Investments (incl. funds held by ceding companies) 28,538.1 +3.7% 27,526.4 25,167.5 22,031.1 20,305.8
Book value per share in EUR 24.03 +11.4% 21.57 20.93 19.94 17.90
Share price at year-end in EUR 35.08 +17.2% 29.93 28.75 27.72 24.30
Combined ratio (property and casualty reinsurance) 98.4% 112.8% 97.2% 96.0% 96.3%
1) 2002–2003 on the basis of US GAAP 2) Natural catastrophes and other major losses in excess of EUR 5 million gross for the Hannover Re Group's share 3) Operating profit (EBIT)/net premium earned
Successful renewal season The renewal negotiations as at 1 January 2006 testify to the sustained favourable market conditions in property and casualty reinsurance: thanks to the reduction of its peak exposures Hannover Re enjoys a more "weatherproof" portfolio and is still able to maintain a stable premium volume in the renewals.
Life portfolio monetised Through a securitisation of life insurance risks Hannover Re monetises an embedded value of EUR 100 million and thereby converts future earnings into current liquidity.
Reorganisation of US primary insurance business Hannover Re transfers US specialty business to the newly established Praetorian Financial Group, Inc. The Clarendon Insurance Group, Inc. which had previously handled these activities, will henceforth concentrate on the management of terminated programs as well as the remaining commodity business. By establishing Praetorian Hannover Re opens up new avenues for profiting from the above-average valuation ratios for such specialised insurers.
Adoption of European Embedded Value Hannover Re reports the European Embedded Value (EEV), i.e. the net value of its in-force life and health (re-) insurance portfolio, for the first time.
Catastrophe bond placed for European windstorm risks Hannover Re successfully transfers one of its peak exposures to the capital market: its first traditional catastrophe bond "Eurus" covers severe windstorm events in Europe and further diversifies the company's risk management.
Excellent ratings confirmed Both Standard & Poor's (AA- "Very strong") and A.M. Best (A "Excellent") confirm their ratings for Hannover Re. The two agencies highlight the company's convincing strategy, adequate capitalisation and superb market position.
Business licence in China Having obtained a licence to transact life and health reinsurance in China at the end of the year, Hannover Re is optimally placed in this rapidly growing market. Establishing a branch office in Shanghai ensures that the company can look to vigorous organic growth and a promising portfolio going forward.
Hannover ReTakaful writes Sharia-compliant reinsurance By setting up a dedicated subsidiary, Hannover Re is the first of the large western reinsurance groups to respond to the emerging Islamic insurance market. Hannover ReTakaful transacts worldwide reinsurance business in accordance with Islamic law from its base in Bahrain.
After a brief "hiccup" in the previous year – attributable to the extraordinary hurricane losses – I am pleased to be able to report to you on another successful financial year. Not only did we achieve our goals, we surpassed them: the Group net income is the highest ever recorded in the history of your company.
With this in mind, our largest and most important business group, property and casualty reinsurance, enjoyed highly favourable market conditions overall. Virtually all lines offered us attractive opportunities to write profitable business. On balance, rate increases were achieved for the seventh consecutive time. This was due, on the one hand, to a contraction in reinsurance capacity and, on the other hand, to the updating of pricing and rating models to include components that had previously been inadequately modelled – or indeed neglected altogether. Once external providers had similarly adjusted their models in early summer, prices for catastrophe covers climbed again as at 1 July – the second-most important renewal date for US business. Increases of up to 100 percent and even more were obtained under programmes that had been impacted by the severe hurricanes of 2005. In view of such favourable conditions – combined with the fact that the year under review was all but spared catastrophe losses – we were able to generate a very good result for the property and casualty reinsurance business group.
I would nevertheless like to reassure you, our valued shareholders, that irrespective of the latest price increases and the absence of costly natural disasters we do not rely solely on a favourable market environment. Your company has taken steps across a broad front to ensure that in the future exceptional major losses cannot place an excessive strain on the result: we have, for example, considerably scaled back our peak exposures while at the same time maintaining a stable premium volume, thereby improving the robustness of our portfolio's risk profile. What is more, alongside our use of traditional retrocessions – i.e. conventional reinsurance of our peak exposures – we are continuing
Business progressed as anticipated in financial reinsurance: having got off to a good start in the first quarter we further enlarged our portfolio, most notably in Eastern Europe and Japan. Although early indications of a revival in demand for structured products emerged in the course of the year, gross premium fell short of the comparative figure for the previous year. This is surely due in part to the fact that some clients are still uncertain about the evaluation of specific contract structures from the standpoint of commercial law and in the eyes of regulators – doubts that are reflected in resistance among potential buyers. I am nevertheless convinced that demand for structured products will continue to stabilise.
Developments in our specialty insurance business group were most tumultuous: at the outset of the year under review we had transferred the entire portfolio of US specialty insurance to the newly established Praetorian Financial Group, Inc. with a view to optimising our structures. The Clarendon Insurance Group, Inc., which had previously been responsible for this business, has since concentrated on the management of terminated programs and the remaining commodity business. That this decision was the right one was already clearly demonstrated in December, when we reached agreement with the leading Australian insurer on the sale of Praetorian. We shall use the capital freed up by this transaction to expand property/casualty and life/health reinsurance. As soon as the sale has been completed – approval from the competent authorities is expected in the second quarter of 2007 – we shall then concentrate exclusively on our core business of reinsurance.
It is our stated dividend policy to distribute 35 to 40 percent of net income; in view of our highly gratifying business performance, we shall join with the Supervisory Board in proposing to the Annual General Meeting that a dividend of EUR 1.60 per share be paid.
Will the current year be able to keep pace with the successful 2006 financial year? Although Europe, and especially Germany and the United Kingdom, has already suffered a severe winter storm in January – which also produced a significant burden of losses for our account –, I believe that basic conditions are favourable. I was thoroughly satisfied with the outcome of the treaty renewals as at 1 January 2007, the date when roughly two-thirds of our treaties in property and casualty reinsurance were renegotiated. With a few exceptions the rate level was largely stable; in subsegments where rates did soften somewhat, they are still generally commensurate with the underwriting risks – and in those areas where this was not the case, we relinquished the business. As anticipated, we obtained further rate increases in property catastrophe reinsurance in the USA. Overall, the market has ceilinged out on a high level.
In life and health reinsurance we have positioned ourselves in interesting and profitably expanding market niches in recent years, thereby enabling us to generate solid growth on an organic basis. Your company has thus assured itself of a strong platform that promises a very good result.
What other consequences will result from the sale of Praetorian? From the current financial year onwards we shall generate a significantly lower premium volume in our total business. Yet this in no way concerns me: based on our improved capital position, we can write more reinsurance business – including highly attractive catastrophe risks as well as life/health reinsurance – and/or increase the level of retained premiums. Ultimately, the decisive factor is this: the positive effect on our result should be at least as high as the profit lost through the sale of Praetorian.
In view of present market conditions in the individual business groups, I expect the current financial year to develop very favourably: for 2007 we are again looking to generate a return on equity of at least 15 percent. As you are aware, this profit forecast is always subject to the proviso that the burden of major losses comes in within the multi-year average and that there are no downturns on the capital market.
Wolf-Dieter Baumgartl 1) 2) Chairman of the Supervisory Board Berg Talanx AG Chairman HDI Haftpflichtverband der
Dr. Immo Querner Member of the Executive Board Ehlershausen Talanx AG (since 27 June 2006) HDI Haftpflichtverband der
Bodo Uebber Member of the Executive Board Stuttgart DaimlerChrysler AG (until 12 May 2006)
1) Member of the Standing Committee 2) Member of the Balance Sheet Committee 3) Staff representative are contained in the individual report of Hannover Rückversicherung AG.
Property and Casualty Treaty Reinsurance Arab, European Romance and Latin American countries,
… and for (re-)insurance stocks too market success by any of the aforementioned standard indices – but rather by the share price movements and dividends of all listed reinsurers worldwide, as reflected in the weighted ABN
At the end of the three-year comparative period the Hannover Re share posted a gain of 35.2%, thus leaving the ABN Amro Rothschild Global Reinsurance Index (22.5%) clearly trailing by almost 13 percentage points on the moving average.
Investor Relations activities again stepped up in the year under review
The performance of our share: supported by our Investor Relations activities
In the twelve years since our going public we have succeeded in significantly boosting the value and appeal of our share. The company's market capitalisation has been more than quadrupled since our stock market flotation at the end of 1994. This is equivalent to an average return of over 12% a year. Given a price of EUR 35.08 as at 29 December 2006, the market capitalisation now stands at EUR 4,230.5 million.
In addition to numerous entrepreneurial activities, a broad range of Investor Relations measures also positively shaped the perception of our company on capital markets. In today's business world it is absolutely essential to present strategic corporate objectives in a transparent and understandable manner for all capital market players. To this end, we use the complete spectrum of established and innovative Investor Relations measures to deliver timely, regular and comprehensive information about the development of Hannover Re's business and its potential opportunities for the future.
We also maintain an extensive Investor Relations website which offers constant access to all the latest key information on the company. New and interesting insights into Hannover Re and its share are presented in our "IR Online Magazine ". A special brochure on Hannover Re's "Equity Story" delivers a focused summary of the company's strategy and potentials from a shareholder 's perspective. Furthermore, Hannover Re recently responded to the steadily growing importance of sustainability in investment decisions with a detailed area of its website devoted to Corporate Social Responsibility.
In 2006 Hannover Re's Investor Relations website was rated for the third time in succession as one of the ten best among all German listed enterprises. For the third time running we placed first in the MDax, and for the third time in a row we also emerged with top honours in the insurance industry as a whole. In the overall rankings we came in three places higher than in the previous year at number six.
In the course of the 2006 stock market year our company was analysed and evaluated by around 40 international financial analysts from all leading securities firms. According to Bloomberg and Reuters, altogether 134 opinions were handed down in the observation period. The majority of opinions were favourable for our company: 73 recommended the Hannover Re share as "buy/overweight", 52 said "hold" and only nine urged "underweight/sell". On a scale of five
The two syndicated guarantees extended to Hannover Re in the amount of USD 2 billion each as well as a syndicated line of credit in the amount of EUR 500 million contain standard market change-of-control clauses that entitle the participating banks to require early repayment if Talanx AG loses its majority interest or drops below the threshold of a 25 percent participation or if a third party acquires the majority interest in Hannover Rückversicherung AG.
Shareholding structure Talanx AG: 50.2% as at 31 December 2006: Free float: 49.8%
Annual General Meeting: 3 May 2007, 10.30 a.m. Hannover Congress Centrum Kuppelsaal Theodor-Heuss-Platz 1–3 30175 Hannover, Germany
Optimal diversification: • We seek to generate maximum profits with our available equity by • making flexible use of capital in those business groups, regions and lines that offer the highest returns.
• Minimum return: risk-free interest rate plus the cost of capital 7. Organisation and infrastructure • Organisation - geared to business processes - is effective and efficient - safeguards know-how and cost leadership • Optimal support for business processes through information and communication systems
• 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 • Constant enhancement of skills and motivation • Fostering of entrepreneurial thinking on all levels • Delegation of tasks, authorities and responsibility wherever possible • Management by objectives (MbO) • Performance-related compensation 9. Enterprise and risk management • Intrinsic Value Creation (IVC) is our central management tool • Comprehensive risk management safeguards continued business survival 10. Performance Excellence • Holistic management system for execution of our strategy
For the purpose of ensuring that we can reliably achieve our strategic objectives, we have broken them down to the level of operating units with profit responsibility (profit centres). In the context of our management reporting we verify twice a year the extent to which attainment of these objectives is supported by the growth in real operating value creation and its value drivers.
We use the following formula to calculate the IVC: IVC = adjusted operating profit (EBIT) – (capital allocated x weighted cost of capital)
Life/Health reinsurance 1) Gross premium growth 12–15% 15.2% 11.4% (4.4%) (7.9%) 4.2%
Growth in earnings per share >– 10% 942.7% (82.4%) (28.4%) 17.8% 2,400.0%
Profit growth targets 1) Continuing operations only 2) Operating profit (EBIT)/net premium earned 3) 750 basis points above the risk-free interest rate (as at 31 December 2006 = 4.03% = current 5-year average) 4) xRoCA = Excess return on capital allocated 5) In 2003 and 2004 the present value components are based on the value of in-force business, since 2005 they have been based on the European Embedded Value (EEV)
Our business groups generated the following value contributions and excess returns: The IVC for 2006 will be announced at the Investors' Day on 29 June 2007 following submission of the required EEV information. The data will also be published on our website on the same day.
%-figures = participation You may find the addresses of our branch offices and subsidiaries on pages 178 to 180
We were thoroughly satisfied with the development of the 2006 financial year. Market conditions in property and casualty reinsurance remained attractive, enabling us to write profitable business in virtually all segments.
After two years of results overshadowed by a heavy toll of natural disasters, the burden of catastrophe losses in the year under review – at 2.7% – was well below the multi-year average of 8% of net premium in property and casualty reinsurance. The vigorous pace of growth observed in international life and health reinsurance was undiminished, opening up good opportunities for our business. Financial reinsurance saw again an increased interest in structured products. Our fourth business group, specialty insurance, was notable on two counts: firstly, the ongoing restructuring of the business at the beginning of the year under review and, secondly, the announcement that Praetorian Financial Group, Inc. had been sold to an Australian insurance group in December 2006. Once this
The expansion of the global economy was initially sustained in 2006, although it flagged somewhat as the year progressed. This can be attributed in particular to weaker cyclical impetus in the industrialised nations; developments nevertheless varied in the major economic zones. The petroleum market eased appreciably in the second half of the year under review as bottlenecks were eliminated and because the high price level of recent years had triggered important substitution processes.
