Management report of the Hannover Re Group . . . . . . . . . . . . . . . . . . . . . . . 17
Book value per share 1) On a US GAAP basis 2) Figures for 2005–2003 before new segmentation
1) Figures for 2005–2003 before new segmentation 2) 2003 on the basis of US GAAP 3) Bonus 4) Incl. expenses on funds withheld and contract deposits 5) Natural catastrophes and other major losses in excess of EUR 5 million gross for the Hannover Re Group's share 6) Excl. funds held 7) Operating profit (EBIT)/net premium earned
Earnings per share (diluted) in EUR 6.08 + 42.6% 4.27 0.41 2.32 3.24 12/158
Combined ratio (non-life reinsurance) 4) 99.7% 100.8 % 112.8% 97.2% 96.0 % 23/115
As far as profitability is concerned, the financial year just-ended comfortably exceeded our expectations: for 2007 your company is reporting the highest Group net income in its history! This result was influenced by the favourable one-off effect associated with the reform of corporate taxation in Germany; yet even without this special effect 2007 would have marked a new record high.
That we are on the right track was confirmed as early as January 2007, when winter storm "Kyrill" swept across large parts of Europe and caused enormous losses for insurers and reinsurers alike. Thanks to the "K5" transaction we were able to significantly reduce our strain from this winter storm. Nevertheless, for our company as for many other market players, "Kyrill" headed the list of major loss events for 2007. On the other hand, contrary to what had been prophesied, the hurricane season in North America and the Caribbean passed off relatively peacefully. Even hurricane "Dean", a storm in the highest intensity category, struggled to make it into our list of major losses – which includes loss events costing us EUR 5 million or more for gross account. We did, however, incur a number of smaller and mid-sized claims, as a consequence of which the total burden of catastrophe losses and major claims was double that of the previous year – albeit still within the bounds of our expectations.
I would rate the development of our business in life and health reinsurance as "excellent". Not only did we achieve our premium and profit targets, we comfortably surpassed them.
The performance of our investments also gave grounds for satisfaction. The crisis in the US real estate sector scarcely had any effect on our conservatively oriented, diversified portfolio. The write-downs that had to be taken on instruments secured with US subprime mortgages remained within manageable bounds. Ordinary income improved despite the weakness of the greenback thanks to good average yields in the portfolios.
As you, our valued shareholders, are aware, our stated dividend policy is to pay out 35 to 40 percent of the Group's profit. In view of our record net income the Supervisory Board and Executive Board intend to propose to the Annual General Meeting that a dividend of EUR 1.80 as well as a bonus of EUR 0.50 per share be paid out to you.
In life and health reinsurance we are very well positioned: our "five pillar model" provides an excellent platform for sustained double-digit growth in original currencies. International life and annuity insurance will be spurred on by the demographic trend in industrialised nations. Yet we also enjoy excellent business prospects in developing countries, where a middle class is emerging very rapidly.
In light of the current market conditions I expect your company's total portfolio to develop very favourably. In 2008 it is again our goal to generate a return on equity of at least 15 percent. As you appreciate, our profit forecast is always subject to the premise that the burden of catastrophe losses and major claims remains in line with expectations and that there are no exceptional downturns on the capital market.
On behalf of all my colleagues on the Executive Board I would like to thank you, our valued shareholders, for your trust. I can assure you that we shall do everything in our power going forward, as we have in the past, to equip Hannover Re to handle the opportunities and risks that lie ahead. Our goal, as always, is to consistently improve the value of your company. With this in mind I look forward to the challenges of 2008.
Non-Life Treaty Reinsurance Arab, European Romance and Latin American countries, Northern and Eastern Europe, Asia and Australasia
2007 will go down as a very turbulent year in the history of international equity markets. Particularly in the second half of the year, the financial sector was heavily impacted by bad news coming out of the United States.
This turmoil also left its mark on the Hannover Re share. General distrust in financial stocks triggered overreactions in the market, and although our company does not itself have significant investments in the subprime sector our share came under selling pressure. Having fared well in the first half of the year – reaching its annual high of EUR 37.50 on 2 May 2007 – it too suffered a downturn in July and listed at its lowest price of EUR 30.30 on 22 November 2007. In view of the growing uncertainty on equity markets and fresh anxieties, financial stocks failed to fully regain lost ground by the end of the year. Our share thus ended as at 28 December at EUR 31.55, a decline of 10.1% in the year under review. Thus market
Performance of the Hannover Re share in comparison with standard indices and the ABN Amro Global Reinsurance Index capitalisation stood at EUR 3,805 million. Our share recorded a price/earnings (P/E) ratio of 5.2 (MDax average: 20.9) and a price/book (P/B) ratio of 1.1 (MDax average: 2.1) for 2007.
Once again our Investor Relations activities met with a positive response in 2007. Numerous roadshows and telephone conferences as well as participation in investor conferences – which give us the opportunity to meet analysts and investors – again ranked among the most vital pillars of our Investor Relations work in the year under review. We are also pleased to host analysts and investors for individual meetings at Hannover Re's offices. Our analysts' conferences held each year at the unveiling of the annual financial statements took place – as in previous years – on the same day in Frankfurt and London, thereby enabling us to brief the capital
Reuters, analysts handed down altogether 134 opinions for Hannover Re in 2007. The majority of opinions recommended the Hannover Re share as "buy/overweight" or (67) "hold" (54). At the outset of the new 2008 financial year most analysts put the fair value of our share at around EUR 38.
The following companies hold direct or indirect capital participations that exceed 10% of the voting rights: An interest of 20.1% in the company's voting rights is held by HDI Verwaltungs-Service GmbH, Riethorst 2, 30659 Hannover. The proportion of voting rights held by Zweite HDI Beteiligungsgesellschaft mbH, Riethorst 2, 30659 Hannover, is 19.7%. Talanx AG, Riethorst 2, 30659 Hannover, holds 10.4% of the company's voting rights.
The appointment and withdrawal of members of the Executive Board are determined by §§ 84 et seq. Stock Corporation Act. Amendment of the Articles of Association is governed by §§ 179 et seq. Stock Corporation Act in conjunction with § 16 Para. 2 and § 21 of the Articles of Association of Hannover Re.
The Hannover Re share ver Re's Articles of Association as well as in §§ 71 et seq. Stock Corporation Act. In this connection the Annual General Meeting authorised the Executive Board on 3 May 2007 pursuant to § 71 Para. 1 No. 8 Stock Corporation Act to acquire treasury shares on certain conditions.
In addition, the retrocession covers in life and non-life business known as the "K" and "L" transactions contain standard market change-of-control clauses which in each case grant the other contracting party a right of termination if a significant change occurs in the ownership structure and participation ratios of the affected contracting party.
As an optimally diversified and economically independent reinsurance group of above-average profitability, our overriding strategic objective is to generate value-oriented growth. All other goals are derived from and subordinate to this overriding objective.
Optimal diversification For us this means: • We seek to generate maximum profits with our available equity by
1) Allowing for the 1:3 stock split in July 2002 2) CAGR: Compound annual growth rate 3) Modified DVFA/GDV calculation method (including amortisation of goodwill) 4) Earnings per share according to US GAAP, diluted
Strategy 1. Profit target • Minimum return on equity of 750 basis points above the risk-free interest rate
- requirements of the Federal Financial Supervisory Authority (BaFin) and the rating agencies (for capital adequacy ratio)
• Target to be achieved through - consistent rise in profitability - above-average Investor Relations (IR) activities
Strategic principles 4. Investments Preferably for: • achievement of an optimally diversified portfolio
• No equity participations in insurance enterprises 6. Invested assets • Mix guided by continuous dynamic financial analysis and the requirements of matching currency coverage
• Optimal support for business processes through information and communication systems
• Performance-related compensation 9. Enterprise and • Intrinsic Value Creation (IVC) is our central management tool risk management • Comprehensive risk management safeguards continued business survival
We support our strategic planning and management processes Group-wide using the Performance Excellence approach. Performance Excellence is a forward-looking, holistic management system, with the aid of which we seek to sustainably increase the value of our company. It takes its lead from the "Excellence Model" of the European Foundation for Quality Management (EFQM) and is based on the evaluation and enhancement of methods, practices and procedures used, complemented by external expert assessments.
Integrated assessment 10. Performance Excellence • Holistic management system for execution of our strategy
The German economy generated further strong growth in the year under review and gross domestic product consequently outstripped the previous year. After a modest start to the year – attributable to the rise in value-added tax – domestic demand in Germany surged sharply. Private consumption played a vital part in the upswing, not least because the state of the labour market in Germany continued to ease and disposable incomes grew.
The year under review forcefully demonstrated that the economic environment consistently poses fresh challenges for our business activities. The factors here were more diverse than ever: not only was the insurance industry affected by a number of economic changes, it was also impacted by various reforms in the German and broader international legal landscape. In Germany the Regulation on Insurance Mediation and Advice (VersVermV) and the Insurance Contract Act (VVG) are intended to promote, above all, improved consumer protection. In July of the year under review the European Commission presented the European Parliament with a proposal for fundamental reform of European insurance supervisory law in the shape of the Draft Outline of a Solvency II Framework Directive.
The year under review again passed off very well for the Hannover Re Group. After closing the sale of Praetorian Financial Group, Inc. – our US primary insurer transacting specialty business – to the Australian insurance group QBE in May 2007, we turned the focus of our attention exclusively to reinsurance. From the year under review onwards, our reporting is therefore restricted to two strategic business groups: non-life reinsurance and life/ health reinsurance. In this context non-life reinsurance now also encompasses the product range comprised of structured products – formerly financial reinsurance – as well as the remaining specialty business.
In compliance with the relevant International Accounting Standards we are reporting the result of our subsidiary Praetorian Financial Group, Inc. in both the consolidated and segmental statement of income (after tax) in a separate line ("net income from discontinued operations").
+++ Hannover Re increases its stake in E+S Rück to 63.8% +++
The development of our second business group – life and health reinsurance – was also once again exceptionally gratifying: the "Five Pillar Model" that drives our business provides an excellent platform for sustainable growth. Life and health reinsurance consequently comfortably outperformed the 2006 financial year both in relation to the pace of growth and profitability. Detailed information on both business groups is contained in the following sections.
Overall, we were satisfied with the performance of our investments: the relatively modest growth in assets under own management compared to the previous year can be attributed principally to the compensatory effect of movements in the US dollar in conjunction with moderate cash inflows. The portfolio of assets under own management grew to EUR 19.8 billion (EUR 19.5 billion) as at 31 December 2007. Ordinary investment income excluding deposit interest nevertheless improved on the previous year by 8.4% to reach EUR 859.0 million (EUR 792.6 million). As part of our active portfolio management the balance of profits and losses on disposals came in at EUR 174.3 million (EUR 217.4 million). Total net investment income retreated by 5.7% to EUR 1,121.7 million (EUR 1,188.9 million). Our conservatively oriented, well diversified portfolio was scarcely affected by the crisis in the US real estate sector. Given our minimal holding of securities with subprime exposure – relative to the entire asset volume – the write-downs of around EUR 10 million were, if anything, negligible.
In the following section we discuss the development of the financial year on the basis of our two strategic business groups, namely non-life reinsurance and life and health reinsurance. In addition, the segmental report provided in the annual financial statement shows the key balance sheet items and profit components broken down into the individual business groups.
The operating profit (EBIT) in the year under review was again thoroughly gratifying; it was boosted by 14.6% to EUR 940.0 million (EUR 819.9 million); the operating profit of around EUR 24 million generated by Praetorian Financial Group, Inc., prior to its sale is not included in this figure. Group net income surged by 42.6% to EUR 733.7 million (EUR 514.4 million) – another record result. Whilst it is true that this figure includes a reduction in deferred taxes amounting to EUR 191.5 million (before minority interests), our company would have achieved a new record profit even without this special effect. The earnings per share climbed from EUR 4.27 to EUR 6.08.
Hannover Re's financial strength was also further reinforced in the year under review: shareholders' equity increased by 15.6% compared to the previous year to reach EUR 3.3 billion (EUR 2.9 billion). The book value per share consequently improved by 15.6% to EUR 27.77 (EUR 24.03). The total policyholders' surplus – shareholders' equity, minority interests and hybrid capital – grew by 8.5% to EUR 5.3 billion (EUR 4.9 billion).
In the context of our total portfolio, non-life reinsurance is not only our largest and most significant business group – it is also the most difficult because in many lines and markets the business development is volatile and cyclical.
Key regulating factors in our underwriting continue to be our active cycle management and opportunistic underwriting policy, according to which we concentrate on those segments that promise the greatest profitability. These include, inter alia, property catastrophe business, worldwide credit and surety insurance, marine insurance and the markets of Central and Eastern Europe. In the lucrative German market, too, we continued to enlarge our share as one of the leading reinsurers. In view of the enormous growth potential inherent in the Islamic insurance markets we are also systematically pursuing – through our subsidiary in Bahrain – the development and expansion of Sharia-compliant business. In the year under review, following the establishment of Hannover ReTakaful in 2006, we also established a branch office in the Kingdom of Bahrain that will concentrate exclusively on traditional reinsurance in this region.
The renewal phases once again reinforced the considerable importance that ceding companies attach to a reinsurer 's rating – especially when it comes to long-tail casualty business. As an established and financially strong reinsurer, we enjoy outstanding ratings and are therefore a preferred point of contact for our clients. Consequently, we rank among those market players who are offered the opportunity to write – and indeed are awarded – virtually the entire spectrum of reinsurance business. This is a clear competitive advantage inasmuch as we are then able to select the business that best satisfies our profitability standards.
Earnings per share in EUR 4.65 +17.1% 3.97 0.04 2.24 1.52
In the year under review we took additional steps to ensure that our equity base is not strained by exceptionally large losses. On the one hand, for example, we further scaled back our peak exposures, while on the other we completed new capital market transactions – i.e. the transfer of insurance risks to the capital market. At the beginning of the year we topped up our largest-volume transaction to date – namely "K5" – by an extra USD 116 million to altogether USD 530 million, thereby making our portfolio even more weatherproof. The portfolio underlying the "K5" transaction consists of nonproportional reinsurance treaties in the property catastrophe, aviation and marine (including offshore) lines.
1) Relative to premium in non-life reinsurance (1998–2006 adjusted to new segmentation) 2) 1998–2004 = 5%, 2005 = 6%, from 2006 = 8% of net premium earned in non-life reinsurance
On account of Clarendon's withdrawal from active specialty business, lower premium income in the area of structured products and reduced peak exposures, the gross written premium in non-life reinsurance contracted by 20.1% to EUR 5.2 billion (EUR 6.5 billion). At constant exchange rates, particularly against the US dollar, the decrease would have been 17.3%. The level of retained premium climbed by 12.9 percentage points to 85.3% (72.4%). Net premium earned consequently slipped by a modest 4.7% to EUR 4.5 billion (EUR 4.7 billion).
States and the Caribbean, on the other hand, failed to materialise. Only hurricane "Dean" took its place in our list of catastrophe losses, with a strain of EUR 7.3 million.
Total net expenditure on catastrophe losses and major claims amounted to EUR 285.4 million (EUR 107.3 million ); this figure corresponds to 6.3% of net premium in non-life reinsurance and was thus slightly below the expected figure of 8%. The combined ratio stood at 99.7% (100.8%) in the year under review. This value reflects our current portfolio mix. We continue to set aside prudent levels of reserves, especially for more recent years in long-tail casualty business. Since we are now also reporting business involving structured products – in which losses are frequently offset by interest components – within the non-life reinsurance business group, structural factors helped to push the combined ratio higher than in previous years.
