KEY FIGURES of the Hannover Re Group * excluding life and health reinsurance and on the basis of net premiums earned
For six years in succession I have been able to report record results in this letter. However, with the occurrence of the largest loss in the history of the insurance industry – the terrorist attacks of 11 September 2001 in the USA – your company has been affected by an event which severely impacted the 2001 result. As one of the leading reinsurers in the international aviation business and with a large proportion of our business stemming from the US market, the strains associated with this act of terrorist vandalism substantially exceed the maximum burden previously considered possible in our very large loss scenarios. Thanks to the strategy of diversification initiated some years ago we were nevertheless able – in contrast to the majority of our competitors – to avoid a balance sheet deficit and even generated a modest net income for the year of EUR 11.1 million. For the first time, however, we are not in a position to propose the distribution of a dividend to the Annual General Meeting.
Overall, then, I take pride in the fact that we managed to absorb an event of such unimaginable dimensions without having to fall back on our capital and reserves. Consequently, even in the wake of 11 September we were able to maintain very good ratings from the agencies Standard & Poor's and A.M. Best. This achievement sets us apart from many of our competitors and gives us a substantial competitive advantage – especially on the property and casualty reinsurance market, where more than ever before the key criteria are security and optimal capital resources. Our goal is to exploit this competitive edge – which offers very strong earnings prospects in the present pronounced market upswing – to the absolute maximum in the interest of our shareholders. As things currently stand, we shall be able to bounce back in the future to the accustomed high level of profitability of the past years and once again pay an attractive dividend.
We also vigorously expanded our other business segments. Particularly gratifying growth was achieved in program business. Inter Hannover – a UK subsidiary charged with developing program business in Europe – established its position in a remarkable fashion. The premium volume written by this company rose by 74%. Even at this early stage after launching this business in Europe, we feel vindicated in our conviction that the USA is not the only market where program business can be successfully transacted.
As is to be expected in view of the events that occurred in the year under review, the quality of results in our business segments varied. It was only the good performance of life and health and financial reinsurance as well as program business which enabled your company to show a break–even result in the 2001 financial year.
Life and health reinsurance gave a further substantial boost to the earnings before tax. In this segment it is also important to bear in mind the increase in the present value of future profits on the portfolio of in–force business – a factor which is not reflected in the consolidated statement of income. Following unsatisfactory results in the previous year, program business generated a positive result in the year under review, thereby helping to offset the losses in property and casualty reinsurance. Furthermore, financial reinsurance – our most highly profitable business segment – was able in 2001 to improve on the already high operating profit of the previous year.
On the financial markets 2001 was a difficult year. Stock markets, which appeared to have bottomed out in the previous year, showed only modest gains in the first half of the year. Movements on bond markets were influenced by the lowered base rates set by central banks. Given this already difficult climate, the stock market collapse after 11 September came as a particularly heavy blow. Although our net investment income showed another overall increase, this was entirely attributable to the growth in our investment portfolio and the associated rise in ordinary income.
The performance of our company's share in the period until early September can be described as relatively satisfactory. Only as it became caught up in the wake of 11 September did the share lose value on a massive scale, falling to EUR 38.51 on 21 September – its lowest point since mid–1997. Although it had recovered some ground by year-end, the share price failed to climb back to its pre-September 11 level. In the months that followed we conducted an intensive information campaign aimed at strengthening confidence in our share and restoring its value. Only during the early months of the current year have these efforts met with appreciable success, as by further stepping up our Investor Relations activities – not only in traditional markets but also in new regions such as Scandinavia, the Benelux countries and Asia – we have been able to stimulate demand for our share.
In order to give you some insight into the current prospects for property and casualty reinsurance at this point in time, I would like to take a moment to discuss certain market movements in greater depth: In the current year we shall be able to almost triple our premium volume in aviation business – an area where we suffered heavy losses in the year under review. While this growth is in part due to the expansion of our portfolio, it derives first and foremost – and this is most gratifying – from premium increases under existing business relationships where the scope of coverage is in every respect limited. We now reinsure risks which hitherto have been included in insurance coverage at no extra premium – for example losses caused by terrorism – only on a separate basis and at adequate premium rates.
Details of memberships of legally required supervisory boards and comparable control boards at other domestic and foreign business entreprises are contained in the report devoted to the parent company.
Karl Heinz Midunsky Corporate Vice President and Treasurer Munich of Siemens AG
Dr. Erwin Möller Member of the Executive Board Hannover of HDI Haftpflichtverband der
André Arrago Treaty business of Property and Casualty Hannover Reinsurance European Romance, Latin American Deputy Member and Arab Countries, Northern and Eastern Europe, (from 1 September 2001) Asia and Australasia
Ulrich Wallin Specialty division (worldwide facultative Hannover business, worldwide treaty and facultative Deputy Member business Marine, Aviation and Space); (from 1 September 2001) Treaty business of Property and Casualty
... and insurance stocks were particularly hard hit 2001 was one of the most difficult years in stock market history ...
Total market value of listed stocks eroded on an unprecedented scale in the year under review
Particularly after recent events on the capital markets, we see further considerable scope for our share to develop favourably. Of course we cannot influence dramatic economic events and fundamental trends on the stock markets. Yet a clear strategy combined with the publication and achievement of our key return-on-equity parameters as well as transparency with regard to our expectations for 2002 establish the necessary conditions for realising the potential of our share.
... but appears capable of realising its potential in the new year
We do not consider the standard stock indices to be representative yardsticks for measuring the performance of our share; instead, we refer to the unweighted "Reactions" World Reinsurance Index, which combines all listed reinsurers worldwide. Our goal is to achieve an increase in the share price which on a 3-year moving average surpasses the performance of this benchmark. While over the past three years the Hannover Re share outperformed global reinsurance stocks almost without exception, it showed a greater decline and slower recovery in the wake of the 11 September terrorist attacks. Closer examination of our share's development in the period until the end of March 2002, however, clearly reveals its potential: although our share began to move upwards at a later point in time, its continuity sets it apart from the World Reinsurance Index. Already by the end of March 2002 the Hannover Re share showed only a difference of 2% compared to the World Reinsurance Index and it gained 24% since the turn of the year.
Losses from the terrorist attacks will be offset in the coming years 1) DVFA – revised calculation method (without adjustment for amortisation of goodwill) 2) Earnings per share calculated in accordance with US GAAP
We conduct highly efficient asset management so as to safeguard an optimal return on equity. Equity represents the most expensive method of financing our business. In order to efficiently structure our capital requirements and hence ensure the highest possible return on the capital invested by our shareholders, we therefore make use of more cost-effective capital substitutes. These take various forms, including the securitisation of reinsurance risks and their transfer to the capital markets, long-term subordinated debt (hybrid capital) as well as traditional reinsurance and retrocession arrangements.
terrorist attacks. While we had forecast earnings per share for the year under review of EUR 7.76 prior to 11 September, we were obliged to adjust this figure as at year-end to EUR 0.34. The current financial year, however, offers us an extraordinarily promising market environment. It is our assumption that we shall be able to recoup the losses stemming from the terrorist attacks within the next three years. For the current year, therefore, our goal is not merely to show a 10% higher year-on-year profit based on the result in 2000, but to comfortably surpass this target figure.
1) German-GAAP basis (HGB) 2) US GAAP-basis; Target: 750 basis points in excess of the average 5-year yield on 10-year government bonds
Bearing in mind that "supply and demand determine the price", we strive to constantly boost awareness of our share in order to generate steadily growing demand. In addition to our participation in numerous investors' fairs and stocks forums organised by various banks and shareholder associations, we attach considerable importance to direct contact with institutional investors. In the year under review, for example, we presented our share at more than 30 individual meetings. These take place both at our home office in Hannover and on international roadshows. In 2001 we also stepped up promotional activities for our share in additional geographical regions. Along with the familiar financial marketplaces of Frankfurt, London and New York, where we are active on a regular basis, we enhanced our presence in France, southern Europe, Scandinavia and the Benelux countries. Not only that, we hold
Our Investor Relations activities: Aimed at consistently generating greater HNR demand than supply
We had already begun to practice the internationally recognised standards of corporate governance two years ago; today, we very largely fulfill the major criteria. The adoption of the German Corporate Governance Codex in February 2002 responds to the need to align Germany as a financial centre even more closely with international capital market standards and to improve its appeal by enhancing the applicable regulations and increasing their flexibility. We affirm our commitment to the trend towards a standardisation of corporate management and controlling conjunction with the AIFA conference (American Association of Insurance and Financial Analysts ) in San Diego – we held a seminar on the subject of program business. The event was attended not only by US analysts but also by almost 30 European capital market experts. This year, too, we shall maintain our already well established tradition of analysts' seminars.
plete data on our share, a description of our business activities and of course an overview of the prospects for our company's development. A further milestone is the establishment of Hannover Re's own Internet service company, which coordinates our Group-wide Internet presence – taking into account all our subsidiaries. We invite you to visit our English-language website at www.hannover-re.com.