Particularly in the United States, the economy slowed in the year under review. From the spring onwards activity levels here were sharply lower – especially due to declining housing investment. The US Federal Reserve Board initially responded to the impending threat of inflation with further rate hikes, only to halt such moves from the summer onwards in view of the emerging cooldown in the economy.
Slackening demand stimuli in Japan also adversely impacted the world economy. In the developing and emerging markets of Asia, on the other hand, the economic upturn continued undiminished.
In Germany, too, the economy enjoyed a vigorous surge in momentum in the year under review. This development was driven in part by rising export figures and a more competitive position in international markets – despite the appreciation of the euro. The business climate was also boosted by increased spending on construction. Yet this growth in residential construction in Germany can probably be attributed primarily to the discontinuation of home-building subsidies and the increase in value-added tax in 2007. Thanks not least to the cyclical turnaround on the labour market, private consumption picked up for the first time since 2001.
The development of the individual business groups is discussed in the following pages.
Hannover Re's financial strength was also further reinforced in the year under review: shareholders ' equity increased by 11.4% compared to the previous year to reach EUR 2.9 billion (EUR 2.6 billion). The book value per share consequently improved by 11.4% to EUR 24.03 (EUR 21.57). The total policyholders' surplus – shareholders ' equity, minority interests and hybrid capital – grew by 6.5% to EUR 4.9 billion (EUR 4.6 billion).
In the context of our total portfolio, property and casualty reinsurance is the largest, most significant and also the most difficult business group.
The treaty renewals in April, July and October underscored, in particular, the further improvement in market conditions for catastrophe-exposed property business in the United States.
In the casualty lines, too, developments were relatively satisfying: with certain exceptions prices here largely held stable on the reinsurance front. All in all, market conditions in property and casualty reinsurance were still commensurate with the risks and hence attractive.
Percentage breakdown of gross premium income in property and casualty reinsurance by line of business
Despite the reduction of peak exposures in the year under review, gross written premium in property and casualty reinsurance came in on a par with the previous year at EUR 4.6 billion (EUR 4.6 billion). At constant exchange rates, especially against the US dollar, growth of 0.1% would have been booked. The level of retained premium showed a minimal decrease of one percentage point to stand at 84.9% (85.9%). The net premium earned of EUR 3.9 billion was also nearly unchanged year-on-year (EUR 3.9 billion).
Unlike in the two previous years, the loss expenditure was well below average in the year under review. Although we incurred a number of major claims, including for example a satellite loss, two fire claims in Germany and cyclone "Larry" in Australia, the total burden of major losses for net account amounted to a satisfactory EUR 107.3 million (EUR 1.0 billion). This is equivalent to 2.7% of net premium in property and casualty reinsurance and is thus well below the multi-year average of 8%. In the previous year the corresponding figure had been as high as 26.3% due to the extraordinary burden of losses from the hurricane events. The combined ratio stood at 98.4% (112.8%) in the year under review. This value reflects our current portfolio mix. We continue to set aside prudent levels of reserves, especially for more recent years in longtail casualty business. It was, however, also necessary to make allowance for belated claim notifications in marine business.
In Germany the good results of recent years served to intensify competitive pressure on the primary insurance sector. Industrial fire and fire loss of profits insurance were particularly hard hit by the sharp decline in prices. Even major claims running into the triple-digit millions of euros failed to halt this trend in the year under review, and with sufficient capacity available worldwide this market situation is unlikely to change significantly in the medium term. The motor market, an important segment for our company, is also experiencing a fierce competitive struggle for market shares in primary business, causing prices to crumble.
The market environment on the reinsurance side nevertheless remained positive in the year under review, with adequate rates and conditions. Exceptions here were the fire and fire loss of profits lines, in which proportional treaties saw double-digit premium erosion. The reinsurance commissions in proportional motor business, on the other hand, remained largely stable, while commissions for excess of loss arrangements even increased somewhat. Despite a slightly poorer overall business performance, we were still able to generate clearly positive results and achieved our defined profit target.
United Kingdom and Ireland The basic environment on the UK and Irish insurance markets remained unchanged from the previous year: while the primary insurance sector is seeing appreciable competition, conditions on the reinsurance market are largely stable.
Property catastrophe covers in the United Kingdom benefited in the year under review from the adjustment of pricing models in the wake of the 2005 hurricanes, enabling rate increases of up to 20% to be obtained. As part of our risk management we nevertheless scaled back our windstorm-exposed business.
Rates in motor insurance held stable for upper layers, while they moved higher for lower and middle layers following an increase in claims.
Thanks to falling insolvency figures and the improved state of the economy, loss ratios in credit and surety insurance in Europe retreated to a record low. The sustained good results of late led to pressure on commissions in the reinsurance sector, which – unlike in the previous year – it proved impossible to entirely resist. Large insurance groups, in particular, were able to push through their demands owing to a surplus of capacity. On the other hand, clients continued to focus on reinsurers noted for their financial soundness and professionalism, a situation from which Hannover Re benefited.
In the year under review we thus maintained our position as one of the market leaders and made up for volume lost as a consequence of cedants carrying higher retentions by acquiring new business and enlarging our existing shares. For reasons of diversification we stepped up our surety business and our acceptances of political risks. Credit and surety reinsurance therefore generated further outstanding results in the year under review, and for the first time returned to growth. No major losses were incurred in these lines either.
Western and Southern Europe The French insurance market suffered a further contraction in premium volume in motor lines; with accident numbers falling, insurers again posted good results in the year under review, leading to greater pressure on rates. On the reinsurance side rates proved to be inadequate in the year under review: although the number of accidents was down, spending on seriously injured victims of traffic accidents moved higher. The situation was exacerbated by the entry of new providers: in order to gain market shares they were even willing to accept insufficient rates, thus depressing the level even further – when in fact rate increases were needed.
Competition in Spain and Portugal intensified in the year under review, as new reinsurers increasingly forced their way into European markets. This was especially true of Spain, where property catastrophe coverage is provided by the state. We nevertheless succeeded in expanding our non-proportional portfolio. Very good results were generated in the fire and motor lines. We achieved our goal of boosting our market share in the casualty sector in builder's risk and professional indemnity insurance. All in all, we enlarged our premium volume and posted very good results in Spain. In Portugal, too, we recorded good results in 2006 on the whole, although a number of mid-sized claims cut into profits in fire insurance. The development of motor business was not satisfactory, as a consequence of which we were very cautious in our acceptances.
Eastern Europe The insurance markets of Central and Eastern Europe continued to grow disproportionately strongly relative to Western European markets, although price competition is extremely intense; this is even the case in markets – such as Russia – with a higher than average number of major and basic claims.
With insurers carrying higher retentions, competition among reinsurers intensified. Still, the general environment for reinsurers remained very largely stable, and rates only came under appreciable pressure in a few programmes. All in all, however, reinsurance margins were adequate.
For Hannover Re, the markets of Central and Eastern Europe offer considerable growth potential. We are one of the four key reinsurance players in these regions. We write business in all lines, albeit with a strict eye to profitability considerations. Our underwriting policy is therefore opportunistic in approach. We continued to reorganise our portfolio in favour of more profitable non-proportional treaties at the expense of high-volume, low-margin proportional business. The premium volume contracted marginally. In property business we incurred a significant number of claims relating to individual risks, but overall we were satisfied with the achieved result.
The considerable strains from the 2005 hurricanes did not cause a lasting disruption in the financial recovery of US insurers. The companies were able to further enlarge their equity capital over the past three years, and the modest rate cuts in some segments – e.g. in casualty business – can therefore come as no surprise. All in all, the situation on the US primary market was therefore rather mixed. There was a drastic shortage of capacity for natural hazards covers, as a consequence of which prices continued to rise – sometimes by considerably more than 50%. Almost all major insurers substantially reduced their own catastrophe exposures and increased their retentions appreciably. On the other hand, in property insurance without any natural catastrophe exposure, for example in the case of policyholders in the Midwest, there was a tendency towards price reductions.
Particularly in the case of major (so-called Fortune 1000) accounts, casualty business saw rate reductions – most notably for casualty umbrella covers. Prices in directors' and officers' (D&O) insurance stabilised in the second half of the year, albeit on a low level. In large areas of the standard casualty market rates held stable, with modest reductions and slight increases balancing each other out. The claims frequency in the year under review was somewhat lower in certain segments, including for example workers' compensation, medical malpractice and D&O covers.
Having substantially enlarged our market share in the aftermath of the events of 11 September 2001, we continued to slightly reduce the business volume as the market softened. Nevertheless, in a number of different segments – such as property, specialty liability and other casualty business – we continue to be one of the leading reinsurers.
In the casualty sector our underwriting policy is geared primarily to non-proportional business. Only a few proportional treaties that promise satisfactory profitability have been continued. Based on our very good ratings and the associated positive assessment of our financial strength, we are one of the few reinsurers that clients can consider for placement of their long-tail casualty risks. In this segment Hannover Re writes risks highly selectively and was again able to generate attractive business in the year under review. Despite rate decreases in some casualty lines, the market was more stable than initially anticipated.
In credit and surety reinsurance we again made the most of the favourable business opportunities; Hannover Re is the market leader here.
We were thoroughly satisfied with results in credit and surety reinsurance, although we were unable to repeat our very good result of 2005. No significant loss events were recorded in the year under review.
Motor business profited inter alia from a drop in auto thefts. In part, this is doubtless attributable to the improved state of the economy in Colombia and Ecuador. Loss ratios improved to reach an acceptable level.
Hannover Re did not incur any natural catastrophe burdens in its most significant Latin American markets, and reinsurance prices consequently came under pressure in the treaty renewals.
In accordance with our strategic objectives we enlarged our portfolio of profitable, non-proportional business and also slightly increased our overall premium volume.
Africa Our most important market on the African continent is South Africa, where we are represented by our Johannesburg-based subsidiary, Hannover Re Africa.
In South Africa Hannover Re writes predominantly specialty business, i.e. niche risks accepted by specialised companies. In this segment Hannover Re Africa writes both proportional and non-proportional treaties, whereas commodity business in South Africa is accepted solely on a non-proportional basis. Overall, we boosted our premium volume in the South African market. Hannover Re Africa is a sought-after partner for all lines, not least because of its quick and flexible handling.
In other African markets we are standing by our strategy of enlarging our portfolio of profitable non-proportional business. It remains the case that this goal can only be achieved incre-
After years of economic stagnation, business activity here has picked up. The associated positive side-effects have also benefited the insurance industry. Thanks to our presence in Tokyo, where we maintain a service company, we are able to stay in constant contact with our clients. We enjoy the status of "core reinsurer" with most of the country's major insurers.
The Japanese casualty market also proved to be relatively stable; we modestly expanded our portfolio here. Especially in the case of overseas covers and pharmaceutical risks, there is a need for greater data transparency in order to optimise risk assessment. All in all, our business in Japan developed very favourably. Our result was not affected by any significant major claims.
Southeast Asian markets witnessed rate reductions in both the primary and reinsurance sectors. Particularly in Malaysia, Indonesia and Pakistan, the year under review was notable for the establishment of takaful companies ("takaful " is an Arabic term meaning "guaranteeing each other"). This business model – which has similarities to that of a mutual insurance society – takes full account of Islamic standards. Since takaful insurers are required to reinsure their business primarily with Sharia-compliant, so-called retakaful companies, the establishment of new retakaful players in the year under review came as no surprise. Hannover Re sees considerable potential in this emerging market and has set up a subsidiary in Bahrain which will serve the Islamic insurance market on an exclusive and worldwide basis.
The strongest growth market in Asia after India is China. This is especially true of motor insurance, although the reinsurance density of this business is not yet particularly marked. China continues to be a target market for the international insurance and reinsurance industry, and competition is correspondingly intense. This situation is further exacerbated by the fact that the China Insurance Regulatory Commission (CIRC) requires at least 50% of all reinsurance cessions to be placed with locally licensed reinsurers. The Chinese market is still dominated by proportional treaties – although developments in the year
under review demonstrated that non-proportional business is slowly gathering momentum. We maintain good business relations with Chinese insurers and are keeping a very close eye on the market. Our involvement in this region is, however, still limited because rates are generally inadequate.
In Taiwan we stepped up our focus on nonproportional business, thereby further optimising the structure of our portfolio. Similarly, in South Korea and Hong Kong we write almost exclusively non-proportional covers. In view of the attractive prices in personal accident and casualty insurance we continued to grow our premium volume in these lines.
Hannover Re ranks third in the Australian non-life reinsurance market. We are a reliable and attractive partner for our clients because we not only have a very good rating, but we are also locally represented through our branch office in Sydney.
Breakdown of gross premium by business centers in % (before consolidation)
HLR International tives are provided to encourage consumers to take out such policies.
Management report life and health reinsurance by foreign branches in Paris, Stockholm, Kuala Lumpur and Hong Kong.
Our strategically important business in the Far East, encompassing the Chinese-speaking economic region as well as Japan and the Korean market, is to be strengthened by the addition of a branch office in China. We were given the green light to establish this office in November 2006 by the China Insurance Regulatory Commission (CIRC) in Beijing.
We maintain long-standing relationships with a small number of professional reinsurers for the passing on of proportional retrocessions, which as a matter of principle we place directly (i.e. not through reinsurance brokers). The retrocessionaires are major companies with first-class ratings, typically AA from Standard & Poor's and A+ from A.M. Best.
Gross written premium from our worldwide cedants grew to EUR 2.8 billion in the year under review – an increase of 15.2% on the previous year (EUR 2.4 billion).
Asian business, particularly from China and Korea, was sharply higher thanks to new treaty relationships, while US life business recorded only modest growth. In this respect it should, however, be borne in mind that under the applicable accounting rules of SFAS 113 a growing portion of our US business no longer has any influence on the reported premium income. The allocation to premium deposits, on the other hand, rose sharply in 2006. This can be attributed not only to US health business but also to large-volume financing transactions from Luxembourg, which are booked as deposit accounting contracts.
No sizeable loss events were incurred in the year under review.