Weak growth was again the hallmark of property and casualty insurance in Germany. The cyclical upturn in our domestic market was scarcely reflected in growth in the premium volume booked by the German insurance industry. As a further factor, the burden of losses was heavier than in the previous year. In this context special reference should be made to winter storm "Kyrill", which produced an insured market loss in the order of EUR 2.5 billion. This was the most expensive single event in the history of the German insurance industry.
+++ Reform of Insurance Supervision Act strengthens German insurance industry in the face of European competition +++
Premium erosion was observed under proportional treaties in the fire and fire loss of profits lines; this can be attributed to a decline in original rates, although they were coming back from what was a high level. In this area we adjusted our involvement accordingly. Conditions in industrial liability business remained firmer; this was true of both our non-proportional and proportional participations. Entirely in keeping with our objectives, we were able to enlarge our premium volume in general liability insurance.
+++ E+S Rück extends its market share in the lucrative German market +++
We boosted our gross premium income in the United Kingdom in the year under review. In terms of catastrophe losses our portfolio was impacted by winter storm "Kyrill" at the start of the year as well as floods in June and July, although the strains for our company were relatively moderate.
In the primary sector aviation insurance is notable for considerable surplus capacities which range as high as 250% in the airline market. This situation, in conjunction with the favourable claims experience, led to appreciable softening in rates. On the reinsurance side, however, only moderate rate reductions were observed; the excess capacities here are limited because ceding companies continue to attach considerable importance to their reinsurer's credit status. We wrote our business selectively, i.e. guided strictly by profitability considerations, and we asserted our leading position in aviation reinsurance despite slightly reducing our market shares. We continued to improve the diversification of our portfolio, as a result of which the dominance previously enjoyed by airline business further diminished. We are thus well positioned to act profitably in a softening market. In this context our focus is on writing non-proportional business. In the year under review we booked a charge of almost EUR 10 million from a plane crash in Brazil – the largest loss in the aviation market in five years. Our account was further impacted by another aviation claim and three satellite failures. All in all, though, we were satisfied with the business experience in aviation reinsurance.
+++ Marine business: limits of liability under windstormexposed programmes in the Gulf of Mexico significantly reduced +++
Overall, we were thoroughly satisfied with the results of our marine business written on the London Market; this was equally true of the business development in other European countries and the United States, where we successfully consolidated the changes made in 2006. Rates consequently held stable, although it was not possible to obtain further price increases. In some small segments early softening tendencies could be discerned on the rates side, yet the quality of the portfolio as a whole was unchanged from the previous year. Our market share in the United States is disproportionately low relative to other regions on account of the fact that we were unable to push through improvements in conditions to the same extent as in other markets. The liability of the treaties that we write here only attaches for more substantial losses, i.e. above the layer comprised of basic losses. Since we already maintain links with almost all writers of marine business in the US, we did not enter into any new business relationships. Whereas in the non-proportional segment we write a relatively broad-ranging portfolio, in proportional treaty business we concentrate on a few lines – such as offshore and war risks – and write niche business. Facultative acceptances are written on a purely opportunistic basis. We recorded a moderate loss experience for the US marine market.
Thanks to falling insolvency figures and the healthy state of the economy, loss ratios in credit and surety insurance retreated to a record low in the year under review. For the first time in years insurers were able to generate organic growth, although in some areas this was offset – due to fiercer competition – by premium erosion. The primary market continued to post profits.
The crisis on the US mortgage market has not had any implications for our credit and surety business. Our underwriting guidelines preclude the use of credit derivatives, which includes mortgage guarantee business.
In France the development of the primary insurance sector was satisfactory. Rate declines were recorded both for coverage of industrial risks and in the motor line. With claims numbers falling, however, insurers again booked good results in the year under review, leading to greater pressure on rates. On the reinsurance side rates in motor business still proved to be inadequate. Although the number of accidents fell, spending on seriously injured victims of traffic accidents moved higher.
No significant loss events occurred in the French market; the strains from windstorm events – such as "Kyrill" – were moderate because the bulk of the claims remained within the retentions carried by insurers. We reduced our premium volume since rates in some areas were inadequate. Owing to the difficult situation in motor insurance, the result fell short of our expectations.
Hannover Re's business in Spain and Portugal fared well. Both markets offered sufficient attractive business opportunities.
In Spain, for example, we were able to generate profitable business; rates held stable on the whole despite intense competition. Both in property business and in the motor line prices remained at an acceptable level on average, prompting us to enlarge our portfolio. We write our treaties in Spain on an opportunistic basis, thereby enabling us to respond flexibly to market downturns. No major losses were recorded here in the year under review. The Portuguese market is highly traditional, meaning that business relations between insurers and reinsurers have a long-term orientation. As a result, the business is less volatile. All in all, we were satisfied with the business development despite the fierce competition prevailing in both the motor liability and workers' compensation lines. The insured limits for motor liability covers were raised from EUR 600,000 to EUR 1.2 million in the year under review. Given the absence of catastrophe losses and major claims in property reinsurance, business in Portugal was profitable.
In the Netherlands Hannover Re is particularly committed to the customer segment comprised of mid-sized insurers and mutual insurance societies. As far as this target group is concerned, our business is geared to long-term relationships. We normally focus on non-proportional niche segments, including for example reinsurance for greenhouses as well as public entities liability and motor fleet business. A tendency towards market softening could be observed in the year under review, although this did not apply to the motor and general liability lines – in which we therefore stepped up our involvement. Our total premium volume in the year under review contracted slightly as primary insurers raised their retentions. Winter storm "Kyrill" produced only a minimal strain for our Dutch portfolio. In property business, however, we
Management report non-life reinsurance incurred a sizeable number of claims. All in all, we were satisfied with the development of our business in the Netherlands.
+++ Focus on small and mid-sized ceding companies in Italy +++
Very good results posted by primary insurers led to increased competition in the year under review. Particularly in Denmark this was reflected in substantial reductions in motor liability premiums. Commercial business was also fiercely competitive, giving rise to double-digit rate reductions.
On the reinsurance side too the rate level was influenced by significant competition – especially in areas where the programmes had been spared any losses. Our goal was to preserve profitable business, and in this respect we were largely successful. The premium income from Northern Europe declined slightly. In the year under review we suffered a catastrophe loss of EUR 7.1 million for net account in the form of windstorm "Per" as well as a number of property claims attributable to fire damage, as a consequence of which the loss ratio rose. Given that market conditions were by no means easy, however, the development of our business in Northern Europe was satisfactory.
+++ Hannover Re among the top three providers in Central and Eastern Europe +++
Conditions for reinsurers were largely stable. Hannover Re ranks among the top three providers in Central and Eastern Europe. In view of predominantly healthy margins we were therefore able to generate attractive business. Our premium volume continued to grow in the year under review; our results in Central and Eastern European markets were also satisfactory. There were no sizeable losses with the exception of winter storm "Kyrill", although here too the strain for our account was moderate.
The North American (re-)insurance market is the largest and most important single market for Hannover Re and indeed for all players worldwide: it accounted for 31.7% of our total premium volume in non-life reinsurance.
+++ Further reduction of premium volume in US D&O business +++
Property business in the primary sector was spared any appreciable price erosion until the beginning of 2007. However, the high rate level attained in the wake of the 2004 and 2005 hurricane years, especially under policies with natural catastrophe exposures, had boosted the appeal of the business and hence – by the middle of the year under review – fanned competition. Rates in property business that had no correlation with catastrophe exposures, on the other hand, had long been under pressure. As yet, however, there has been no indication of a softening in treaty terms and conditions, which is always the unmistakeable sign of a "soft" market.
In view of the softening on the market that currently lies ahead, we have scaled back our overall involvement in property business with no catastrophe exposure and in casualty business – as a consequence of which our premium volume in the year under review contracted. In accordance with our anticyclical underwriting policy,
+++ Further intensification of marketing activities aimed at acquiring new clients and improving diversification +++
In the year under review we nevertheless further intensified our marketing activities with the aim of acquiring new clients and improving our diversification. We are stepping up our participations with regional mutual insurance societies, since rate movements in this segment are less volatile.
Our US business is written almost exclusively through brokers; this gives us greater flexibility, particularly in light of our anticyclical underwriting policy. By means of refined client segmentation, however, we have also identified companies that we serve irrespective of market cycles. We maintain long-standing, trusting business relationships with these clients.
As a further step with an eye to the softening market, we continued to reorganise our proportional business in favour of non-proportional arrangements. Only a small number of proportional covers that promise adequate profitability have been continued.
provided we consider the price and scope of coverage to be reasonable.
In the primary sector there were no significant changes compared to the previous year; the solvency level continues to be good. Growth was sustained in the credit market, with very good results. Nor did the crisis in the US real estate market have any repercussions on business. Demand in the surety line remained strong, although fierce competition and the absence of claims led to modest pressure on rates.
On the reinsurance side, too, business again developed highly favourably in the year under review; most notably, surety business – for Hannover Re the dominant line in the United States – was characterised by an attractive level. Against a backdrop of above-average profitability, we maintained our already significant market position here and even extended it in some areas. In credit reinsurance our premium volume showed double-digit growth and results continued to be very good. In the political risks segment we also further boosted our premium income.
Our credit and surety portfolio was unaffected by the crisis on the US mortgage market. Our underwriting guidelines preclude mortgage guarantee business and credit derivatives.
Half of our premium income in the area of structured products derives from the United States. In view of the exceptional importance of this market we maintain a representative office in Chicago specially for marketing purposes. What is more, we leverage the advantages offered by our subsidiary in Dublin, namely the scope for economically realistic discounting of loss reserves, in combination with the exemption available at this location from Federal Excise Tax – a special tax on premiums ceded to non-American companies. Following the turmoil that had erupted around structured products in recent years, demand for our conceptual solutions stabilised in the year under review – albeit on a lower level.
Latin America Mexico, Colombia, Venezuela, Ecuador and Argentina are the most important Latin American markets for our company.
Our strategy in the agricultural risks segment is to acquire additional market shares. State-run premium subsidy programmes in the primary sector and the promotion of plant-based energy sources as well as rising prices for farm products led to stronger demand for agricultural insurance – and hence to a greater need for reinsurance capacities.
In Africa Hannover Re reinsures predominantly specialty risks; this niche business, encompassing for example motor liability covers for taxis, is accepted by specialised managing general agents. A sizeable portion of our specialty portfolio is assumed from our subsidiary Compass Insurance Company. Our commodity business in South Africa and Mauritius is focused on non-proportional acceptances; only in exceptional cases and only if the conditions are very attractive are we also prepared to write proportional treaties on a selective basis. In other African markets we are standing by our strategy of enlarging our portfolio of profitable non-proportional business. It is, however, difficult to achieve this goal because ceding companies on the African continent prefer to place treaties together in bouquets.
In view of the impending changes in South Africa with respect to capital requirements, we anticipate fresh growth impetus here in the area of structured reinsurance products.
Asia Japan is by far our largest Asian market. Thanks to our presence in Tokyo, where we maintain a service company, we are able to stay in constant personal contact with our clients. We enjoy the status of "core reinsurer" with most of the country's major insurers. Our most important single line in Japan is natural catastrophe business, which we write predominantly on a non-proportional basis.
Demand for earthquake covers in the primary sector further intensified in the year under review. With ceding companies carrying higher retentions, however, the premium volume on the reinsurance market contracted; we were able to beat this trend and consolidate our position. The price level held stable overall: reinsurance commissions under proportional treaties rose thanks to improved results and the absence of catastrophe losses. In non-proportional personal accident business rates were for the most part stable, although modest reductions were observed in certain areas. The property lines saw average price decreases of 5%.
The strongest growth market in Asia is China. While Hong Kong, Taiwan and South Korea are established insurance markets that scarcely changed year-on-year, the Chinese market again recorded disproportionately vigorous growth – a trend witnessed across all lines but especially evident in motor business and casualty lines. China continues to be a target market for international insurers and reinsurers, and competition is correspondingly intense. This, in turn, was reflected in declining rates and deteriorating terms and conditions, although the current market environment in Taiwan, Hong Kong and South Korea is also soft.
No major losses were incurred in the year under review, although the frequency of smaller claims was on the increase.
Hannover Life Re – the infrastructure and international network infrastructure in the year under review: we pressed ahead with the second foundation phase for a life branch in China and expect operational business to commence in the early months of 2008. In South Korea we received approval in principle in December 2007 from the local regulator for establishment of a branch in Seoul, while in India we are currently in the process of setting up a service company in Mumbai that will support Hannover Re's life and facultative non-life business from 2008 onwards.
Hannover Life Re's business model continues to be based on the "five pillar model" through which we are able to offer our clients a broad range of reinsurance solutions. Our over 470 staff at 18 locations worldwide are thus in
The 2007 financial year can be rated as "excellent" on account of the fact that we accomplished our targets with respect to both premium volume and profitability – and in some cases even surpassed them by a very comfortable margin. In so doing, however, we in no way compromised on our reserving practice, which in accordance with the principles of IFRS facilitates a prudent reserving policy. What is more, we continue to adopt a conservative underwriting practice that ensures optimal diversification of our portfolio in terms of both lines and regions.
Development of premium income total income – our most significant market, while North America with 20.8% (23.0%) and Germany with 14.0% (15.9%) consolidated second and third place respectively. Australia and New Zealand – producing 11.6% of premium income combined – also played an important part in our portfolio, especially as we have been market leader here for many years. Further major markets are South Africa, France and Italy.
a position to respond to the special needs of the various markets and individual clients and incorporate them into their solution concepts.
Gross premium incl. premium deposits 3,937.4 -0.6% 3,959.8 2,733.2 2,487.9 2,534.2
Net premium incl. premium deposits 3,579.0 +3.5% 3,457.8 2,532.1 2,223.5 2,149.7
Key figures for life and health reinsurance 1) Figures for 2003 to 2005 before new segmentation 2) On a US GAAP basis 3) Operating profit (EBIT)/net premium earned
• development of the structural risk associated with the persistency of the business in force,
The biometric risk of morbidity manifests itself in widely differing coverage concepts in the individual markets; special mention should be made of critical illness covers (in the United Kingdom, South Africa and Australia), Senior Health Medicare Supplement plans (in the United
The risk associated with the persistency of the in-force reinsured portfolios, which is especially important for our financing transactions with respect to unit-linked products in Germany and South Africa, exhibited a similarly favourable development: the observed lapse rates were normally below those that had been actuarially calculated and factored into the pricing.
The operating profit (EBIT) generated by Hannover Life Re showed significant growth of 65.4% in the year under review to reach EUR 230.8 million (EUR 139.5 million), although this figure was positively influenced by a number of special factors. These special effects accounted for around EUR 30 million in total, leaving a normalised operating profit (EBIT) in the order of EUR 200 million.
The EBIT margin reached 8.3% – an increase of 2.4 percentage points compared to the previous year. Even after factoring out special effects the level comfortably surpassed our target of 5%.
The German life insurance industry was in transition in the year under review: the new actuarial interest rate of 2.25% was adopted effective 1 January 2007, and extensive preparations were underway for the entry into force on 1 January 2008 of the Law amending the Insurance Contract Act (VVG-Novelle).