"Recent confirmation of a breakeven profit target for 2001 has helped reassure the market [...] and has boosted Hannover Re’s image in terms of underwriting quality".
"With the latest outlook for 2002 Hannover Re’s management breathed new life into the investment story. In the final analysis the "flight to quality" – a trend which began some time ago – continues unchecked. In other words, in the wake of recent events (and insurance bankruptcies ) many market players now prefer to pay a higher premium for a reinsurer with a better rating than ultimately risk the uncertainty of losing insurance protection by paying a lower premium to a more poorly rated reinsurer. This is a trend from which not only the "AAA"-rated insurers but also "AA"-rated providers such as Hannover Re will profit".
"A mark of confidence in the profitability of the business it has written this year, Hannover Re has been quick to show its determination to take full advantage of today’s rates conditions".
"On the basis of its well-diversified portfolio the Hannover Re Group can react more swiftly to positive and negative margin trends in individual market segments".
Number of shares as at 31 December 2001: 32,387,976 no-par value registered shares
Share information * incl. bonus of EUR 0.25 ** DVFA earnings per share in accordance with German accounting principles
Financial calendar 2002 25 April 2002 Press conference on the annual results 2001 Beginning 2:00 p.m.
Hannover Rückersicherungs-AG Karl-Wiechert-Allee 50 30625 Hannover, Germany 26 April 2002 DVFA Analysts’ meeting, Frankfurt 26 April 2002 Analysts’ meeting, London 24 May 2002 Annual General Meeting Beginning 10:30 a.m.
With the aim of familiarising you more closely with these guidelines we have set out below our self-image and the strategic objectives (our "ten commandments") which apply to our Group as a whole.
We consider a long-term, strategic mind-set and way of conducting business to be a crucial factor in our Group's success. This calls for vision, on the one hand, but also necessitates concrete strategic objectives, which serve to guide our company's tactical orientation.
In order to update or redefine these necessary visions and objectives, we draw up a strategy document setting out such goals roughly every three years. This document is – very de-
Our actions are guided by the goal of constant value enhancement for all our shareholders. It is essential for us to present our share as a solid and attractive investment.
As a "somewhat different reinsurer" we chart our own course. Its hallmarks are the power of innovation, flexibility, a readiness to perform and, most notably, the quality of our services.
The divergence between capital requirements under risk-based-capital considerations and the actual capital stock generates excess capital. Such excess capital is exposed to risk in accordance with our profit targets.
With a view to minimising the costs of raising equity capital, the performance of our share assumes key importance. The development of the earnings per share and our investor relations activities are intended to ensure a share price development exceeding, on a moving 3-year average, the performance of the unweighted World Reinsurance Index.
We strive for an efficient organisation geared to our business processes with a minimum of bureaucracy.
Our accounting systems are organised in such a way that they satisfy the demands of the international capital markets as well as internal management and controlling requirements.
Quality enjoys a special status in our way of thinking and the way we do business. By means of specific actions and a constant process of quality improvement, we strive to become 10. Risk management
Our risk management system regularly monitors all global, strategic and operating risks within the Hannover Re Group. In addition to control and early warning systems for tradthe quality leader in international reinsurance ("Clients prefer to work with us!") in order to attain competitive advantages.
itional underwriting risks, systems are developed and maintained for the identification and containment of all other risks which may have a bearing on the Group's survival.
In order to ensure the achievement of our company-wide return-on-equity target, we have broken down this goal into specially defined units within our total business volume. To this end, we subdivided our total business into 40 units, each characterised by the greatest possible homogeneity from the risk perspective.
By combining these insights with our return -on-equity target, it is possible to calculate a minimum profit margin that every concluded treaty must generate in order to produce a satisfactory return on equity. This enables our underwriters to examine the contribution made by every single proposed treaty to the achievement of our return-on-equity target. The accomplishment of this goal forms an important integral part of the agreements on targets drawn up with our managerial staff and hence also of our system of remuneration. In this way, we ensure at the operating level that our return-on-equity target is fulfilled for the Group as a whole.
In the Eurozone the economy slowed markedly in the first quarter, although initial indications of a recovery could be discerned – especially as the upsurge in prices eased appreciably. In the second quarter of 2001 overall economic production was flat. Although domestic demand remained relatively stable, it proved insufficient to offset the slump in exports – particularly to the USA. The events of 11 September were followed by another noticeable slowdown in economic activity. By the turn of the year, however, there were a growing number of indications that the economic downturn had come to a halt.
Even leaving aside the extraordinary strains associated with the terrorist attacks in the USA, 2001 was a year of heavy losses. It is true that the number of worldwide natural catastrophes in the financial year under review - totalling some 700 loss events - was lower than in the previous year, which recorded 850 events. Yet the insured losses in the order of USD 11.5 billion were substantially higher than in 2000 (USD 7.5 billion). Particularly notable loss events included the earthquake in El Salvador, tropical storm "Allison"in the southern states of the USA and typhoon "Nari"in Taiwan. In addition to these natural catastrophes, major loss events, such as the fire and subsequent total loss suffered by the drilling platform "Petrobras " off the Brazilian coast, the Sri Lankan Air-
After climbing to a record high of EUR 364.9 million in the 2000 financial year, the net income after taxes of EUR 11.1 million in the year under review was one of the poorest results in the company’s history. This highly unsatisfactory development was largely attributable to the
This event – the most dramatic in the history of the insurance industry – cost our company net claims expenditure in the order of EUR 400 million.
Excluding the 11 September losses, our earnings per share –at around EUR 7.441 – would thus once again have been most gratifying. In fact, however, the earnings per share totalled just EUR
We increased our gross premium income in all business segments. For the first time it surpassed the EUR 10 billion threshold. The total premium volume grew by EUR 3.2 billion or 38.3% to EUR 11.5 billion. Approximately 1.3 percentage points of this growth were due to exchange rate factors.
The development of life and health reinsurance was satisfactory in the year under review. The growth of 13.4% fulfilled our expectations.
However, some premium components, which would be reported as such under German accounting requirements, are excluded under US GAAP due to the lack of risk transfer (SFAS 97). Consequently, the premium income that was reported under US GAAP was EUR 289 million lower (previous year: EUR 404 million lower).
Our investment portfolio grew from EUR 10.2 billion to EUR 12.1 billion. We were unable to repeat the very high profits on disposals generated in 1999 and 2000 due to the depressed state of the international capital markets: they declined from EUR 251 million to EUR 190 million. In combination with sharply increased ordinary income, however, we again succeeded in boosting net investment income in the year under review by 8.9% to EUR 945.7 million. Similarly impacted by the unsatisfactory situation prevailing on the capital markets, we were unable to further expand our valuation reserves. They decreased in the year under review from EUR 71.4 million to EUR 31.2 million after tax.
Due to the unsatisfactory result and the lower valuation reserves in our investment portfolio, our stockholders’ equity did not record the organic growth generated in previous years. This was, however, counteracted by the capital increase of EUR 194 million implemented in December 2001. On balance, our stockholders’ equity grew by just EUR 98.7 million to EUR 1.7 billion.
The balance of cash flows from operating, investing and financing activities produced an inflow of EUR 348.4 million.
By the beginning of the year under review the major insurance markets had already bottomed out and conditions in some markets were showing a favourable trend. Although we do not pursue strategic growth targets in the cyclical property /casualty reinsurance segment and are guided instead by profitability considerations, we increased our gross premium income by 45.9% (previous year: 30%). Exchange rate movements accounted for -0.5% of this increase.
The gratifying development of this segment was brought to a sudden end by the events of 11 September. After deducting the shares of retrocessionaires, we carried an amount of EUR 400 million in our retention. This burden corresponds to an increase of 13 percentage points in the loss ratio. The net loss incurred was roughly equivalent to our planned consolidated net income before tax, which was consequently eroded almost in its entirety.
Had it not been for the events of 11 September and the subsequent recording of a heavy major loss incidence (especially in the second half of the year), we would have once more accomplished our planned targets in the year under review.
The following pages describe the development of the property and casualty lines of business, broken down into geographical markets, as well as of the special lines written by our centralised units with worldwide responsibility.
In the second half of the year 2000 German insurers had already begun to restructure their portfolios of industrial business owing to the sustained string of poor results. This trend continued in the year under review. Nevertheless, despite initial rehabilitation successes, premiums and conditions in many areas of commercial and industrial business were still inadequate.