• movements on the international capital markets, especially in the relevant currencies of EUR, USD, GBP, ZAR and AUD,
The mortality factor is the most significant biometric risk for our portfolio – in this respect our most notable exposures are in the United Kingdom, South Africa, Australia and Asia. The overall experience was satisfactory in the year under review, although certain regional differences cannot be overlooked. The claims experience within the year also exhibits a seasonal pattern, especially in the case of substantial death benefits – which occurred predominantly in the first half of 2006.
The longevity factor is of considerable relevance to our company due to our market leadership in the field of UK single-premium enhanced annuities. Our actuarial analyses indicate that this business is progressing in line with our projections.
Movements on international capital markets had a neutral effect on the business result of Hannover Life Re in the year under review, although income from self-managed assets increased by around 0.9% due to the enlarged investment portfolio.
Management report life and health reinsurance steps to safeguard the interests of policyholders. We attribute this state of affairs, which has prevailed for many years now, to our prudent scrutiny of client quality as part of our marketing approach supported by customer relationship management.
United Kingdom The United Kingdom continues to be Europe 's most important life reinsurance market – UK life insurers traditionally make the most of the opportunities to ease their risk burden and also optimise their solvency through large quota share reinsurance arrangements.
As Hannover Life Re we are active in this key market through three risk carriers: Hannover Life Re UK, Hannover Life Re Ireland and the Group parent Hannover Re.
Our subsidiary Hannover Life Re UK based outside London handles conventional business from the United Kingdom, Ireland and the Isle of Man, with a focus on so-called protection business – i.e. the reinsurance of the biometric risks of mortality and critical illness. Health business has not been written to date, and the volume of disability business is minimal.
Management report life and health reinsurance ances from the market. Hannover Re, on the other hand, has been active in the enhanced annuities market for many years – business that picked up considerably for our company in 2006.
Hannover Life Re UK delivered a record operating profit (EBIT) of EUR 16.9 million (+24.6%). The EBIT margin thus amounted to 20.6% of net premium earned, while net income after tax came in at EUR 11.6 million after EUR 9.2 million in the previous year.
Re Ireland writes worldwide treaty business with concentrations in the USA, UK, Canada, South Africa and a number of Asian markets.
The company booked a sharp surge of 19.9% in gross written premium to EUR 597.6 million in 2006, while net premium earned grew by 15.1% to EUR 524.6 million.
The operating profit (EBIT) amounted to EUR 72.8 million after EUR 15.0 million in the previous year. The EBIT margin thus stood at 13.9%, while net income totalled EUR 63.7 million (EUR 13.3 million).
Through enlargement of the business volume – new clients were acquired and existing accounts in the area of bancassurance expanded – premium income from this region was boosted to EUR 366.7 million (EUR 180.3 million) in the year under review. The Paris branch contributed the lion's share of EUR 289.4 million.
Scandinavia, Eastern Europe, Israel and Turkey Marketing and underwriting responsibility for these markets rests with our life branch in Stockholm. It writes predominantly risk-oriented business, although the portfolio also includes a significant financing transaction with a Swedish insurance group.
Gross premium totalled EUR 503.3 million in 2006, a modest increase of 1.7%. Net premium earned remained virtually unchanged at EUR 215.6 million, while the level of premium retained by Hannover Re Life America stood at 42.9%.
All in all, therefore, Hannover Life Re America 's operating profit (EBIT) retreated somewhat from EUR 17.4 million in the previous year to EUR 15.9 million. Net income after tax declined to EUR 8.7 million (EUR 10.5 million).
Our office in Mexico City writes business from its domestic Mexican market as well as other Central American countries. Based on our service orientation, with the special importance that we attach to underwriter training, we have succeeded in building a loyal customer base. Gross premium in the year under review amounted to EUR 27.5 million, and results were again satisfactory.
Africa Our subsidiary Hannover Life Re Africa, which is based in Johannesburg with a branch office in Cape Town, has concentrated on individual business in recent years and writes predominantly life, critical illness and – to a lesser extent – disability covers. The markets served are South Africa and certain English-speaking African markets.
The company has built up special expertise in innovative individual life products and ranks among the market leaders for reinsurance of these products.
The company's gross written premium climbed by 12.2% to EUR 105.4 million and net premium earned – boosted by an increased retention from 1 January 2006 onwards – grew by as much as 18.8% to EUR 63.3 million.
Results in all lines were within the planned actuarial limits. The operating profit (EBIT) totalled EUR 3.2 million (-18.2%); this produced an EBIT margin of 5.2% of net premium earned.
Asia We traditionally serve the Asian region from two Hannover Life Re branches: the branch office in Kuala Lumpur is responsible for the ASEAN markets and South Asia, while the branch office in Hong Kong handles the Chinese-speaking economic region as well as Japan and Korea. We write largely risk-oriented business in the life, critical illness and personal accident lines.
The company concentrates on writing life, critical illness and disability annuities. A special feature of its business is that it also assumes mortality and morbidity risks in connection with occupational retirement provision.
Directly written group life business, on the other hand, delivered a highly gratifying performance with non-recurring income in the high singledigit million euros from the commutation of IBNR reserves.
All in all, the operating profit (EBIT) of EUR 26.3 million came in 55.6% higher than the previous year's figure of EUR 16.9 million. Net income after tax stood at EUR 20.9 million (EUR
Management report financial reinsurance potential buyers, as a consequence of which the number of inquiries and actual contracts closed still cannot be compared with the period prior to the probe launched by the New York Attorney General and the Securities and Exchange Commission (SEC) into the activities of some reinsurers.
The redefinition of risk transfer standards for financial reinsurance is expected to bring by far the most significant developments in this mapping out of the way ahead. All major supervisory bodies, legislative organs and industry representatives have formed working groups that are exploring various conceptual ideas relating to the scope and measurement of risk transfer.
Key figures for financial reinsurance 1) On a US GAAP basis 2) Operating profit (EBIT)/net premium earned
By and large, we can look back on a satisfactory financial year in financial reinsurance. Gross written premium contracted by 4.9% to EUR 878.5 million (EUR 924.1 million). At constant exchange rates the decrease would have been 4.6%. With the level of retained premium slightly lower than in the previous year, net premium declined by a more appreciable 16.2% to EUR 698.3 million (EUR 833.8 million).
Due to the commutation or expiry of numerous old contracts over the past two years, resulting in a substantial decrease in technical provisions and an associated contraction in interest income, net investment income declined sharply. The operating profit (EBIT) consequently fell by 6.0% to EUR 72.2 million (EUR 76.8 million). Nevertheless, we were thus still able to achieve our medium-term goal of generating an EBIT margin of at least 7.5% in the year under review. Group net income gained 11.8% to EUR 55.3 million (EUR 49.4 million) due to a significant reduction in minority interests. The financial reinsurance business group therefore contributed earnings of 0.46 EUR (0.41 EUR) per share to Group net income.
We use the term "specialty insurance" to designate a form of primary insurance which concentrates on closely defined, homogeneous portfolios of niche or other non-routine business that is not normally offered or adequately covered by traditional insurers. Major aspects of the business (from acquisition through the issuing of policies and premium collection to claims settlement) are normally outsourced and handled by specialised managing general agents (MGAs) or third-party administrators (TPAs).
Numerous new players entered the specialty insurance market in the year under review. This can come as no surprise, since in past years too insurers were happy to use the distribution channel of MGAs – through which the bulk of Praetorian 's in-force business is written – as an anti-
Management report specialty insurance cyclical source of new business during soft market phases with low rates. This process now appears to be repeating itself.
In March of the year under review we completed the final steps in the restructuring of our specialty insurance business group in the United States: in order to create clearly defined areas of responsibility, we transferred all US specialty business to the newly established Praetorian Financial Group, Inc.; this was preceded by an internal organisational separation of functions. The Clarendon Insurance Group, Inc., which had previously been responsible for this business, will henceforth concentrate on the management of terminated programs and the remaining commodity business.
Praetorian's new management concentrated on internal company structures: its immediate task was to review existing partnerships with an eye to their quality and the type of business written. Profitable partnerships were continued, whereas cooperation with producers of commodity business was discontinued. Selected specialty contracts were taken over from Clarendon. Praetorian's management team also introduced a new organisational structure based on a matrix of line-of-business specialists and program managers. In January 2006 the rating agency A.M. Best, which is of particular relevance to US business, confirmed its rating of "excellent" ("A-").
Praetorian is one of the few US insurers to concentrate exclusively on specialty insurance. With licences covering all federal states it is one
Praetorian Insurance group of the market's leading providers. The contracts are written by around 50 managing general agents (MGAs) that have links with Praetorian. However, in what is currently an attractive market climate we also renewed commodity business on an opportunistic basis, including for example workers' compensation covers.
Praetorian's gross written premium by line of business in % (before consolidation)
In accordance with our strategic planning, Clarendon was transformed in the year under review from an active insurer to a company that manages almost exclusively terminated contracts. In the course of the year Clarendon also transferred to the newly established Praetorian the portfolio of specialty business that is to be continued. Business that was not already in run-off or had not been transferred to Praetorian (such as certain hurricane-exposed property programs in Florida) was actively terminated wherever possible. The company has not yet, however, been able to scale back the residual catastrophe-exposed business to the desired extent due to regulatory restrictions, including state-imposed moratoria. For this reason we were compelled to re-
Clarendon Insurance Group tain the programme of protection cover for the remaining natural catastrophe exposures – albeit now at considerably increased costs.
The gross premium income booked by Clarendon before consolidation totalled EUR 771.0 million (EUR 1,128.1 million) in the year under review. The bulk of this volume derived from fronting transactions for Praetorian. Net premium therefore totalled a mere EUR 0.2 million. On account of considerable strains from protection covers that had to be purchased one last time to protect expiring windstorm business in Florida, Clarendon's operating result (EBIT) in the year under review was heavily in the red (-EUR
Inter Hannover consolidated its existing portfolio from cooperations with various managing general agents in the year under review. New business was, however, selectively expanded – most notably in Spain, Italy and France. Overall, though, rate declines in primary insurance on Europe's main markets had a negative impact on the premium volume and results. The company booked gross premium income of EUR
Total business The gross premium income booked by all companies transacting specialty insurance contracted by a substantial 28.2% in the year under review to EUR 1.0 billion (EUR 1.5 billion). At constant exchange rates the decline would have
The operating result (EBIT) deteriorated to -EUR 71.7 million (-EUR 49.7 million) on account of the expensive programme of protection cover purchased for Clarendon. This also explains why the combined ratio surged to 190.6 % – after 111.3 % in the previous year – and should not be considered as having any informational value. Due to the inclusion of Praetorian's very good profit contribution as a discontinued operation, Group net income nevertheless climbed to EUR 41.2 million (-EUR 2.4 million). This corresponded to earnings of 34 cents (-2 cents) per share.
Prime rates moved sharply higher by 100 basis points in both the USA (to 5.25%) and the Eurozone (to 3.50%). The yield curve in the Eurozone flattened gradually in the course of the year, albeit without inverting markedly as was the case in the USA. Ten-year US treasury bonds yielded average returns of 4.8%, while the average yield in the Eurozone was a mere 3.8%. The corporate bond market saw only isolated increases in the risk premium for selected instruments, while the overall market generally moved within a very tight spread. The euro closed the year at USD
Hannover Re's investment policy is guided by the following core principles. We seek to: • generate stable, plannable and tax-optimised returns while at the same time maintaining the high quality standard of the portfolio; Investments
• ensure the Hannover Re Group's liquidity and solvency at all times; • diversify risks within the scope of our investment strategy; • act in accordance with the principle of matching currencies when managing our currency exposures.
Within the scope of our asset/liability management activities, the allocation of investments by currency is determined by the development of underwriting items on the liabilities side of the balance sheet. We are thus able to achieve extensive currency matching of assets and liabilities, thereby ensuring that our result is not significantly affected by fluctuations in exchange rates. As at year-end 41.5% of our asset portfolio was held in US dollars, 42.6% in euros and 6.6% in pounds sterling.
Our performance was in line with the planned parameters thanks to the neutral/defensive posture of our bond portfolio. Based on the strong cash inflow from the technical account, our portfolio of self-managed assets grew to EUR 19.2 billion (EUR 19.1 billion) despite the weak US dollar and rise in average yields. Ordinary income, which was positively affected by the increased average yields, came in considerably higher than in the previous year at EUR 784.8 million (EUR 654.6 million).
Deposit interest and expenses contributed EUR 221.9 million (EUR 351.6 million) on balance to net investment income. Gains of altogether EUR 305.1 million were realised on disposals in the reporting period as part of our active man-
With these goals in mind we engage in active risk management on the basis of balanced risk/return analyses. In this context we observe centrally implemented investment guidelines and are guided by dynamic financial analysis based on the latest scientific insights. These ensure that at all times we are able to meet our payment obligations in light of our liabilities profile.
As in previous years, we actively managed the duration of our fixed-income portfolio, thereby not only optimising our returns but also conserving our shareholders' equity. The modified duration of our bond portfolio was kept stable over the reporting period, standing at 4.0 as at year-end 2006.
The quality of our fixed-income securities – measured in terms of the average rating of the instruments – was maintained on a consistently high level. The proportion of securities rated "A" or better – at 93.3% – was higher than in the previous year (91.8%).
As at 31 December 2006 we held a total amount of EUR 721.3 million in short-term assets, including overnight money and time deposits, and EUR 351.8 million in current assets. Funds held by ceding companies climbed to EUR 9.3 billion (EUR 8.4 billion).
Of our total holdings of alternative investments that have been accumulated steadily over a number of years, an amount of EUR 529.1 million (including uncalled capital) was apportionable to investments in private equity funds, EUR
307.7 million to high-return bond funds and loans, EUR 110.5 million to structured real estate investments and EUR 69.4 million to CDO equity tranches. The fair value of the portfolio showed favourable growth.
