliated companies and participations has been drawn up separately and deposited with the Commercial Register (Hannover HRB 6778).
Real estate is divided into real estate for own use and third-party use. Only the real estate in the portfolio which is used to generate income is shown under the investments.
Effects of currency conversion at exchange rates on 31 December of year under review (net) (125 708) 52 235
Actual provision for income taxes (129 025) 80 267 5.6 Staff and expenditures on personnel
The basic earnings per share and the fully diluted earnings per share shown in the statement of income are calculated as follows on the basis of the annual result: Neither in the year under review nor in the previous reporting period was there any extraordinary comprehensive income which should have been included in the calculation.
Present value of future profits on acquired life reinsurance portfolios 19 409 23 253
Emoluments of EUR 206 thousand were received by the Supervisory Board and EUR 3,353 thousand by the Executive Board in the year under review. The emoluments of former executive board members and their surviving dependants amounted to EUR 598 thousand, and a liability of EUR 7,519 thousand was shown as at year-end.
With effect from 1 January 2000 Hannover Re set up a virtual stock option plan. Members of the Executive Board as well as the two further levels of management may choose to waive variable remuneration components and acquire stock options. The number of such options granted each year is based upon the diluted earnings per share under US GAAP. An additional performance criterion is an industry benchmark based upon the (unweighted) Reactions' reinsurance index.
In order to strengthen the available capital of the Hannover Re Group, Hannover Re has issued subordinated loans. For this purpose it established Hannover Finance (Luxembourg) S.A. on 8 February 2001 as a wholly-owned subsidiary with common stock of EUR 200 thousand. At the beginning of March 2001 this company placed a subordinated loan on the European capital market. The issue, which has a term of 30 years and a call option for the issuer after 10 years, has a total volume of EUR 350 million and is secured by Hannover Re. Hannover Re received a loan of EUR 100 million from Hannover Finance.
Hannover Life Reassurance (Ireland) Ltd. No. 2 Custom House Plaza, IFSC Dublin 1
Hannover Reinsurance Mauritius Ltd. Suite 335, Barkly Wharf Le Caudan Waterfront Port Louis
Fair value: Price at which a financial instrument would be freely traded between two parties.
Proportional reinsurance: reinsurance treaties on the basis of which shares in a risk or ➞ portfolio are reinsured under the prevailing original conditions. ➞ Premiums and losses are shared proportionately on a pro-rata basis. This is in contrast to ➞ non-proportional reinsurance.