As in the previous years, our involvement in industrial property insurance was not especially heavy during the first half of 2001. It was only after the terrorist attacks of 11 September that we exploited the extensive improvements in conditions and made additional capacity available on the market. Consequently, for the first time since 1994 we expanded our written premiums in this line of business. Industrial property business was, however, adversely impacted by another sharp rise in the volume of major losses in the year under review.
We would have again met our goals had it not been for the terrorist attacks
Expanded premium volume in industrial property insurance for the first time in eight years
tions of our worldwide aviation and marine portfolios. We report separately on this business from page 37 onwards. It is still the case that we write only a small volume of liability business through the London Market, since we do not yet consider the rate level for liability covers to be adequate.
The effects of the winter storms "Lothar" and "Martin" from December 1999 could still be felt in this market during the year under review. Since they occurred so late in the year, these losses had little impact on pricing for the year 2000 because the treaty negotiations between insurers and reinsurers had already been largely completed. For the reinsurers, then, the agreed market conditions represented the lowest point in the business development with wholly inadequate terms and conditions. It was only in the year under review that a marked rate recovery began to take hold. This led to a rate level, which echoed the premium-rich years of 1993 and
The wave of mergers among Scandinavian insurance companies led to very heavy concentration in the market. In almost all of the northern European countries up to 90% of the property/casualty insurance volume is now in the hands of just a few major players. This trend had virtually no repercussions on the reinsurance sector. Only in the wake of the terrorist attacks of 11 September have primary insurers specifically sought reinsurance partners with superb credit ratings.
In the Benelux countries there was a reduction in the capacity offered for natural catastrophe covers. We were thus able to enlarge our premium volume in this market.
Furthermore, we succeeded in writing additional acceptances in all Nordic countries. Overall, therefore, we expanded our premium volume in this area and – due the absence of significant major losses – strongly improved the result.
Reforms are currently the hallmark of central and eastern European markets. Most notably, those countries with prospects of joining the European Union are presently striving to bring the regulatory frameworks of their markets into line with EU standards.
We steadily enlarged our premium volume in the year under review. The lion’s share of our portfolio derived from the fire and motor lines of business. No major loss events occurred. The year was highly favourable overall, and our portfolio therefore closed with a technical profit.
Even prior to 11 September the cyclical trend in the USA was declining. The terrorist attacks of 11 September and their far-reaching economic repercussions accelerated this deterioration.
Initial positive changes in conditions, primarily in the insurance sector but also to some extent on the reinsurance side, could already be discerned at the end of 2000. However, these price increases in the first half-year were not sufficient to bring about an appreciable improvement in profitability. Some market players in both the insurance and reinsurance sectors withdrew from the market or repositioned themselves due to the inadequate earnings situation.
After-effects of the flood disaster of the year 2000 still being felt
In addition to the estimated market loss of around USD 50 billion due to the terrorist attacks, the storm “Allison ” also adversely affected our result. Most of the damage caused by this windstorm event occurred in the southern part of the United States. The total market loss is set at more than EUR 5 billion.
A favourable development emerged not only in property insurance but also – and most strikingly – in certain segments of liability insurance during the year under review. Our premium growth here was attributable to rate increases on the primary market, which were also reflected in the reinsurance treaties. Professional indemnity business was particularly noteworthy. Overall, we enlarged our premium volume in this market by more than 70%.
Very fierce competition is the hallmark of the Latin American insurance market. The five largest insurance companies enjoy a market share of more than 50% in virtually all markets. Growth in this region is significantly hampered by the economic recession.
On the reinsurance market modest improvements in terms and conditions could initially be
Geographical breakdown of property and casualty reinsurance in % of gross premium discerned in the first half-year 2001, followed by further improvements after the events of 11 September.
The Japanese insurance market is still feeling the effects of the deregulation initiated in 1998. Insurers struggled to cope with low premium growth and inadequate rates in some sectors. This gave rise to a wave of mergers. Insurance companies were also faced with a shortage of reinsurance capacity for natural hazards as well as tighter reinsurance terms and conditions.
Although our premium volume declined as a consequence of this, the absence of natural catastrophe losses enabled us to show a highly positive result.
Despite the low rates prevailing on the insurance market, various new players – most notably foreign companies – are striving to enter the market.
The Taiwanese insurance market is intensively competitive. Original rates in key lines of business have declined.
As recently as the year 2000 the reinsurance market had developed very favourably because capacity was in short supply. In the year under review, however, the decrease in original premiums was also reflected in the reinsurance treaties.
Our premium growth was modest in view of the state of the market. Our account was impacted by a major fire as well as three typhoon loss events. The total losses for our portfolio produced a highly unsatisfactory technical result.
This region continues to feel the effects of the financial crises of the 1990s. Competition among market players is still very lively, and the level of insurance premiums is consequently low. Premiums for business with natural hazards exposure were even more heavily underpriced than the rates for property insurance, which had already been under pressure for some time. Tariffs for motor insurance, on the other hand, were adjusted upwards in Malaysia and Thailand after many years of cuts.
Contrary to the situation on the primary markets, it was possible to secure considerably improved terms and conditions – especially for
Positive result in Japan and China due to absence of major losses
Heavy losses in Taiwanese fire and windstorm business the enlargement of our non-proportional portfolio, the reduction of the higher-volume yet unprofitable proportional business caused our total premium income to decline.
Insurance premiums rose in this market climate. At the end of the year under review certain liability covers, for example medical malpractice, were taken over by the government because physicians were no longer able to meet premium increases on such a scale.
The insurance sector in Africa is affected by a very high level of competitive pressure as well as the continuously unstable political situation in many regions. Especially in South Africa, various insurers have responded to the general competitive pressure by merging with one another in recent years. As a result, competition has been limited to a steadily shrinking group of market players.
The reinsurance market is dominated by a handful of reinsurers. With a number of companies realigning their business orientation, the growth prospects for the remaining players have improved.
Hannover Re one of the leading providers non-proportional covers – on the reinsurance markets. This trend continued in the year under review, although it was counteracted by a substantial oversupply of reinsurance capacity. The elimination of a number of competitors in the wake of 11 September ultimately helped to improve the price level.
On balance, we closed the year under review with a modest technical profit.
and boost our premium volume in numerous lines of business. The premium trend is considerably more favourable in non-proportional reinsurance than in the proportional sector. Results were markedly better than in the previous year.
As a result of the terrorist attacks on the World Trade Center in New York and the Pentagon in Washington, D.C. on 11 September 2001, aviation insurance suffered losses on a hitherto unprecedented scale. This group of claims alone produced a market loss in the order of USD 4 billion (the largest loss to date had been the Swiss Air crash of 1998, costing a comparatively "modest" USD 800 million). The aviation market immediately responded to this burden of losses with substantial premium increases and a reduction in liability for third-party liability claims. The latter was cut to USD 50 million. Furthermore, additional premiums were imposed for the war and terrorism risk under liability coverage, producing a considerably higher total premium from the airlines’ fleet business. Sizeable rate increases were also implemented under aviation product liability covers and in general aviation insurance, although these were not on the same scale as those in airline fleet business.
Our underwriting policy sought to make the most of the significantly improved terms and conditions in aviation reinsurance so as to exploit the opportunities to write profitable business. Due to these market conditions, we achieved impressive overall premium growth in excess of
The rate level in marine cargo and hull insurance is showing clear signs of recovery. Nevertheless, rates are still unsatisfactory. The situation in offshore business is different, where substantial rate increases were observed in the wake of a disastrous claims experience. Conditions in this line also improved markedly in regards to the scope of liability and the level of deductibles.
Particularly in marine excess of loss reinsurance, sizeable rate increases occurred in the wake of the events of 11 September. On the London Market these ranged from 50 to more than 100% for pure marine programmes. Overall, we doubled our volume in this market. Business outside the London Market also recorded extraordinary rate increases in the order of 20 to 50%. Reinsurance capacity in the marine sector did not contract, but in fact increased as new Bermudabased reinsurers entered the market.
Central to our underwriting policy is a strong focus on excess of loss business, while we continue to scale back our proportional commitments.
Surrounded by our friends of every faith, we know this is not a clash of civilisations. It’s a conflict between murders and humanity."
We consider credit and surety reinsurance a major strategic niche segment. This line of business is transacted exclusively from our competence centre in Hannover.
As the economic climate continued to deteriorate, we progressively tightened our underwriting policy in the course of the year. As a result, we were able to increase our premium volume in this line of business by around 35%. At the same time, the profit contribution remained stable despite a number of major claims and a higher claims frequency in Western Europe. As far as the group of claims relating to the Enron bankruptcy is concerned, the insurers still have to determine whether these are fully covered by the insurance. On precautionary grounds, however, we have reserved our potential loss from this event.