The turnover and absenteeism figures once again clearly demonstrate that employee satisfaction is also reflected in key personnel data – even allowing for the fact that the difficult state of the labour market in Germany undoubtedly also plays a role here. Absentee rates serve as a seismograph for detecting the existence of inhouse conflicts. By holding our conflict management seminar for executives and employees we help to defuse any tensions that may arise.
Employee loyalty is also fostered by flexible working-time models. This is impressively underscored by our various models for part-time working arrangements, which are used by more than 16% of our workforce. They harmonise the company 's interests with those of our staff in a broad
Balance between career and leisure range of life situations. 70 employees – almost 8% of our team at Hannover Home Office – work from home as telecommuters, thereby also playing their own modest part in helping the environment.
We continue to feel a lasting commitment to personnel development. Over the past three years an average 5% of our workforce participated in personnel development workshops: the total investment in further and advanced training amounted to six days for each staff member per year.
Total investment in further training: six days for each staff member per year
Staff participation in the company's success – the Group Performance Bonus
The remuneration report is based on the recommendations of the German Corporate Governance Code and contains information that is also mandatory in accordance with the requirements of § 315 Para. 2 No. 4 German Commercial Code (HGB). This information is discussed as a whole in the remuneration report. Consequently, we have not provided any further explanation in the present management report.
We attach considerable importance to the training of young people, as borne out by the excellent qualifications obtained by our trainees. Personnel development involves the timely recognition of opportunities and risks on the labour market. After a protracted demand-driven job market, we expect the supply side to take the lead in the coming years. This can be deduced from the demographic population trend for the next 20 years in Germany. We consider a differentiated, medium-term training initiative to be an appropriate, well-timed instrument for preempting this trend. So far, training has only been available for the occupational profile of certified insurance practitioner. Going forward, we intend to take a close look at other areas where opportunities for professional qualification may be available, including for example the Bachelor's degree in business informatics.
We would like to thank our employees for their initiative, dedication and performance. Our staff identified with the company's defined objectives and pursued them purposefully at all
Our strategy, like our actions in daily business, is founded on high ethical and legal standards. As a service provider, we recognise that the public image of the Hannover Re Group is crucially shaped by the manners, actions and conduct of every member of staff.
Hannover Re responds to its social responsibility with active involvement: we run a foundation that benefits the Sprengel Museum Hannover, thereby supporting the advancement of contemporary art in Hannover. Opened in 1979, the Sprengel Museum – with its extensive collection and diverse programme of rotating exhibitions – ranks among the leading museums for twentieth-century art. The Hannover Re Foundation was launched in 1991 to mark the occasion of Hannover Re's twenty-fifth anniversary. The foundation's mission is to promote Hannover as a centre for art through the acquisition of contemporary artworks that are loaned to the Sprengel Museum; the foundation is also charged with funding accompanying publications and events.
Performance Excellence serves as our guideline and is a particularly effective means of consistently enhancing our customer orientation.
Performance Excellence assessment (IQNet Business Excellence Class) covering several areas of the company. Our Home Office in Hannover was praised for its excellent management. With this advanced management system we also have at our disposal an outstanding tool that will enable us to fully satisfy future requirements. Yet not only at the company's main location in Hannover is Performance Excellence a high-priority issue: Hannover Life Re US in Orlando was our first non-German subsidiary to undergo external assessment – and it hit the ground running with a very good result.
Employee responsibility daily tasks. What is more, all members of staff undertake to conduct themselves vis-à-vis their colleagues and clients in a manner that is honest, fair and law-abiding. These guidelines are regularly updated in order to keep them in tune with changing socio-political standards.
Criteria for establishing a balance between career and leisure are also applied at Hannover Re: not least in the form of a varied range of parttime working and telecommuting arrangements as well as a flexi-time system for flexible structuring of working hours. Among other things, this puts in place an optimal foundation for enabling staff to harmoniously balance personal and professional matters at their own responsi-
Hannover Re is held in high international esteem. In the year under review a survey conducted by the respected US Flaspöhler Research Group ranked us the best reinsurer in the North American broker market for the second time in succession. Compared to the outcome of the last survey two years ago, the results showed further substantial improvement. Special reference was
International reputation made to the cordial personal relationships with underwriters in Hannover and our prompt case handling. This is all the more remarkable if we remember that Hannover Re writes its entire North American portfolio from Hannover. As far as market know-how and customer orientation are concerned, geographical distance is evidently no obstacle for Hannover Re.
We always take our opportunities by weighing up the associated risks. Only if an increase in the value of the company is to be expected do we systematically and purposefully enter into these risks. Risk management is an integral component of our value-based enterprise management. Risk management is therefore accorded a special status in Hannover Re's strategy. In the year under review we adjusted the risk management approach that has been in place at Hannover Re for many years. The key qualitative and quantitative elements of risk management were – under the leadership of the Chief Risk Officer (CRO) – concentrated in the newly created Central Division Group Risk Management so as to be able to control our assets-side and liabilities-side risks on a holistic basis going forward. In addition, we have set up a Risk Committee which is charged with bringing transparency to the entire risk situation and highlighting the essential action fields. In this context, the Risk Committee's decision-making power is limited to the degree of risk defined by the full Executive Board. In functional terms, the Risk Committee is composed of the Chairman of the Executive Board, the Chief Financial Officer, the members of the Board with primary responsibility for worldwide life and non-life reinsurance business, the Central Divisional Manager Controlling and the Chief Risk Officer. The Risk Committee meets quarterly and on an ad hoc basis when needed. The following elements are the hallmarks of our risk management organisation: • Hannover Re's risk management is centrally coordinated, but based on local responsibility in the various areas.
• In light of the information currently available, all conceivable risks that could jeopardise the Group's net income or survival are recorded thoroughly and systematically.
• We have a large number of efficient steering and controlling systems. The structure of the systems and the granularity of the reporting depends on the nature of the risk in question.
Best reinsurer in North America for the second time in succession
Our risk report reflects the requirements of German Accounting Standard DRS 5-20, supplemented by further information in the Notes (Section 6 "Management of technical and financial risks"). The details provided in the Notes are based on the requirements of International Financial Reporting Standard (IFRS) 4.
• review and, as appropriate, adjustment of the underwriting policy (e.g. through contractual exclusions, defined limits),
The additional information to be included in the management report pursuant to § 315 Para. 4 German Commercial Code (HGB) as a consequence of the Takeover Directive Implementation Act is provided in the section "The Hannover Re share."
Strategic risks The hallmark of strategic risks is their causal relationship to the company's objectives. These risks derive primarily from an imbalance between the defined corporate strategy and the continually changing general economic conditions. We therefore regularly review our strategy and adjust our structures and processes accordingly. Every three years – most recently in 2005 – the assumptions underlying our corporate strategy
• Within the scope of accumulation control – i.e. monitoring of the natural hazards exposure of Hannover Re's portfolio – maximum underwriting limits ("capacities") are defined for various scenarios (e.g. hurricanes in the USA) and return periods/probabilities on the basis of the company's overall risk strategy. The portfolio risk for the scenarios in question is then calculated in the form of probability distributions on a gross basis, in other words our simulation models for natural hazards are used to determine the expected loss for specific occurrence probabilities. As a final step,
Management report risk report this data based on individual scenarios is then collated for the portfolio as a whole, which is considered both on a gross basis and for net account after application of the existing retrocession structure. The data described here is also an integral component of our reporting to internal bodies, regulators and rating agencies.
• The extreme events caused by natural disasters in recent years have also demonstrated that it makes sense not only to use purely probabilistic natural hazards models for the purposes of accumulation control, but also to supplement the individual scenarios with the inclusion of realistic extreme loss scenarios. We are now in the process of progressively adding these deterministic scenario analyses and integrating their insights into probabilistic accumulation control.
Life and health reinsurance Biometric risks (miscalculation of mortality, life expectancy and disability probabilities) as well as lapse and credit risks are of special importance in life and health reinsurance.
• In addition, Home Office in Hannover conducts a number of relevant spot checks every year, for example regarding the amount of the technical provisions constituted for our worldwide health business. The findings of these checks are also submitted to the full Executive Board.
• In this connection we devoted special attention in the year under review to the risk of a worldwide pandemic (caused, for example, by avian influenza). Within the scope of the Enterprise Risk Management (ERM) analysis required by Standard & Poor's, the quantitative effects on our existing portfolio were modelled for the first time. We therefore took as our starting point a risk spectrum geared to scenarios that the US Centers for Disease Control and Prevention (CDC) designated as "severe" on the basis of the Spanish influenza from the years 1918/1919. It emerged that the financial repercussions of such a pandemic on the various parts of our portfolio differ greatly and are to some extent contradictory, producing a total financial strain in the order of EUR 130–150 million. In this context primary effects, such as deaths caused directly by the virus, were overlaid with secondary effects such as deaths caused by the excessive burden placed on healthcare systems (physicians, clinics ) and the default of Hannover Life Re's retrocessionaires. The conclusion drawn from these calculations is that a pandemic on this scale would probably wipe out Hannover Life Re's operating profit (EBIT) for one year, but would not have a lasting negative impact on the portfolio 's longer-term value creation.
• Investments are guided by the requirements of the reinsurance business (e.g. with respect to currencies and maturities).
• Asset management and liability management – and the synthesis of both segments under the umbrella of our asset/liability management approach – in order to optimise Hannover Re's overall position according to a single financial risk/return target.
• The implemented management and control mechanisms take their lead from the standards adopted by the Federal Financial Supervisory Authority (BaFin) and foreign regulators as well as the risk preferences specified by the Executive Board.
As an internationally operating reinsurance group we are exposed to a diverse spectrum of potential risks that are not necessarily always directly correlated with our business activities. These risks can have a not inconsiderable impact on our assets, financial position and net income. Yet such risks always go hand-in-hand with opportunities, since opportunity and risk are two sides of the same coin. Only with the aid of effective controlling tools – that ensure risks can be identified and opportunities maximised in a timely manner – can practical realisation of our strategic objectives be safeguarded. Hannover Re has at its disposal sophisticated systems and methods which we use to steer our business over an appropriate planning horizon, thereby enabling us to satisfy the requirements of effective and holistic risk/opportunity management.
What is more, these mechanisms ensure that any potential need for improvement or adjustment can be proactively translated into concrete measures.
In 2007, as in the year under review, economic activity in the USA initially looks set to be weak, with only slow growth in gross domestic product. A cyclical cooldown will also curb consumer spending. As capacity utilisation continues to decline, the US Federal Reserve Board will likely abstain from further interest rate hikes from the spring onwards – although solid data from the labour market and inflation worries do not suggest that appreciable interest rate cuts are to be anticipated in the near future.
Winter storm "Kyrill", which swept across large parts of Europe in January 2007 and caused a market loss of EUR 4 to 7 billion, should favourably affect rates in European catastrophe business. For Hannover Re, "Kyrill" produced a net loss burden in the order of EUR 120 to 180 million.
The renewal season once again demonstrated that ceding companies are attaching ever-greater importance to their reinsurers' ratings. This is especially true of the underwriting of long-tail liability lines. In this case a very good rating is a precondition for even being able to
The experience of the intense hurricane season in 2005 and its effects on pricing and rating models have changed the (re-)insurance industry much more profoundly than was the case with catastrophe events of earlier years. It may be assumed that current price levels for the provision of catastrophe reinsurance will be sustained in view of the updating of simulation models to reflect previously neglected or inadequately modelled components.
The economic momentum in the markets of East Asia is likely to be sustained, albeit at a somewhat more restrained pace. For China too a continued rapid expansion in gross domestic product is forecast.
Irrespective of the moderating influences of a strong euro and a rather restrictive monetary policy – the European Central Bank is expected to announce another modest rise in interest rates – the economy should be able to maintain its upward momentum in Europe, albeit at a reduced tempo. Among other things, the increase in value-added tax in Germany, Europe's largest national economy, is likely to make itself felt here. Nevertheless, the improved state of the job market will help to stimulate private consumption and corporate spending should also serve as a positive stimulus. All in all, the German economy looks set to continue its upward trend in the current year.
From 2007 onwards only two strategic business groups: non-life reinsurance and life and health reinsurance in the USA in the middle of 2006 have eased as capital markets brought additional solvency capital to the table.
In Australia we shall continue to concentrate on niche business; we therefore again expect to generate stable income in the current financial year. The premium volume is forecast to come in slightly higher.
Risk management remains a high priority for our company. We have already made provisions across a broad front – and will continue to do so – in order to ensure that exceptional catastrophe losses do not affect our capital base. Our peak exposures have been further reduced while maintaining an unchanged premium volume, and we shall continue to make use of special securitisation transactions – i.e. the transfer of insurance risks to the capital market – so as to optimally protect our portfolio. With this in mind, we boosted our "K5" securitisation by an additional USD 106 million to altogether USD 520 million at the beginning of the current year. Not only that, in March we successfully transferred credit risks associated with reinsurance recoverables to the capital market for the first time. This securitisation enables us to further reduce the default risk on reinsurance recoverables and hence improve the quality of our capital.
We anticipate stronger demand for structured covers. In particular, the progressive changeover to IFRS accounting and the associated increased volatility in results are prompting our clients in Europe to make greater use of such products. The switch from US GAAP to IFRS planned for Japan in the years 2008 to 2010 consequently also offers considerable promise for
Management report forecast our future business. Last but not least, the impending implementation of Solvency II – with its capital requirements for the European insurance industry – is also stimulating demand for structured reinsurance solutions.
Total non-life reinsurance business is forecast to deliver a very healthy profit contribution, provided the burden of catastrophe losses and major claims remains with the expected value of 8% of net premium. In addition to winter storm "Kyrill", the major losses incurred to date consist of a modest windstorm loss in Northern Europe, flood damage in Indonesia and the crash of a satellite. All in all, net loss expenditure is still within the expected bounds.
