29 March 2005 Annual Results Press Conference Hannover Re Karl-Wiechert-Allee 50 30625 Hannover, Germany 30 March 2005 DVFA Analysts' meeting, Frankfurt 30 March 2005 Analysts' meeting, London 12 May 2005 Interim Report 1/2005 14 June 2005 Annual General Meeting Beginning 10:30 a.m.
Book value per share in EUR 21.20 +6.3% 19.94 17.90 17.21 17.76
Combined ratio (property and casualty reinsurance) 97.0% 96.0% 96.3% 116.5% 108.4%
"Tomorrow's success will hinge on the course that we chart today. We are well prepared for the risks and opportunities that lie ahead in the coming years. What is more, we shall never lose sight of our common interest and goal of consistently enhancing the value of your company."
Wilhelm Zeller Chairman of the Executive Board 2004 has gone down as the presumably most expensive year of natural disasters ever recorded in insurance history. The four severe hurricanes in the Caribbean and in the United States were alone enough to place a massive strain on reinsurers and – quite literally – left our plans in a spin. Japan was also hard hit by several typhoons, and then at the end of the year we witnessed a strong earthquake under the Indian Ocean, with a resulting tsunami that triggered a human tragedy of almost unimaginable dimensions. In view of the devastating images that we all have seen, it is difficult to turn one’s mind back to hard economic figures. Nevertheless, initial market estimates suggest that insurers and reinsurers will pay out an amount in the order of EUR 30 billion for natural catastrophe losses in the year under review.
So what did all these natural disasters in 2004 mean for Hannover Re? They prevented your company from achieving another record result: due to the extraordinarily large losses of more than EUR 300 million in the third quarter attributable solely to the hurricanes in the Caribbean and in the USA, we were compelled to revise our original profit forecast in October. Yet, as late as August on the occasion of the telephone conference held with analysts to discuss the financial statements for the first half-year, I had been asked whether we ought to raise our profit forecast in view of our excellent performance. Pointing to the uncertainties of the remaining hurricane and typhoon season in the Caribbean and Far East I rejected this suggestion. At the time, though, I too had not envisaged losses on such a heavy scale. Nevertheless, in the light of this vastly above-average burden of natural catastrophe losses, a none-too-friendly capital market and the persistent weakness of the US dollar, it is with some pride that I can report a good business performance. Even in this difficult market climate, we achieved the target we had set for ourselves of generating a return of at least 12% after tax on the capital that you provided. Together with the Supervisory Board, we shall therefore propose to the Annual General Meeting that an increased dividend of EUR 1.00 be distributed.
In property and casualty reinsurance, our oldest and largest business group, almost all segments continued to offer attractive opportunities for writing profitable business. The year under review again saw no "softening", i.e. there was no deterioration in rates and conditions in the hard market. The anticipated price erosion in natural catastrophe reinsurance failed to materialise due to the hurricanes in the Caribbean and the typhoons that affected Japan. These favourable market conditions, combined with a number of strategic moves on our part, ensured that in property and casualty reinsurance we were very largely able to cushion the exceptionally high major loss expenditure of EUR 287 million.
pany reported a loss. The four severe hurricanes that hit Florida – an event with a statistical return period in excess of once in a century – produced the worst possible scenario for Clarendon. This is because Florida, a state where Clarendon has been active for many years in windstorm-exposed homeowners’ insurance business, was affected by every single hurricane. If, instead of four hurricanes, there had been only a single event – even with a far higher insured loss – or, if the hurricanes had been spread more across various US states, the burden incurred by Clarendon would have been considerably lower.
What should we expect from the current financial year? The treaty renewals in property and casualty reinsurance as at 1 January 2005 – the time of the year when roughly two-thirds of our portfolio is renegotiated - demonstrated that market conditions remain very favourable. The so-called hard market will be sustained in 2005: stable rates and conditions were obtained in almost all segments. In certain segments – most notably in casualty business – it was even possible on average to secure further slight improvements.
Turning now to the development of our investments in 2005, I am confident that with the anticipated positive underwriting cash flow our asset portfolios will continue to grow. If interest rates show the modest increase that is generally expected, investment income should continue to rise. Overall, it is our assumption that net investment income will improve on the previous year – a promising foundation then for a successful financial year. Provided there are no adverse movements on capital markets and as long as major losses remain within the bounds of the multiyear average, we anticipate a very good overall result for the current financial year: net income is forecast to be in the region of EUR 430 to 470 million, an increase of roughly 50% on the year under review.
It may be noted in this context that the difficulties in which certain highly reputed players within our industry once again found themselves in the year under review clearly show how past success counts for little. Tomorrow's success will hinge on the course that we chart today. Let me assure you: we are well prepared for the risks and opportunities that lie ahead in the coming years. What is more, we shall never lose sight of our common interest and goal of consistently enhancing the value of your company.
On my own behalf and that of all my colleagues on the Executive Board, I would like to express my deepest appreciation for the trust that you place in us.
Dr. Paul Wieandt2) Chairman of the Management Board Hof/Saale Resba GmbH Deputy Chairman
and natural catastrophes on the other hand. Ultimately, however, the markets experienced a year-end rally that promised some hope for the current year. The major German and European indices fared somewhat better, closing 2004 for the most part in positive territory: Dax (+7.34%), MDax (+20.28%), TecDax (-3.94%), SDax (+21.56%) and EuroStoxx 50 (+7.31%).
Considerable volatility with no clearly discernible trend was the hallmark of global equity markets in 2004. Insurance stocks, in particular, failed to generate any significant gains throughout the year. This was due to the steady rise in the price of oil and various other fundamental factors that had a depressive effect on the economy on the one hand, and to terrorism concerns it held its ground very well by industry standards. We outperformed the industry index CDax for insurance stocks by 9.24 percentage points. This is all the more remarkable when we think of the barrage of bad news suffered by the industry in the year under review, which on occasion sent our share, too, on a downward slide: reserving
In a three-year comparison our share surpassed our internal benchmark, namely the unweighted "Reactions" World Reinsurance Index, by a comfortable 85 percentage points. Yet, taken in isolation the year under review was also clearly favourable with an outperformance of 8.45 percentage points.
The Hannover Re share conferences with international analysts, investors and journalists representing the business press. On 6 December 2004 we relaunched Hannover Re's Internet presence with a more modern design and enhanced functionalities. We are now able to provide you with even more detailed and transparent information about our company and our Investor Relations activities.
The placement of 20.6% of our stock with institutional investors by our majority shareholder Talanx AG in February 2004 has since almost doubled Hannover Re's free float by a further 24.8 million shares to its current level of 48.8% of the capital stock.
The volume of shares traded daily increased in a 12-month comparison by more than twoand -a-half times from EUR 4.0 million to EUR 10.3 million. The number of Hannover Re shareholders as at 31 December 2004 stood at
Shareholding structure by natural persons/ corporate entities as % of free float
Number of shares as at 31 December 2004: 120,597,134 no-par-value registered shares
Corporation-tax credit – – – – 0.36 1) On each fully paid-up no-par-value registered share for the year 2000 2) Incl. bonus of EUR 0.08
We are guided by three maxims from which all further strategic objectives and principles are derived: Above-average profitability: For us this means that we strive to be one of the three most profitable reinsurers worldwide in terms of return on equity and annual growth in earnings per share.