The progressive trend towards consolidation – in the second half of 2001 one of the largest US life reinsurers was taken over by the global market leader – has only minimal implications for our market position. According to the latest surveys conducted by external market observers (A.M. Best, Manulife etc.), we are now ranked third in Europe and fourth among all life and health reinsurers operating around the world.
Geographical breakdown of life and health reinsurance as % of gross premium
North America and Asia for the reinsurance of life and annuity insurance products.
In the German-speaking parts of Europe we again concluded a sizeable volume of new business financing transactions for the unit-linked life and annuity products of high-growth insurers. In the United Kingdom we particularly reinforced our position as a product partner for enhanced annuities. In Romance-speaking markets such as France, Spain and Italy we concentrated on the bancassurance segment, a market which continues to be of considerable importance.
Our portfolio developed very favourably in the Asian markets, most notably in Japan and Greater China, in the year under review. We defended our leading market position in Australia.
Including the "premium deposits" (savings components) under unit-linked products as well as similar income not recognised as premium under US GAAP, consolidated gross premium income in 2001 increased by approximately 7% to EUR
Particularly notable growth impetus derived from the German-speaking markets, which generated premiums of EUR 406 million (a gain of 55% on the previous year).
Premiums in the USA climbed to EUR 976 million thanks to the realignment of the portfolio, while growth in Asia – and especially in the Far East – was even stronger. Markets in the southern hemisphere, e.g. South Africa and Australia,
We adjusted the portfolio structure in the year under review in favour of the more highly profitable product segments of life and annuity insurance. These effects will only become apparent more clearly in the course of the coming years.
The sharply lower level of interest rates on the major capital markets had only a minimal impact on our operating result. Generally speaking, the savings components of insurance premiums are deposited in trust with the insurer in return for payment of a guaranteed interest rate; the investment risk consequently remains with the insurer.
Our portfolio was only slightly affected by the terrorist attacks on the World Trade Center and the Pentagon on 11 September 2001 because we scarcely transact reinsurance business in the US market with a conventional risk transfer. We received only a small number of claim notifications and anticipate gross claims expenditure of less than EUR 2.0 million.
Breakdown of personal reinsurance lines showed more modest growth, although in some cases unfavourable currency movements (cf. ZAR/EUR) played a role.
Net premiums retained (including premium deposits) totalled EUR 1,869 million in the year under review. The retention rate was thus unchanged year-on-year at 70%. We continue to draw extensively on the international financial markets, in particular, as retrocession facilities in order to finance the strong portfolio growth.
In addition to the net income before taxes shown directly in the balance sheet, Hannover Life Re generated a further consolidated increase in value of EUR 44 million that cannot be discerned from the balance sheet. The total net value added before taxes thus amounted to EUR 88 million.
Our subsidiary Hannover Life Re America, with its head office in Orlando/Florida and an underwriting office for group life business on Long Island, bears responsibility for the US life market. The company has positioned itself in the USA as a reinsurer specialising in financing arrangements; it only writes a minimal volume of conventional risk-oriented business.
New business activities continued to focus on block assumptions transactions (BATs) and financing arrangements in the senior citizens’ market. In the course of the year under review we successfully concluded two block assumption transactions, both in the US life insurance sector.
The performance of both life and annuity business was favourable in the year under review, whereas in health insurance we had to substantially strengthen the technical reserves.
Market leadership in Australia defended in the face of fierce competition
Based in Johannesburg with a branch office in Cape Town, Hannover Life Re Africa writes reinsurance business in South Africa and the Englishspeaking markets of so-called sub-Saharan Africa with a focus on conventional individual and group life insurance.
The profit situation improved relative to the previous year. Following a significant deficit in the previous year, we achieved a virtual break-even result in the year under review.
Hannover Life Re UK based in Virginia Water /London covers the traditional risk-oriented market in the United Kingdom with a clear focus on life business, critical illness policies and annuity business marketed through bancassurance partners. The office writes virtually no disability or health business. We boosted our gross written premiums by 23.4% to GBP 52.3 million (EUR 84.4 million), while net premiums grew to GBP 39.3 million (EUR 63.3 million).
Hannover Life Re Ireland, Dublin, has a twofold strategic approach: firstly, it is the specialist reinsurer within the Hannover Life Re network for large financially oriented solutions; secondly, it is the reinsurer serving clients who wish to utilise the specific latitude for business activities offered by the Irish market. The bulk of the business is currently ceded from the USA, the United Kingdom and South Africa; these countries account for altogether 71% of Hannover Life Re Ireland’s acceptances.
Despite intense competition we defended our position as market leader in Australia with a market share of roughly 30%. The profit situation was favourable, and in the year under review we posted net income of AUD 13.3 million (EUR 7.7 million) before tax and AUD 10.2 million (EUR 5.9 million) after tax.
The gross premium income from German clients increased by 48% to EUR 356 million, with the various life and personal accident insurers of the HDI Group generating particularly vigorous growth. The claims experience was highly favourable, and the persistency of the portfolio remained within the anticipated actuarial parameters.
Two sizeable financing relationships for “Riester” pension business acquired from life insurers in the bancassurance sector
These three Romance-speaking markets are covered by local offices of Hannover Life Re in Paris, Milan, and Madrid. Our activities are concentrated on insurers in the bancassurance sector and on larger, independent sales organisations with which we cooperate closely in the field of product development. The Paris office also serves several major international clients.
The South American markets, which are handled from Hannover, currently account for premiums of EUR 31 million. We stepped up our involvement in Colombia and Venezuela, whereas in Argentina we had already scaled back our participations some time ago. Technical results were good in life insurance, but unsatisfactory in health business. Overall, this region produced a slight deficit in the year under review.
Following a disappointing 2000 financial year we achieved considerable improvements in
We transact program business in two business models. The distinguishing feature of the first business model ("ceded model"), of which the Clarendon Insurance Group is a notable exponent, is that risks are for the most part passed on to reinsurers. In other words, the program writer essentially contributes only his licences and ratings together with his infrastructure and knowhow. The main source of income is the fees, which Clarendon receives from the reinsurers for services rendered. Currently, Clarendon is progressively increasing its own retention. The combination of technical income plus additional revenues from fees enhances the return on equity in this segment. Under the second business model ("retained model") programs are largely run in the retention. In this case, the companies writing the business generate their earnings entirely from the technical result and the investment income.
significantly. The premium volume attributable to these programs accounted for around 30% of the premium in 2000.
By acquiring attractive new programs and obtaining substantial rate increases, Clarendon succeeded in boosting its gross premium income from USD 1,670 million (EUR 1,803 million) to USD 1,969 million (EUR 2,199 million).
Overall, Clarendon was able to consolidate and expand its position in the US market not least because some of its competitors were downgraded by the rating agencies, in some cases depriving them of their livelihood. This market climate facilitated a selective underwriting policy, which led to the creation of numerous profitable new programs. In conjunction with the decline in competition on the US market, these developments hold the promise of good results in the current year. The favourable market environment also opened up the possibility of raising the retention rate from 14.5% to 27.4%. In subsequent years we shall strive to increase this figure to as much
The net loss ratio decreased to 77.8%. This improvement was largely the fruit of our portfolio rehabilitation measures. Clarendon’s operating result increased compared to the previous year, although it still cannot be considered satisfactory.
In addition to the Clarendon Insurance Group, the Insurance Corporation of Hannover, Los Angeles (ICH) also writes program business in the USA. Unlike Clarendon, the latter runs most of its business in its retention. In March 2001 ICH acquired the renewal rights of Acceptance Insurance Companies, Inc., Itasca, with gross premiums of around USD 70 million (EUR 78.2 million). A highly experienced underwriting team was also taken over as part of this transaction. ICH boosted its gross premium income to USD 175.3 million (EUR 195.9 million). In the course of the year under review both the portfolio of business and the management were fully integrated into the Group. We primarily wrote smaller, very profitable programs (e.g. insurance of private art collections against theft and natural hazards). Due to the profitability of the acquired business, the purchase price for this company was amortised in full in just the first year since its inclusion in the Group.
Since especially motor insurance in the United Kingdom currently offers very attractive business opportunities, we are showing disproportionately strong growth in this line. Indeed, with gross premiums of GBP 81.3 million (EUR 131.1 million), motor business accounts for approximately 65% of Inter Hannover’s total premium income. Due to the unsatisfactory rate level in the past and driven upward by major claims, the premiums increased very favourably. This trend was given added impetus by the withdrawal of some competitors from the market. In the medium term, however, we are striving for greater diversification – in terms of both lines of business and regions. Consequently, Inter Hannover is currently in the process of establishing a foothold in the French and Scandinavian markets. In the long term we also view Italy and Spain as interesting markets. Our market study has confirmed our assessment that in the medium to long term the business model of "program business" will also become established outside North America and the United Kingdom.