Hannover Life Re is looking forward to a continued positive climate in both the current year and 2008 that should enable us achieve our growth targets on an organic basis. The reinsurance market remains fiercely competitive, but in recent years we have assured ourselves of a sufficient number of interesting and profitable market niches.
In non-life reinsurance we are very well placed to operate profitably even as the market softens. Developments in life reinsurance promise further growth momentum. Our gross premium income in total business will contract appreciably following the sale of Praetorian Financial Group. Based on our improved capital position, however, we will be able to write an increased volume of attractive catastrophe business or enlarge our portfolio in other lines. In other words, the positive effect will more than outweigh the profit lost through the sale of Praetorian.
Based on our current knowledge of market conditions in our two business groups and on the capital markets, we expect to enjoy further good business opportunities in 2008.
In life reinsurance, on the other hand, we have set ourselves an annual growth target of 12%–15% for both gross premium income and the operating profit (EBIT). Only in this business group are we prepared to contemplate value-enhancing acquisitions.
Fixed-income securities – at fair value through profit or loss 7.1 166,463 88,111
Cash and cash equivalents at the beginning of the period 465,161 481,051
Change in cash and cash equivalents according to cash flow statement (113,385) (15,890)
Hannover Re's segmental report is based on IAS 14 "Segment Reporting" and on the principles set out in German Accounting Standard No. 3 "Segment Reporting" (DRS 3) of the German Standards Council, supplemented by the requirements of DRS 3–20 "Segment Reporting of Insurance Enterprises".
Total investments and cash under own management 12,888,354 12,430,328 2,722,978 2,081,187
Commission and brokerage, change in deferred acquisition costs and other technical income/expenses 833,215 826,936 823,935 684,142
1. Company information 90 2. Accounting principles 90 3. Accounting policies 92 3.1 Change in accounting policies 92 3.2 Summary of major accounting policies 92 3.3 Major discretionary decisions and estimates 96 4. Consolidated companies and consolidation principles 98 5. Major acquisitions, new formations and other corporate changes 103 5.1 Acquisitions and new formations 103 5.2 Disposals and discontinued operations 103 6. Management of technical and financial risks 106 6.1 General risk management 106 6.2 Technical risks 109 6.3 Investment risks 111 7. Notes on the individual items of the balance sheet and statement of income 114 7.1 Investments including income and expenses 114 7.2 Technical assets and liabilities 128 7.3 Contracts without sufficient technical risk 135 7.4 Goodwill; present value of future profits on acquired life reinsurance portfolios 135 7.5 Taxes and deferred taxes 136 7.6 Staff and expenditures on personnel 139 7.7 Provisions for pensions and other post-employment benefit obligations 140 7.8 Debt and subordinated capital 145 7.9 Shareholders' equity and minority interests 147 7.10 Other comprehensive income 147 7.12 Earnings per share 148 7.13 Other assets and liabilities 148 7.14 Technical statement of income 154 7.15 Other income/expenses 155 8. Related party disclosures 155 8.1 Transactions with related parties 155 8.2 Remuneration and shareholdings of the management boards of the parent company 157 8.3 Share-based payment 158 8.4 Mortgages and loans 161 9. Other notes 161 9.2 Contingent liabilities 161 9.3 Long-term commitments 162 9.4 Rents and leasing 163 9.5 Currency translation 164 9.6 Fee paid to the auditor 165 9.7 Events after the balance sheet date 165
Pursuant to EU Regulation (EC) No. 1606/2002, the present consolidated financial statement and group management report of Hannover Re have been drawn up in accordance with the International Financial Reporting Standards (IFRS) that are to be used within the European Union. We have also made allowance for the supplementary regulations applicable pursuant to § 315a Para. 1 German Commercial Code (HGB) and the supplementary provisions of the parent company's Articles of Association as amended on 12 May 2006.
For financial years beginning on or after 1 January 2006 IAS 19 "Employee Benefits" allows the option of recognising actuarial gains and losses from post-employment benefits outside profit or loss. Hannover Re does not intend to take advantage of this option, but will instead continue to apply the previously prescribed corridor method for determining the actuarial gains and losses to be recognised in income.
Under amendments to IAS 21 "The Effects of Changes in Foreign Exchange Rates" translation adjustments resulting from long-term receivables and loans provided between group entities are to be recognised outside profit or loss in a separate component of shareholders' equity. The amendment is applicable to financial years beginning on or after 1 January 2006. This change has no implications for the accounting of intragroup loans within Hannover Re.
In August 2005 IAS 39 "Financial Instruments: Recognition and Measurement" and IFRS 4 "Insurance Contracts" were amended with respect to the accounting of financial guarantee contracts and credit (re-)insurance contracts. Commencing 1 January 2006 credit reinsurance may be accounted in accordance with IAS 39. Hannover Re is not availing itself of this option, but instead continues to include its credit reinsurance business in the technical account.
Standards or changes in standards that have not yet entered into force
Notes accounting policies of which is not yet mandatory for the year under review and which are not being applied early by Hannover Re: As a consequence of the amendment of IAS 1 "Presentation of Financial Statements", disclosures are to be provided in the Notes that enable readers to understand the entity's objectives, policies and processes for managing capital and expand on the information contained in the statement of changes in shareholders' equity. The amended standard is mandatory for financial years beginning on or after 1 January 2007. First-time adoption will result in extended disclosures in the Notes.
The adjustment was made retrospectively in accordance with IAS 8. In the year under review we therefore recognised directly held minority shares in partnerships for the first time under other liabilities. This did not give rise to a revaluation effect for Hannover Re, since as before shares in partnerships were carried – as an approximation of fair value – at the latest available "net asset value" as at the balance sheet date. Direct minority interests in the profit or loss of partnerships are recognised under other income and expenses. Directly held minority shares of EUR 20.2 million were reclassified as at the balance sheet date, of which EUR 15.9 million was attributable to cumulative effects from previous years. In the current year the corresponding minority interests in profit and loss of EUR 0.4 million were charged to earnings.
Financial assets held to maturity are comprised of non-derivative assets that entail fixed or determinable payments on a defined due date and are acquired with the intent and ability to be held until maturity. They are measured at amortised cost. Payment of the corresponding premiums or discounts is spread across the duration of the instruments in the statement of income using the effective interest rate method. Depreciation is taken in the event of permanent impairment.
Financial assets at fair value through profit or loss consist of securities held for trading and those classified as measured at fair value through profit or loss since acquisition. In addition, all derivative financial instruments not acquired for hedging purposes are recognised here. Also reported here are all structured securities that would have needed to have been broken down had they been recognised as available for sale – a breakdown which Hannover Re did not make. Trading securities are carried at their fair value on the balance sheet date. If stock market prices are not available for use as fair values, the carrying values are determined – especially in the case of derivatives – using generally acknowledged measurement methods. All unrealised gains or losses from this valuation are recognised in net investment income. Securities held for trading encompass all fixed-income and variable-yield securities that we acquired for trading purposes and with the aim of generating short-term gains. Realised and unrealised gains or losses on financial assets carried at fair value through profit or loss are recognised directly in the statement of income in the period in which they occur.
Financial assets classified as available for sale are carried at fair value; accrued interest is recognised in this context. Unrealised gains and losses arising out of changes in the fair value of securities held as available for sale are recognised – with the exception of currency valuation differences on monetary items – in shareholder's equity after deduction of deferred taxes. All financial instruments that do not satisfy the criteria for classification as held to maturity, loans and receivables, at fair value through profit or loss, or trading are allocated to the category of available for sale.
Notes accounting policies below acquisition cost. In accordance with IAS 39.69 the reversal of impairment losses on equities to the statement of income once impairment has been taken is prohibited, as is adjustment of the cost basis. Impairment is tested in each reporting period using the criteria defined by Hannover Re. If a security is considered to be impaired on the basis of these criteria, IAS 39.68 requires that a value adjustment be recognised in the amount of the fair value less historical cost and less prior value adjustments, meaning that depreciation is taken on the fair value as at the closing date – if available, on the publicly quoted stock exchange price.
Investments in associated companies are valued at equity on the basis of the proportionate shareholders ' equity attributable to the Group. Under IAS 28.23, which requires the application of the equity method based on the investor's share of the results of operations of the investee, the goodwill apportionable to the associated companies must be recognised together with the investments in associated companies. The year-end result of an associated company relating to the Group's share is included in the net investment income and shown separately. As a general rule, the shareholders' equity and yearend result are taken from the associated company's latest available annual financial statement.
Real estate used by third parties (investment property) is valued at cost less scheduled depreciation and impairment. Straight-line depreciation is taken over the expected useful life – at most 50 years. Under the impairment test the market value of real estate for third-party use (recoverable amount) is determined using acknowledged valuation methods, compared with the carrying value and unscheduled depreciation is taken where necessary. Maintenance costs and repairs are expensed. Value-enhancing expenditures are capitalised if they extend the useful life.
Accounts receivable: the accounts receivable under reinsurance business and the other receivables are carried at nominal value; value adjustments are made where necessary on the basis of a case-by-case analysis.
Notes accounting policies safety margin for the risks of change, error and random fluctuation. They correspond to those used in the premium calculation and are adjusted if the original safety margins no longer appear to be sufficient.
Minority interests are shares in the equity of affiliated companies not held by companies belonging to the Group. IAS 1 "Presentation of Financial Statements" requires that minority interests be recognised separately within Group shareholders' equity. The minority interest in profit or loss is shown separately as profit appropriation following the net income ("thereof" note). This item refers mainly to minority interests in E+S Rück AG and its subsidiaries.
For further details, for example concerning the modelling of natural catastrophe scenarios and the assumptions relating to asbestos and pollution risks, the reader is referred to our comments in Section 6 "Management of technical and financial risks". We would further refer to our explanatory remarks on the technical reserves in Section 3.2 "Summary of major accounting policies" and Section 7.2 "Technical assets and liabilities."
In life business too the calculation of reserves and assets is crucially dependent on actuarial projections of the covered business. So-called model points are defined according to the type of business covered. The main distinguishing criteria are the age, sex and (non-)smoker status of the insured, tariff, policy period, period of premium payment and amount of insurance. The portfolio development is simulated for each model point, in which regard the key input parameters are either predefined by the tariff (e.g. allowance for costs, amount of premium, actuarial interest rate) or need to be estimated (e.g. mortality or disability rates, lapse rates). These assumptions are heavily dependent on countryspecific parameters and on the sales channel, quality of the cedant's underwriting and claims handling, type of reinsurance and other framework conditions of the reinsurance treaty. The superimposition of numerous model points gives rise to a projection, which incorporates inter alia assumptions concerning the portfolio composition and the commencement of covered policies within the year. Such assumptions are estimated at the inception of a reinsurance treaty and subsequently adjusted to the actual production.
Hannover America Private Equity Partners II GmbH & Co. KG, Hannover/Germany1) 94.3 EUR 82,678 1,966
GbR Hannover Rückversicherung AG/ E+S Rückversicherung AG Grundstücksgesellschaft, Hannover/Germany 77.9 EUR 60,655 968
Hannover Euro Private Equity Partners III GmbH & Co. KG, Hannover/Germany1) 63.8 EUR 36,131 769
Hannover Euro Private Equity Partners II GmbH & Co. KG, Hannover/Germany1) 54.9 EUR 32,296 3,328
Hannover Finance (UK) Limited, Virginia Water/United Kingdom 100.0 GBP 116,089 (10)
Hannover Life Reassurance Company of America, Orlando/USA 100.0 USD 111,396 2,380
Hannover Life Reassurance (Ireland) Ltd., Dublin/Ireland 2) 100.0 EUR 245,894 63,772
Hannover ReTakaful B.S.C. (c), Manama/Kingdom of Bahrain 100.0 BHD 20,000 –
Hannover Services (UK) Ltd., Virginia Water/United Kingdom 100.0 GBP 796 74
Hannover Reinsurance Group Africa (Pty) Ltd., Johannesburg/South Africa2) 100.0 ZAR 147,230 24,275
Hannover Reinsurance Group Africa (Pty) Ltd. compiles its own subgroup financial statement, including the following major companies in which it holds the following shares: Hannover Life Reassurance Africa Ltd., Johannesburg/South Africa2) 100.0 ZAR 108,177 7,032
Hannover Re Real Estate Holdings, Inc., Orlando/USA 5) 94.0 USD 232,259 28,027
Penates A, Ltd., Tortola/British Virgin Islands 5) 88.1 USD 89,912 6,014
HANNOVER Finanz GmbH Beteiligungen und Kapitalanlagen, Hannover/Germany6) 25.0 EUR 73,967 4,147
WPG CDA IV Liquidation Trust, Grand Cayman/Cayman Islands 7) 11) 12) 26.8 USD 444 (461)
The capital consolidation complies with the prescriptions of IAS 27 "Consolidated and Separate Financial Statements". Subsidiaries are consolidated as soon as Hannover Re acquires a majority voting 1) Financial year as at 30 September 2006 2) Provisional (unaudited) figures 3) Inactive company 4) IFRS figures 5) US GAAP figures 6) Financial year as at 31 December 2005 7) Company is in liquidation 8) Financial year as at 31 July 2006 9) Consolidated figures 10) Financial year as at 31 October 2005 11) Figures as at 31 August 2006 12) Formerly: WPG Corporate Development Associates IV (Overseas) L.L.C.
Minority interests in shareholders' equity are reported separately within Group shareholders' equity in accordance with IAS 1 "Presentation of Financial Statements". The minority interest in profit or loss, which forms part of net income and is shown separately after net income as a "thereof" note, amounted to EUR 88.4 million (EUR 32.1 million) as at 31 December 2006.
Since November 2000 Hannover Re has held voting equity interests in a special purpose entity for the securitisation of reinsurance risks in France and Monaco. The securitisation ended as per the contractual agreement on 18 November 2005. The bonds issued as security were repaid in full to investors. The special purpose entity is expected to be wound up in the first quarter of 2007.