The stated aim of the reform of the Insurance Contract Act is to enhance the transparency of German life and annuity insurance products and to put consumers in a better position in the event of early surrender of their policies. At the same time, we were required to bring about implementation of the new EU Mediation Directive on the German market and put into practice the amendments to the Insurance Supervision Act (VAG-Reform).
Germany government-assisted "Riester" and "Rürup" products are currently the dominant component of new business, against the backdrop of an unmistakable shift in market shares away from conventional towards unit-linked annuities. The market premium was flat relative to 2006 at EUR 78.1 billion.
United Kingdom policies; our Irish subsidiary Hannover Life Re Ireland writes a few key accounts directly and is also available as a retrocessionaire or co-reinsurer for Hannover Life Re UK.
Total gross written premium from UK cedants climbed 35.0% to EUR 927.4 million (EUR 686.9 million); of this amount, 40.1% was attributable to Hannover Life Re Germany, 21.2% to Hannover Life Re UK and 38.7% to Hannover Life Re Ireland.
The operating profit (EBIT) generated by Hannover Life Re UK therefore reached a new record high of
Hannover Re's life branch in Paris booked gratifying premium growth of 9.9% to EUR 317.9 million in the year under review against a backdrop of continued above-average profitability. Key growth drivers were treaty acceptances from the European bancassurance segment, especially in support of activities conducted by major French banks in foreign European and Arab markets.
These regional markets are handled by our life branch in Stockholm, with bancassurance relationships playing a central role in Scandinavia. In this part of the world we reinsure first and foremost the mortality and disability risks in connection with occupational retirement provision.
Our main activities in Eastern Europe are in the Baltic countries, while in other markets we adopt a highly selective approach. In Turkey we significantly stepped up our activities in the bancassurance segment in the year under review, and in Israel we are taking a closer look at product differentiation under our clients' critical illness and long-term care insurance policies.
Hannover Life Re America continues to concentrate its new business activities on non-traditional areas of the US life reinsurance market, putting the emphasis on block assumption transactions involving life and annuity portfolios as well as on various segments of health business in the senior citizens' market.
The gross premium volume assumed by Hannover Life Re America grew in the year under review by 10.5% measured in US dollars; indeed, measured in euros it even surpassed the previous year's figure to reach EUR 508.6 million (EUR 503.3 million). The operating profit (EBIT) came in at EUR 8.7 million (EUR 15.9 million), while net income after tax amounted to EUR 4.9 million (EUR 8.7 million).
Our youngest subsidiary, Hamilton-based Hannover Life Re Bermuda, received its business licence from the Bermuda
Our portfolio in Italy was notable for the expiry of past financing transactions, while in the Spanish market we were active principally in bancassurance business.
Africa Our subsidiary Hannover Life Re Africa, which is based in Johannesburg with a branch office in Cape Town, bears underwriting responsibility for business from South Africa and the neighbouring countries of English-speaking Africa.
In past years product innovations were at the heart of developments in the South African market; of late, however, closer attention has been paid to new, more costeffective and efficient distribution methods. In this context we are able to provide our clients with tailored solutions, especially in the area of underwriting systems.
Central and South America Our service office in Mexico City, which is responsible for its home Mexican market and the countries of Central
Monetary Authority – the local regulator – in October 2007. Equipped with an equity base of EUR 120 million, it writes a worldwide portfolio and leverages the special strengths of Bermuda as an insurance location in the interests of our clients. At the end of the year under review it concluded three reinsurance treaties with two clients, although the premium volume is still marginal. The company closed the year under review with a modest operating profit.
Results were very good in all markets in the year under review; no sizeable major losses were reported.
Australia and New Zealand Our Sydney-based subsidiary Hannover Life Re Australasia is responsible for business relationships in Australia, New Zealand and Oceania; in the year under review it was again able to successfully consolidate its position as market leader.
The assumed gross premium volume climbed 15.2% to EUR 348.6 million, while net premium earned surged by as much as 28.2% to EUR 242.0 million due to the increase in the level of retained premium.
Despite a major loss in excess of EUR 10 million for gross account, results were highly gratifying – especially in superannuation business – and we were therefore able to boost the operating profit (EBIT) by 31.1% to EUR 34.5 million (EUR 26.3 million). Net income of EUR 25.9 million (EUR 20.9 million) remained after tax.
Ten-year US treasury bonds yielded a return of 4.0% as at year-end, while in Europe the yield on bonds of the same duration was 4.3%. In the area of fixed-income securities the market for corporate bonds and other credit products came under a cash strain from the third quarter until the end of the year. The euro consistently moved strongly higher against virtually all major world currencies.
Hannover Re's investment policy continues to be guided by the following core principles: • generation of stable, plannable and tax-optimised returns while at the same time maintaining the high quality standard of the portfolio; Management report investments
• ensuring the company's liquidity and solvency at all times; • high diversification of risks within the scope of our investment strategy; • control of currency exposures in accordance with the principle of matching currencies.
Within the scope of our asset/liability management activities, the allocation of investments by currency is determined by the development of underwriting items on the liabilities side of the balance sheet. We are thus able to achieve extensive currency matching of assets and liabilities, thereby ensuring that our result is not significantly affected by fluctuations in exchange rates. As at year-end 44.7% of our asset portfolio was held in euros, 38.5% in US dollars and 6.7% in pounds sterling.
Thanks to the neutral/defensive posture of our bond portfolio our performance was in line with the planned parameters. Based on the cash inflow from the technical account and the investments themselves, our portfolio of self-managed assets grew to EUR 19.8 billion (EUR 19.5 billion) despite the weak US dollar. Boosted by the increase in the average yield of our portfolio, ordinary income came in considerably higher than in the previous year at EUR 859.0 million (EUR 792.6 million).
As in previous years, we actively managed the duration of our fixed-income portfolio, thereby not only optimising our returns but also conserving our shareholders' equity. The modified duration of our bond portfolio was kept stable over the reporting period, standing at 4.0 years as at year-end 2007.
Results from participation in associated companies 11.0 +73.4% 6.3 3.9 2.2 9.7
Net investment income from funds withheld 220.1 -0.8% 221.9 351.6 382.1 517.5
+++ Quality of our fixed-income securities by rating categories on a consistently high level +++
The international financial and capital markets have been significantly impacted by the US credit crunch and real estate collapse since the middle of the year. Of our total investment portfolio of EUR 19.8 billion, a volume of EUR 47.8 million is potentially affected by the crisis, i.e. a mere 0.2%. The concrete depreciation requirement in the year under review was in the order of EUR 10 million.
As at 31 December 2007 we held a total amount of EUR 1,266.2 million (EUR 1,073.6 million) in short-term assets and current assets. Funds held by ceding companies amounted to EUR 9.2 billion (EUR 9.3 billion).
In light of the favourable trend on stock markets we again realised increased gains on equities. The equity allocation rose to around 10% (8%), while in absolute terms the portfolio of listed equities grew to EUR 2,000.4 million (EUR 1,596.3 million). By using targeted option strategies we were able to partially hedge our equity holdings against price losses.
Of our total holdings of alternative investments that have been accumulated steadily over a number of years, an amount of EUR 555.5 million (including uncalled capital) was apportionable to investments in private equity funds, EUR 345.9 million to high-return bond funds and loans, EUR 102.5 million to structured real estate investments and EUR 61.4 million to CDO equity tranches. The fair value of the portfolio showed very favourable growth.
The real estate allocation within the portfolio remains very low while we await an attractive entry level. In the medium term we are targeting a 3% to 5% share of our total investment portfolio.
In non-life reinsurance we have many years of positive experience using a ratio based on underwriting years, namely "DB 5": level 5 of our contribution margin accounting method constitutes the clear profit after earning the discounted claims expenditure (level 1) plus all external (level 2) and internal costs (level 3), including the cost of capital (level 4). We apply DB 5 to the nonlife reinsurance treaty departments as part of the fine tuning of portfolios down to the level of individual contracts.
In life and health reinsurance we use the European Embedded Value (EEV). The EEV is defined as the intrinsic value of an enterprise, measured as the discounted profit flow until final run-off of the in-force portfolio – from the standpoint of the shareholder and after taxes.
Both concepts reflect the specific characteristics of the individual segments. Together, they constitute the basis for our central management tool: Intrinsic Value Creation (IVC).
System of value-based management: Performance Excellence combines the strategic and operational levels
Non-life reinsurance Combined ratio <– 100% 99.7% 100.8% 112.8% 97.2% 96.0%
Growth in earnings per share >– 10% 42.6% 942.7% (82.4%) (28.4%) 17.8%
Growth in book value per share >– 10% 15.6% 11.4% 3.0% 6.3% 11.4%
Management by Objectives The targets that emerge out of the planning process are integrated into the individual agreements on objectives with managers. When defining targets the participants take into account not only profit-oriented but also nonfinancial goals, including for example the activity planning.
Management Reporting Internal Management Reporting is drawn up twice a year, tiered according to areas of responsibility. In the first place, the achievement of objectives in the past year is reviewed here, and secondly the planning is assessed with an eye to the strategic objectives.
The adjusted operating profit (EBIT) consists principally of the reported Group net income after tax and the change in the balancing items for differences between present values and amounts stated in the balance sheet (one adjustment for non-life and one for life/health reinsurance). In addition, the interest on hybrid capital, minority interest in profit and loss and extraordinary profits and losses are eliminated.
We consider the allocated capital to be the shareholders' equity plus minority interests, the balancing items for differences between present values and carrying amounts as well as the hybrid capital. Capital is allocated to the profit centres according to the risk content of the business in question.
Value management is not limited to the specification and determination of a value-based ratio, but also encompasses the definition of so-called value drivers. These describe action fields through which the Intrinsic Value Creation can be influenced.
With regard to the operational units the IVC consists of six levels; its degree of detail varies according to external and internal units as well as in non-life and life/health reinsurance: 1. IVC from gross underwriting (current business)
Once they have been calculated we communicate the IVC and xRoCA for the reporting year in various media, including on our website.
The Hannover Re Group employed 1,825 (2,002) staff as at 31 December 2007. The turnover ratio at Home Office in Hannover of 4.4% (3.7%) – measured in relation to the average workforce of 905 – was slightly higher than in the previous year, albeit still comfortably below the industry average. The rate of absenteeism was on a par with the record low of 2.5% recorded in 2006.
Although the state of the labour market shifted appreciably in the year under review in favour of those seeking employment – politicians and the media are already talking about another lack of skilled workers –, the turnover and absenteeism figures are still well below the industry average. With 3,600 applications, the ratio of candidates to employees was roughly four to one in
More than half of our workforce can draw on a rich store of professional expertise based on their age. With an average length of service of nine years and an average age of 40, they have comprehensive experience at their fingertips.
Demographic change and its potential implications for the business world were often the subject of public debate over the past two years – and were particularly widely discussed in companies' personnel departments. For our part, we too have begun to take a close look at this issue. An analysis of our company's age structure revealed that Hannover Re – in common with many other enterprises – does not have a balanced age structure: the majority of our company's staff are aged between 30 and 40. While this does not mean that we shall have an agerelated problem filling jobs in the coming years, we will, however, constantly have to keep a close eye on the different situations in the departments and hierarchical levels so as to be able to respond quickly to developments.
Demographic change encompasses a very broad range of issues. In many of these areas Hannover Re is already
–14 ye ars 15–19 ye ars 20–24 ye ars >–2 5 y ea rs
superbly positioned, including for example the organisation of working time (flexible working-time/part-time models and telecommuting options), aspects of wellness promotion (company sports), work/life balance considerations and in terms of an extensive internal training programme.
In the current year we shall analyse to what extent there is a need for action with respect to the themes of cooperation and leadership, further training and professional development as well as the preservation of our employees' physical and mental well-being. We shall then enhance or adjust the existing tools. A further constant challenge in this connection – particularly for a service provider such as ourselves – is safeguarding and passing on the expertise already existing within our organisation.
In its human resources policy Hannover Re attaches considerable importance to promoting the compatibility of its employees' professional and private lives. Our various part-time working models, which are used by more than 18% of our workforce, already offer a high degree of flexibility to promote the harmonisation of family and career. In the year under review 113 staff – i. e. 12.5% of our workforce at Hannover Home Office – were
Career and family telecommuting some of the time from home. 743 staff were in full-time employment in the year under review, 164 were employed part-time. This flexibility was again assessed exceptionally positively in the latest personnel survey. Working together with dedicated members of staff, we are developing further models so as to harmonise still better company needs and private concerns.
By means of company-wide guidelines – including for example our business principles – which we update regularly and adjust in line with changing socio-political requirements, we have defined standards that are valid for all employees worldwide. All members of staff undertake to conduct themselves vis-à-vis their colleagues and
Today, as in the past, personnel development is one of the cornerstones of our human resources management. Over the past three years an average of 4.1% of the workforce took part in a personnel development workshop; the total time invested in further and advanced
Personnel development training amounted to six days per employee per year. In 2008 we shall move forward with the closer interlinking of our individual personnel development tools such as the appraisal interview, personnel development workshop and management feedback.
Participation of staff in the Group Performance Bonus (Hannover Home Office)
Training is good – more training is better. Guided by this maxim, we have enabled many graduates to embark on a professional career in recent years. Cementing the affinity of qualified young people at an early stage is an important element of our corporate philosophy. After a protracted demand-driven market we now anticipate
Since August 2006 the General Act on Equal Treatment (AGG) has been in force. The German federal government thereby implemented European Union guidelines on equal treatment in national law. As a globally operating organisation the concerns of the AGG are nothing new for us. Diversity has long been part of our corporate
We would like to thank our employees for their initiative, dedication and performance. Our staff identified with the company's defined objectives and pursued them purposefully at all times. We would also like to express our
Word of thanks to our staff appreciation to the representatives of staff and senior management for their critical yet always constructive cooperation.
Social commitment ganised by Hannover Medical School (MHH) to showcase the work of the emergency rescue services.
Yet our company's social commitment is not limited to the Greater Hannover region or indeed Germany. Internationally, too, social responsibility matters greatly to us. A variety of support and development projects are
Yet we do not attach exclusive importance to our exchange of ideas with this institution – we also set great store by
In 2007 Hannover Re participated for the first time in the "Ecological Project for Integrated Environmental Technology" (Ecoprofit). The basic idea underlying this project is to combine economic profit with ecological benefit. Through preventive environmental protection – for example thanks to the systematic saving of resources such as water and energy – the goal is to sustainably improve the state of the environment in a particular region and at the same time save costs. As a financial services company our emissions of harmful substances are of course significantly lower than those of a manufacturing plant. We nevertheless aspire to leave the smallest possible footprint on our environment, and we are therefore consistently reducing our use of resources and our emissions.
Environment a consequence of which CO2 emissions for 2007 were cut by around 175,000 kg. For its successful implementation of these steps Hannover Re was singled out as an "Ecoprofit " business in December 2007; this is the title awarded by the City and Region of Hannover to companies that save energy through appropriate measures and hence reduce their emissions of polluting carbon dioxide. Implementation of the remaining six measures is scheduled for early 2008.