Strategic objectives 1. Profit target • Return on equity at least 750 basis points over and above the risk-free interest rate • Annual double-digit growth in - operating profit (EBIT) - earnings per share - operating (intrinsic) value creation
Strategic principles 4. Investments • Priority attached to investments aimed at achieving an optimally diversified portfolio 5. Growth • Organic growth before acquisitions • Acquisitions only when they offer more than volume growth 6. Invested assets • Generation of an optimal profit contribution in the light of risk/return considerations • Ongoing dynamic financial analysis for the purpose of optimal asset/liability management
• Attainment of optimal performance levels as regards to satisfaction among staff and clients in order to achieve the best possible business results
%-figures = participation You may find the addresses of our branch offices and subsidiaries on pages 126 to 128
"As-if-pooling" is a US GAAP specialty (SFAS 141 App. D 11–18) applicable only to transactions between companies that are under common control. The most important implication is that Hannover Reinsurance (Dublin) Ltd. must be treated as if it had always been part of the Hannover Re Group. The disclosure for the previous period has to be adjusted according to this modified treatment – in other words, Hannover Reinsurance (Dublin) Ltd. must be included effective 1 January – in order to ensure that the figures for the various accounting periods can be compared. In our assessment, this heavily distorts the representation of the Hannover Re Group's economic performance in the 2003 financial year. Since the "as-if-pooling" method constitutes the formal implementation of the US GAAP standard, the certificate issued by our auditors is based upon these figures. In this context we would refer the reader to our comments in the notes to the financial statements contained in this annual report.
Whereas in the previous year we had generated the best operating profit in the company's history (EUR 732.1 million), EBIT stood at just EUR 577.6 million in the year under review – a decline of 21.1%. Net income contracted by 12.9% to EUR 309.1 million (EUR 354.8 million), thereby marginally surpassing our adjusted profit target and producing earnings of EUR 2.56 (EUR 3.24) per share.
Gross premium income was again lower than in the previous year, decreasing by 15.7% to EUR 9.6 billion (EUR 11.3 billion). The persistent weakness of the US dollar was also a factor here. Had it not been for this effect gross premiums would have fallen by just 11.1%. Further reasons for the decline were the now completed restructuring of the business relationship with our affiliated HDI companies as well as our "More from less" initiative, under which we are systematically replacing high-volume, low-margin proportional business with lower-volume, but more profitable non-proportional treaties.
Gross premiums in property and casualty reinsurance contracted, in part due to the strength of the euro, by 14.4% (adjusted for exchange -rate effects: -11.1%) to EUR 4.1 billion on account of the aforementioned reasons. Net premiums remained virtually stable at EUR 3.5 billion (EUR 3.5 billion) due to a higher retention. Once again it was evident that the quality of the business written – not the premium volume – is the decisive factor. In view of the strong profitability in the market we boosted the net income after tax by an excellent 54.9% year-on-year to EUR 258.6 million – despite the heavy burden of catastrophe losses. The numerous major losses had another effect on the insurance industry: they served as a reminder that losses actually occur – even in the so-called hard market that continued to prevail in property and casualty reinsurance across virtually all lines and regions in the year under review.
Record burden of major losses absorbed in property and casualty reinsurance
With the placement of subordinated debt in the amount of EUR 750 million by our Luxembourg subsidiary at a very attractive interest rate – a facility which the rating agencies recognise as equity –, we were able to further strengthen our capital position in February of the year under review. Parts of the proceeds were used to almost entirely buy back outstanding debt in the amount of USD 400 million taken out by our US financing company. In addition, we repaid the surplus debenture that became due in November 2004. Combined with the equity
to approach these investigations in a relaxed frame of mind, since our underwriting guidelines have long addressed the issues that provoked the bulk of the scepticism towards financial reinsurance. What is more, the protracted hard market in recent years and the associated opportunities for our clients to strengthen their own equity resources have caused demand for solvency-supporting coverage solutions to diminish. Following several years of vigorous growth gross premium volume in financial reinsurance consequently shrank by 27.6% to EUR 1.2 billion (adjusted for exchange-rate effects: 22.6%). Net premium earned showed a parallel contraction of 22.9%, while the level of retained premiums remained virtually unchanged. The net income of EUR 89.0 million fell 10.1% short of the previous year (EUR 99.1 million).
that accumulated from retained earnings, we were again successful in further enhancing our capitalisation and thereby stabilising our ratings. In the course of the year, therefore, both Standard & Poor's (AA- "very strong") and A.M. Best (A "excellent") upgraded their rating outlook from "negative" to "stable".
The feedback that we received in the year under review from our clients and other market players regarding our market presence and business model were also highly favourable. In 2004 Hannover Re was crowned "Reinsurance Company of the Year" by the trade magazine "The Review". Hannover Re is thus the first reinsurer to have received this distinction on three occasions – following on from 1998 and 2001.
Similarly, we were chosen as the best reinsurer overall on the US market – our largest and most important single market – in the 2004 Flaspöhler broker survey.
Generating 42.9% of our gross premium income, property and casualty reinsurance remains our largest business group. In the year under review the "hard market" climate once again prevailed: rates and conditions continued to be favourable, and in some lines further improvements were obtained. This was especially true of the longer-tail liability lines. In marine insurance, too, gratifying rate increases were observed in those segments that had been hit by the repercussions of hurricane "Ivan". Only in some property lines and in aviation business could a certain softening in rates be detected.
Hannover Re again profited to the fullest extent from these advantageous market conditions in the year under review. As always, we wrote our business in compliance with strict profitability criteria. We continued to optimise our portfolio as part of the "More from less" initiative and replaced low-margin proportional business with more profitable non-proportional arrangements. The latter also enable us to keep a considerably tighter grip on the pricing of the treaties. It was therefore gratifying to note that the share of our total property and casualty reinsurance portfolio attributable to non-propor-
Gross written premiums in property and casualty reinsurance contracted by 14.4% in the year under review to EUR 4.1 billion (EUR 4.8 billion ). At constant euro exchange rates – especially against the US dollar – the decrease would have been just 11.1%. The decline was also attributable to the reorganisation of our business relationship with our HDI affiliates. In view of the good quality of the business written and our improved capital position we substantially increased the level of retained premiums to 85.6% (72.2%). Net premiums remained virtually unchanged, falling by 0.8% to EUR 3.5 billion.
After the relatively light burden of major losses recorded in 2003, the year under review will probably go down as the most expensive year for natural disasters in the history of the insurance industry. Provisional market estimates suggest that the insurance sector will be paying out around EUR 30 billion to settle major claims. The burden of losses incurred by Hannover Re in the year under review was also correspondingly high: compared with just EUR 51.5 million in the previous year, major loss expenditure in property and casualty reinsurance totalled EUR 287.2 million in the year under review. The proportion of major losses relative to net premiums thus stood at 8.3%, a figure many times higher than in the previous year (1.5%). The four severe hurricanes in Florida alone cost our company EUR 194.3 million. The disastrous flooding suffered in South Asia on 26 December 2004, a tragic event with a death toll of almost 300,000, produced a strain of EUR 29.1 million for our company. This relatively slight loss burden was attributable to the very low insurance density in the affected regions. On the whole it is therefore no surprise that the combined ratio – after allowance is made for additional major claims – was somewhat higher than the previous year (96.0%) at 97.0%. This is nevertheless a highly satisfactory figure in view of the disproportionately heavy loss expenditure, and it clearly demonstrates that we were able to further enhance the quality of our property and casualty reinsurance business in the year under review.