Since 20 September 2002 Hannover Re has held the equity of a special purpose entity for the purchase and handling of so-called "life settlements" through its Irish subsidiary Hannover Life Reassurance (Ireland) Ltd. The equity participation was terminated in June 2006. The special purpose entity is closed for the acceptance of new business and is currently in the process of winding up. Hannover Re does not exercise a controlling influence in any of its business relations with the company.
Under a transaction designated "K5" Hannover Re again used the capital market to securitise reinsurance risks. The transaction had a volume of EUR 314.1 million as at the balance sheet date, which was further increased in January 2007. Please see Section 9.7 "Events after the balance sheet date" for further details. The securitisations were placed predominantly with institutional investors in North America. The portfolio assembled for the securitisation consists of non-proportional reinsurance treaties in the property, catastrophe, aviation and marine lines, including offshore business. Kaith Re Ltd., a special purpose entity domiciled in Bermuda, was used for the transaction. In accordance with SIC–12 the interest in Kaith Re Ltd. has been consolidated since 1 January 2006.
In the third quarter, with the aim of transferring peak exposures deriving from natural disasters to the capital market, Hannover Re issued a catastrophe ("CAT") bond that can be traded on a secondary market – the first time it has used such a tool. The CAT bond with a volume of USD 150 million was placed with institutional investors from Europe and North America by Eurus Ltd., a special purpose entity domiciled in the Cayman Islands. Hannover Re does not exercise a controlling influence over the special purpose entity. In accordance with IAS 39.9 the contract constitutes a derivative, the fair value of which as at 31 December 2006 amounted to EUR 0.1 million and which we carried under other invested assets as at the balance sheet date.
Notes major acquisitions 5. Major acquisitions, new formations and other corporate changes 5.1 Acquisitions and new formations
Effective 1 January 2006 Kaith Re Ltd., a Bermuda-based special purpose entity for the securitisation of reinsurance risks, was registered under the Segregated Accounts Act 2000. Since that date Hannover Re has held the majority interest of 88% in the company. The special purpose entity was also consolidated for the first time as at that date.
Within the subgroup Hannover Finance, Inc., Wilmington, Praetorian Insurance Company, Itasca (formerly Insurance Corporation of Hannover, Itasca), acquired the Wilmington-based Alea North America Specialty Insurance Company effective 29 September 2006 and renamed it Praetorian Specialty Insurance Company. The company has licences to write insurance business in 38 US states, including New York, California and Texas. Revaluation of the assets and liabilities within the scope of the acquisition gave rise to a reduction of EUR 0.5 million relative to the original book values. This resulted from the adjustment of the fair value of assets. The cost of purchase was EUR 26.3 million. Appropriate allowance was made for transaction costs. The transaction gave rise to goodwill of EUR 3.2 million in the third quarter, reflecting the Praetorian Group's improved access to the US market. The transaction as a whole is to be allocated to discontinued operations. We would refer the reader to our explanatory remarks in Section 5.2 "Disposals and discontinued operations" and Section 7.4 "Goodwill; present value of future profits on acquired life reinsurance portfolios."
Effective 3 October 2006 Hannover Re established Hannover ReTakaful B.S.C. (c) domiciled in Manama, Bahrain. Hannover Rück Beteiligung Verwaltungs-GmbH and Hannover Re hold 95% and 5% respectively of the company's shares. Hannover ReTakaful B.S.C. (c) writes worldwide reinsurance in accordance with Islamic law (known as retakaful business) and has received the appropriate licence from the Central Bank of Bahrain (CBB) – formerly Bahrain Monetary Agency. Business operations commenced on 1 January 2007.
Pursuant to IFRS 5 "Non-current Assets Held for Sale and Discontinued Operations", a component of Hannover Re 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 a discontinued operation classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. PFG was classified as a discontinued operation as at the balance sheet date.
Claims trends around the world as well as developments in relevant legal fields and applicable accounting standards are constantly monitored as part of the management of global risks. Analyses of claims trends paid special attention to losses associated with asbestos, pollution damage, electromagnetic fields and pharmaceutical risks. At the present time we are keeping a particularly close eye on developments in supervisory law (notably with respect to structured products), compliance requirements and tax law.
Risk spreading across lines of business is referred to as diversification. It reduces the required equity resources and hence enhances the efficiency of the employed capital. We determine the diversification effect using our internal risk model. Depending upon the capital requirement of our business segments and lines and their contribution to diversification, we define the cost of capital to be generated for each business unit.
Rise in the overall interest rate curve: from 200 basis points for the three-month interest rate to 100 basis points for the 10-year interest rate (with a linear interpolation between the two) (387) (465)
Not only do we need to take account of all conceivable scenarios, we also have to make a special assessment of certain (extreme or stress) scenarios for risk management purposes. We regularly determine the effects of selected stress scenarios on key balance sheet variables and performance indicators and evaluate them in relation to the planned figures.
• 34.7% of our recoverables from reinsurance business are secured by deposits or letters of credit. What is more, for the majority of our retrocessionaires we also function as reinsurer, meaning that in principle recoverables can potentially be set off against our own liabilities.
• Since 2002 we have reduced the level of recoverables by altogether 50.7%.
• The average default rate over the past three years was 0.6%.
The retention, i.e. the portion of assumed risks that we do not retrocede, developed as follows in recent years: Retention as a percentage of gross written premium 6.2 Technical risks
Risks of random fluctuation refer to possible divergences in the collective actual amount of claims from the estimated empirical value as a consequence of random fluctuations in the volume or number of claims.
The loss reserves in non-life business are determined using actuarial methods, primarily based on information provided by our cedants. Additional reserves are established where necessary on the basis of our own loss assessments. The so-called IBNR (incurred but not reported) reserve is constituted for claims that have probably already occurred but have not yet been reported to us (especially in the liability lines). Broken down into risk categories and regions, the total IBNR reserve established by the Hannover Re Group in the year under review amounted to EUR 2,786.9 million. Our own calculations of the reserves are also regularly reviewed and quality-controlled by external actuaries and auditors. The correct measurement of loss reserves for asbestos- and pollution-related claims is a highly complex matter. Decades may elapse between causation of the loss and reporting of the claim. Hannover Re's exposure to asbestos-related claims and pollution damage is, however, comparatively slight. The relative level of these reserves is measured using the so-called "survival ratio". This ratio expresses how many years the reserves would cover if the average level of paid claims over the past three years were to continue. As at the end of the year under review our survival ratio stood at 26.1.
In the context of regularly performed accumulation controls, the aggregate amounts of the expected exposures from one or more treaties for a specific combination of countries and hazard zones and a specific probability (e.g. 1% probability = 100-year return period) are calculated. These controls have been enhanced with the introduction of realistic extreme loss scenarios.
Notes management of technical and financial risks with respect to the calculation methods used and assumptions made (e.g. use of mortality and disability tables, assumptions regarding the lapse rate etc.).
Due to the prefinancing of our clients' new business acquisition costs the lapse risk and credit risk are also of major importance. In many instances the interest rate guarantee risk is only of minimal risk relevance owing to contractual exclusions and the use of conservative assumptions.
The liquidity risk refers to the risk that it may not be possible to sell holdings or close open positions due to the illiquidity of the markets – or to do so only with delays or price markdowns – as well as the risk that the traded volumes influence the markets in question. Regular liquidity planning and a liquid asset structure ensure that Hannover Re is able to make the necessary payments at all times. We manage the liquidity risk inter alia by allocating a liquidity code to every security. The spread of investments across the various liquidity classes is specified in the monthly investment reports and controlled by limits.
Listed equities (direct holdings and investment funds) At most 17.5% 8.2%
We use short-call and long-put options as well as swaps to partially hedge portfolios, especially against price, exchange and interest rate risks. In the year under review we also used derivative financial instruments to optimise our portfolio in light of risk/return considerations. 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 the use of such transactions.
7. Notes on the individual items of the balance sheet and statement of income 7.1 Investments including income and expenses
Investments are measured in accordance with IAS 39 "Financial Instruments: Recognition and Measurement."
Held to maturity due in one year 66,775 66,892 57,293 57,769 due after one through two years 27,742 27,295 49,301 51,086 due after two through three years – – 23,118 23,176 due after three through four years 21,615 21,749 – –
Financial assets at fair value through profit or loss due in one year 102,378 102,482 51,319 51,319 due after one through two years 895 1,224 4,310 4,489 due after two through three years – – 828 939 due after three through four years – – – –
In the second quarter fixed-income securities with a fair value of EUR 1.4 billion were reclassified from "available for sale" to "held to maturity". Taking account of cash flow projections, these securities will be permanently available to the company. The ability to hold these instruments to maturity enables us to reduce balance sheet volatility.
Government debt securities of EU member states 1,147,438 9,131 4,086 19,358 1,171,841
Fair value of the trading portfolio As at 31 December 2006 Hannover Re's trading portfolio was comprised exclusively of technical derivatives in an amount of EUR 22.4 million (EUR 22.8 million) that were separated from the underlying transaction and measured at fair value.
Financial assets – at fair value through profit or loss 5,351 4,311
Transfer of gains/losses from the fair-value measurement of the available-for-sale portfolio to the result for the period (29,662) (72,814)
Fixed-income securities – held-to-maturity 752,170 350,784 430,610 68,493 – – – – 1,602,057
Fixed-income securities – available-for-sale 7,045,032 2,730,169 2,473,254 445,955 32,075 284,744 10,117 40,804 13,062,150
Fixed-income securities – at fair value through profit or loss 1,170 28,177 27,543 48,124 24,680 36,061 708 – 166,463
Fixed-income securities – at fair value through profit or loss 906 47,689 8,145 19,328 3,555 6,753 – 1,735 88,111
Total fixed-income securities incl. derivatives 8,684,403 2,911,778 2,771,826 819,513 49,850 307,983 8,403 94,876 15,648,632
Fixed-income securities – loans and receivables – – 813,482 7,620 – 66,078 – 28,413 915,593
Fixed-income securities – at fair value through profit or loss – – 44,717 – – 121,746 – – 166,463
Equity securities – available-for-sale 19,728 2,760 1,410,630 6,871 – 122,763 21,490 1,829 1,586,071
Equity securities – trading – – 16,089 – – 6,279 – – 22,368
Fixed-income securities – held to maturity – – 414,042 – – 1,902 42,773 – 458,717
A small number of treaties in life and health reinsurance meet criteria which require the application of the prescriptions in IFRS 4.7 to 4.9 governing embedded derivatives. These standards require that certain derivatives embedded in reinsurance contracts be separated from the underlying insurance contract ("host contract"), reported separately at fair value in accordance with IAS 39 and recognised under investments. Fluctuations in the fair value of the derivative components are to be recognised in income in subsequent periods.
The derivative components of another group of contracts were measured on the basis of stochastic considerations. The valuation had no effect on investment income (EUR 4.0 million) as at the balance sheet date.
The application of the standards had no significant impact on the consolidated financial statement in the year under review. The fair values of the embedded derivates were recognised in the investments as at the balance sheet date and on this extent increased the investment income by altogether EUR 0.2 million (EUR 1.7 million).
Net book value at 31 December of the previous year 170,414 182,082
Balance at 1 January of the year under review 169,282 182,367
Gross book value at 31 December of the previous year 290,507 289,905
Net book value at 1 January of the year under review 280,605 302,684
Cumulative depreciation at 31 December of the previous year 92,385 84,150
Net book value at 1 January of the year under review 90,456 86,241
Cumulative depreciation at 31 December of the year under review 24,236 92,385
Net book value at 31 December of the previous year 198,122 205,755
Net book value at 1 January of the year under review 190,149 216,443
Net book value at 31 December of the year under review 17,979 198,122
The disposals relate primarily to the sale of eight developed sites by Hannover Re and E+S Rück, which produced a total net gain on disposal of EUR 1.8 million.
This item comprises investments with an original life of up to one year.
In non-life business, acquisition costs directly connected with the acquisition or renewal of contracts are deferred for the unearned portion of the premium.
Balance at 1 January of the year under review 2,170,377 2,080,825 thereof from discontinued operation 31,214 –
Net book value at 31 December of the year under review 2,228,152 2,228,501
For further explanatory remarks please see Section 3.2 "Summary of major accounting policies."
Loss and loss adjustment expense reserve 17,596,325 3,048,496 14,547,829 20,210,041 4,739,026 15,471,015
In one subsegment of financial reinsurance technical provisions were discounted at interest rates of between 6.5% and 8.2%. The interest rates are determined by the contractual agreements. The period from inception to expiry of such contracts is at least four years. The discounted amount totals EUR 20.2 million (EUR 44.2 million). As at year-end 2006 the discounted provisions amounted to EUR 105.3 million (EUR 283.3 million).
Specific value adjustment for retrocessions – 53,500 (53,500) – – –
Net book value at 31 December of the year under review 17,596,325 3,048,496 14,547,829 20,210,041 4,739,026 15,471,015
The net book value of the retro shares in the loss reserves of EUR 3,048.5 million includes specific value adjustments of EUR 53.5 million in the current financial year. The total amount of these reserves is EUR 14,766.9 million. The following remarks refer to this figure.
The table below shows the net loss reserve (loss and loss adjustment expense reserve) for property and casualty reinsurance in the years 1996 to 2006 as well as the run-off of the reserve.
The development of the euro relative to major foreign currencies is also a significant influencing factor in this context. In particular, the decline of the US dollar against the euro compared to the previous year by 11.4% led to an appreciable reduction in the loss and loss adjustment expense reserve on a euro basis.
IFRS 4.38 in conjunction with 4.39(d) requires information which helps to clarify the amount and timing of cash flows expected from reinsurance contracts. In the following tables we have shown the future maturities of the technical reserves and broken them down by the expected remaining durations. As part of our duration analysis we have directly deducted the deposits put up as security for these reserves, since the cash inflows and outflows from these deposits are to be allocated directly to the ceding companies. For further explanation of the recognition and measurement of the reserves please see Section 3.2 "Summary of major accounting policies."