Following its premiere back in 1998, the year under review saw the tenth examination concert in Hannover. Every year this concert – organised by E+S Rück in cooperation with Hannover University of Music and Drama – offers three to four "master students" the opportunity to perform with the accompaniment of a large orchestra. With this performance the students are able to complete their final examination and are thereby able to satisfy the requirements for embarking on a career as a soloist. At the same time we consider the examination concert to be the musical highlight of E+S Rück's annual "Hannover Forum" seminar event.
Supervisory Board • Advising and monitoring the Executive Board in its management of the company, inter alia with respect to risk management
Risk Committee 1) • Monitoring and coordinating body with respect to operational risk management • Decision-making power is within the bounds of the risk strategy defined by the
– development of processes/methods for risk assessment, management and analysis, – risk limitation and reporting, – risk monitoring and determination of the required risk capital across the Group.
Business units 3) • Primary risk responsibility, inter alia responsible for risk identification and assessment on the departmental level. The task is performed on the basis of the guidelines for the independent risk monitoring function.
Line-independent monitoring • Group-wide review of all functional areas of Hannover Re by Internal Auditing
2) Led by: Chief Risk Officer; functions: aggregate control, natural catastrophe modelling, actuarial claims analysis, dynamic financial analysis (DFA), handling of operational risks and risk reporting.
• documentation of the essential components of the system in compulsory rules
• systematic and thorough recording of all conceivable risks that could jeopardise the company's net income or survival from the current perspective
In the year under review the US rating agency Standard & Poor's assessed our risk management as "Strong", the second-highest rating. This opinion reflects the quality of our approach to risk management, also in comparison with the broader market environment.
Global risks are beyond our direct sphere of influence and we therefore concentrate our risk management activities on early detection. These risks may derive inter alia from changes in the legal (including the regulatory and tax) framework, social and demographic changes, developments in the insurance industry as well as environmental and climate factors. We counter these potential risks by taking a number of steps, including constant monitoring of claims trends as well as analyses of claims
Global risks and catastrophe losses. We adjust our underwriting policy accordingly, as necessary by means of appropriate contractual exclusions or through material and geographical diversification of the portfolio. Furthermore, we track developments in relevant legal areas (e. g. US liability law) and in regulatory/statutory requirements as well as changes in accounting standards (e. g. IFRS).
Strategic risks by incorrect strategic policy decisions – or by a failure to consistently implement the defined strategies. We therefore regularly review our strategy and systematically adjust our structures and processes as and when required. Our holistic management system of "Performance Excellence " ensures that our strategy is constantly reviewed and consistently translated into practice. We continuously and systematically improve our performance under all
Excellence criteria and subject them not only to internal but also external assessment. In this regard "Policy and Strategy" is an independent assessment criterion. Every three years the assumptions underlying our corporate strategy are systematically re-examined, most recently in 2005. This structured process is a core element of our integrated opportunity management.
Risks on the underwriting side can be subdivided into risks of random fluctuation, risks of error and risks of change. A significant technical risk is the risk of underreserving. In non-life reinsurance we calculate our loss reserves on an actuarial basis. The point of departure here is always the information provided by our cedants, where necessary supplemented by additional reserves that may seem appropriate on the basis of our own loss estimations. Furthermore, we constitute an IBNR (incurred but not reported) reserve for losses that have already occurred but have not yet been reported to us. Our own actuarial calculations regarding the adequacy of the reserves are subject to annual quality assurance reviews conducted by external actuaries and auditors.
In order to assess the risks posed by natural hazards the Hannover Re Group uses licensed scientific simulation models. We also employ our own scientists to evaluate and control the quality of the models. Within various segments we additionally determine extra safety loadings that are added to the output of the simulation models in order to adjust our calculation base to adequately reflect the risks. In addition, the Hannover Re Group's natural hazards experts constantly monitor the findings of all available scientific research with an eye to possible changes in the risk situation. The simulation models and the know-how of our specialists in geosciences and natural sciences form the basis for the risk management of our natural hazards exposure. We continually review the utilisation of our maximum permissible exposure limits, the allocation of equity according to profitability criteria and the active management of our own reinsurance requirements.
Management report risk report occurrence probabilities of the expected loss with the aid of our simulation models for natural hazards. As a final step, this data based on individual scenarios is then collated for the portfolio as a whole, which is considered both on a gross basis and for net account after application of the existing retrocession structure.
The data described here also forms an integral component of our regular reporting to the Executive Board and the Risk Committee. The tools used for accumulation control are supplemented by the progressive inclusion of realistic extreme loss scenarios. The tasks, responsibilities and processes within our overall system of natural hazards accumulation control are set out in guidelines drawn up specially for this purpose.
The effects of the crisis in the US real estate and credit markets were minimal in relation to our technical account; our portfolio does not contain any underwriting risks from mortgage protection policies that originate from the subprime crisis. In US directors' and officers' and professional indemnity business we anticipate only a minimal strain in light of the consistent reduction in our market share.
Quality is further assured – especially at the level of the subsidiaries – by the actuarial reports and documentation required by local regulators. A key tool of our valuebased management and risk management in the area of life and health reinsurance is the European Embedded Value (EEV). This refers to the present value of future earnings from the worldwide life and health reinsurance portfolio – after appropriate allowance for all risks underlying the covered business.
The interest guarantee risk, which is important in life business in the primary insurance sector, is of only minimal risk relevance to our business owing to the structure of our contracts and the use of conservative assumptions.
+++ Matching currency coverage minimises the effects of exchange rate fluctuations +++
We seek to generate stable, plannable and tax-optimised returns while at the same time maintaining the high quality standard of the portfolio. Our goal is to generate an optimal contribution margin while adhering to maximum defined risk limits. We therefore strive to generate at least the risk-free interest rate plus the cost of capital associated with the asset structure. Investments are guided by the requirements of the reinsurance business (e.g. with respect to currencies and maturities). The underwriting portfolio (liability management) is linked and
Investment risks harmonised with the investment portfolio (asset management ) under the umbrella of integrated asset/liability management. The mix of our asset portfolio is guided by continuous dynamic financial analysis (DFA) as well as the requirements of liquidity and matching currency coverage. The latter is important because a large portion of our business is written in foreign currencies. Since we systematically adhere to the principle of matching currency coverage, however, these risks are largely neutralised. The implemented management and control mechanisms are wide-ranging and encompass organisational rules – such as the principle of separation of functions with respect to trading, settlement and risk control which is applied through to the level of senior management – as well as regular reviews of limits and portfolio/sensitivity analyses, together with standard and ad hoc reports that are stipulated on this basis, all of which are integrated into the overall process.
The write-downs taken by Hannover Re as a result of the subprime crisis are comparatively modest. They amount to a maximum of around EUR 10 million.
In our understanding, this category encompasses the risk of losses occurring directly or indirectly because of inadequacy or failure of internal procedures, human error or system failure, organisational shortcomings and external events.
In this regard, our internal control system – which embraces all harmonised and interlinked checks, measures and rules – is a vital risk management tool for minimising operational risks. As a mandatory component of all audits, our Internal Audit unit regularly checks the proper functioning of the internal control system. Internal auditing is thus a major element of the line-independent monitoring of risk management. In the year under review, in response to the growing importance of the internal control system, we began to further optimise our existing control system and attune it even more closely to future requirements.
The hallmark of emerging risks is that the content of such risks is not as yet known with any certainty and their implications are difficult to assess. These risks evolve gradually from scarcely perceptible signals to unmistakable tendencies. It is therefore important to detect such signals at an early stage and to systematically identify them, determine their relevance and assess the risk that
Emerging risks they pose. On this basis it is possible to decide which steps must be taken, e g. the implementation of contractual exclusions or the development of new reinsurance products. This situation can currently be observed, for example, in connection with so-called obesity or the advancement of nanotechnology.
Monetary policy in the Eurozone will likely tend more towards an expansionary stance. The European Central Bank will probably leave its base rate unchanged for as long as the dangers on the financial markets have not been averted.
+++ 2008/2009 should profit from the favourable business climate of previous years +++
For systemic reasons the effects of incipient market softening are only reflected in our results after a certain time lag, and we therefore expect the operating profit (EBIT) to actually increase. Similarly, 2009 should still profit from the favourable business climate that has prevailed in non-life reinsurance in recent years.
The renewal season once again clearly demonstrated the considerable importance that ceding companies attach to their reinsurer's rating. This is especially true when it comes to the underwriting of casualty business; in order simply to be asked to submit a quotation a very good rating is an indispensable prerequisite here. With its very good ratings ("AA-" from Standard & Poor's and "A" from A.M. Best), Hannover Re is one of the few reinsurers to meet this condition without reservation. Our good financial strength has consequently enabled us to profit disproportionately from attractive business opportunities.
+++ Position cemented as one of the leading reinsurers in the German market +++
We are thoroughly satisfied with the market environment in Germany. Our subsidiary E+S Rück enjoyed highly gratifying treaty renewals in its domestic market: property business showed vigorous growth here. We were
Aviation (re)insurance, for which the London Market is the centre of global business, is experiencing further premium erosion; all in all, then, market conditions are not particularly attractive at present. We only write business that we consider to be profitable. We shall continue to reduce our proportional treaties while further diversifying our non-proportional portfolio.
In the Netherlands rates for programmes impacted by winter storm "Kyrill" are holding steady. This is also true of liability and motor business.
Intense competition still prevails in the countries of Central and Eastern Europe. We expect stable prices under direct customer relationships; in broker business, on the other hand, appreciable rate reductions are likely. By and large, however, margins should remain adequate. We are striving to further boost our share of non-proportional business in Russia and the CIS states.
In North America it will become more difficult for many of our clients to maintain the combined ratios reported in recent years of less than 90% in some areas as well as returns on equity in excess of 15% while at the same time growing their gross and net premium. The second and third quarters of the year under review were notable for the lowest increase in gross premium in decades.
We do not expect the competitive pressure in property insurance to ease. In the case of business with a less pronounced catastrophe exposure (such as in the Midwest), the possibility cannot be ruled out that even in 2008 a profitable level can no longer be maintained. The casualty insurance market could clearly slide into a soft market phase during the current financial year.
Especially with an eye to the softening market environment, we shall actively pursue our strategy of diversification in 2008 and 2009. In concrete terms, this means that we are increasingly directing our sales activities at mid-sized and smaller clients. The foundations for this approach have been put in place by business management studies conducted in recent years by our Central Division North America.
In China we expect to see a further decline in rates and diminishing profitability, although in other East Asian countries too the indicators point to a softening market.
We are continuing to push our profitable, predominantly non-proportional business and expect the premium volume to come in unchanged. In India, Indonesia and Thailand prices are showing gratifying increases of up to 30%; it should, however, be borne in mind that the previously existing level was not particularly attractive.
The state of the so-called retakaful market is highly positive: in view of strong economic growth and the construction boom in South Asia as well as the Near East, demand is consistently growing for Sharia-compliant products, especially in property insurance and the engineering lines. A large number of infrastructure-related building projects are funded by Islamic financial institutions, which for their part take out insurance with takaful companies. In our assessment, the retakaful market offers particularly attractive business opportunities. Through our subsidiary in Bahrain we are able to offer our customers tailored, innovative products. Thanks to our good rating we are a preferred partner for our clients. Over the next two years we expect the premium volume to grow appreciably.
In light of appreciable competition we anticipate softening market conditions for our business in South Africa.
Australia is likely to deliver premium growth in 2008: on account of several major loss events in the year under review we anticipate modestly rising rates in property business. In the liability sector we shall continue to benefit from our good rating.
We were thoroughly satisfied with the treaty renewals in international credit and surety insurance as at 1 January 2008, during which 85% of our portfolio was renegotiated. Although rates and conditions came under moderate pressure on the back of excellent results in the year under review and previous years, we consolidated our market position – even as ceding companies raised their retentions – and selectively enlarged our portfolio. The historically low loss ratios of 2007 will likely normalise in the current financial year on account of rising insolvency figures. Another gratifying result should nevertheless be possible.
Structured products can be expected to develop favourably around the world. In the United States demand should slowly pick up again, not least thanks to improved framework conditions. New solvency standards in the EU (Solvency II) as well as risk-weighted capital requirements in other markets will increase the capital required by some ceding companies in the medium term – and hence also lead to resurgent interest in reinsurance, inter alia with respect to quota share cessions, stop loss covers and portfolio transfers. The significant economic upturn in Asia and Eastern Europe should generate disproportionately strong growth in insurance demand. This, too, will give rise to sharply rising capital requirements, and insurers will respond by increasingly turning to structured products.
Although the treaty renewals as at 1 January 2008 clearly showed that the market is tending to soften, we still view the environment in non-life reinsurance as favourable for the current year: in view of our profitoriented underwriting policy and the very good diversification of our portfolio, and thanks to our excellent rating, we are able to generate attractive business. In non-life reinsurance we continue to focus on profitable niche segments, and our portfolio is therefore expected to develop favourably in the current year. Results in 2008 and 2009 will also be positively affected by unearned premium as well as late premium settlements and possible run-off profits from the hard market conditions of previous years.
We remain very upbeat about the prospects for Hannover Life Re going forward.
The crucial long-term growth factors for international life and annuity insurance continue to apply in principle: the demographic trend in industrialised countries, the retirement of the baby boomer generation and the rapid emergence of a middle class in many developing countries. For internationally operating, well diversified reinsurers such as Hannover Life Re the growth opportunities over the next two years are therefore promising and should outpace the rates of increase in most primary insurance markets.
In the German market our principal involvement is in the area of senior citizens' products and unit-linked covers, with long-term care annuities likely to enjoy a particularly lively surge in demand. All in all, our premium income is expected to come in slightly higher.
Although competition in the international arena has intensified – first and foremost in the Anglo-American markets –, we expect the healthy level of profitability
Bearing in mind the market conditions described above and our strategic orientation, we are looking forward to a good financial year in 2008: gross and net premium are both expected to grow by about 5% in original currencies. As things currently stand, we expect to generate a return on equity of at least 15%. This is subject to the premise that the burden of catastrophe losses does not significantly exceed the expected level and that there are no unforeseen adverse movements on capital markets. As for the dividend distribution, the company remains committed to a payout ratio in the range of 35% to 40%.
The expected positive cash flow that we generate ourselves from the technical account and our investments should – subject to stable exchange rates – lead to further growth in our asset portfolio. Despite the very turbulent state of the credit markets so far, we expect to further increase the income from our investments under own management. In the area of fixed-income securities we continue to stress the high quality and diversification of our portfolio. Combined with investments in equities
In life and health reinsurance, on the other hand, we have set ourselves an annual growth target of 12%–15% for both gross premium income and the operating profit (EBIT). Only in this business group are we prepared to contemplate value-enhancing acquisitions.
Earnings per share in EUR 7.12 6.08 4.27 from continuing operations in EUR 5.79 3.56 from discontinued operations in EUR 0.29 0.71
Income and expense directly recognised in equity (147,395) 61,070 11,392 6,946 (119,087) (187,074)
Other financial instruments – at fair value through profit or loss
Cash and cash equivalents at the beginning of the period 351,776 465,161
Change in cash and cash equivalents according to cash flow statement (16,354) (113,385)
From insurance business with external third parties and from discontinued operations 5,189,508 6,495,697
Commission and brokerage, change in deferred acquisition costs and other technical income/expenses 1,016,676 1,162,349
1) After elimination of internal transactions within the Group across segments
The parent company Hannover Rückversicherung AG ("Hannover Re") and its subsidiaries (collectively referred to as the "Hannover Re Group") transact all lines of non-life and life/health reinsurance. The Group maintains business relations with more than 5,000 insurance companies in about 150 countries. With gross premium of approximately EUR 8.3 billion, Hannover Re is one of the largest reinsurance groups in the world. The Group's global network consists of more than 100 subsidiaries, affiliates, branches and representative offices in around 20 countries. The Group's German business is conducted by the subsidiary E+S Rück. We employ over 900 staff in Hannover and roughly 1,800 worldwide. The parent company is a joint-stock corporation, the registered office of which is located at Karl-Wiechert-Allee 50, 30625 Hannover, Germany.