Thanks to our conservative reserving policy we had no need to constitute additional reserves in either the property or the casualty lines in the year under review.
Despite the heavy burden of major losses incurred in the year under review, we are very satisfied overall with the development of property and casualty reinsurance. Our business performed superbly in all segments and in large measure made up for the reduced profit due to the natural catastrophe losses. Although the underwriting profit was significantly lower yearon -year at EUR 104.9 million, investment income increased by 18.9% to EUR 467.6 million (EUR 393.4 million) – despite declining interest rates – thanks to the strong underwriting cash flow and the associated high level of additions to our asset portfolio. Below the line this was reflected in a 3.8% higher operating profit (EBIT) of EUR 483.3 million (EUR 465.9 million). Net income surged by a substantial 54.9% to EUR 258.6 million (EUR 167.0 million). The property and casualty reinsurance business group thus contributed earnings of EUR 2.14 per share to the consolidated result, as against EUR 1.52 in the previous year.
In addition to these favourable market conditions, we profited from our excellent financial strength as well as from the business difficulties experienced by one reinsurer and the withdrawal of another competitor.
Despite initial softening tendencies on the primary insurance market, we were able to write profitable business in two key segments: thanks to the fundamental rehabilitation of industrial fire business on the insurance side this line has also taken a very favourable turn for reinsurers. This is also true of our largest line of business,
On the reinsurance side adequate rates and conditions were again obtained in the year under
Management report property and casualty reinsurance motor third party liability insurance. Rates and conditions were more than adequate in both segments and the situation as regards major claims was favourable. Against this backdrop we generated a positive underwriting result in this business.
What is more, in the year under review we surveyed the satisfaction levels of our German clients with the products, services and personnel of E+S Rück. The outcome was excellent: in virtually every category E+S Rück received praise for providing outstanding service.
In cooperation with a number of primary insurers we were also able to successfully launch innovative, jointly designed personal accident products with assistance benefits on the German market in 2004. This was made possible through signing a cooperation agreement with a renowned provider of assistance services, which offers an extensive range of assistance to our clients' policyholders who might find themselves needing help as a consequence of an accident.
In view of the favourable market climate E+S Rück substantially increased its market share in credit and surety reinsurance. Yet, here too, we were guided by our "More from less" standards, in accordance with which we concentrated exclusively on profitable business. No appreciable major claims were incurred in credit and surety reinsurance.
Against this attractive backdrop we expanded our position in the reinsurance market in the year under review, especially in long-tail casualty lines. In view of the contraction in available market capacity and our very good ratings, we were a sought-after partner in this area for ceding companies.
True to our "More from less" initiative we scaled back our proportional portfolio with an eye to the softening in the primary sector. At the same time we stepped up our acceptances of non-proportional business. In addition, we were successful in acquiring numerous smaller companies as new clients.
The London Market is also a prominent centre for the underwriting of marine and aviation risks. Aviation business, in particular, was affected by declining insurance and reinsurance rates as well as surplus capacities in the reinsurance market. In light of this market softening we wrote risks very selectively and scaled back our volume. Premium income in aviation business consequently contracted, although the current rate level still remains adequate. Hannover Re continues to be one of the leading reinsurers in this line. There were no major claims in the year under review.
In marine reinsurance our primary concern was to consolidate our portfolio. First and foremost, we sought to defend the good rate level – an endeavour in which we were very largely successful. We again focused on writing profitable non-proportional business, especially middle and upper programme layers. By far the largest loss event for marine business was hurricane "Ivan", the third of the four hurricanes to make landfall in Florida in the year under review. The damage to the oil platforms in the Gulf of Mexico produced the largest insured loss ever recorded in offshore business. Thanks to our selective underwriting policy, this portfolio nevertheless closed with an underwriting profit. Non-proportional marine business continued to develop profitably despite the loss expenditure associated with hurricane "Ivan". What is more, the downward trend in primary insurance rates was halted and reinsurance conditions further improved as a consequence of this loss.
France, Benelux Since 2004 the French insurance market has been subject to closer regulatory supervision. Insurers and reinsurers are now obliged to provide the state insurance regulator (CCAMIP) with a detailed report on the structure of their reinsurance. In this way the agency is seeking, inter alia, to exert a greater influence on the controlling of risks, including, for example, accumulations.
Non-proportional marine business develops profitably despite loss expenditure associated with hurricane "Ivan"
We have concentrated our know-how in catastrophe reinsurance at Hannover Re (Bermuda) Ltd. Almost two-thirds of the catastrophe covers in the Hannover Re
The reinsurance market in France found itself facing more intense competition from new Bermuda-based providers in the year under review. Yet no significant price erosion was observed. Although windstorm business saw some modest reductions in rates, they remained stable in other lines. Hannover Re asserted its position in the market and was very largely successful in preserving the rate level.
In the Benelux countries we were successful in enlarging our market share – most strikingly in motor third party liability business. We wrote increased shares with existing accounts and acquired new clients. Here, too, with an eye to our "More from less" initiative aimed at enhancing profitability, we scaled back our proportional property treaties and continued to expand our non-proportional portfolio.
Credit and surety insurers recorded very low loss ratios due to light basic losses and the absence of major claims. In the year under review it was finally possible to uncouple underwriting results from the persistent adverse credit cycle affecting the banks. In the reinsurance sector the dramatic tightening of conditions has thus entirely proven its worth. In this segment, too, new Bermuda-based providers forced their way into the market, albeit without triggering appreciable pressure on terms and conditions.
All in all, we were highly satisfied with our business results in France and the Benelux markets.
Notable features of the reinsurance market in Italy were difficulties affecting two of our competitors and a reduction in the number of providers on the market. For Hannover Re, therefore, new opportunities to write attractive business opened up. We continued to regroup our portfolio in the year under review, replacing proportional acceptances with non-proportional arrangements. In this context we concentrated on companies that do not belong to groups and are therefore able to take their own decisions on reinsurance coverage. This gives us more space to manoeuvre on the pricing side. Overall, we continued to write business very selectively in Italy. Motor third party liability business, in which rehabilitation efforts have now been completed, has returned to underwriting profitability. No major claims occurred in the year under review, so that we are highly satisfied with the business development.
Denmark is our largest market in Northern Europe. Our main lines here are fire and motor reinsurance. We are the market leader in providing reinsurance for the country's mutual insurance societies.
The Danish market suffered a sizeable loss with an explosion at a fireworks factory. Overall, though, our business in Northern Europe developed satisfactorily.
The mood on the reinsurance market was really upbeat in the year under review: no substantial deteriorations in rates were observed.