The consolidation tendencies on the primary markets towards ever-larger insurance groups have also brought about changes on the reinsurance markets, most notably affecting the pattern of demand among our clients. Thus, for example, the sole purpose of risk transfer is steadily diminishing in importance for some companies. In its place, demand for measures to provide balance sheet protection is rising sharply. As ac-
The development of financial reinsurance is also influenced by the current state of the reinsurance markets. Following the events of 11 September 2001 reinsurance prices skyrocketed in some traditional segments. In this situation ceding companies increasingly turn to alternative reinsurance products, which enable reinsurance arrangements to be individually tailored to a client’s specific requirements. What is more, clients try to limit their reinsurance budget during hard market cycles, a move, which causes them to run sharply higher retentions. This triggers an increase in the volatility of technical results, which in turn boosts the demand for financial reinsurance solutions.
The hardening of terms and conditions on the reinsurance markets fostered the favourable trend in our business. In the year under review gross premium income showed another strong increase of 100% to reach EUR 1,740.6 million. Exchange rate movements accounted for 6.1% of the growth in gross premiums. As before, the bulk of our business stemmed from the US market. For the first time a sizeable portion of the gross premium income was retroceded to other reinsurers via special transactions. The retention rate consequently decreased from 92.4% to
Gross premiums with a heavily limited risk transfer increased from around EUR 17 million to
EUR 68 million in the year under review. Such contracts are not reflected in the technical account; the effects on net income are instead included in the item "other income/expenses“.
The cash outflow from paid losses in the 2001 financial year was relatively slight, facilitating strong growth in interest carriers for the financing of future loss payments. Our selective underwriting policy, under which we wrote only 15% of the contracts offered to us, supports the profitability of this segment. Overall, the operating result grew by 23.4% to EUR 66.7 million. We again succeeded in boosting the gross profit contribution of financial reinsurance before minority interests by more than 20%.
The proportion of the portfolio attributable to North American business grew disproportionately in the year under review. Especially due to non-recurring effects, these premiums accounted for 90% of the total volume. As a further factor, many of our contracts respond to our clients’ significant need to strengthen reserves for previous years by requiring experience-based extra premiums. These further enhance our profit potential. In the US market we largely concentrated on solutions that enable our clients to realise portfolio profits more quickly, which in economic terms have already been achieved.
In the year under review we began to adjust our client profile. Having focused heavily on a few key accounts in the past, we succeeded in acquiring a diverse range of new clients in the year just-ended. This reduces our dependence on specific major clients and thus broadens the portfolio base. This positive change in the structure of our portfolio was further supported by the fact that some multi-year contracts with large clients are expiring. We also scaled back our participation in large-volume fronting contracts in favour of more strongly risk-oriented contracts with mid-sized companies. Our efforts to lead contracts in which we have a substantial participation – or at least to play a major role in the structuring of terms and conditions – remain undiminished. With this in mind, we systematically enlarged our personnel capabilities for the US market.
The United Kingdom remains our most important market in Europe. Due to the marked volatility of marine business – a line with a particularly strong presence on the Lloyd’s insurance market – demand for covers designed to stabilise results again increased sharply in the year under review. As a further factor, entire portfolios frequently change hands in the London Market without the purchaser wishing to assume the associated run-off risks. This has given rise to growing demand for run-off covers based on financial reinsurance arrangements. We approached this segment cautiously and only after subjecting the risks inherent in such portfolios to intense scrutiny. Nevertheless, this market segment gained substantially in importance, and we believe that it offers a considerable potential.
Geographical breakdown of financial reinsurance in % of gross premium income
Clients in the Asian market seek to ensure balance sheet continuity and to reduce the cost of capital.
Asia and Australia the main markets for financial reinsurance after the USA
The national central banks reacted to the negative cyclical trend with massive interest rate cuts and sought to supply the markets with sufficient liquidity, especially in the wake of the September 11 terrorist attacks. Starting in January 2001, the US Federal Reserve Board reduced the key interest rate incrementally by altogether 475 basis points from 6.5% at the beginning of the year to 1.75% at year-end. In contrast to the Federal Reserve, the European Central Bank was relatively slow to cut interest rates and took less aggressive action: it was content to trim prime rates by a "mere" 150 basis points from 4.75% to
On the international equity markets the year 2001 will go down as one of the most difficult years in history. Falling capital market rates as well as tax and pension reforms in Europe created a fundamentally favourable environment, yet at the same time companies were repeatedly compelled to revise their profit expectations downwards. Overall, following the trends of 2000 the leading stock indices again gave up considerable ground in the year under review.
Our total portfolio of self-managed assets (i.e. excluding funds held by ceding companies)
Interest rate cuts by the Fed and ECB following global economic down
Cash outflows due to claims payments associated with the terrorist attacks in the USA were only minimal in the period until year-end, and this loss event therefore did not significantly impact the development of the investment portfolio in the year under review.
S&P 500 etc. In the year under review we again did not make any stock purchases on the New Market or in comparable European and American market segments.
The focus of our self-managed assets continued to be on fixed-income securities, which accounted for a share of 72% (previous year: 67%). When selecting securities we always ensure that issuers have a first-class rating. The proportion of highly liquid fixed-income securities with a rating of AAA was thus 60% of the total portfolio of fixed-income securities. We used the sometimes rather drastic decline in yields in this asset class – especially in the wake of the events of 11 September – to realise profits and shorten the maturity pattern of the portfolio. Realised price gains on the disposal of fixed-income securities totalled EUR 51.4 million and were therefore clearly in excess of the previous year (EUR 3.2 million).
We also continued to cautiously expand our portfolio of alternative assets (private equity funds, hedge funds, high-yield instruments and real estate) in the year under review. At the end of the 2001 financial year we held investments of approximately EUR 1 billion in this asset class. While the performance of our private equity funds reflected the stock market trend and was thus rather disappointing, our hedge funds and our real estate holdings generated highly gratifying profit contributions.
Against the backdrop of the anticipated claims payments arising out of major losses incurred in the year under review, most notably those associated with the terrorist attacks in the USA, we substantially increased our short-term investments. As at year-end 2001 we held a total amount of EUR 622.6 million (previous year: EUR 475.8 million) in short-term assets, including overnight money and time deposits.
Despite the decreased average yield on investments due to the lower interest rate level and the shortening of the maturity pattern, ordinary investment income rose sharply in the year under review by around EUR 143 million or 18% to EUR 942 million. This increase was due not only to exchange rate factors and the ordinary investment portfolio, but also – and most importantly – to considerably higher deposit interest credited under life and financial reinsurance treaties. These credits were generally opposed by corresponding charges, although these were reflected not in the net investment income but in the other income/expenses.
Substantially higher ordinary investment income in the year under review lion). The net unrealised appreciation/depreciation of our trading portfolio reported in the statement of income produced a gratifying positive balance of EUR 21.3 million. Other investment expenses were lower than in the previous year, totalling EUR 73.6 million. The total expenses of EUR 106.5 reported in the previous year were influenced by value adjustments to our private equity portfolio in the order of EUR 55 million.
Total net investment income thus showed a pleasing rise from EUR 868.7 million in the previous year to EUR 945.7 million in the 2001 financial year. Relative to our average investment portfolio, this corresponded to a net return of 5.0%.
"This was an apocalypse, a nightmare that I would have never thought to be possible. Thank goodness, it didn’t change anything for me personally. [...] Right now we can only surmise what the attack will mean for us architects. Some things will remain, however: the modern city, the myth that is New York City, and the desire of many to build high up in the sky. However, the security of high-rise buildings will occupy our minds for times to come. Depending on each project we will have to develop new approaches towards thinking about and planning for dangers."
Indicators sensitive to individual risks warn immediately of potentially undesirable developments
Risk categories segments, within which the responsible board members define the operating objectives. Risk management is locally integrated into the organisation of Hannover Re’s various strategic segments. This local allocation of responsibility is intended to ensure that risks can be identified, reported and managed as quickly as possible. To this end, we use a number of different indicators that are tailored to individual risks and provide prompt information about any potentially undesirable developments.
The efficiency of the risk management system is regularly reviewed by internal and external instances and adjusted according to the constantly changing economic environment. Our company’s risk situation can be comprehensively described by the following risk categories: • global/external risks,
• operating risks, which we subdivide into - technical risks, - investment risks and - operational risks.
Overall responsibility for risk management is determined according to the specific strategic
Stable positioning as a reinsurance group of above-average profitability a major risk for the Hannover Re Group. In life reinsurance, for example, this could be caused by the elimination of tax assistance for old-age provision. We therefore systematically monitor, inter alia, the tendencies in legislation as well as the new business statistics (number of policies, sums insured, annual premiums) on the relevant markets.