Hannover Rückversicherung AG is a subsidiary of Talanx AG, which in turn is wholly owned by HDI Haftpflichtverband der Deutschen Industrie V.a.G. (HDI).
The annual financial statements included in the consolidated financial statement were for the most part drawn up as at 31 December. Pursuant to IAS 27.27 there is no requirement to compile interim accounts for Group companies with
diverging reporting dates because their closing dates are no earlier than three months prior to the closing date for the consolidated financial statement.
The present consolidated financial statement was examined by the Supervisory Board, adopted at the meeting of the Supervisory Board held on 11 March 2008 and hence released for publication.
IFRIC 8 "Scope of IFRS 2" clarifies the scope of IFRS 2 "Share-based Payment", which is also applicable to transactions where an entity receives goods or services in consideration for share-based payment. IFRIC 8 explains that IFRS 2 applies even if the entity cannot specifically identify some or all of the goods or services received. IFRIC 8 is mandatory for financial years beginning on or after 1 May 2006. The Interpretation had no implications for the consolidated financial statement. For further details we would refer the reader to Section 8.3 "Share-based payment".
The IASB has issued the following standards, interpretations and amendments to existing standards with possible implications for the consolidated financial statement of Hannover Re, application of which is not yet mandatory for the year under review and which are not being applied early by Hannover Re: In November 2006 the IASB issued IFRS 8 "Operating Segments", which replaces the previous IAS 14 "Segment Reporting ". IFRS 8 requires adoption of the "management approach" for reporting on the economic position of segments. Under this approach, the segmentation and the disclosures for the segments are based on the information used internally by management for evaluating segment performance and deciding on the allocation of resources. IFRS 8 applies to financial years beginning on or after 1 January 2009. Hannover Re is currently investigating the implications of this standard for the consolidated financial statement.
In January 2008 the IASB published the revised versions of IFRS 3 "Business Combinations" and IAS 27 "Consolidated and Separate Financial Statements". The new provisions primarily cover the recognition of minority interests, measurement issues in connection with successive acquisition, changes in a participating interest with or without a loss of control and adjustments to acquisition costs depending upon future events and their effects on goodwill. The revised IFRS 3 does not apply to combinations of entities under common control. The amendments are mandatory for financial years beginning on or after 1 July 2009. Hannover Re is currently investigating the implications of these standards for the consolidated financial statement.
Funds held are receivables due to reinsurers from their clients in the amount of their contractually withheld cash deposits; they are recognised at acquisition cost (nominal amount). Appropriate allowance is made for credit risks.
Accounts receivable: the accounts receivable under reinsurance business and the other receivables are carried at nominal value; value adjustments are made where necessary on the basis of a case-by-case analysis. We use value adjustment accounts for value adjustments taken on reinsurance accounts receivable, while all other write-downs are booked directly against the underlying position.
Unearned premium is premium that has already been collected but is allocated to future risk periods. In reinsurance business flat rates are sometimes used if the data required for calculation pro rata temporis is not available.
Deferred tax liabilities: in accordance with IAS 12 deferred tax liabilities must be accounted for if assets are to be recognised in a higher amount or liabilities in a lower amount in the consolidated balance sheet than in the tax balance sheet and if these differences will be cancelled out again in the future for tax purposes (so-called temporary differences).
The projections, which cover various model scenarios ("conservative assumptions" versus "best estimate"), constitute the starting point for numerous areas of application encompassing quotation, the determination of carrying values and embedded values as well as contract-specific analyses, e.g. regarding the appropriateness of the recognised reinsurance liabilities ("liability adequacy test"). In this context we would refer the reader to our comments on technical assets and reserves in Section 3.2 "Summary of major accounting policies" and on the "liability adequacy test" in Section 7.2 "Technical assets and liabilities".
In determining the carrying values for certain financial assets it is sometimes necessary to make assumptions in order to calculate fair values. In this regard we would refer the reader to our remarks in Section 3.2 "Summary of major accounting policies" concerning financial assets at fair value through profit or loss and securities held as available for sale.
The figures for the capital and capital reserves as well as the result for the last financial year are taken from the local financial statements drawn up by the companies.
Hannover Rück Beteiligung Verwaltungs-GmbH, Hannover/Germany 1) 100.0 EUR 2,618,749 EUR –
Hannover Insurance-Linked Securities GmbH & Co. KG, Hannover/Germany 2) 100.0 EUR – EUR –
Hannover America Private Equity Partners II GmbH & Co. KG, Hannover/Germany 3) 95.3 EUR 105,260 EUR 2,987
HEPEP III Holding GmbH, Hannover/Germany 3) 67.1 EUR 9,167 EUR 1,231
HEPEP II Holding GmbH, Hannover/Germany 3) 57.7 EUR 9,912 EUR 5,028
E+S Reinsurance (Ireland) Ltd., Dublin/Ireland 4) 100.0 EUR – EUR 2,855
Hannover Life Reassurance (UK) Ltd., Virginia Water/United Kingdom 100.0 GBP 48,233 GBP 9,595
Hannover Reinsurance (Dublin) Ltd., Dublin/Ireland 4) 100.0 EUR – EUR 7,053
Hannover Services (UK) Ltd., Virginia Water/United Kingdom 100.0 GBP 749 GBP 4
Hannover Reinsurance Group Africa (Pty) Ltd., Johannesburg/South Africa 1) 100.0 ZAR 182,048 ZAR 125,191
Hannover Reinsurance Group Africa (Pty) Ltd. compiles its own subgroup financial statement in which the following major companies are included: Hannover Life Reassurance Africa Ltd., Johannesburg/South Africa 1) 100.0 ZAR 160,212 ZAR 57,465
Hannover Re Real Estate Holdings, Inc. holds a subgroup in which the following major company is included: 5115 Sedge Corporation, Chicago/USA 1) 7) 95.1 USD 1,879 USD 190
Minority interests in shareholders' equity are reported separately within Group shareholders' equity in accordance with IAS 1 "Presentation of Financial Statements". The minority interest in profit or loss, which forms part of net income and is shown separately after net income as a "thereof" note, amounted to EUR 116.4 million (EUR 88.4 million) as at
Internationale Schule Hannover Region, Hannover/Germany 11) 11.1 EUR 1,005 EUR 190
Since November 2000 Hannover Re had held voting equity interests in the special purpose entity Mediterranean Re PLC for the securitisation of reinsurance risks in France and Monaco. The securitisation ended as per the contractual agreement on 18 November 2005. The bonds issued as security were repaid in full to investors. The additional paid-in capital was repaid to the partners. The special purpose entity was finally wound up in the first quarter of 2008.
Under a transaction designated "K5" Hannover Re uses the capital market to securitise reinsurance risks. The transaction was topped up during the year 2007 to USD 530.0 million and had a volume of EUR 360.2 million (EUR 314.1 million ) as at the balance sheet date. The securitisation was placed predominantly with institutional investors in North America, Europe and Japan. The additional capital was provided by both new and existing investors. The portfolio assembled for the securitisation consists of non-proportional reinsurance treaties in the property, catastrophe, aviation and marine lines, including offshore business. Kaith Re Ltd., a special purpose entity domiciled in Bermuda, was used for the transaction. The planned term of the transaction runs until 31 December 2008. In accordance with SIC–12 Kaith Re Ltd. is included in the consolidated financial statement.
In February 2007 the Hannover Re Group for the first time transferred risks from reinsurance recoverables to the capital market. With this securitisation, which has a term of five years, the default risk associated with reinsurance recoverables is reduced. The portfolio of recoverables underlying the transaction has a nominal value of EUR 1.0 billion and is comprised of exposures to retrocessionaires. The securities serving as collateral are issued through the special purpose entity Merlin CDO I B.V. A payment to Hannover Re is triggered by the insolvency of one or more retrocessionaires as soon as Hannover Re's contractually defined cumulative deductible of EUR 60.0 million over the term of the contract is exceeded. Hannover Re does not derive the majority of the economic benefits or risks arising out of the special purpose entity's activities through any of its business relations.
In the previous year, with the aim of transferring peak exposures deriving from natural disasters to the capital market, we issued a catastrophe ("CAT") bond that can be traded on a secondary market – the first time we had used such a tool. The CAT bond with a volume of USD 150 million was placed with institutional investors from Europe and North America by Eurus Ltd., a special purpose entity domiciled in the Cayman Islands. Hannover Re does not exercise a controlling influence over the special purpose entity.
R.E.RE Investors GmbH, Cologne, equal shares of which are held by Hannover Re and E+S Rück, was established on 23 July 2007. The company was included in the consolidated financial statement for the first time in the third quarter. In the fourth quarter of 2007 the company name was amended to Hannover Re Euro RE Holdings GmbH pursuant to the revised memorandum of association. The object of the company is to acquire, hold, manage and sell real estate, property and participating interests in real estate funds in Germany and abroad as well as in funds that participate in real estate, property or real estate funds. The company’s financial year begins on 1 October and ends on 30 September of the following calendar year.
Effective 23 November 2007 Hannover Re established HILSP Komplementär GmbH, Hannover. The object of the company is participation as a personally liable managing partner in Hannover Insurance-Linked Securities Partners GmbH & Co. KG. The company’s financial year begins on 1 October and ends on 30 September of the following calendar year. The company was included in the consolidated financial statement for the first time in the fourth quarter of 2007.
Also effective 23 November 2007 Hannover Re established Hannover Insurance-Linked Securities Partners GmbH & Co. KG. HILSP Komplementär GmbH and Hannover Re – as managing limited partner – are authorised to manage the company 's business. The object of the company is to build, hold and manage a portfolio of insurance-linked securities. The financial year of the company, which was included in the consolidated financial statement for the first time in the fourth quarter of 2007, begins on 1 October and ends on 30 September of the following calendar year.
A capital reduction of EUR 29.1 million was implemented in the first and fourth quarter 2007 at WRH Offshore High Yield Partners, L.P., Wilmington, 70.0% of which is held by Hannover Re and 30.0% by E+S Rück, through the sale of part of the company's assets and payment of the sales proceeds to the shareholders.
In order to avoid distorting effects on the profits and losses of the separately disclosed operations, transactions of a long-term nature between the two groups of operations that are continued beyond the disposal date are recognised on an unconsolidated basis.
Effective 1 July 2007 HRBV sold 2% of its stake in E+S Rück to an outside third party for a price of EUR 27.0 million by way of a share reduction in a consolidated Group company without a change of control status. As part of the transaction the goodwill, on which scheduled amortisation was taken until the 2001 financial year, was reduced by an amount of EUR 1.2 million in light of pro-rata amortisation from previous years. In addition, intercompany profits of EUR 4.8 million were realised. Upon closing of the transaction HRBV now holds 63.78% of the shares in E+S Rück.
Risk spreading through diversification Risk spreading across lines of business is referred to as diversification. In this way we are able to enhance the efficiency of the allocated capital while at the same time reducing the required equity resources. The diversification effect is determined using our internal risk model. Depending upon the capital required by our business segments and lines and their contribution to diversification, we define the cost of capital to be generated for each business unit.
Risk capital* required per Multi-Specialist line without diversification effect * Capital requirement calibrated to the 99.97% quantile as per internal risk model 41.5% Diversification
European Embedded Value A key tool of our value-based management and risk management in the area of life and health reinsurance is the European Embedded Value (EEV). The EEV is a ratio used to evaluate life insurance and reinsurance business. It is comprised of the value of in-force business and the corresponding capital. The value of in-force business is determined as the present value of the future shareholders' earnings from worldwide life and health reinsurance business after appropriate allowance for all risks underlying this business. Since the 2006 financial year the EEV has been calculated on a basis that is consistent with the market. The European Embedded Value (EEV) for 2007 will be published on our website together with the interim financial report on the first quarter of 2008.
Based on the latest available data published on 3 May 2007, the following table shows the EEV and its sensitivity to selected scenarios in comparison with the corresponding figures for the previous year.
Rise in the overall interest rate curve, from 200 basis points for the three-month interest rate to 100 basis points for the 10-year interest rate (with a linear interpolation between the two) (485.8) (465)
The moderate change in the EEV under the scenarios set out above is in line with our expectation and reflects our portfolio 's high degree of diversification.
The consolidated EEV without minority interests amounted to EUR 1,518.3 million (EUR 1,305.9 million) as at 31 December 2006, an increase of 16.3% (8.2%) compared to the corresponding figure for the previous year. The operating embedded value earnings totalled EUR 185.6 million (EUR 112.5 million), while the value of new business stood at EUR 64.2 million (EUR 84.7 million). Leaving aside non-recurring special effects, the development relative to the previous year's figures was in line with our expectations.
• In terms of the Hannover Re Group's major companies, EUR 238.4 million (9.4%) of our accounts receivable from reinsurance business in an amount of EUR 2,525.9 million were older than 90 days as at the balance sheet date.
• The average default rate over the past three years was 0.4%.
In the year under review we succeeded in significantly reducing the remaining credit risks through the first-ever securitisation of bad debt risks from reinsurance recoverables on the capital market. Under the innovative transaction – dubbed "Merlin" – the default risks on a portfolio of receivables amounting to EUR 1,000.0 million were transferred to the capital markets using a CDO structure. We would refer the reader to our explanatory remarks on securitisation transactions in Section 4 "Consolidated companies and consolidation principles".
The underreserving of claims constitutes a significant technical risk. The loss reserves in non-life reinsurance are determined using actuarial methods, primarily based on information provided by our cedants. Additional reserves are established where necessary on the basis of our own loss assessments. Reserves are set aside for claims that have occurred and been reported to the insurer, but in respect of which the amount is not yet known and which therefore cannot yet be paid. There are also claims that do not manifest themselves until a later stage and which are therefore only reported by the policyholder to the insurer and by the insurer to its reinsurer quite some time after their occurrence. Reserves must also be established for such IBNR (incurred but not reported) claims because years or even decades often elapse until the final settlement of such losses. This is especially true of liability claims. Uncertainties in relation to reserving are therefore unavoidable, not least because the reinsurer is at the end of the information chain and ultimately dependent on the information provided by its ceding companies. The additional IBNR reserve established by the Hannover Re Group in the year under review amounted to EUR 2,956.1 million. The IBNR reserve is calculated on a differentiated basis according to risk categories and regions. All in all, the anticipated ultimate loss ratios are calculated in 68 subsegments. Our own calculations of the reserves are also reviewed and quality-controlled by external actuaries and auditors.
The ratios shown below constitute further key tools for the monitoring and management of the credit risks associated with our entire business operations.
Run-off triangles are another tool used to verify our assumptions. Such triangles show how the reserve has changed over time as a consequence of paid claims and the recalculation of the reserves that are to be established as at each balance sheet date. Adequacy is monitored using actuarial methods (cf. here our explanatory remarks on technical reserves in Section 7.2 "Technical assets and liabilities").