Since 2001 Hannover Re has considerably enlarged its market share in North America. This has not gone unnoticed by ceding companies and brokers. In a study conducted by the highly reputed US Flaspöhler Research Group we emerged as the best reinsurer overall on the North American reinsurance market. Hannover Re has explicitly been given a recommendation as a reinsurer by 93.5% of the more than 200 brokers participating in the survey. This favourable assessment by the brokers is particularly valuable because in the American market almost 70% of reinsurance business is handled through these intermediaries rather than directly between insurer and reinsurer.
Based on our very good ratings and our business partners' positive assessment of our financial strength, we are one of the few reinsurers to be approached for placement of long-tail casualty risks. In the year under review we were thus once again able to write such reinsurance treaties highly selectively and acquire attractive business.
Credit and surety reinsurance offered attractive opportunities following the withdrawal of numerous US reinsurers. We enlarged our market share despite growing competition from Bermuda; in so doing, we adhered strictly to the profitability criteria that guide our underwriting policy. No significant loss events were recorded. All in all, the result in credit and surety reinsurance continued to improve thanks to a reduced loss ratio.
Hannover Re's most important market. We are represented in Johannesburg by our subsidiary, Hannover Re Africa.
We generally write our reinsurance business in South Africa as excess of loss covers, accepting only specialty business on a proportional basis. In the other African markets we adhere to a highly selective underwriting policy. In compliance with our exacting quality standards and our Group-wide "More from less" initiative, we withdrew from low-margin, large-volume proportional reinsurance business. This led to an appreciable premium reduction in our South African portfolio, especially in fire business. There were no significant major losses in the African countries.
In last year's annual report we announced that Hannover Re Africa's results would improve as a consequence of the revised underwriting policy and the company's repositioning. This confidence was entirely justified: the combined ratio for 2004 stood at 95.3%, compared to 107.1% in the previous year.
The area of South and Southeast Asia was struck by the severe undersea earthquake off the coast of Sumatra in the year under review. A seismic tidal wave, known as tsunami, devastated the coastlines of several countries. Since the insurance density in these markets is extremely low, however, the losses for the insurance industry were relatively slight. Hannover Re incurred loss expenditure of EUR 29.1 million.
China remains a target market for the international insurance and reinsurance industry, and the competition is correspondingly intense. Our premium volume is not particularly signifi-
In Germany changes in tax law towards downstream taxation of retirement income that came into effect on 31 December 2004 fuelled a veritable surge in demand for retirement products that far outstripped the so-called "Eichel boom" of 1999. Compared to previous years many life insurers report growth of 50% to 100% in their new business.
Reinsurers with very good ratings are highly sought-after in Australia, and Hannover Re was able to profit accordingly.
Our aim in the year under review was once again to enlarge our share of profitable, nonproportional business – a goal which we succeeded in achieving. The loss events recorded in the Australian market had only minimal implications for our company, and we were therefore very satisfied overall with our portfolio in this region.
The reinsurance of life, health, annuity and personal accident insurances (the latter to the extent that they are transacted by life insurers) is brought together in our life and health reinsurance business group, which we operate worldwide on a uniform basis under the proprietary brand name of Hannover Life Re.
Net premiums incl. premium deposits 2 223.5 +3.4% 2 149.7 2 257.5 1 869 1 723
With respect to morbidity – which has a bearing on the critical illness, health and disability lines – a positive experience was observed in all markets. Even Australian disability pension business – which for competitive reasons traditionally shows only marginal profitability – was in satisfactory shape for the first time in many years.
The net income shown in the illustration highlights the company's gratifying profit trend.
The remaining value of the in-force business is attributable to a large number of non-financing transactions. The future impairment of this subportfolio was calculated by modelling clusters of similar business.
The development of the value of our inforce business has been a consistent feature of our reporting for some years now. While the calculation method used has been refined over time, it has not changed fundamentally. The value of in-force business still refers to the present value of future technical profit flows before taxes. It is determined by the actuaries at our business centers and externally verified by highly respected actuarial consultants.
The calculation comprises the following elements: • portfolio components attributable to retrocessionaires are deducted
The value of in-force business reflects first and foremost the profitability of our long-term proportional business. This includes not only longterm life and annuity business, but also health business – insofar as this involves financing transactions – and long-term personal accident business.
At the suggestion of our external consulting actuaries, the calculation of the value of in-force business also includes short-term business for the first time this year. The value of in-force business for Hannover Re and E+S Rück thus makes allowance for the income anticipated in the current year from already renewed short-term proportional business. It remains the case that nonproportional business is excluded from the value of the in-force portfolio.
Value of in-force business reflects the earnings potential of our long-term proportional portfolio
• Internal capital model ensures risk-adequate capital allocation to preserve a "AA-" rating
• Allowance made for future mortality improvements only in the United Kingdom and to a minimal extent in the USA
• Internal risk-oriented capital model of Hannover Re or local capital requirements
Hannover Life Re UK, Virginia Water/London 97.2 73.3 62.4 58 53
The table below shows the development of the value of in-force business over time at our seven business centers. The total value of inforce business showed highly satisfactory growth of around 10% to reach EUR 1,495.2 million.
Of the total value of in-force business, EUR 351.5 million was attributable to new business – which includes new reinsurances taken out in the year under review as well as cessions in the 2004 underwriting year under previously concluded reinsurances. This allocation is made possible by the large proportion of treaties booked on the basis of underwriting years. We work with assumptions in those cases where we do not have detailed information broken down by underwriting years. The negative net underwriting result attributable to new business amounted to EUR 251.8 million, leaving a total new business value of EUR 99.7 million.
The risk discount rates determined in accordance with the method described above for the major currencies were as follows: The following table shows the outcome of sensitivity analyses performed for all business centers. It indicates the extent to which the value of a business center's in-force portfolio would change if, for example, a 10% higher mortality were to be applied in all future years.
Hannover Life Re Africa, Johannesburg 0.6 (0.5) (6.3) 5.8 (0.7) (1.2) (0.9) 1.7
Hannover Life Re America, Orlando 9.3 – (88.4) 81.5 (8.3) 13.6 (18.2) 18.3
Hannover Life Re International, Hannover 37.0 (26.9) (67.4) 67.4 (31.3) 6.5 (18.0) 19.2
Hannover Life Re Ireland, Dublin 8.5 0.4 (13.9) 10.1 (5.4) 8.8 (5.1) 5.6
These sensitivity analyses reveal that exogenous parameters (exchange rates and discount interest rate) roughly balanced each other out; had the exchange rates and the interest rate level of various currencies that determine the risk discount rates remained unchanged from the previous year, the value of in-force business would have been EUR 6.3 million lower.
Value of in-force business 1 495.2 1 361.1 1 206.0 1 048 874
Our activities on the German life insurance market, which is served by our subsidiary E+S Rück, were influenced by three main factors in the year under review: Talanx AG, our majority shareholder, strengthened its presence in the bancassurance sector through the acquisition of a sizeable financial services group in Northern Germany. Cooperation with the other life and personal accident insurers within the Talanx Group, which concentrate on business with unit-linked life insurance policies and over-the-counter sales through two leading banks, was expanded.
We acquired new customer relationships with German mutual insurers: E+S Rück is a preferred partner for this group of clients.