Strategic risks refer to specific factors that may jeopardise achievement of our strategic objectives in the individual business segments. We conduct our business in four largely autonomous strategic segments: property and casualty reinsurance, life and health reinsurance, financial reinsurance and program business. For each of these segments independent strategic objectives have been defined, the fulfilment of which is subject to constant monitoring. The paramount goal is to safeguard our stable positioning as a reinsurance group of above-average profitability.
We have at our disposal various sets of rules in order to counteract technical risks. In life and health reinsurance these include the use of reliable biometric actuarial bases with statistically adequate safety margins. For example, the morbidity risk (e.g. for health, critical illness and disability risks) is assessed and monitored on the basis of actuarial studies of the morbidity experience.
Retrocession is a further key instrument of risk limitation. The business that we accept is not always carried entirely in our own retention but is retroceded where necessary. Written risks are scrutinised in order to ascertain the extent to which they promote a balance within a given portfolio. Our retentions and retrocessions are calculated and structured accordingly. Whereas premiums are always payable at the beginning of a contract, risks chiefly derive from the fact that long periods may elapse until we can call on our retrocessionaires and collect on the losses. This entails the risk that retrocessionaires may default on payment. When ceding business it is therefore essential to carefully select our retrocession partners with an eye to their long-term ability to meet such financial obligations.
Operational risks are unexpected losses attributable to operational hazards such as human error, criminal intent, inadequate controls, or organisational shortcomings. The failure of technical equipment, especially in the case of the data processing infrastructure and the availability of the applications, which it provides, also poses a significant risk to our company. In order to minimise this risk we invest systematically in improving the security and availability of our information technology. This includes, for example, the comprehensive use of virus protection and filtering software as well as measures to optimise network stability. We shall continue to meet the exacting security standards to which our information processing is subject, and with this aim in mind the position of IT Security Officer has been created to coordinate all security-related IT issues for the Hannover Re Group.
Over a period of more than ten years the two leading rating agencies for the insurance and reinsurance industry, Standard & Poor’s and A.M. Best, have rated us in their second-highest categories of AA ("Very Strong“) and A+ ("Superior“), respectively. This means that our economic capital is at least 50% higher than the capital required according to Standard & Poor’s calculations. In view of the increasingly demanding quality standards in the insurance and reinsurance sectors, the importance of the relevant ratings in our industry is growing.
Given the information currently available to us, however, we do not perceive any risks, which could jeopardise the continued existence of our company in the short or medium term or which could impair the assets, financial position or net income in a significant or sustained manner.
The close dovetailing of corporate and personnel strategy was maintained in the year under review and set new standards for human resources management within the Hannover Re Group. Today, the personnel function contributes significant value added and through the strategic orientation of human resources management it supports the Group’s future development. Reforms in personnel systems, such as the introduction of a market-oriented and performance-enhancing remuneration scheme for managerial staff, are designed to safeguard the long-term added value contributed by the workforce to the Group’s success.
The number of staff employed within the Group increased by 17% to 1,780 (previous year: 1,528) in the year under review. We thus added 252 employees to the workforce. As can be seen from the table below, the primary emphasis was on the further expansion of our international organisation.
Remuneration management, with its twin components of performance and development, must enable managerial staff to identify and work on their own strengths and weaknesses as well as on areas requiring action in their fields of responsibility. At the same time, staff should have the opportunity to give feedback in order to enjoy optimal scope for the performance of their tasks. In order to support managerial staff in the development of their area and their own personal qualities, we launched a 270°feedback process in the year under review. As a first step, the second level of management assessed the influences exerted on them by the board as a whole. Each executive then received feedback from the board on his/her contribution to the company’s performance. This represents a further significant milestone as we progress towards a Group-wide system of remuneration founded upon an inherently coherent and comparable basis.
The growing challenges assumed by our internationally oriented Group can only be met by systematically grooming and developing young executives. In the year under review we further intensified our contacts with relevant university chairs and polytechnic departments. We offer internships in various areas of the company and support diploma students writing on reinsurancerelated topics with appropriate stipends.
Via our intranet we offer employees a transparent internal job market through which specific information can be obtained on vacant positions. The international expansion of the company’s intranet promotes the submission of applications from in-house candidates in all countries and Group divisions.
We would like to take this opportunity to thank all our staff for their personal commitment and dedicated service. Their energetic efforts enabled us to master the special challenges that confronted us in 2001. We would also like to express our appreciation to the employee council and the senior management committee for their constructive and trusting cooperation.
In Germany, the economic trend continues to be more sluggish than in the majority of Euroland countries. The domestic economy, in particular, is lacking sufficient growth impetus. Consequently, Germany's gross domestic product is likely to rise by a mere 0.75%.
Forecasts suggest that the European Central Bank will leave key interest rates at their current level until summer 2002. Short- and medium-term capital market rates are likely to climb again in the course of the year as the economy recovers in the United States and Europe. The Euro is expected to appreciate slightly in value.
The terrorist attacks in the USA had a heavy impact on the 2001 financial year, leading to extremely disappointing results. Yet the repercussions of these events will also continue to be felt on the property and casualty reinsurance market in the years to come: significant capital
Very shortly after the attacks we realised that these products were being offered at highly attractive conditions, and we were one of the first reinsurers to participate in these covers.
The 2002 treaty renewals concluded to date thus promise strongly higher profitability in this business segment. Assuming an incidence of major losses in line with the multi-year average, we therefore expect to recoup the losses from the 11 September terrorist attacks in less than three years.
In life and health reinsurance our mediumterm objective is to claim the number three position on the world market. We shall accomplish this goal with an average annual growth of between 10 and 20%. Our efforts will be geared first and foremost to generating further organic growth.
Losses from the terrorist attacks to be recouped in at most three years
– in the role of a "stochastic banker". By means of these products we strive to cater to our clients’ overall financial situation. We anticipate that the launch of the semi-privatised, so-called "Riester " pension in Germany coupled with further growth in the area of unit-linked life insurance in continental Europe will generate a considerable need for financing among our clients and hence offer us opportunities to grow our portfolio.
We have developed "relationship marketing " in order to optimise our performance. This is intended to help us identify our most promising clients for the future and recognise their needs; we then adjust our capacities accordingly.
Subject to a normal loss experience, the overall results situation in program business should continue to improve in the current year.
These developments will play a major role in enabling us to expand our strategic position in the global market. The current debate surrounding financial reinsurance will also have positive effects. A number of insurance supervisory authorities are looking at the issue very
The competitive situation in this segment improved markedly after a number of providers withdrew from the market in the wake of the events of 11 September.
On the basis of these expectations in our four strategic business segments, we anticipate substantial double-digit growth in our total gross premium income. In this hard market climate our portfolio diversification will show a shift in favour of property and casualty reinsurance. Assuming a normal loss experience, the information available to date indicates that the underwriting result in this segment should prove highly satisfactory.
Our investment income is by its very nature difficult to forecast. Stock markets appear to have bottomed out, and key interest rates are also moving upwards again. Yet we can scarcely anticipate that profits on disposals in the current year will be on a par with the level of previous years. The growth in the investment portfolio will generate higher ordinary income, and overall, it therefore appears likely that net investment income will be comparable with the previous year.
In view of our expectations with respect to the technical account and provided both the major loss incidence and capital market conditions remain within normal bounds, net income before tax should increase substantially. From the current standpoint, therefore, the net income after tax is also expected to be highly gratifying.
Equity securities – available for sale 5.1 1 021 451 1 593 969
Change in policy benefits for life and health contracts 5.2 297 973 37 494
Net realised gains and losses on investments (55 953) (180 644)
Change in cash and cash equivalents (I.+II.+III.+IV.) 348 397 44 996
Reinsurance recoverables on benefit reserves – – 493 650 254 696
Reinsurance recoverables on incurred claims and others 3 309 175 1 329 943 187 807 195 144
Loss and loss adjustment expense reserve 10 120 457 7 497 745 1 087 888 952 999
Commission and brokerage and other technical expenses 603 834 625 844 492 601 424 602
Hannover Re is the parent company of the Group. The consolidated financial statement includes three German and eighteen foreign companies, as well as two foreign consolidated entities. Two German and three foreign companies were consolidated using the equity basis of accounting.
WPG Corporate Development Associates IV (Overseas), L.L.C., Grand Cayman/Cayman Islands 26.5
• Goodwill is classified as a non-wasting asset and scheduled depreciation of existing goodwill has been suspended
• New allocation criteria have been defined for goodwill on the basis of compulsory allocation to reporting units (reporting units - impairment test level)
• A special two-level impairment method has been defined for the determination of goodwill
The innovations set out above will be applied for the first time by Hannover Re in the financial year commencing after 31 December 2001.