Figures in EUR million Catastrophe losses and major claims in 2007
Combined and catastrophe loss ratio over the past ten years 1) Based on figures reported in accordance with US GAAP 2) Natural catastrophes and other man-made major losses > EUR 5 million gross for the share of the Hannover Re Group as a percentage of net premium earned 3) Figures from 2006 onwards in accordance with new segmentation 6.3 Investment risks
The overriding principle guiding our investment strategy is capital preservation while giving adequate consideration to the security, liquidity, mix and spread of the assets. Through analysis of the "efficient frontier" we compare the risk/ return ratio of various portfolios with one another.
Risks in the investment sector consist primarily of market, credit and liquidity risks. The most significant market price risks are share price, interest rate and currency risks.
The "value at risk" (VaR) is a vital tool used for monitoring and managing market price risks. The VaR is determined on the basis of historical data, e.g. for the volatility of the fair values and the correlation between risks. As part of these calculations the probability of a decline in the fair value of our portfolio is simulated with a given probability and within a certain period.
Portfolio Scenario Portfolio change based on fair value in EUR million
Notes management of technical and financial risks in % Parameter as per investment guidelines
Bonds (direct holdings and investment funds) At least 50.0 79.1 82.0
Against the backdrop of the US real estate crisis and credit crunch, it should be noted that our investment portfolio does not contain any directly written credit derivatives. Furthermore, in this connection we did not write any off-balance sheet risks through structured transactions with special purpose entities. Of our total portfolio of asset-backed securities, more than 85% were attributable to mortgage bonds, municipal bonds and collateralized debt obligations as at the balance sheet date, 5% were comprised of commercial mortgage-backed securities and 8% consisted of residential mortgage-backed securities. The latter items, which encompass lower-quality mortgage loans, had a fair value of altogether EUR 47.8 million as at the balance sheet date; the underlyings for these securities were in part subprime assets. The value adjustments taken on this portfolio amounted to EUR 9.6 million.
Corporate bonds Asset-backed securities in % in EUR million in % in EUR million in % in EUR million in % in EUR million 1) Securities held through investment funds are recognised pro rata with their corresponding individual ratings.
Held to maturity due in one year 34,241 32,885 66,775 66,892 due after one through two years 1,705 1,662 27,742 27,295 due after two through three years 34,779 34,363 – –
Loans and receivables due in one year 32,710 33,086 38,480 38,636 due after one through two years 68,132 67,068 33,631 34,203 due after two through three years 131,788 127,981 69,169 67,579 due after three through four years 113,524 109,759 128,392 124,386 due after four through five years 19,496 19,417 95,100 91,091 due after five through ten years 1,037,707 1,002,324 647,424 627,393 due after ten years 134,532 136,201 151,447 151,433
Financial assets at fair value through profit or loss due in one year 66,784 66,784 102,378 102,482 due after one through two years 29,087 29,087 895 1,224 due after two through three years – – – –
due after five through ten years 34,133 35,089 31,840 31,928 due after ten years 27,187 27,780 27,411 30,829
The stated 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.
Government debt securities of EU member states 49,589 – 827 760 49,522
Government debt securities of EU member states 52,922 – 1,355 813 52,380
Government debt securities of EU member states 29,327 80 975 563 28,995
Debt securities issued by semi-governmental entities 248,616 22 11,583 3,403 240,458
Debt securities issued by semi-governmental entities 220,901 191 9,471 2,755 214,376
As at 31 December 2007 Hannover Re reported as financial assets at fair value through profit or loss technical derivatives previously recognised in the trading portfolio in an amount of EUR 18.5 million (EUR 22.4 million) that were separated from the underlying transaction and measured at fair value. In addition, put options on the Dax and EuroStoxx 50 indices previously reported in the trading portfolio with a fair value of EUR 1.9 million were recognised in this item for the first time as at 31 December 2007. For further information please see the explanatory remarks on derivative financial instruments in this section. The figures for the corresponding previous periods have been adjusted accordingly retrospectively.
Making use of the fair value option contained in IAS 39, we allocated loans and receivables amounting to EUR 60.9 million (EUR 62.6 million) to the category of financial assets at fair value through profit or loss. These instruments involve unsecured corporate securities.
The impairments of EUR 71.4 million (EUR 14.4 million) were attributable entirely to assets classified as available for sale. Of the impairments taken on fixed-income securities of EUR 26.6 million (previous year: none), an amount of EUR 9.6 million (previous year: none) related to structured products connected with the crisis on the US housing market in respect of which Hannover Re identified a risk of default. The impairments on fixed-income securities were taken largely on structured assets and determined on the basis of a case-by-case analysis. In this context consideration was given not only to pure changes in the fair value of the securities, but also to qualitative criteria. The fair value of the underlying instruments totalled EUR 66.8 million as at 31 December 2007. They accounted for accrued interest of EUR 0.1 million as at the balance sheet date. In addition, an impairment loss of EUR 34.2 million (EUR 7.8 million) was recognised on equities whose fair value had fallen significantly or for a prolonged period below acquisition cost. For further explanatory remarks on the impairment criteria please see Section 3.2 "Summary of major accounting policies".
Financial assets – at fair value through profit or loss 12,284 5,351
The net gains and losses on the portfolio held to maturity, loans and receivables and the available-for-sale portfolio are composed of interest income, realised gains and losses and impairments. In the case of fixed-income securities recognised at value through profit or loss and those recognised in the trading portfolio, allowance is also made for changes in unrealised gains and losses.
Making allowance for the other investment expenses of EUR 52.0 million (EUR 49.5 million), net income from assets under own management of altogether EUR 901.6 million (EUR 967.0 million) was recognised in the reporting period.
Fixed-income securities – loans and receivables 301,546 311,219 501,937 43,617 161 5,163 – – 1,163,643
Total fixed-income securities incl. derivatives 8,099,918 3,414,529 3,433,317 606,189 56,916 325,968 10,825 40,804 15,988,466
Fixed-income securities – held to maturity 18,238 30,851 880,977 42,857 – 605,025 24,109 – 1,602,057
Fixed-income securities – loans and receivables – – 1,061,532 7,620 – 66,078 – 28,413 1,163,643
Fixed-income securities – available-for-sale 636,706 325,650 4,485,611 1,118,848 43,268 6,086,480 116,042 249,545 13,062,150
Fixed-income securities – held to maturity 12,136 32,717 841,003 39,073 – 544,911 18,976 – 1,488,816
Derivatives are financial instruments, the fair value of which is derived from an underlying instrument such as equities, bonds, indices or currencies. We use derivative financial instruments to a limited extent to hedge parts of our portfolio against interest rate and market price risks, optimise returns or realise intentions to buy/sell. In this context we take special care to limit the risks, select first-class counterparties and rigorously monitor the standards defined by investment guidelines.
Hannover Re calculates the fair value of the embedded derivatives in Modco treaties using the market information available on the valuation date on the basis of a "credit spread" method. Under this method the derivative is valued at zero on the date when the contract commences and its value then fluctuates over time according to changes in the credit spreads of the securities. The derivative had a negative value of EUR 13.0 million as at the balance sheet date and was recognised under other liabilities. The charge to investment income from the derivative amounted to altogether EUR 20.0 million before taxes as at the balance sheet date (previous year: pre-tax improvement in investment income of EUR 0.2 million). This development can be attributed exclusively to the sustained widening of the credit spreads in the year under review – especially in the fourth quarter. The underlying securities are of a high quality and were not downgraded in the year under review.
The derivative components of another group of contracts in the area of life and health reinsurance were measured on the basis of stochastic considerations. The measurement produced a positive derivative value of EUR 12.7 million on the balance sheet date. The derivative was recognised under other financial assets at fair value through profit or loss. The valuation resulted in a charge against investment income of EUR 0.7 million as at 31 December 2007.
All in all, application of the standards governing the carrying of derivatives in connection with the technical account led to recognition of assets totalling EUR 18.5 million (EUR 22.4 million) as well as recognition of liabilities from the derivatives resulting from technical items in an amount of EUR 15.9 million (previous year: none) as at the balance sheet date. Increases in investment income amounting to EUR 5.8 million (EUR 0.2 million) as well as charges to income of EUR 23.7 million (previous year: none) were brought to account from derivatives in the year under review.
Balance at 1 January of the year under review 166,375 169,282
Public price listings are not available for companies valued at equity.
The other invested assets consisted largely of participating interests in partnerships measured at fair value in an amount of EUR 528.2 million (EUR 449.8 million). The amortised cost of these participations amounted to EUR 385.2 million (EUR 336.4 million); in addition, unrealised gains of EUR 155.1 million (EUR 120.3 million) and unrealised losses of EUR 12.1 million (EUR 6.9 million) were recognised from these participations.
Gross book value at 31 December of the previous year 42,215 290,507
Cumulative depreciation after currency translation at 1 January of the year under review 23,934 90,456
Cumulative depreciation at 31 December of the year under review 24,408 24,236
Net book value at 31 December of the previous year 17,979 198,122
Net book value at 1 January of the year under review 17,324 190,149
The funds held by ceding companies totalling EUR 8,610.6 million (EUR 8,730.7 million) represent the cash and securities deposits furnished by our company to our cedants that do not trigger any cash flows and cannot be used by cedants without our consent. The durations of these deposits are matched to the corresponding provisions. In the event of default on such a deposit our reinsurance commitment is reduced to the same extent.
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 premium.
Balance at 1 January of the year under review 1,885,668 2,170,377 from discontinued operations – 31,214
The age structure of the accounts receivable which were unadjusted but considered overdue as at the balance sheet date is presented below.
In addition, we took specific value adjustments on reinsurance recoverables on unpaid claims in the year under review. We would refer the reader to the corresponding remarks on the loss and loss adjustment expense reserve in this section.
Cumulative value adjustments at 31 December of the previous year 76,626
Net book value of accounts receivable at 31 December of the year under review 2,525,871
In order to show the net technical provisions remaining in the retention the following table compares the gross provisions with the corresponding retrocessionaires' shares shown as assets.
The loss and loss adjustment expense reserves are in principle calculated on the basis of the information supplied by ceding companies. Additional IBNR reserves are established for losses that have been incurred but not as yet reported.
Technical provisions were discounted at interest rates of between 6.5% and 8.2% (6.5% and 8.2%) with respect to a certain group of contracts relating to the Hannover Re Advanced Solutions division. The interest rates are determined by the contractual agreements. The period from inception to expiry of such contracts is at least four years. The discounted amount totalled EUR 3.3 million (EUR 20.2 million). The discounted provisions as at year-end 2007 amounted to EUR 25.9 million (EUR 105.3 million).
The total amount of the net reserve before specific value adjustments, to which the following remarks apply, was EUR 14,098.5 million as at the balance sheet date.
Net book value at 31 December of the previous year 17,596,325 3,048,496 14,547,829 20,210,041 4,739,026 15,471,015
Reserve at 1 January of the year under review 16,406,711 2,782,894 13,623,817 18,850,199 4,383,573 14,466,626 thereof from discontinued operations – – – 544,894 152,950 391,944
Net book value at 31 December of the year under review 16,553,888 2,471,585 14,082,303 17,596,325 3,048,496 14,547,829
To some extent the loss and loss adjustment expense reserves are inevitably based upon estimations that entail an element of uncertainty. The difference between original and current estimates is reflected in the net run-off result. In addition, owing to the fact that the period of some reinsurance treaties is not the calendar year or because they are concluded on an underwriting-year basis, it is frequently impossible in reinsurance business to make an exact allocation of claims expenditures to the current financial year and the previous year. Consequently, the development of earlier years – and especially the immediately preceding year – may be distorted. In our assessment, therefore, informative analyses can only be performed after the elapse of at least two years.
Loss and loss adjustment expense reserve (from balance sheet) 5,570.1 5,913.1 7,012.5 8,482.0 12,182.7 12,863.4 13,462.2 13,120.7 14,295.9 13,279.8 12,718.2
Due after one through five years 6,102,419 965,745 5,136,674 204,984 6,561 198,423
Due after five through ten years 2,040,895 267,452 1,773,443 311,282 32,723 278,559
Due after ten through twenty years 1,884,577 261,773 1,622,804 602,423 10,077 592,346
The average duration of the loss and loss adjustment expense reserves was 6.1 years (5.9 years), or 6.4 years (6.2 years) after allowance for the corresponding retrocession shares. Benefit reserves had an average duration of 13.2 years (13.3 years) – or 13.3 years (13.4 years) on a net basis.
Benefit reserves are established for life, annuity, personal accident and health reinsurance contracts. Based on the duration of these contracts, long-term reserves are constituted for life and annuity policies and predominantly short-term reserves are set aside for health and personal accident business.
The benefit reserves are calculated on the basis of the following parameters: 1. interest income; 2. lapse rates; 3. mortality and morbidity rates.
Net book value at 31 December of the previous year 1,581,034 339,096 1,241,938 1,977,570 463,528 1,514,042
Net book value at 31 December of the year under review 1,186,382 92,322 1,094,060 1,581,034 339,096 1,241,938
The contract deposits on the liabilities side increased by EUR 142.0 million in the year under review from EUR 3,526.8 million to EUR 3,668.8 million. The rise was due principally to growth in new business in the area of non-traditional life reinsurance.
7.4 Goodwill; present value of future profits on acquired life reinsurance portfolios
The funds held under reinsurance treaties totalling EUR 956.9 million (EUR 1,419.4 million) represent the cash and securities deposits furnished to our company by our retrocessionaires that do not trigger any cash flows and cannot be used without the consent of our retrocessionaires. The durations of these deposits are matched to the corresponding shares of the reinsurers in the technical provisions. If such a share no longer exists the corresponding funds held are reduced to the same extent.
Net book value at 31 December of the year under review 45,438 152,639
The PVFP, the period of amortisation of which varies between 5.5 and 15 years, is recognised under other assets. For further information please refer to our explanatory notes on intangible assets in Section 3.2 "Summary of major accounting policies".
Net book value at 31 December of the year under review 2,911 5,102
In July 2007 the German Federal Council approved the Business Tax Reform Act 2008. Among other things, this will lead to a reduction in tax rates for corporations domiciled in Germany effective 1 January 2008. Deferred taxes relating to domestic Group companies were therefore measured using the correspondingly lower tax rate. Consequently, the tax expenditure for the current financial year recognises non-recurring income from this revaluation in an amount of EUR 191.5 million for the parent company Hannover Re and E+S Rückversicherung AG. Taken together with the changes in relation to other Group companies, the total change in deferred taxes due to changes in tax rates was EUR 193.3 million.
Change in deferred taxes due to changes in tax rates (193,253) –
Deferred tax assets and deferred tax liabilities of all Group companies
Availability of capitalised loss carry-forwards Unused tax loss carry-forwards of EUR 230.3 million (EUR 522.4 million) existed as at the balance sheet date. Making allowance for local tax rates, EUR 210.2 million (EUR 207.2 million) thereof was not capitalised since realisation is not sufficiently certain.
In addition, tax credits of EUR 17.9 million (EUR 14.0 million) were available, of which EUR 17.2 million were not capitalised.
As at the balance sheet date altogether 1,825 (2,002) staff were employed by the Hannover Re Group, with 907 (877) employed in Germany and 918 (1,125) working for the consolidated Group companies abroad. The decrease in the workforce abroad was attributable to the discontinued operations.