United Kingdom This market is served primarily by our local subsidiary Hannover Life Re UK based in Virginia Water near London. The company concentrates on risk-oriented products such as term life policies and critical illness covers. Very little disability business is written; instead, smaller annuity policies from the bancassurance sector are accepted and administered for the insurers concerned.
Hannover Life Re Ireland is systematically deployed in the role of co-reinsurer for most highvolume quota share arrangements with major UK life insurers. This model optimises the necessary solvency capital for the ceding company and the reinsurer.
For more than ten years now Hannover Life Re International has also operated as a specialist reinsurer for various enhanced annuity programmes. Premiums contracted in the year under review following the discontinuation of new business under a major account as at the end of 2003. In the autumn of 2004, however, a successor company was established for which we function as lead reinsurer.
Hannover Life Re UK reported an operating profit (EBIT) of EUR 10.2 million, corresponding to a return of 12.9% on the company's net premiums earned. Net income totalled EUR 7.0 million (+59.0%).
Hannover Life Re Ireland developed very favourably in the year under review. Gross premium income grew by 5.9% to EUR 346.9 million, while net premiums earned amounted to EUR 291.0 million (+9.9%).
The operating profit (EBIT), which in the previous year had been burdened by a special effect in the investment sector, normalised at EUR 15.0 million – a gain of 284.6%. Net income totalled EUR 13.5 million.
Responsibility for these markets rests with our life branch in Stockholm, which concentrates on risk-oriented business, bancassurance and European financing transactions with Swedish life insurers.
As at 1 January 2004 we assumed a modest reinsurance portfolio of terminated international contracts from a major Finnish life insurer.
Gross premiums from this region climbed to EUR 40.5 million, with 67.6% of this amount deriving from Scandinavian cedents focusing predominantly on Swedish business. Results were highly gratifying.
Hannover Life Re International has operated as a specialist reinsurer of deferred annuity programmes for more than ten years
In the year under review we again completed a number of block assumption transactions. Working in consultation with our clients we prefer those transactions that trigger only a minimal flow of liquidity.
Asia The Asian markets, served by our branches in Kuala Lumpur and Hong Kong, exhibited a dynamic growth momentum in the year under review.
Gross premium income surged by EUR 51.2 million – a rise of 8.9% deriving largely from the markets of Hong Kong, Japan and Malaysia. The claims experience throughout the region was satisfactory; most notably, the mortality risk in Japan improved considerably in the year under review compared to the preceding two years.
Re Advanced Solutions brand, is predominantly written by three companies based in Ireland. They are appropriately capitalised by market standards and can draw on many years of experience as well as considerable expertise.
Yet it was the investigations launched by New York Attorney General Eliot Spitzer and the US stock exchange regulatory agency, the Securities and Exchange Commission (SEC), that grabbed most of the headlines. The practices of a number of financial reinsurers came under close critical scrutiny. In a letter to our clients we explained that we had not been – nor are we – active in any of the potentially problematic areas touched upon by the Attorney General's Office. In this respect our underwriting guidelines satisfy even the most exacting standards.
We are one of the world's three largest providers of traditional financial reinsurance solutions. With our brand name Hannover Re Advanced Solutions we highlight our expertise in developing the individually tailored customer solutions that are the hallmark of our business group. Based on our considerable experience, technical expertise, minimal fluctuation and not least our proven financial business success, we are able to cultivate numerous long-term client relationships in the United States, by far our largest market. We work together with the major brokerage houses, with whom we similarly maintain long-standing business relations.
For the most part we service our business contacts in the United Kingdom through Lloyd's and London-based brokerage firms. In Germany we are represented by E+S Rück. In the rest of Europe we have been able to significantly enhance our awareness level – as was clearly borne out by the growth figures in the year under review – through targeted marketing activities, especially in the countries of Eastern Europe. On the Australian market we still felt a certain caution among ceding companies as an after-effect of the insolvency of a major insurer, in connection with which financial reinsurance had come in for some criticism. In Asia, on the other hand, we made some advances.
The bulk of our financial reinsurance business is written by our Irish companies which can offer strong capitalisation, good ratings and – for many transactions – an accounting regime that has the edge over other countries. However, we also write business in Germany if the framework conditions of a specific transaction suggest this would be appropriate. The integration of Hannover Re (Dublin) Ltd. into our portfolio has clearly benefited our market position.
Program business is a specialty form of primary insurance which concentrates on closely defined, homogeneous portfolios (programs) of niche risks that are not normally offered or adequately covered by traditional insurers. Major functions of the insurance business (from acquisition through the issuing of policies and premium collection to claims settlement) are normally outsourced and handled by specialised managing general agents (MGAs).
A further feature of this business group is the often very high percentage of proportional reinsurance. This is due to the fact that many programs come into being through a reinsurer's relations with an MGA and the reinsurer itself wishes to write a large portion of the business – although it is not licensed to transact primary insurance.
Following the successful rehabilitation of Clarendon's portfolio and the restructuring activities carried out in recent years, the strategic objective in the year under review was to move forward with our new, so-called underwritingoriented business model. The goal is to generate technical profits independently of fee income by consistently achieving a combined ratio of less than 100% for the entire portfolio even before reinsurance.
The illustration provides a breakdown of Clarendon's total gross written premiums of EUR 2.3 billion by lines of business.
Clarendon will profit from the sustained very hard market climate by renewing profitable programs and entering into new programs. In the year under review new programs were written, inter alia, in the homeowners, workers' compensation, professional indemnity and municipal casualty segments as well as in marine business. Clarendon is supported in its approach by very good financial strength ratings. A.M. Best, the key rating agency for US business, gives Clarendon a rating of "excellent" ("A-").
London-based Inter Hannover enjoyed a satisfactory year overall in its main markets of the United Kingdom, Ireland, Scandinavia, France and Germany. It generated gross premium income of EUR 258.4 million (EUR 275.3 million) and contributed EUR 6.6 million (EUR 8.5 million) to consolidated net income.
Clarendon would have been considerably lower. In this situation, however, the net loss amounted to EUR 90 million and the gross burden even surpassed EUR 300 million. What is more, premiums had to be added for the reinstatement of reinsurance coverage. In the year under review Clarendon consequently posted its first deficit since its acquisition by Hannover Re in 1999.
Clarendon posts disappointing business results due to strains associated with the four hurricanes
Taken together, the companies transacting program business generated gross premiums of EUR 2.1 billion (EUR 2.6 billion) in the year under review, a decline of 20.3%. At constant exchange rates, especially as regards the US dollar against the euro, the reduction would have been significantly less marked at 13.0%. Owing to the large loss posted by Clarendon, the total strain on consolidated net income amounted to EUR 88.5 million, contrasting with a contribution of EUR 42.2 million in the previous year. This corresponded to earnings of EUR -0.73 (EUR 0.39) per share.
Beyond the general conditions described as part of the economic climate, capital markets were characterised by rising stock indices in the USA and steady growth in European equity prices.
The second half of the year saw erratic movements on the foreign exchange markets. The euro appreciated against the US currency to USD 1.3640 by year-end, boosting the annual average exchange rate to USD 1.2474 (USD
We used the modestly positive development of the equity markets to realise profits and reposition ourselves tactically. As at year-end we then slightly scaled back the weighting of our stock portfolio.