The capital consolidation is based upon the "purchase accounting" method (comparable to the German revaluation method). The purchase costs of the parent company have been netted with the proportionate stockholders' equity of the subsidiary at the time when it was first included in the consolidated financial statement after the revaluation of all assets and liabilities. The difference between the revalued stockholders ' equity of the subsidiary and the purchase price is shown in the assets as goodwill and depreciated at a constant rate over the expected useful life. The anticipated useful life is between 15 and 40 years. Immaterial and negative goodwill were booked to earnings in the year of their occurrence. Where minority interests in the stockholders' equity exist, such interests are shown under other liabilities. The minority interest in the result is deducted from the net income in the statement of income and totalled EUR 24,553 thousand (previous year: EUR 68,421 thousand) in the 2001 financial year.
Fixed-income securities classified as held to maturity are valued at purchase costs plus/minus amortised costs. The amortised costs derive from the difference between the nominal value and purchase cost and are spread over the time to maturity of the fixed-income securities.
Securities whose fair value falls permanently below purchase cost are written down to current value and recognised within the statement of income.
The other investments primarily consist of shares in private equity limited partnerships.
Due after one through five years 197 670 206 654 162 949 167 962
Due after five through ten years 75 095 64 465 84 007 89 010
Due after five through ten years 1 815 000 1 859 462 1 350 009 1 371 195
Due after five through ten years 38 789 39 016 45 25 1 40 869
The actual maturities may in individual cases diverge from the contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.
Fixed-income securities – held-to-maturity 185 612 64 272 10 853 5 438 856 – – – 267 031
Contrary to German accounting requirements, SFAS 60 "accounting and reporting by insurance enterprises " requires that acquisition costs be capitalised as assets and amortised via the statement of income in proportion to the earned premiums.
Real estate is divided into real estate for own use and third-party use. Only the real estate in the portfolio which is used to generate income is shown under the investments. Real estate is valued at cost of acquisition less scheduled depreciation.
This item comprises investments with a life of up to one year.
The portfolio of investments includes securities whose returns are dependent on the occurrence of defined natural catastrophe events. Interest on these securities is calculated using the retrospective interest method.
The loss and loss adjustment expense reserves are in principle calculated on the basis of the information supplied by ceding companies. IBNR reserves are also included. The total amount of the reserves corresponds to the "principle of best estimate" under US GAAP. This estimate is based on past experience and estimations of future development. In one subsegment of financial reinsurance technical provisions were discounted at interest rates of between 5.0% and 8.6%. The interest rates are determined by the contractual agreements. These treaties are discounted over a period of at least four years, which represents the period from inception to expiry of the respective contracts. The discounted amount totals EUR 1,370.4 million (EUR 675.9 million). As at year-end 2001 the discounted provisions amounted to EUR 4,758.3 million (EUR 1,760.3 million).
Overall, the deferred acquisition costs developed as follows in the year under review
The development of the loss and loss adjustment expense reserve is shown in the following table. Commencing with the gross reserve, the change in the reserve after deduction of the reinsurers' portions is shown in the year under review and the previous year.
Effects of currency conversion as at 1 January of year under review 264 825 303 350
Net reserve as at 1 January of year under review 9 514 845 8 183 613
Effects of currency conversion at exchange rates on 31 December of year under review (net) (27 442) (125 708)
Reserve as at 31 December of year under review (retro) 6 758 763 3 532 690
Reserve as at 31 December of year under review (gross) 18 859 679 12 782 710 2001 2000Figures in EUR thousand
The amortisation reported in the financial year was primarily attributable to E+S RückversicherungsAG and the Clarendon Insurance Group.
5.4 Goodwill; present value of future profits on acquired life reinsurance portfolios
Valuation differences arising out of property and casualty reinsurance 84 195 83 935
Reconciliation of the expected expense for income taxes with the actual provision for income taxes 5.6 Staff and expenditures on personnel
The average number of staff at the companies included in the consolidated financial statement of the Hannover Re Group was 1,676 (previous year: 1,525). Of this number, 707 were employed in Germany in the year under review. The majority of staff was employed at the consolidated Group companies abroad.
*In the previous year also before other taxes 2001 2000Figures in EUR thousand
Number of employees (excluding board members) 1 525 1 584 1 641 1 700 1 780 1 676
The expenditures on insurance business, claims expenses (claims settlement) and expenditures on the administration of investments include the following personnel expenditures: 5.7 Provisions for pensions and similar liabilities
Pension commitments are given in accordance with the pension plan. The 1968 pension plan provides for retirement, disability, widows' and orphans' benefits. The pension entitlement is dependent on length of service; entitlements under the statutory pension insurance scheme are taken into account. The pension plan was closed to new participants with effect from 31 January 1981.
a) Wages and salaries aa) Expenditures on insurance business 83 208 76 262 ab) Expenditures on the administration of investments 6 334 4 433 b) Social security contributions and expenditure on provisions and assistance ba) Social security contributions 10 120 8 162 bb) Expenditures for pension provision 6 418 5 475 bc) Expenditures for assistance 2 589 1 338 2001 2000Figures in EUR thousand
Additional similar obligations based upon length of service exist at some Group companies. Expenditures for these commitments in the financial year totalled EUR 585,300.
Provisions for pensions are established in accordance with SFAS 87 (employers' accounting for pensions) using the projected unit credit method. The basis of the valuation is the estimated future increase in the rate of compensation of the pension beneficiaries. The benefit entitlements are discounted by applying the capital market rate for highest-rated securities.
Projected benefit obligation at the end of the reporting year 48 289 45 361
Amortisation of net obligation 457 457 2001 2000Figures in EUR thousand
On 31 March 1999 Hannover Finance Inc. issued a floating-rate debt 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 issuing 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 the event that interest incurred in connection with servicing the surplus debenture should in future no longer be deductible in Germany for the purpose of calculating taxable income, a right of premature repayment exists. Interest payments and repayment of the nominal amounts are dependent on the company ’s results. In the event of insolvency, the participating rights are serviced before the stockholders and after the claims of creditors.
In order to protect against possible future major losses, Hannover Re took out a new credit line of EUR 250 million in 2000 in the form of a syndicated loan. The facility has a term of five years and is due in 2005. E+S Rück has a credit line of EUR 40 million, which is extended on a half-yearly basis and can be drawn on as required.
The stockholders' equity is shown as a separate component of the financial statement and is in accordance with SFAS 130 (reporting of comprehensive income). The stockholders' equity comprises not only the net income deriving from the statement of income but also the changes in the value of asset and liability items which do not impact the statement of income.
By a resolution of the Annual General Meeting of Hannover Rückversicherungs-AG adopted on 20 July 2001, the company was authorised until 31 December 2002 to acquire treasury stock of up to 10% of the capital stock existing on the date of the resolution. The company did not hold treasury stock as
Neither in the year under review nor in the previous reporting period was there any extraordinary comprehensive income which should have been included in the calculation.
The basic earnings per share and the fully diluted earnings per share as at 31 December 2001 shown in the statement of income are calculated as follows on the basis of the year-end result: Total number of fully-paid shares 32 387 976 27 446 882
Fully diluted earnings per share 11 084 32 386 073 0.34 364 880 29 464 467 12.38
Present value of future profits on acquired life reinsurance portfolios 17 015 19 409
5.15 Other income/expenses 6. Relations with affiliated companies 6.1 Relations with affiliated non-consolidated companies
HDI Haftpflichtverband der Deutschen Industrie V.a.G. (HDI) indirectly holds more than 75% of the shares of Hannover Re through Talanx AG.
Expenses for the company as a whole 15 965 18 024
Position as at 1.1.2001 6.2 Emoluments received by the management boards of the parent company and loans granted to them
Emoluments of EUR 252 thousand were received by the Supervisory Board and EUR 3,173 thousand by the Executive Board in the year under review. The emoluments of former executive board members and their surviving dependants amounted to EUR 652 thousand, and a liability of EUR 10,188 thousand was shown as at year-end.
With effect from 1 January 2000 Hannover Re set up a virtual stock option plan. Members of the Executive Board as well as the two further levels of management may choose to waive variable remuneration components and acquire stock options. The number of such options granted each year is based upon the diluted earnings per share under US GAAP. An additional performance criterion is the movement in the price of the Hannover Re share relative to an industry benchmark based upon the (unweighted) Reactions World Reinsurance Index.
As a second performance criterion, a calculation is made to determine the extent to which the stock market performance of the Hannover Re share exceeds or undershoots the development of the Reactions World Reinsurance Index in the year when the stock options are granted. For each full percentage point by which the Hannover Re share surpasses the benchmark index, the basic number of stock options increases by 10% up to a maximum of 400% of the basic number; if the share falls short of the benchmark index, the basic number decreases by 5% for each full percentage point, although by no more than 50%.