On 1 April 1993 (1 June 1993 in the case of managerial staff) the 1993 pension plan came into effect. This pension plan provides for retirement, disability and surviving dependants' benefits. The scheme is based upon annual determination of the pension contributions, which at 1% up to the assessment limit in the statutory pension insurance scheme
Nationality of employees German US South African UK Irish Other Total
Figures in EUR thousand 2007 2006 a) Wages and salaries aa) Expenditures on insurance business 98,396 88,724 ab) Expenditures on the administration of investments 8,015 8,275 b) Social security contributions and expenditure on provisions and assistance ba) Social security contributions 13,397 13,186 bb) Expenditures for pension provision 11,686 14,453 bc) Expenditures for assistance 1,727 1,654
Projected benefit obligation at the end of the year under review 79,135 77,400
Projected benefit obligation from wholly or partially funded plans (before deduction of fair value of plan assets) 8,425 8,113
Funded status (present value of earned benefit entitlements less fund assets) 69,763 70,098
The fair value of the plan assets developed as follows: The change in the projected benefit obligation of the pension commitments as well as their breakdown into plans that are unfunded or are wholly or partially funded was as follows:
The fair value of plan assets as at the balance sheet date included amounts totalling EUR 1.5 million (EUR 3.7 million) for own financial instruments.
The actual return on the plan assets amounted to EUR 0.2 million (EUR 0.8 million) in the year under review.
The following table presents a reconciliation of the funded status – calculated from the difference between the defined benefit obligations and the plan assets – with the provision for pensions recognised as at the balance sheet date.
The recognised provision for pensions developed as follows in the year under review: Figures in EUR thousand 2007 2006
The components of the net periodic pension cost for benefit plans were as follows: Figures in EUR thousand 2007 2006
In the current financial year Hannover Re expects payments of EUR 6.2 million under the pension plans set out above.
Defined contribution plans In addition to the defined benefit plans, some Group companies have defined contribution plans that are based on length of service and the employee's income or level of contributions. The expense recognised for these obligations in the year under review in accordance with IAS 19.46 was EUR 2.9 million (EUR 3.1 million), of which only a minimal amount (EUR 0.1 million) was due to obligations to members of staff in key positions.
On 31 March 1999 Hannover Finance, Inc., Wilmington/USA, issued subordinated debt in the form of a floating-rate loan in the amount of USD 400.0 million with a term of 30 years. The due date of the loan is 31 March 2029. It may be redeemed by the issuer no earlier than 31 March 2009. In order to hedge against the risk of interest rate changes associated with this loan, the company purchased interest rate swaps in 1999 in the same amount which expire on 31 March 2009. In this way, the interest rate is converted from a floating rate to a fixed rate for a period ending commensurate with the first opportunity to redeem the loan. In February 2004 and May 2005 Hannover Re bought back portions of the debt amounting to USD 380.0 million, equivalent to altogether 95% of the total volume. The interest rate swaps were closed out in the second quarter of 2006. Under a contract dated 1 June 2007 Hannover Finance, Inc. repurchased the subordinated debt in an amount of USD 380.0 million from Hannover Re. Effective 17 July 2007 the interests in the loan amounting to USD 380.0 million were cancelled and have not been traded on the capital market since that date. The remaining portions of the debt totalling USD 20.0 million are held by investors outside the Group and carry a coupon of LIBOR +80 basis points until 31 March 2009, subsequently stepping up to LIBOR +180 basis points.
In May 2005 Hannover Re issued further subordinated debt in the amount of EUR 500.0 million through its subsidiary Hannover Finance (Luxembourg) S.A. As part of the transaction, holders of Hannover Re's EUR 350.0 million subordinated debt placed in 2001 and which has a term of 30 years and may be called in prior to maturity by the issuer after 10 years, were offered an opportunity to exchange their existing issue for holdings in the new bond. Participation in the exchange was nominally EUR 211.9 million, corresponding to EUR 240.5 million of the new bond issue. The cash component of the new bond in the amount of nominally EUR 259.5 million was placed predominantly with institutional investors in Europe. The remaining volume of the bond issued in 2001 after the exchange amounted to EUR 138.1 million.
The aggregated fair value of the extended subordinated loans is based on quoted, active market prices. If such price information was not available, fair value was determined on the basis of the recognised effective interest rate method or estimated using other financial assets with similar rating, duration and return characteristics. Under the effective interest rate method the current market interest rate levels in the relevant fixed-interest-rate periods are always taken as a basis.
Other financial facilities In order to protect against possible future major losses Hannover Re took out a new credit line of EUR 500,0 million in 2004 in the form of a syndicated loan. The facility has a term of five years and ends in August 2009. It has not been used to date.
In addition, facilities exist with various financial institutions for letters of credit, including two syndicated guarantee facilities each in the amount of USD 2.0 billion from 2005 and 2006. 50% of the first of these lines matures in January 2010 and the other 50% in January 2012, while the second line matures in January 2013. For further information on the letters of credit provided please see our explanatory remarks in Section 9.2 "Contingent liabilities and commitments ".
The ordinary expenses include interest expenses of EUR 77.6 million (EUR 77.8 million) resulting from the subordinated debt with coupons of between 5.0% and 6.25% placed through Hannover Finance (Luxembourg) S.A. in the years from 2001 to 2005. In addition, interest expenditures from the remaining portions of the floating-rate loan issued by Hannover Finance, Inc. are recognised here.
Shareholders' equity is shown as a separate component of the financial statement in accordance with IAS 1 "Presentation of Financial Statements" and subject to IAS 32 "Financial Instruments: Disclosure and Presentation" in conjunction with IAS 39 "Financial Instruments: Recognition and Measurement". The change in shareholders' 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 not recognised in the statement of income.
Minority interests are established in accordance with the shares held by companies outside the Group in the shareholders’ equity of the subsidiaries.
The policyholders' surplus totalled EUR 5,295.1 million (EUR 4,878.4 million) as at the balance sheet date.
Dividends of EUR 193.0 million (EUR 0.0 million) were paid in the year under review for 2006.
On the occasion of the Annual General Meeting to be held on 6 May 2008 it will be proposed that a dividend of EUR 1.80 per share plus a bonus dividend of EUR 0.50 per share, equivalent to a total amount of EUR 277.4 million, should be distributed for the 2007 financial year. The dividend proposal does not form part of this consolidated financial statement.
Weighted average of issued shares – 120,597,134 – – 120,597,134 –
Gross book value after currency translation 80,162 83,412 from discontinued operations – 3,673
Gross book value at 31 December of the year under review 95,352 83,344
Net book value at 31 December of the year under review 25,781 23,732
As at the balance sheet date the item included EUR 0.1 million (EUR 0.1 million) for self-provided software and EUR 11.7 million (EUR 13.8 million) for purchased software. Scheduled depreciation is taken over useful lives of three to ten years.
The additions can be broken down into EUR 13.4 million (EUR 10.6 million) for purchased software and EUR 2.8 million (EUR 2.6 million) for advance payments on self-provided software.
Cumulative depreciation at 31 December of the previous year 96,212 93,730
Cumulative depreciation at 31 December of the year under review 99,039 96,212
Net book value at 31 December of the previous year 45,030 35,836
Credit risks may result from other financial assets that were not overdue or adjusted as at the balance sheet date. In this regard, the reader is referred to our overall comments in Section 6.1 "General risk management".
Audits and costs of publishing the annual financial statements 2,928 (56) 2,872
The administrative expenses amounted to altogether 2.8% (2.7%) of net premium earned.
Commissions and brokerage, change in deferred acquisition costs (net) 1,759,010 1,940,353
7.15 Other income/expenses 8. Related party disclosures 8.1 Transactions with related parties
Of the separate value adjustments, an amount of EUR 52.5 million (EUR 35.8 million) was attributable to accounts receivable, EUR 2.0 million (EUR 53.5 million) to reinsurance recoverables on unpaid claims and EUR 0.2 million (EUR 0.7 million) to other receivables.
Income from contracts recognised in accordance with the deposit accounting method 75,383 33,391
The Hannover Re Group provides reinsurance protection for the HDI Group. To this extent, numerous underwriting business relations exist with related parties in Germany and abroad which are not included in Hannover Re's consolidation. This includes business both assumed and ceded at usual market conditions. Protection Reinsurance Intermediaries AG grants Hannover Re and E+S Rück a preferential position as reinsurers of ceding companies within the Talanx Group. In addition, Hannover Re and E+S Rück are able to participate in the protection covers on the retention of Group cedants and share in the protection afforded by them.
Hannover Re holds a participation certificate of HDI Haftpflichtverband der Deutschen Industrie V.a.G. in an amount of EUR 18.5 million with a coupon of 7.25% which becomes due on 1 October 2008. The participation certificate, to which accrued interest of EUR 1.3 million is allocable, was recognised under the portfolio of fixed-income securities held to maturity.
The Group companies E+S Rück, Hannover Finance (Luxembourg) S.A., Hannover Reinsurance (Ireland) Ltd. and Hannover Re (Bermuda) Ltd. invested in an amount of altogether EUR 153.9 million in a bearer debenture of Talanx AG with a term until 8 July 2013 and a coupon of 5.43%. The book value of the instrument, which is recognised under fixed-income securities held to maturity, included accrued interest of EUR 3.9 million as at the balance sheet date.
Pension obligations were assumed or transferred as a number of employees moved from AmpegaGerling Asset Management GmbH to Hannover Re and E+S Rück and from Hannover Re to Protection Reinsurance Intermediaries AG.
Companies belonging to the Talanx Group granted the Hannover Re Group insurance protection inter alia in the areas of public liability, fire, group accident and business travel collision insurance. Talanx AG took out directors' and officers' (D&O) insurance for Praetorian Financial Group, Inc. on behalf of the Hannover Re Group. The insurance premiums were billed to Hannover Re, which the latter on-debited to Hannover Finance, Inc. In addition, Talanx AG billed Hannover Re and E+S Rück pro rata for the directors' and officers' insurance of the Talanx Group. Divisions of Talanx AG also performed services for us in the areas of taxes and general administration.
With regard to the acquisition of the 10% stake held by CiV Lebensversicherung AG, a subsidiary of Talanx AG, in E+S Rück by Hannover Rück Beteiligung Verwaltungs-GmbH and the subsequent resale of 2% of this stake to a third party outside the Group, we would refer the reader to our remarks in Section 5.3 "Further corporate changes".
8.2 Remuneration and shareholdings of the management boards of the parent company
With regard to this information we would refer the reader to the remuneration report included as part of our Corporate Governance report, in particular pages 185 to 190.
With effect from 1 January 2000 the Executive Board of Hannover Re, with the consent of the Supervisory Board, introduced a virtual stock option plan that provides for the granting of stock appreciation rights to certain managerial staff.
Period 10 years 10 years 10 years 10 years 10 years
Number of rights existing at 31.12.2007 809,034 164,288 258,438 105,298 8,028
Provisions at 31.12.2007 (in EUR million) 1.69 1.47 1.69 0.82 0.04
Amounts paid out in the 2007 financial year (in EUR million) – 0.07 1.34 0.95 0.02
Stock appreciation rights of Hannover Re *Although the maximum amount was reached some participants did not exercise all stock appreciation rights.
Hannover Re has secured by subordinated guarantee a subordinated debt in the amount of USD 400.0 million issued in the 1999 financial year by Hannover Finance, Inc., Wilmington/USA. In February 2004 and May 2005 Hannover Re bought back portions of the subordinated debt in an amount of altogether USD 380.0 million, leaving USD 20.0 million still secured by the guarantee. Effective 4 June 2007, the date of payment, the issuer repurchased the debt in an amount of USD 380.0 million from Hannover Re for the purpose of cancellation. This portion of the debt was cancelled as at 17 July 2007. For further details please see Section 7.8 "Debt and subordinated capital".
Hannover Re has placed three subordinated debts on the European capital markets through its subsidiary Hannover Finance (Luxembourg) S.A. Hannover Re has secured by subordinated guarantee both the debt issued in 2001, the volume of which now stands at EUR 138.1 million, and the debts from financial years 2004 and 2005 in amounts of EUR 750.0 million and EUR 500.0 million respectively. For further details please see Section 7.8 "Debt and subordinated capital".
On this basis the aggregate provisions for the year under review amounted to EUR 5.7 million. The expense totalled EUR 1.9 million.
As security for technical liabilities to our US clients, we have established a master trust in the USA. As at the balance sheet date this master trust amounted to EUR 2,088.3 million (EUR 2,238.8 million). The securities held in the master trust are shown as available-for-sale investments. The substantial decrease was entirely attributable to movements in exchange rates.
Within the scope of a novation agreement regarding a life insurance contract we assumed contingent reinsurance commitments with respect to due date and amount. The financing phase was terminated effective 31 December 2004 as per the agreement. The level of Hannover Re’s liability as at the date of novation (31 December 2011) in relation to future balance sheet dates may change due to fluctuations in the EURIBOR and discrepancies between the actual settlements and the projections. The estimated amount of the reinsurance commitments as at the balance sheet date was EUR 10.3 million (EUR 33.4 million). The decrease of EUR 23.1 million in the reinsurance commitment compared to the previous year resulted from the considerably more favourable run-off of the business than anticipated.
Following the termination of the German Aviation Pool with effect from 31 December 2003, our participation consists of the run-off of the remaining contractual relationships.
Operating leasing contracts produced expenditures of EUR 3.5 million (EUR 4.4 million) in the year under review.
Effective 1 January 2007 Hannover Reinsurance Africa Ltd. purchased the land and business premises previously leased under a sale-and-lease-back contract.
The rental income resulted principally from the business activities of Hannover Real Estate Holdings, which rented out one property following the disposals made in the previous year. This non-cancellable transaction has a remaining term of three years with an option to renew for a further five years.
Of this total amount, EUR 1.5 million (EUR 1.3 million) was attributable to the fee paid to the appointed auditor of the consolidated financial statement as defined by § 318 German Commercial Code (HGB). The amount includes a fee of EUR 1.2 million (EUR 1.0 million) for the auditing of the financial statement, EUR 0.2 million (EUR 0.2 million) for tax consultancy services and EUR 0.1 million (EUR 0.1 million) for consultancy and other services performed for the parent or subsidiary companies.
Effective 1 January 2008 Hannover Rückversicherung AG, Bahrain Branch, which had received a corresponding licence in June 2007 from the Central Bank of Bahrain (CBB), commenced business operations alongside the already existing subsidiary Hannover ReTakaful B.S.C. (c), which had been established in 2006.
With effect from 10 January 2008 the majority interest in Hannover Re has been held in an unchanged amount (50.22%) exclusively by Talanx AG, into which HDI Verwaltungs-Service GmbH and Zweite HDI Beteiligungsgesellschaft mbH were merged with legal force on the same date.
We anticipate a burden of losses in the range of EUR 11.0 million to EUR 13.0 million from the snowstorms in China in January and February 2008.
Effective 3 March 2008 HRBV reached agreement with a third party outside the Group on the sale of a further 1% of its stake in E+S Rück – by way of a share reduction without a change of control status – in order to intensify the business relations. Upon closing of the transaction HRBV held an interest of 62.78% in E+S Rück.