Due after one through five years 7,581,910 1,937,418 5,644,492 138,284 15,273 123,011
Due after five through ten years 2,378,619 518,146 1,860,473 299,281 10,513 288,768
The average duration of the loss and loss adjustment expense reserves was 5.9 years (5.6 years), or 6.2 years (6.1 years) after allowance for the corresponding retrocession shares. Benefit reserves had an average duration of 13.3 years (13.7 years) – or 13.4 years (13.8 years) on a net basis.
Benefit reserves are established for life, annuity and health reinsurance contracts. Based on the duration of these contracts, long-term reserves are constituted for life and annuity policies and predominantly short-term reserves are set aside for health and personal accident business.
The benefit reserves are calculated on the basis of the following parameters: 1.interest income; 2.lapse rates; 3.mortality and morbidity rates.
At the inception of every reinsurance contract, assumptions are made and locked in regarding the aforementioned components 1 to 3 for the purpose of calculating the benefit reserves. At the same time, safety/fluctuation loadings are built into each of these components. In order to ensure at all times that the originally chosen assumptions continue to be adequate throughout the contract, checks are made on a regular – normally annual – basis in order to determine whether these assumptions need to be adjusted ("unlocked").
Net book value at 31 December of the previous year 1,977,570 463,528 1,514,042 1,825,914 489,085 1,336,829
anticipated future income will not be sufficient to fund future payments, the entire shortfall is recognised in income by first writing off capitalised acquisition costs corresponding to the shortfall. Any remaining difference is constituted as an additional provision.
We have identified insurance contracts which do not satisfy the requirements of SFAS 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts". These involve reinsurance treaties under which the risk transfer between the ceding company and the reinsurer is of merely subordinate importance. These contracts were recognised using the so-called "deposit accounting " method and hence eliminated from the technical account. The profit components were netted under other income/expenses. The payment flows resulting from these contracts were reported in the cash flow statement under financing activities. The balances were shown as contract deposits, the fair values of which corresponded approximately to their book values.
The contract deposits increased by EUR 1,083.8 million in the year under review from EUR 2,443.0 million to EUR 3,526.8 million. The rise was due principally to growth in new business in the area of non-traditional life reinsurance.
Net book value at 31 December of the previous year 193,098 173,315
Net book value at 1 January of the year under review 175,628 193,610
Group, Inc. in 1999. For further information on the method used to test impairment the reader is referred to our explanatory remarks in Section 3.2 "Summary of major accounting policies."
In the context of the planned sale of Praetorian Financial Group by Hannover Finance, Inc. and the associated classification as a discontinued operation, IFRS 5 requires an impairment test for the goodwill existing at the time of such classification. On this basis, an impairment of EUR 19.9 million was taken on the goodwill recognised for Hannover Finance, Inc.
Deferred tax assets and liabilities are booked in accordance with IAS 12 for tax reductions and additional tax charges expected in subsequent financial years, insofar as they result from different valuations of individual balance sheet items. In principle, such valuation differences may arise between the national tax balance sheet and the national commercial balance sheet, the uniform consolidated balance sheet and the national commercial balance sheet as well as from tax loss carry-forwards and
Net book value at 31 December of the previous year 7,472 9,767
Net book value at 31 December of the year under review 5,102 7,472
Domestic/foreign breakdown of recognised tax expenditure/income tax credits. Deferred taxes are based on the current tax rates. In the event of a change in the tax rates on which the calculation of the deferred taxes is based, appropriate allowance is made in the year in which the change in the tax rate is stipulated in law with sufficient certainty. Deferred taxes at the Group level are booked using the Group tax rate of 40%.
Breakdown of actual and deferred income taxes: Notes notes on the individual items
Please refer to Section 3.2 "Summary of major accounting policies" regarding the recognition and measurement of deferred tax assets and liabilities.
Figures in EUR thousand 1–5 years 6–10 years > 10 years Unlimited Total
Availability of limited and unlimited loss carry-forwards in subsequent years 7.6 Staff and expenditures on personnel
Figures in EUR thousand 2006 2005 a) Wages and salaries aa) Expenditures on insurance business 88,724 98,096 ab) Expenditures on the administration of investments 8,275 8,721 b) Social security contributions and expenditure on provisions and assistance ba) Social security contributions 13,186 19,853 bb) Expenditures for pension provision 14,453 13,899 bc) Expenditures for assistance 1,654 367 7.7 Provisions for pensions and other post-employment benefit obligations
Expenditures on personnel The expenditures on insurance business, claims expenses (claims settlement) and expenditures on the administration of investments include the following personnel expenditures: The table shows the personnel expenditures of the continuing operations. In the year under review additional wages and salaries of EUR 34.3 million (EUR 6.1 million) and social security contributions of EUR 7.5 million (EUR 1.4 million) were recognised in profit or loss from the discontinued operation.
From 1997 onwards it has been possible to obtain pension commitments through deferred compensation. Following the merger with Gerling-Konzern Lebensversicherungs-AG, Cologne, the employee -funded commitments included in the provisions for accrued pension rights are protected by an insurance contract with HDI Gerling Lebensversicherung AG, Hamburg, at unchanged conditions.
Projected benefit obligation at the beginning of the year under review 85,233 63,382
Projected benefit obligation from wholly or partially funded plans (before deduction of fair value of plan assets) 8,113 11,175
Projected benefit obligation at the end of the year under review 77,400 85,233
Funded status of plan (present value of earned benefit entitlements less fund assets) 70,098 74,733
Fair value at the beginning of the year under review 10,500 7,204
The fair value of the plan assets of US plans developed as follows: The change in the projected benefit obligation of the pension commitments as well as their breakdown into plans that are unfunded or are wholly or partially funded was as follows: Notes notes on the individual items
The structure of the asset portfolio underlying the plan assets was as follows: The fair value of plan assets as at the balance sheet date included amounts totalling EUR 3.7 million (EUR 3.8 million) for own financial instruments.
The recognised provision for pensions developed as follows in the year under review: Figures in EUR thousand 2006 2005
Net provisions for pensions at 31 December of the previous year 57,626 55,265
The components of the net periodic pension cost for benefit plans were as follows: Figures in EUR thousand 2006 2005
In the coming financial year Hannover Re expects payments of EUR 5.7 million under the pension plans set out above.
Actuarial gains of EUR 0.4 million (EUR 0.3 million) were recognised as at the balance sheet date in other comprehensive income.
On 31 March 1999 Hannover Finance, Inc., Wilmington/USA, issued subordinated debt in the form of a floating-rate loan in the amount of USD 400.0 million with a term of 30 years. The due date of the loan is 31 March 2029. It may be redeemed by the issuer no earlier than 31 March 2009. In order to hedge against the risk of interest rate changes associated with this loan, the company purchased interest rate swaps in 1999 in the same amount which expire on 31 March 2009. In this way, the interest rate is converted from a floating rate to a fixed rate for a period ending commensurate with the first opportunity to redeem the loan. In February 2004 and May 2005 Hannover Re bought back portions of the debt in the amount of USD 370.0 million and USD 10.0 million respectively, equivalent to altogether 95% of the total volume. After repurchase of the debt the interest rate swaps were recognised as stand-alone derivatives and closed out in the second quarter of 2006. Following close-out of the swaps the bond carries a coupon of LIBOR +80 basis points until 31 March 2009, subsequently stepping up to LIBOR +180 basis points.
In December 2005 the Praetorian Financial Group, Inc. – which in the year under review is classified as a discontinued operation – issued "Trust Preferred Securities" in an amount of USD 80.0 million with a term of 30 years and a yield of quarterly LIBOR + 310 basis points. The "Trust Preferred Securities" were placed with institutional investors. Redemption prior to March 2011 is possible only under special circumstances and at a price of 107.5% of the nominal amount, but they may be redeemed at any time thereafter. In the year under review the securities allocable to the discontinued operation with a fair value of EUR 62.1 million (EUR 67.6 million) were recognised under liabilities connected with assets held for sale.
The aggregated fair value of the extended subordinated loans is based on quoted, active market prices. If such price information is not available, fair value was determined on the basis of the recognised effective interest rate method or estimated using other financial assets with similar rating, duration and return characteristics. Under the effective interest rate method the current market interest rate levels in the relevant fixed-interest-rate periods are always taken as a basis.
Present value of future profits on acquired life reinsurance portfolios 5,102 7,472
No dividends were paid in the year under review for 2005.
On the occasion of the Annual General Meeting to be held on 3 May 2007 it will be proposed that a dividend of EUR 1.60 per share, equivalent to a total amount of EUR 193.0 million, should be distributed for the 2006 financial year. The dividend proposal does not form part of this consolidated financial statement.
Gross book value after currency translation 83,412 73,541 thereof from discontinued operation 3,673 –
Gross book value at 31 December of the year under review 83,344 85,606
Cumulative depreciation at 31 December of the year under review 59,612 55,389
Net book value at 31 December of the previous year 30,217 26,597
Net book value at 31 December of the year under review 23,732 30,217
With regard to the measurement of fixtures, fittings and equipment, the reader is referred to our explanatory notes on the other assets in Section 3.2 "Summary of major accounting policies."
The additions can be broken down into EUR 1.5 million for purchased software and EUR 10.1 million for advance payments on self-provided software.
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 39.7 million (EUR 36.2 million).
Interest pursuant to 233a Fiscal Code (AO) 15,121 – 15,121 – –
Effective 1 January 2006 Hannover Re and E+S Rück assumed equal shares of the interest held by Hannoversche Lebensversicherung AG, Hannover, in GbR Hannover Rückversicherung AG/E+S Rückversicherung AG. Under the buyout agreement dated 9 December 2005 Hannoversche Lebensver-
Notes related party disclosures sicherung AG received compensation of EUR 10.7 million, which was paid in equal portions by Hannover Re and E+S Rück.
Under a real estate contract dated 28 June 2006 Hannover Re sold the land and premises at Riethorst 4, Hannover, to HDI Industrie Versicherung AG for a price of EUR 6.0 million.
As part of long-term lease arrangements companies belonging to the Hannover Re Group rented out business premises in 2006 to Ampega Investment AG, HDI Service AG, HDI Industrie Versicherung AG, HDI Privat Versicherung AG and Protection Reinsurance Intermediaries AG, all based in Hannover. IT and management services were also performed for the latter under three service contracts.
Within the contractually agreed framework AmpegaGerling Asset Management GmbH performs investment and asset management services for Hannover Re and some of its subsidiaries. Assets in special funds are managed by AmpegaGerling Investment GmbH, into which Ampega Investment AG was merged in the year under review. AmpegaGerling Immobilien Management GmbH performs services for Hannover Re within the framework of a management contract.
With regard to this information we would refer the reader to the remuneration report included as part of our Corporate Governance report.
With effect from 1 January 2000 the Executive Board of Hannover Re, with the consent of the Supervisory Board, introduced a virtual stock option plan that provides for the granting of stock appreciation rights to certain managerial staff. The content of the stock option plan is based solely on the Conditions for the Granting of Stock Appreciation Rights. All the members of the Group's management are eligible for the award of stock appreciation rights. Exercise of the stock appreciation rights does not give rise to any entitlement to the delivery of Hannover Re stock, but merely to payment of a cash amount linked to the performance of the Hannover Re share. Recognition of transactions involving stock appreciation rights with cash settlement is governed by the requirements of IFRS 2 "Share-based Payment".
Upon exercise of a stock appreciation right the amount paid out to the entitled party is the difference between the basic price and the current market price of the Hannover Re share at the time of exercise. In this context, the basic price corresponds to the arithmetical mean of the closing prices of the Hannover Re share on all trading days of the first full calendar month of the allocation year in question. The current market price of the Hannover Re share at the time when stock appreciation rights are exercised is determined by the arithmetical mean of the closing prices of the Hannover Re share on the last twenty trading days prior to the first day of the relevant exercise period.
The allocations for the years 2000 and 2002 to 2004 gave rise to the following commitments in the year under review. No allocations were made for 2001 or 2005.
Expense in the 2006 financial year (in EUR million) 1.17 1.25 0.62 (0.07)*
Stock appreciation rights of Hannover Re *Although the maximum amount was reached some participants did not exercise all stock appreciation rights
In the year under review the waiting period expired for 100% of the stock appreciation rights awarded in 2000, 60% of those awarded in 2002 and 40% of those awarded in 2003. 153,879 stock appreciation rights from the 2000 allocation year, 160,824 stock appreciation rights from the 2002 allocation year and 278,257 stock appreciation rights from the 2003 allocation year were exercised. The total amount paid out stood at EUR 3.5 million.
The calculations were based on the year-end closing price of the Hannover Re share of EUR 35.08 as at 29 December 2006, expected volatility of 32.50% (historical volatility on a five-year basis), an expected dividend yield of 4.42% and risk-free interest rates of 3.90% for the 2000 allocation year, 3.93% for the 2002 allocation year, 3.94% for the 2003 allocation year and 3.96% for the 2004 allocation year.
The average fair value of each stock appreciation right was EUR 5.49 for the 2000 allocation year, EUR 8.39 for the 2002 allocation year, EUR 7.98 for the 2003 allocation year and EUR 12.03 for the 2004 allocation year.
The stock appreciation rights of Hannover Re have developed as follows since 2001:
Employees who are not members of the Executive Board or Supervisory Board were granted mortgages and mortgage loans to finance residential property. These loans are all secured by a first charge on property. Bad debt losses did not exist and are not anticipated.
In connection with the acquisition of Lion Insurance Company, Trenton/USA, by Hannover Finance, Inc., Wilmington/USA – a subsidiary of Hannover Re –, a legal dispute exists with the former owners of Lion Insurance Company regarding the release of a portion of the purchase price at that time which is held in trust as well as a commitment to pay further portions of the purchase price and incentive compensation under management contracts. There is also a legal dispute regarding the release of a trust account that serves as security for liabilities of the previous owners in connection with a particular business segment.