In the year under review we grew our total portfolio of self-managed assets (i.e. excluding funds held by ceding companies) by 9.8% to EUR 15.8 billion (EUR 14.4 billion). This was attributable to a strong cash flow from our reinsurance business despite the hurricane season. Had it not been for the inhibiting effect of the US dollar's downward slide, the volume of our assets would have increased by as much as 13.3% to EUR 16.3 billion.
Within the scope of our asset/liability management activities, the allocation of investments by currency is guided by the development of underwriting items on the liabilities side of the balance sheet. This ensures extensive currency matching of assets and liabilities, thereby keeping earnings-affecting currency fluctuations within manageable bounds. As at year-end 39.4% of our asset portfolio was held in US dollars, 43.3% in euros and 6.8% in pounds sterling.
An amount of EUR 283.2 million was invested in alternative investments, including for example private equity funds and emerging market funds. The fair value of the portfolio showed modest growth.
We made the most of opportunities on the bond and equity markets to realise profits. Total profits on disposals of EUR 217.6 million were generated in the year under review. This contrasted with realised losses on disposals of EUR 56.4 million. The positive balance of EUR 161.2 million thus improved slightly on the previous year's figure of EUR 140.7 million. The lower write-downs on investments of EUR 24.7 million (EUR 99.3 million) – attributable not least to the moderately upbeat trend on equity markets
Our internal risk reporting consists primarily of standard and ad hoc reports that are made available to decision-makers within a central risk information system on a periodic basis or, where necessary, immediately. Constant monitoring of
Management report risk report and the high quality of our asset portfolio – had a clearly favourable impact on the investment performance.
Our business consists of the systematic acceptance of underwriting risks. In our understanding, the concept of risk has both positive and negative connotations (opportunities and dangers ). We assume our business partners' risks on the basis of advanced methods and procedures,
Global risks derive, inter alia, from: • developments in legislation and court practice, including questions of liability,
Risks of this type can be reduced only to a limited extent, nor can they necessarily be avoided because they are beyond our direct sphere of influence. Our risk management measures must therefore ensure that unfavourable developments, in particular, are identified as early as possible and appropriate actions taken. We counter these potential risks, inter alia, by means of the following measures: • Diversification of our portfolio into four largely autonomous business groups. In this way we reduce the capital adequacy otherwise required in property and casualty reinsurance by altogether around 50%. At the same time we achieve optimal risk spreading.
• Constant monitoring of claims trends (e.g. electromagnetic fields, toxic mould, silica, biotechnology, pharmaceutical risks as well as analyses of claims and major losses). Our underwriting policy is regularly adjusted on the basis of these analyses, e.g. through the use of appropriate contractual exclusions or through technical and geographical diversification of the portfolio.
One of the tools used to monitor the risk of losses exceeding premiums in property and casualty reinsurance is tracking of the combined ratio over time (both inclusive and exclusive of catastrophe losses).
Combined and catastrophe loss ratio * Based on figures reported in accordance with the German Commercial Code (HGB) ** 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 premiums earned
The loss reserves in property and casualty reinsurance are determined by specially trained insurance actuaries at Hannover Re. Their calculations are also regularly checked by external actuaries and auditors. In addition to the losses reported to us by our clients, we establish additional reserves where necessary on the basis of our own claims investigations. Furthermore, we constitute a so-called IBNR (incurred but not reported ) reserve for claims that have probably already occurred but have not yet been reported to us. The latter, which are especially relevant in the liability lines, are calculated using recognised actuarial methods. The IBNR reserve established by the Hannover Re Group amounted to EUR 1,781.3 million in the year under review. It is calculated according to a breakdown into risk categories and regions. The anticipated ultimate loss ratios are determined in altogether 53 subsegments with the aid of statistical run-off triangles and actuarial methods. Asbestos- and pollution-related claims constitute a special issue in IBNR reserving. In this area years or sometimes even decades may elapse between causation of the loss and reporting of the claim. Hannover Re's exposure to asbestos-related claims and pollution damage is relatively slight. In view of the increased risks associated with these claims, we nevertheless maintained our reserves on a high level. The ratio of our additional reserves to the reported reserves increased by more than 20%. The relative level of these reserves is measured using the so-called "survival ratio". This ratio expresses how many years the reserves would cover if the average level of paid claims over the past three years were to continue. As at the end of the year under review our survival ratio stood at
Retrocession is another key tool for risk limitation. The business that we accept is not always fully retained, but instead portions are retroceded as necessary. Assumed risks are examined in order to determine the extent to which they spread the overall risk in the portfolio in question. The levels of retained premiums are determined on this basis and our retrocession arrangements structured accordingly. It is therefore particularly important to carefully select retrocession partners in light of credit considerations. Our Security Committee classifies the reinsurers acceptable to the Hannover Re Group with binding effect. 94.4% of our retrocessionaires have a so-called investment grade rating (AAA to BBB), and 88.8% thereof are rated "A" or better. The average default rate over the past three years was 0.7%. Less than 8% of our accounts receivable from reinsurance business were older than 90 days as at the balance sheet date.
45.7% of our receivables from reinsurance business are secured by deposits or letters of credit. What is more, for the majority of our retrocessionaires we also function as reinsurer, meaning that in principle receivables can potentially be set off against our own liabilities. Since 2001 we have – as an additional step – consistently reduced the level of receivables by altogether 38.4%.
Receivables due from reinsurers split by external rating classes in percent
• linking and matching of these two subsegments through asset/liability management.
• It must be ensured that the Hannover Re Group is liquid and solvent at all times.
Listed equities (direct holdings and investment funds) At most 17.5% 7.0%
The following tables illustrate the possible effects of price, default and liquidity risks as well as risks from fluctuations in payment flows to which the company – subject to the assumptions set out below – is exposed as at the balance sheet date.
Scenarios for changes in the fair value of our securities as at the balance sheet date
Portfolio Scenario Portfolio change based on fair value in EUR million * Exchange-rate fluctuations of +/-10% against the euro
Operational risks are generally defined as the risk of losses occurring because of
The availability of applications, protection of confidentiality and integrity of its data are of vital importance to Hannover Re. The global sharing of information, increasingly via e-mail, also exposes us to attack from computer viruses. We invest systematically in the security and availability of our information technology in order to maintain and enhance the current high level of security. For example, the existing contingency and disaster recovery plans are presently being updated and tested under real conditions. Group-wide coordination is the responsibility of the Corporate Information Security Officer appointed in the year under review.
The Group employed 2,035 (1,972) staff in 18 countries as at 31 December 2004, including 826 (789) working for the Hannover Re Group in Germany.
All in all, we do not currently see any indications of developments that could significantly impact Hannover Re's assets, financial position or net income. No risks can be discerned that could jeopardise the continued existence of the company.
• preparing managerial staff for their tasks and equipping them with the necessary skills,
To this end our Personnel Development team provides a range of development tools that are used by management and employees in consultation with personnel advisors and developers. Needless to say, the personnel development tools employed by the Hannover Re Group are constantly reviewed and regularly expanded and optimised according to company and market requirements.