We conducted our audit of the consolidated financial statements in accordance with § 317 HGB and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the consolidated financial statements in accordance with the applicable financial reporting framework and in the group management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Group and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the consolidated financial statements and the group management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual financial statements of those entities included in consolidation, the determination of entities to be included in consolidation, the accounting and consolidation principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and group management report. We believe that our audit provides a reasonable basis for our opinion.
In our function as the Supervisory Board we considered at length during the 2007 financial year the position and development of the company and its major subsidiaries. We advised the Executive Board on the direction of the company and monitored the management of business on the basis of written and verbal reports from the Executive Board. The Supervisory Board held five meetings in order to adopt the necessary resolutions after appropriate discussion. Resolutions were adopted by a written procedure with respect to three matters requiring attention at short notice. Furthermore, we received quarterly written reports from the Executive Board on the course of business and the position of the company and the Group pursuant to § 90 German Stock Corporation Act. Purely on the basis of the company's economic position no audit measures pursuant to § 111 Para. 2 German Stock Corporation Act were required in the 2007 financial year. The reports provided by the Executive Board contain, inter alia, up-to-date details of the current planned and expected figures for the individual business groups. The reporting also covers strains from major losses as well as the investment portfolio, investment income, the ratings of the various Group companies and the development of the Group's global workforce. The quarterly reports with the quarterly financial statements and key figures for the Hannover Re Group constituted a further important source of information for the Supervisory Board. We received an analysis of the 2006 results in non-life and life/health reinsurance as well as a presentation from the Executive Board covering the profit expectations for the 2007 financial year and the operational planning for the 2008 financial year. In addition, the Chairman of the Supervisory Board was constantly advised by the Chairman of the Executive Board of major developments and impending decisions as well as of the risk situation within the company and the Group. All in all, we were involved in decisions taken by the Executive Board and assured ourselves of the lawfulness, regularity and efficiency of the company's management as required by our statutory responsibilities and those placed upon us by the company's Articles of Association.
As part of its discussion of important individual projects the Supervisory Board considered, inter alia, the acquisition by Hannover Rück Beteiligung Verwaltungs-GmbH (HRBV) of the 10 percent interest held by CiV Lebensversicherung AG in E+S Rückversicherung AG and the subsequent sale of a 2 percent interest held by HRBV in E+S Rückversicherung to WGV Holding AG. In addition, we gave our consent to the purchase of the 50 percent stake previously held by E+S Rückversicherung AG in Hannover Life Re of Australasia Ltd. The Supervisory Board also approved the establishment of a life reinsurance company in Bermuda with a capitalisation of EUR 120 million. Furthermore, we closely examined the issue of "insurance-linked securities", a concept for the securitisation of insurance risks that is currently attracting considerable attention as an alternative to traditional retrocession in the context of the risk management of catastrophe risks. Additionally, we were briefed by the Executive Board on the relevance of Solvency II and the EU Reinsurance Directive to Hannover Re. Questions relating to business tax reform in Germany and the crisis on the US mortgage market were also explored at length. In this connection the Executive Board explained that Hannover Re is scarcely affected by this crisis.
Of the committees formed by the Supervisory Board within the meaning of § 107 Para. 3 German Stock Corporation Act, the Balance Sheet Committee met four times and the Standing Committee met on three occasions. The Chairman of the Supervisory Board updated the full Supervisory Board on the committees' major deliberations at the next meeting.
The Balance Sheet Committee considered inter alia the consolidated financial statement drawn up in accordance with IFRS and the individual financial statement of the parent company Hannover Re drawn up in accordance with the German Commercial Code (HGB) and discussed with the auditors the reports submitted by the independent auditor on these financial statements. In addition, an expert opinion on the adequacy of the loss reserves in non-life reinsurance was reviewed and the accumulated prefinancing volume in life reinsurance was discussed. The risk report pursuant to the Act on Control and Transparency in Business (KonTraG) and the report on compliance with Corporate Governance principles were received and discussed. Furthermore, the Committee examined the balance sheet treatment of certain reinsurance contracts in the commercial-law annual financial statements for the years 2001 to 2005, to which the Federal Financial Supervisory Authority (BaFin) had objected, and for the purpose of clarification obtained an expert opinion from a major international accountancy firm that had not previously examined the transactions. In its opinion the latter concludes that no compulsory accounting rules were violated by the balance sheet treatment. The investment structure and investment income – including stress tests with regard to the investments and their implications for net income and the equity base –, the criteria used for equity allocation within the Group and a comparison of target returns with the actual returns delivered by the individual business groups constituted further key areas of deliberation.
The Standing Committee determined the performance bonuses of the members of the Executive Board for the 2006 financial year and the overall number of stock participation rights to be awarded to the Executive Board. The basic number of stock participation rights for the 2007 financial year was defined. In addition, with an eye to the reappointment of members of the Executive Board recommendations were drawn up for the full Supervisory Board. Furthermore, the medium- and long-term personnel planning for the Executive Board were discussed.
The accounting, annual financial statements, consolidated financial statements and the corresponding management reports were audited by KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft (KPMG DTG), Hannover. The Supervisory Board selected the auditor for the audit and the Chairman of the Supervisory Board awarded the concrete audit mandate. In addition to the usual audit tasks, the audit focused particularly on the accounting treatment of securitisations as well as the correct calculation and carrying of additional and segmental reserves. In the context of the consolidated financial statements to be drawn up by Hannover Re in accordance with International Financial Reporting Standards (IFRS), the auditors were required to subject the reporting (mapping of the local systems to the package collector accounts) as well as the regular and consistent preparation of the cash flow statement to special scrutiny. For the first time the mandate for the review report by the independent auditors on the interim financial report as at 30 June 2007 was also awarded. The special challenges associated with the international aspects of the audits were met without reservation. Since the audits did not give rise to any objections KPMG DTG issued unqualified audit certificates. The Balance Sheet Committee discussed the annual financial statements and the management reports with the participation of the auditors and in light of the audit reports, and it informed the Supervisory Board of the outcome of its examination. The audit reports were distributed to all members of the Supervisory Board and scrutinised in detail – with the participation of the auditors – at the Supervisory Board meeting held to consider the annual results. The auditors will also be present at the Annual General Meeting.
We have examined a) the annual financial statements of the company and the management report prepared by the Executive Board, b) the consolidated financial statements of the Hannover Re Group and the Group management report prepared by the Executive Board and c) the report of the Executive Board pursuant to of § 312 German Stock Corporation Act (Report on relations with affiliated companies)
– in each case drawn up as at 31 December 2007 – and have no objections. Nor do we have any objections to the statement reproduced in the dependent company report. The Supervisory Board thus concurred with the opinions of the auditors and approved the annual financial statements and the consolidated financial statements; the annual financial statements are thereby adopted. We concur with the Executive Board's proposal regarding the appropriation of the disposable profit for 2007 after studying all relevant aspects.
On 20 March 2007 Dr. Paul Wieandt, a long-standing member of our Supervisory Board, passed away. For ten years Dr. Wieandt helped to shape the company's development. From 1997 until his death he belonged to the company's Supervisory Board, serving as its Deputy Chairman during this time. He was similarly unfailing in applying his considerable expert knowledge and vast experience to the work of the Balance Sheet Committee. Dr. Wieandt earned our deep esteem with his sense of responsibility and farsightedness. We shall honour his memory.
Good enterprise management and supervision in the spirit of state-of-the-art Corporate Governance continues to be enshrined in Hannover Re's business practices as a matter of course. That this is in no way limited to rigid compliance with formal rules or seen as a necessary "going through the motions", but rather is understood as a dynamic process is readily apparent from the fact that we promptly took up and acted on the resolutions regarding refinement of the Code adopted by the Government Commission on the German Corporate Governance Code on 14 June 2007. In November 2007, for example, the Supervisory Board already constituted a Supervisory Board Nomination Committee. The rules of procedure of the Supervisory Board's Balance Sheet Committee were extended such that the committee now bears additional responsibility for compliance matters. In this context, "compliance" is understood in the broadest sense of the term as compliance with the law, statutes and internal guidelines within the company. The Chairman of the Committee has requested the Executive Board to provide a compliance report at the next meeting of the Balance Sheet Committee. Explicit responsibility for this issue is also enshrined in the Executive Board's schedule of responsibility.
At the first meeting of the Supervisory Board in 2007 the Corporate Governance Officer presented the findings of a confidential survey of Supervisory Board members regarding the efficiency of the Supervisory Board's work in an anonymised and aggregated form. Following extensive discussion within the Supervisory Board measures were approved aimed at further enhancing the already existing trusting cooperation between the Executive Board and the Supervisory Board as well as between the full Supervisory Board and its various committees.
In the year just-ended we again devoted considerable attention to our communication with the financial markets and developed an impressive range of Investor Relations activitities. For further details please see the section entitled "The Hannover Re share" in this Annual Report.
Shareholdings pursuant to Item 6.6 of the German Corporate Governance Code
The remuneration report summarises the principles used to determine the remuneration of the Executive Board of Hannover Re and explains the structure and amount of the income received by the Executive Board in the 2007 financial year on the basis of the Board members' work for Hannover Re and its affiliated companies. In addition, the amount of the remuneration paid to the Supervisory Board on the basis of its work for Hannover Re and its affiliated companies and the principles according to which this remuneration is determined are explained.
Responsibility The Supervisory Board has delegated responsibility for determination of the structure and amount of the remuneration paid to Hannover Re's Executive Board to the Standing Committee.
The fixed emoluments, paid in twelve monthly instalments, are guided by the professional experience and area of responsibility of the Board member in question.
The variable bonus is cash compensation measured by the performance in the financial year; half is based on the individual Board member's profit contribution and half on the net income generated by the Group as a whole.
The internal performance criterion is satisfied upon achievement of the target diluted earnings per share (EPS) calculated in accordance with IAS 33 "Earnings Per Share". The external performance criterion is the increase in the value of the Hannover Re share. The benchmark used to measure this increase in value is the weighted ABN Amro Rothschild Global Reinsurance Index. The benchmarks cannot be retrospectively altered.
As at 31 December 2007 the members of the Executive Board had at their disposal a total of 319,444 (172,874) granted, but not yet exercised stock appreciation rights with a fair value of EUR 2.2 million (EUR 1.5 million).
The remuneration paid to former members of the Executive Board and their surviving dependants, for whom eleven pension commitments existed, totalled EUR 0.9 million (EUR 0.9 million) in the year under review. Altogether, an amount of EUR 9.8 million (EUR 9.8 million) has been set aside for these commitments.
In accordance with § 12 of the Articles of Association as amended on 3 August 2007, the members of the Supervisory Board receive fixed annual remuneration of EUR 10,000 per member in addition to reimbursement of their expenses. Furthermore, each member of the Supervisory Board receives variable remuneration of 0.03‰ of the operating profit (EBIT) reported by the company in the consolidated financial statement drawn up in accordance with International Financial Reporting Standards (IFRS). Variable remuneration is not paid if the EBIT is negative.
In addition, the members of the Balance Sheet Committee formed by the Supervisory Board receive an emolument of 30% of the previously described fixed and variable remuneration for their committee work. The members of the Standing Committee formed by the Supervisory Board receive an additional emolument of 15% of the previously described fixed and variable remuneration for their committee work.
No remuneration was approved for the members of the Nomination Committee that was set up in the year under review.
Herbert K. Haas Member of the – Supervisory Board – Standing Committee – Balance Sheet Committee – Nomination Committee 107.9
Dr. Erhard Schipporeit Member of the – Supervisory Board (since 3 May 2007) – Balance Sheet Committee 3.6
Ass. jur. Renate Schaper-Stewart* Member of the Supervisory Board (until 2 May 2007) 42.4
Dipl.-Ing. Hans-Günter Siegerist* Member of the Supervisory Board (until 2 May 2007) 35.6
Uwe Kramp* Member of the Supervisory Board (since 3 May 2007) 1.2
Gert Waechtler* Member of the Supervisory Board (since 3 May 2007) 1.2
Individual remuneration received by the members of the Supervisory Board in the year under review
Members of the Supervisory Board and Executive Board of Hannover Re as well as their spouses or registered partners and first-degree relatives hold less than 1.0% of the issued shares. As at 31 December 2007 the total holding amounted to 0.031% (0.024%) of the issued shares, i.e. 37,096 (29,110) shares.
The company is in compliance with the recommendations of the Code in all respects (cf. in detail the Declaration of Conformity below).
Name Type of transaction Type of security ISIN Transaction date Number of securities Price in EUR
Declaration of Conformity pursuant to § 161 Stock Corporation Act (AktG) regarding compliance with the German Corporate Governance Code at Hannover Rückversicherung AG
Australia Hannover Rückversicherung AG Australian Branch - Chief Agency Sydney, Australia
Hannover Re (Bermuda) Ltd. 50 Parliament Street, 2nd Floor Hamilton, HM 12
China Hannover Rückversicherung AG Shanghai Representative Office Suite 1707, United Plaza 1468 Nan Jing Xi Lu 200040 Shanghai
Hannover Rückversicherung AG Hong Kong Branch 2008 Sun Hung Kai Centre 30 Harbour Road Wanchai, Hongkong
Hannover Services (UK) Ltd. Hannover House Virginia Water Surrey GU25 4AA
Ireland Hannover Life Reassurance (Ireland) Limited No. 4 Custom House Plaza, IFSC Dublin 1
Italy Hannover Re Services Italy Srl Via Mazzini, 12 20123 Milan
Av. Santa Fé No. 170 Col. Lomas de Santa Fé C.P. 01210 México, D.F.
International Insurance Company of Hannover Ltd. England filial Hantverkargatan 25 P. O. Box 22085
Taiwan Hannover Rückversicherung AG Taipei Representative Office 8F, No. 122, Tun Hwa North Road Taipei 105, Taiwan
Bancassurance: partnership between a bank and an insurance company for the purpose of selling insurance products through the banking partner's branches. The link between the insurer and the bank is often characterised by an equity participation or a longterm strategic cooperation between the two parties.
Capital asset pricing model (CAPM): the CAPM is used to explain the materialisation of prices/returns on the capital market based on investor expectations regarding the future probability distribution of returns. Under this method, the opportunity cost rate for the shareholders' equity consists of three components – a risk-averse interest rate, a market-specific risk loading and an enterprise-specific risk assessment, the beta coefficient. The cost of shareholders' equity is therefore defined as follows: risk-averse interest rate + beta * enterprise-specific risk assessment.
International Accounting Standards (IAS): cf. ➞ International Financial Reporting Standards (IFRS)
Price earnings ratio (PER): ratio of the market value of a share to the earnings per share of a publicly traded corporation.
Provision for unearned premiums (also: unearned premium reserve ): premiums written in a financial year which are to be allocated to the following period on an accrual basis. This item is used to defer written premiums.
Rating: systematic evaluations of companies with respect to their ➞ credit status or the credit status of issuers with regard to a specific obligation. They are awarded by a rating agency or bank.
Stochastic partnerships: targeted provision of financial support for primary insurers through reinsurance arrangements under which the reinsurer participates in the original costs of an insurance port-
Structured Product: reinsurance with limited potential for profits and losses; the primary objective is to strive for risk equalisation over time and to stabilise the ➞ cedant's balance sheet.
Technical result: the balance of income and expenditure allocated to the insurance business and shown in the technical statement of income (after additional allowance is made for the allocation to/ withdrawal from the equalisation reserve: net technical result).
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