Hannover Re has secured by subordinated guarantee a subordinated debt in the amount of USD 400.0 million issued in the 1999 financial year by Hannover Finance, Inc., Wilmington/USA. In February 2004 and May 2005 Hannover Re bought back portions of the subordinated debt in amounts of USD 370.0 million and USD 10.0 million respectively, leaving an amount of USD 20.0 million still secured by the guarantee.
Hannover Re has placed three subordinated debts on the European capital markets through its subsidiary Hannover Finance (Luxembourg) S.A. Hannover Re has secured by subordinated guarantee both the debt issued in 2001, the volume of which now stands at EUR 138.1 million, and the debts from financial years 2004 and 2005 in amounts of EUR 750.0 million and EUR 500.0 million respectively. For further details please see Section 7.8 "Loans and long-term liabilities."
As security for our technical liabilities, various financial institutions have furnished sureties for our company in the form of letters of credit. The total amount of the letters of credit as at the balance sheet date was EUR 2,684.2 million (EUR 3,154.2 million). Here too the appreciable decrease was mainly due to exchange rate fluctuations.
Outstanding capital commitments with respect to special investments exist in the amount of EUR 91.3 million (EUR 118.3 million) for E+S Rück and EUR 155.0 million (EUR 233.4 million) for Hannover Re. These involve primarily private equity funds and venture capital firms.
Several Group companies are members of the association for the reinsurance of pharmaceutical risks and the association for the insurance of German nuclear reactors. In the event of one of the other pool members failing to meet its liabilities, an obligation exists to take over such other member's share within the framework of the quota participation.
The significant decline in the total leasing commitments resulted from the cancellation of longterm lease agreements. The lease agreement concluded by the Clarendon Group in 2003 for business premises, the term of which originally ran until 29 August 2023, was cancelled effective March 2007. The disclosure of Praetorian Financial Group, Inc. – which includes Praetorian Insurance Company, Itasca – as a discontinued operation gave rise to a further decrease in the total leasing commitments.
Items in the annual financial statements of Group subsidiaries were measured in the currencies of the economic environment in which the subsidiary in question primarily operates. These currencies are referred to as functional currencies. The euro is the reporting currency in which the consolidated financial statement is prepared.
Winter storm "Kyrill", which swept across large parts of Europe on 18 and 19 January 2007, caused insured losses in the order of EUR 4.0 to 7.0 billion. The exact scale of insured damage cannot yet be reliably estimated in view of the multitude of small- and medium-sized losses and the large number of countries affected. With this in mind Hannover Re expects a net loss burden of EUR 120.0 to 180.0 million before tax; the bulk of this expenditure is attributable to claims in Germany. The total loss amount was alleviated by the "K5" risk securitisation, the volume of which had been increased as at 1 January 2007.
Effective 1 January 2007 Hannover Re completed the reorganisation of some of its Irish Group companies. With the exception of specific reinsurance contracts, the business operations of E+S Reinsurance (Ireland) Ltd. and Hannover Reinsurance (Dublin) Ltd. were transferred by sale to Hannover Reinsurance (Ireland) Ltd. Since that date E+S Reinsurance (Ireland) Ltd. and Hannover Reinsurance (Dublin) Ltd. have been in run-off and are no longer writing new business.
We have audited the consolidated financial statements prepared by the Hannover Rückversicherung AG, Hannover, comprising the balance sheet, the income statement, statement of changes in equity, cash flow statement and the notes to the consolidated financial statements, together with the group management report for the business year from 1 January to 31 December 2006. The preparation of the consolidated financial statements and the group management report in accordance with IFRS, as adopted by the EU, and the additional requirements of German commercial law pursuant to § 315a Para 1 HGB and supplementary provisions of the articles of incorporation are the responsibility of the parent company's management. Our responsibility is to express an opinion on the consolidated financial statements and on the group management report based on our audit.
As part of its discussion of important individual projects the Supervisory Board considered, inter alia, the sale of the US subsidiary Praetorian Financial Group, Inc., Wilmington, Delaware, for a price of USD 800 million. Following disposal of this company, in which our US specialty insurance is concentrated, Hannover Re will focus exclusively on its core business of reinsurance going forward. Another development of special significance was the establishment of a Sharia-compliant reinsurance company (Hannover ReTakaful B.S.C.) in Bahrain. This move was prompted by the fact that the market for such reinsurance products in predominantly Islamic countries is enjoying rapid and sustained growth.
Against the backdrop of the severe strains incurred from various hurricanes in the southeastern United States and the Caribbean in 2004 and 2005, the Supervisory Board examined the attractiveness of natural catastrophe business in the context of a specialist analysis and informed itself of measures taken to improve accumulation and aggregate control and to reduce US windstorm exposure. In this connection the findings of a special audit of the accumulation assessment systems conducted by the Executive Board with external support were also discussed in detail. The explanation provided by the Executive Board of the retrocession structure in property and casualty reinsurance also formed part of the discussion of this issue.
The accounting, annual financial statements and management report were audited by KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft (KPMG DTG), Hannover. The Supervisory Board selected the auditor for the 2006 audit and the Chairman of the Supervisory Board awarded the concrete audit mandate. In addition to the usual audit tasks, the audit focused particularly on an examination of the internal control system for the avoidance of fraudulent acts as well as of the compensation paid internally within the Group across countries (transfer pricing with a special eye to the "Ordinance on records regarding income allocation" ("Gewinnaufzeichungsverordnung "). A special focus in the context of the consolidated financial statements to be drawn up by Hannover Re in accordance with International Financial Reporting Standards (IFRS) was the examination of the appropriateness of the procedures and documentation used to show an adequate risk transfer under reinsurance contracts. Collaboration with the auditors took place on a trusting and cooperative basis. The special challenges associated with the international aspects of the audit were met without reservation. Since the audit did not give rise to any objections KPMG DTG issued an unqualified audit certificate. The Balance Sheet Committee discussed the annual financial statements and the management report at a meeting attended by the auditors. The auditors' report was distributed to all members of the Supervisory Board and scrutinised in detail – with the participation of the auditors – at the Supervisory Board meeting held to consider the annual results. The auditors will be present at the Annual General Meeting.
– in each case drawn up as at 31 December 2006 and awarded the auditors' unqualified audit certificate – and have no objections. The Supervisory Board has thus approved the annual financial statements and the consolidated financial statements; the annual financial statements are thereby adopted. We concur with the Executive Board's proposal regarding the appropriation of the disposable profit
With effect from the end of the Annual General Meeting on 12 May 2006 Mr. Bodo Uebber resigned his seat on the Supervisory Board as a representative of the shareholders. The Supervisory Board thanked Mr. Uebber for his constructive work and praised his contribution to the company's development. At the request of the Executive Board, Hannover County Court – which has jurisdiction in this matter – appointed Dr. Immo Querner as a member of the company's Supervisory Board with effect from 27 June 2006 in accordance with § 104 German Stock Corporation Act.
Corporate Governance describes for the Executive Board and Supervisory Board of Hannover Re the legal and actual institutional framework for the management and supervision of the company in all key areas of enterprise constitution. Corporate Governance is not an end in itself, nor is it limited to rigid compliance with formal rules. Nor is it in any way seen as a necessary "going through the motions"; rather, it is conceived of as a dynamic process aimed at bringing about sustained growth in the value of the company as well as strengthening and consolidating on a lasting basis the trust placed in the enterprise by our shareholders, business partners, clients, employees and the general public. On this basis Hannover Re supports the principles of value-based and transparent enterprise management and supervision as defined in the German Corporate Governance Code (DCGK) and recognises their importance in guiding its activities.
It should further be emphasised that the 2006 Annual General Meeting resolved by a large majority, at the proposal of the Executive Board and the Supervisory Board, to use the scope created by the entry into force at the end of 2005 of the Act on Corporate Integrity and Modernisation of the Right of Avoidance (UMAG) in order to promote the brisk conduct of the Annual General Meeting and it resolved to amend the Articles of Association accordingly. In addition, the Supervisory Board resolved at its final meeting of the year to subject the work of the Supervisory Board to an efficiency audit at the start of 2007 based on a self-assessment questionnaire. A major goal of this project is to further enhance the already trusting cooperation between the Supervisory Board and the Executive Board. The findings of this audit will be collated by the Corporate Governance Officer in strict confidentiality and presented to the Supervisory Board in an anonymised and aggregated form at the first meeting of 2007.
The remuneration report summarises the principles used to determine the remuneration of the Executive Board of Hannover Re and explains the structure and amount of the income received by the Executive Board in the 2006 financial year. In addition, the amount of the remuneration paid to the Supervisory Board and the principles according to which it is determined are explained.
The remuneration report is based on the recommendations of the German Corporate Governance Code and contains information which forms part of the notes to the 2006 consolidated financial statement as required by IAS 24 "Related Party Disclosures." Under German commercial law, too, this information includes data specified as mandatory for the notes (§ 314 HGB) and the management report (§ 315 HGB). These details are discussed as a whole in the remuneration report. Consequently, we have not provided any further explanation of the information discussed in the remuneration report in the Group management report.
Structure of the remuneration received by the Executive Board With this objective in mind, the remuneration system consists of three components: fixed emoluments, a variable bonus as well as a share-based remuneration component based on a virtual stock option plan with a long-term incentive effect and risk elements.
As at 31 December 2006 the members of the Executive Board had at their disposal a total of 172,874 (300,450) granted, but not yet exercised stock appreciation rights with a fair value of EUR 1.5 million (EUR 1.8 million).
Sideline activities of the members of the Executive Board The members of the Executive Board require the approval of the Supervisory Board to take on sideline activities. This ensures that neither the remuneration granted nor the time required for this activity can create a conflict with their responsibilities on the Executive Board. If the sideline activities involve seats on supervisory boards or comparable control boards, these are listed and published in the Annual Report of Hannover Re. The remuneration received for supervisory board seats at Group companies is deducted when calculating the variable bonus and shown separately in the above table.
The remuneration for a financial year is due upon completion of the Annual General Meeting that ratifies the acts of the Supervisory Board for the financial year in question. Transaction tax payable upon the remuneration is reimbursed by the company.
Wolf-Dieter Baumgartl Chairman of the – Supervisory Board – Standing Committee – Balance Sheet Committee 90.2
Dr. Paul Wieandt Deputy Chairman of the Supervisory Board Member of the Balance Sheet Committee 29.1
Dr. Immo Querner Member of the Supervisory Board (since 27 June 2006) 0.5
Dealings in shares, options and derivatives of Hannover Rückversicherung AG effected by members of the Executive Board or Supervisory Board of Hannover Re or by other persons with managerial functions who regularly have access to insider information concerning the company and who are authorised to take major business decisions – as well as such dealings conducted by certain persons closely related to the aforementioned individuals – in excess of EUR 5,000 are to be reported pursuant to § 15a Securities Trading Act (WphG). No reportable transactions took place in the 2006 financial year.
The German Corporate Governance Code sets out major statutory requirements governing the management and supervision of German listed companies. It contains both nationally and internationally recognised standards of good and responsible enterprise management. The purpose of the Code is to foster the trust of investors, clients, employees and the general public in German enterprise management. Under § 161 Stock Corporation Act (AktG) it is incumbent on the Management Board and Supervisory Board of German listed companies to provide an annual declaration of conformity with the recommendations of the "German Corporate Governance Code Government Commission" published by the Federal Ministry of Justice or to explain which recommendations of the Code were/are not applied. Implementation of the recommendations by Hannover Rückversicherung AG does not diverge from the German Corporate Governance Code (amended version of 12 June 2006) in any respect.
Bermuda Hannover Re (Bermuda) Ltd. 50 Parliament Street, 2nd Floor Hamilton, HM 12
Taiwan Hannover Rückversicherung AG Taipei Representative Office 17F No. 167, Tun Hwa North Road Taipei 105, Taiwan Life Dept.
Block assumption transaction (BAT): proportional reinsurance treaty on a client's life or health insurance portfolio, by means of which it is possible, inter alia, for our clients to realise in advance the future profits so as to be able to efficiently ensure the attainment of corporate objectives, e.g. in the areas of financial or solvency policy.
Due diligence: activity generally performed as part of a capital market transaction or in the case of mergers and
acquisitions, covering inter alia an examination of the financial, legal and tax situation.
Financial reinsurance: 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.
Proportional reinsurance: reinsurance treaties on the basis of which shares in a risk or ➞ portfolio are reinsured under the relevant direct insurer's conditions. ➞ Premiums and losses are shared proportionately on a pro-rata basis. This is in contrast to ➞ non-proportional reinsurance.
Quota share reinsurance: form of proportional reinsurance under which the reinsurer assumes a contractually set percentage share of the written risk. Since the insurer is responsible for acquisition, pricing, policy administration and claims handling, the administrative expenditure for the reinsurer is very low. The latter therefore participates in the aforementioned expenses through payment of a reinsurance commission. This commission can amount
Glossary to 15%–20% of the original premium depending upon the market and cost situation.
Patricia Fogden: Pages 52/53 Prof. Dr. Heike Wägele/Universität Bonn: Pages 60/61
14 March 2007 Annual Results Press Conference Hannover Re Karl-Wiechert-Allee 50 30625 Hannover, Germany 15 March 2007 DVFA Analysts' meeting, Frankfurt 15 March 2007 Analysts' meeting, London 03 May 2007 Annual General Meeting Beginning 10:30 a.m.
Hannover Congress Centrum Theodor-Heuss-Platz 1–3 30175 Hannover, Germany 03 May 2007 Interim Report 1/2007 03 August 2007 Interim Report 2/2007 07 November 2007 Interim Report 3/2007 06 May 2008 Annual General Meeting Beginning 10:30 a.m.