Having successfully implemented specialist software for, inter alia, salary accounting and applicant management some time ago, we shall in future apply such technology to the area of personnel development, too. Central data input in this module will enable us – while maintaining the greatest possible objectivity – to bring together the various personnel development tools and obtain a comprehensive overview of employee skills. This systematic identification of potential junior managers within the company facilitates structured, fair and efficient successor planning.
Our staff evaluate their employer: • Does my company recognise my individual performance?
Germany's most popular employers was based, in part, on the findings of the employee survey with regard to quality criteria such as credibility, respect, fairness, pride in one's work and company as well as team orientation; the results of this anonymous survey accounted for two-thirds of the total score. The rating also included a so-called "culture audit", in which the programmes, concepts and activities that make up our personnel development work were evaluated. Hannover Re was one of the few companies to participate in this study by way of a comprehensive survey, in which a response rate of 75.6% was achieved. Our Group received an impressive mark from its workforce: 92% of respondents rated their company as a very good employer, nine out of ten staff are proud to tell others that they work here and a further 90% closely identify with the company: today, they would again choose to work for Hannover Re and would recommend the company as an employer to a good friend.
The Group Performance Bonus (GPB) enables not only the Executive Board and senior management but also – for the first time – a significantly extended group of staff to participate to a greater extent than before in the company's success and profit from the favourable performance of the Hannover Re Group. For this purpose a new variable component was introduced that allows the annual salary to be reduced by a maximum of 0.85 monthly salary payments and increased by a maximum of 1.7 monthly salary payments. The benchmark used in the calculation is the earnings per share – and hence the performance of the entire Group.
In the year just-ended our staff again pursued their company's ambitious goals with exceptional dedication and to a considerable extent achieved these objectives. We would like to thank all our staff as well as the employee council and the senior management committee most sincerely for their efforts.
As far as monetary policy is concerned, the US Federal Reserve Board is likely to further tighten the reins. The interest rate level still appears to be very low in view of the cyclical risks. Furthermore, a more restrictive fiscal policy will probably become the reality in China. In Euroland, however, pressure on the European Central
Bank to postpone the turnaround in interest rates is growing as economic activity flattens out.
All in all, the world economy is expected to experience a slowdown in 2005, although this is not tantamount to a downturn. Growth in domestic demand and capital spending, including in the hitherto disappointing Eurozone, will be of critical importance. The situation here will be complicated by the fact that as energy costs increase real incomes are slow to rise, a state of affairs that is hardly likely to really drive consumption.
Private consumption also promises a modest revival. Overall, though, growth is likely to remain on the weak side.
In the countries of Northern Europe, too, the current year promises to develop favourably. It is our assumption that primary insurance rates in the United Kingdom will come under pressure and conditions – especially in property business – will gradually deteriorate. The reinsurance market will be impacted accordingly.
Treaty renewals in the Asian markets take place predominantly as at 1 April. An exception here is Taiwan, where most treaties were renegotiated as at 1 January. Rates on the original market here deteriorated. We responded by further scaling back our acceptances – especially proportional covers – in this market. Rates and conditions for catastrophe business in Japan are likely to improve for windstorm risks, while they are expected to remain stable for earthquake risks. All in all, reinsurers continue to enjoy a gratifying business climate.
Overall, despite a certain tendency towards softer markets, property and casualty reinsurance should continue to fare well in the year under review. Premium income is forecast to rise. Provided the burden of major losses does not exceed the multi-year average of around 5% of net premiums, we are looking forward to a very healthy profit contribution well in excess of the previous year.
The European bancassurance sector offers outstanding potential; we traditionally concentrate on Romance-speaking markets, although our activities have now been extended to cover the Scandinavian countries and some markets in Southeast Europe. To a growing extent we are supporting moves by Northern European insurance groups to enter the Baltic markets, and we therefore expect our business in Eastern Europe to expand sharply in the coming years.
We are seeking to further expand the good market position that we have now attained in
Increased pace of growth on the German life and health reinsurance market
South Africa, principally by focusing on conventional individual life business. In the Asia-Pacific region the most attractive growth opportunities are offered by Malaysia, Thailand and Japan. Bancassurance continues to grow in Japan: as part of extensive market deregulation banks are progressively being permitted to market life and annuity products. This process, which will primarily benefit the Japanese subsidiaries of foreign life insurers, is to be completed by 2007. Attractive business opportunities are also opening up for reinsurers in this context.
We are systematically moving forward with the licensing procedure for a branch office in China. Based on close, trusting contacts with the
Major trends in financial reinsurance are expected to be sustained in 2005. Most notably, clients will have to devote time to their preparations for the changeover to IFRS accounting standards, and increased volatility of results should cause demand for financial reinsurance products to rise. We intend to press ahead with the enlargement of our portfolio outside the USA and to selectively pursue further growth there. Last but not least, it is our view that the hurricanes in the Caribbean and the USA as well as numerous other natural disasters will likely prompt an expansion of catastrophe business within the financial reinsurance segment. Demand for surplus relief covers, on the other hand, will continue to decline.
On the basis of closer cooperation with Managing General Agents (MGAs) who have highly developed expertise in their particular markets, Clarendon should profit from the presently favourable market climate in 2005. What is more, our second company in the USA, ICH, will step up its cooperation with MGAs specialising in smaller niche programs.
Rates for some areas of homeowners' business should increase as a consequence of the hurricanes in the Caribbean and the USA. Generally speaking, though, in all our program business markets it is to be anticipated that rates in the primary sector will come under some pressure in the current year due to noticeably fiercer competition.
We therefore expect to generate somewhat higher net premiums in program business, while gross premium income will remain roughly unchanged. Subject to a normal claims experience and provided there are no unusual movements on capital markets, results should move comfortably back into positive territory in 2005.
The anticipated positive underwriting cash flow will likely lead to further growth in the total asset volume. If interest rates rise slightly investment income should also increase again. We shall maintain our equity allocation on its present level of roughly 7%. In the area of fixed-income securities we continue to attach the utmost importance to the high quality of our portfolio.
Equity securities – available for sale 5.1 1 105 014 925 595 925 595
Reinsurance recoverables on unpaid claims 5.2 4 162 630 4 396 564 4 396 564
Funds held by ceding companies 8 965 291 7 664 683 7 664 683 * On the need to apply the “as-if-pooling” method under US GAAP cf. management report p. 16 and the explanations provided in the “Capital consolidation” section of the Notes.
Loss and loss adjustment expense reserve 5.2 18 246 946 18 703 170 18 703 170
Policy benefits for life and health contracts 5.2 5 253 328 4 001 148 4 001 148
Cumulative foreign currency conversion adjustment, net of deferred taxes (413 259) (352 502) (340 938)
Unrealised gains and losses on investments 5.1 8 669 8 517 8 517
Consolidated net income (after tax) 309 140 354 779 418 321
Changes in tax assets/provisions for taxes 29 470 206 461 213 954
Changes in claims reserves (net) 512 873 2 120 995 2 125 305
Changes in other technical provisions 71 131 (14 187) (14 197)
Cash flow from investing activities (1 745 075) (2 640 386) (2 601 816)
* On the need to apply the “as-if-pooling” method under US GAAP cf. management report p. 16 and the explanations provided in the “Capital consolidation” section of the Notes.