Following expiry of the waiting period a maximum of 40% of the granted stock options may be exercised. The waiting period for each additional 20% is one year. Stock options, which are not exercised lapse after 10 years.
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 3,314.4 million (previous year: EUR 2,060.0 million).
Derivative financial instruments are used within the Hannover Re Group solely for hedging purposes, in particular to minimise the risk of interest rate fluctuations and hedge currency exposures.
SFAS 133 „accounting for derivative instruments and hedging activities“ is applied as amended by SFAS 137 and SFAS 138. These standards require all derivatives to be valued at fair value. If the underlying transaction and the derivative cannot be reported as a single unit, the derivative is to be classified under the „trading portfolio“ item in the balance sheet.
Prior to the application of SFAS 133 derivative instruments were reported at fair value. Unrealised gains and losses from changes in fair value were included immediately in the statement of income. A single valuation unit was established in cases where a direct correlation and allocation existed between a derivative and an underlying transaction. Gains and losses on these valuation units were only recognised in the statement of income upon realisation of the underlying transaction.
Derivatives involving exposures were of minimal significance within the total asset portfolio of the Hannover Re Group. The fair value of unmatched positions used for hedging purposes was -EUR 33.3 million.
The Insurance Corporation of Hannover and the Clarendon Group have multi-year contracts for the lease of business premises. In the latter case, the ten-year lease ends on 31 August 2005. The rent installments are fixed for the rental period, although adjustments in line with changed market conditions are possible at contractually agreed upon times.
Effective 1 April 2002 Hannover Re concluded its „K3“ securitisation transaction to transfer large-scale and catastrophe risks to the international capital markets.
„K3“ is a portfolio-linked securitisation encompassing a variety of reinsurance covers. It comprises both natural hazards (hurricanes and earthquakes in the USA, storms in Europe and earthquakes in Japan) and worldwide aviation business.
Summary of leasing commitments for the financial years 2002 to 2006
Foreign currency items in the individual companies’ statements of income are converted into the respective national currency at the average rates of exchange. The individual companies’ statements of income prepared in the national currencies are converted into Euro at the average rates of exchange and transferred to the consolidated financial statement. The conversion of foreign currency items in the balance sheets of the individual companies and the transfer of these items to the consolidated financial statement are effected at the mean rates of exchange on the balance sheet date. In the case of functional currencies, differences arising between the average exchange rate and the exchange rate on the balance sheet date lead to the establishment of a separate item in the stockholders ’ equity, which is excluded from the statement of income. Differences arising with regard to nonfunctional currencies are recognised in the statement of income. Functional currencies are defined as those currencies in which investments are effected.
Mean rate of exchange on the balance sheet date 1 Euro corresponds to:
We have audited the consolidated financial statements of Hannover Rückversicherungs-Aktiengesellschaft for the business year from January 1 to December 31, 2001, comprising the consolidated balance sheet, the consolidated income statement, the consolidated statement of cash flow and consolidated statement of changes in stockholders' equity as well as the notes to the financial statements. The preparation and content of the consolidated financial statements in accordance with US Generally Accepted Accounting Principles (US GAAP) are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
Our audit, which also extends to the group management report prepared by the Executive Board for the year from January 1 to December 31, 2001, has not led to any reservations. In our opinion the group management report provides a suitable understanding of the Group's position and suitably presents the risks of future development.
We supervised the management of Hannover Rückversicherungs-AG (Hannover Re), the parent company of the Hannover Re Group, regularly during 2001 on the basis of detailed written and verbal reports from the Executive Board. The Supervisory Board held a total of four meetings – lasting several hours – in order to adopt the necessary resolutions. In addition, particularly urgent decisions were taken on two occasions using a written procedure and once by telephone. The Standing Committee, a committee within the meaning of § 107 Para. 3 German Stock Corporation Act, also met on four occasions. In addition, we received quarterly written reports from the Executive Board on the course of business and the position of the company pursuant to § 90 German Stock Corporation Act. These reports contain, inter alia, up-to-date details of the current planned figures for the Group with regard to the development of premiums, losses, expenses and investments as well as the growth of the global workforce. All in all, we were involved in decisions taken by the Executive Board as required by our statutory responsibilities and those placed upon us by the company's Articles of Association. The development of our major subsidiaries and participations was also included at all times in our consultations.
KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft (KPMG DTG), Hannover, was mandated – without the existence of any legal requirement to this effect – to audit the consolidated financial statement and the Executive Board's report for the Hannover Re Group (compiled in accordance with United States Generally Accepted Accounting Principles – US GAAP). KPMG DTG issued an unqualified audit certificate. 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.
We examined both the Executive Board's report and the auditors' report on the company's relations with affiliated companies, and we found everything to be in order. In light of our examination, we had no objections to the statement by the Executive Board at the end of its report on relations with affiliated companies.
On 31 August 2001, Dr. Andreas-Peter Hecker's service on the Executive Board came to a close. The Supervisory Board expressed its appreciation and recognition of the work performed by Dr. Hecker in more than fifteen years on the Executive Board – eight of them as Deputy Chairman – and thanked him for his contribution to the company's development. The appointment of Dr. Detlef Steiner as a member of the Executive Board was also terminated by mutual agreement on 31 August 2001. On 1 September 2001, Dr. Steiner took over the management of the Clarendon Insurance Group in New York (initially in the role of Chief Operating Officer, from 1 January 2002 onwards as Chief Executive Officer). The Supervisory Board also expressed its appreciation of Dr. Steiner's contribution to the company's development. With effect from 1 September 2001 Mr. André Arrago and Mr. Ulrich Wallin were appointed as deputy members of the Executive Board. Effective 1 January 2002, Dr. Elke König was appointed as a deputy member of the Executive Board. The appointment of Mr. Herbert Haas as a member of the Executive Board was terminated by mutual agreement with effect from 31 January 2002, since Mr. Haas moved to the Board of Management of the Group's parent company HDI VaG effective 1 February 2002. The Supervisory Board expressed its recognition and appreciation of the work performed by Mr. Haas over almost twenty years – eight of them on the Executive Board – and thanked him for his considerable contribution to the company's development.
China Hannover Rückversicherungs-AG Shanghai Representative Office Suite 2711, Bank of China Tower 200 Yin Cheng Zhong Road Pudong New Area 200120 Shanghai
International Insurance Company of Hannover Ltd. Hannover House Virginia Water Surrey GU25 4AA
Hannover Reinsurance (Ireland) Ltd. No. 2 Custom House Plaza, IFSC Dublin 1
South Africa Hannover Life Reassurance Africa Limited P. O. Box 10842 Johannesburg 2000
Hannover Reinsurance Africa Limited P. O. Box 10842 Johannesburg 2000 www.hannover-re.co.za
Accumulation loss: sum of several individual losses incurred by various policyholders as a result of the same loss event (e.g. hurricane, earthquake). This may lead to a higher loss for the direct insurer or reinsurer if several affected policyholders are insured by the said company.
Block assumption transactions (BAT): proportional reinsurance treaties on our clients' 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.
Cash flow statement: statement on the origin and utilisation of cash and cash equivalents during the business year. It shows the changes in liquid funds separated into cash flows from operating, investing and financing activities.
Expense ratio: administrative expenses in relation to the net premiums written.
Funds held by ceding companies/funds held under reinsurance treaties: collateral provided to cover insurance liabilities between insurer and reinsurer. In this case, the retaining company shows funds held under a reinsurance treaty, while the company furnishing the collateral shows funds held by a ceding company.
LOC (Letter of credit): bank guarantee; at the request of the guaranteed party, the bank undertakes to render payment to the said party up to the amount specified in the LOC. This method of providing collateral in reinsurance business is typically found in the USA.
Portfolio: all risks assumed by a direct insurer or reinsurer on an overall basis or in a defined sub-segment (e.g. line of business, country).
Program business: a speciality of the Anglo-American insurance markets written by insurers working in very close cooperation with reinsurers and highly specialised managing general agents. The segment is typically focused on niche and non-standard coverages and hard-to-place risks.
Provision: liability item as at the balance sheet date to discharge obligations which exist but whose extent and/or due date is/are not known. Technical provisions, for example, are for claims which have already occurred but which have not yet been settled, or have only been partially settled (= provision for outstanding claims, abbreviated to: claims provision).
Hannover Life Re 22 f., 40 ff., 66, 85, 120 ff.
Financial reinsurance hannover re Ad v a n c e d S o l u t i o n s®
Photographs: dpa, Hamburg: Cover Zippo, Hamburg: Pages 1, 6/7 dpa, Hamburg: Pages 28,38; Background Pages 28/29, 38/39, 46/47,56/57, 68/69 Martin Joppen, Frankfurt: Page 46
Klaus Frahm, Börnsen: Page 56 Hermann Krause Kunsthandel GmbH, Cologne: Page 68