Inflow from capital increase through contribution in kind – 11 402 –
Cash flow from financing activities 1 234 533 461 601 450 199
Cash and cash equivalents at the end of the period 480 810 386 134 386 134
In the following table we have allocated the underwriting assets and liabilities as at 31 December 2004 and 2003 to our business segments after eliminating intergroup transactions across segments.
Reinsurance recoverables on benefit reserves – – 95 004 206 717
Reinsurance recoverables on incurred claims and others 1 492 976 1 817 976 89 731 96 379
Funds held by ceding companies 161 804 176 330 5 706 555 3 257 988
Change in policy benefits for life and health contracts – – – (253 796) (297 797) (297 797)
In the consolidated financial statement it is to some extent necessary to make estimates and assumptions which affect the assets and liabilities shown in the balance sheet, the information on contingent claims and liabilities as at the balance sheet date and the disclosure of income and expenses during the reporting period. Key elements subject to such assumptions and estimates include, for example, the impairment of conditional reinsurance commitments, the impairment of participations in associated companies, the valuation of derivative financial instruments as well as assets and liabilities relating to payments rendered to employees. The actual amounts may diverge from the estimated amounts.
The annual financial statements included in the consolidated financial statement were for the most part drawn up as at 31 December. There is no requirement to compile interim accounts pursuant to ARB 51 Para. 4 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.
Hannover Re is the parent company of the Group. There has been no change in the group of consolidated companies compared to the situation as at 31 December 2003. The consolidated financial statement includes nine German and seventeen foreign companies as well as three foreign consolidated entities. Three German and three foreign companies were consolidated using the equity basis of accounting.
In conformity with Item 7.1.4 of the recommendations of the German Corporate Governance Code as amended on 21 May 2003 the following table also lists major participations in unconsolidated third companies.
Hannover Finance (UK) Limited, Virginia Water/United Kingdom 2) 100.00 GBP 111 093 (9)
Hannover Life Reassurance (UK) Ltd., Virginia Water/United Kingdom 100.00 GBP 36 930 (886)
Hannover Re Sweden Insurance Company Ltd., Stockholm/Sweden 4) 5) 100.00 SEK – (2 804)
Insurance Corporation of Hannover, Itasca/USA 100.0 USD 198 700 5 186
Hannover Reinsurance Group Africa (Pty) Ltd. compiles its own sub-group financial statement, including the following major companies in which it holds the following shares: Compass Insurance Company Ltd.,
Hannover Reinsurance Africa Ltd., Johannesburg/South Africa 2) 100.0 ZAR 375 986 87 543
Hannover Re Real Estate Holdings, Inc. holds a sub-group including the following major companies in which it holds the following shares: Hannover USA Real Estate Corporation,
HANNOVER Finanz GmbH Beteiligungen und Kapitalanlagen, Hannover/Germany 4) 25.0 EUR 76 004 6 575
The consolidated financial data of the Group reported on this basis for the periods prior to the transfer do not necessarily reflect the assets, financial position and net income that would have been reported had it not been for the inclusion of HDI Reinsurance required by US GAAP. For this reason, we expanded the consolidated financial statement for the previous year to include figures based on first-time consolidation of the company as at 1 July 2003 ("commercial treatment"). Effective 8 December 2003 Hannover Re transferred its shares in HDI Reinsurance (Ireland) Ltd. by way of a capital increase for a contribution in kind to Hannover Reinsurance (Ireland) Ltd., which was then renamed Hannover Reinsurance (Dublin) Ltd.
Major participations are accounted "at equity" in cases where Hannover Re does not hold a controlling interest but is able to exercise a significant influence on the operating and financial decisions of the enterprise ("associated company").
All figures reported in the Notes are subject to application of the "as-if-pooling" method.
Where minority interests in the stockholders' equity exist, such interests are reported separately. The minority interest in the result is deducted from the net income in the statement of income and totalled EUR 59,754 thousand in the 2004 financial year (previous year: EUR 55,988 thousand).
On 1 January 2004 Hannover Re opened Hannover Rückversicherung AG Succursale française pour la Réassurance Vie, Paris, as a permanent establishment of Hannover Rückversicherung AG, Hannover. The purpose of the permanent establishment is to underwrite life reinsurance business.
Fixed-income securities classified as held to maturity are valued at purchase cost plus/minus amortised costs. The amortised costs derive from the difference between the nominal value and purchase cost and they are spread over the time to maturity of the fixed-income securities.
Contractual maturities of the fixed-income securities in the held-to-maturity portfolio and availablefor -sale portfolio as at the balance sheet dates of 31 December 2004 and 2003
Due after one through five years 109 952 114 862 114 953 123 384
Due after one through five years 7 348 338 7 377 058 6 212 600 6 280 794
Other foreign government debt securities 20 255 – – 20 255
Government debt securities of EU member states 1 571 258 11 080 2 086 1 580 252
Other foreign government debt securities 212 817 4 006 276 216 547
Other foreign government debt securities 318 673 4 612 458 322 827
The other income includes interest on deposits of EUR 432.5 million (EUR 548.8 million).
Fixed-income securities – held-to-maturity – – 427 288 – – 1 539 41 427 – 470 254
Fixed-income securities – available-for-sale 553 090 245 236 3 536 043 1 250 990 87 930 5 159 204 64 438 222 636 11 119 567
Securitisation of reinsurance risks In the previous year the FASB published the revised version of FIN 46 "Consolidation of Variable
Interest Entities" (FIN 46R) addressing the consolidation of so-called variable interest entities. In cases where consolidation is not required on the basis of a majority voting interest, a variable interest entity is to be consolidated by the primary beneficiary. The primary beneficiary is the party that absorbs a majority of the entity's expected losses and receives a majority of its expected residual returns as a result of holding variable interests. The term "variable interest" is defined in FIN 46R as a "contractual, ownership or other pecuniary interest in an entity that changes with changes in the entity's net asset value".
Within the scope of the portfolio-linked securitisation of certain reinsurance risks under transactions concluded in the years from 1993 to 2002, Hannover Re retroceded business on a proportional basis to an insurance enterprise in the form of a special purpose entity that finances the business via the international capital markets. The company has been in the process of winding up since February 2003. This transaction falls within the scope of applicability of FIN 46R. Since Hannover Re's relations with the company do not constitute variable interests as defined by FIN 46R, the transaction does not give rise to a consolidation requirement.
In the period from March 2002 to December 2004 Hannover Re retroceded natural catastrophe risks (including hurricanes and earthquakes in the USA, windstorms in Europe and earthquakes in Japan) as well as worldwide aviation on a proportional basis to a special purpose entity that financed the business via the international capital markets. The transaction was terminated as per the contractual agreement effective 31 December 2004. Hannover Re's relations with this entity do not constitute variable interests, and there is therefore no consolidation requirement.
Real estate Real estate is divided into real estate for own use and third-party use. Only the real estate in the portfolio which is used to generate income is shown under the investments. Real estate is valued at cost of acquisition less scheduled depreciation.
This entity reported liable equity capital of EUR 168.6 million (EUR 182.4 million) as at 31 December 2004. It is fully secured and thus does not constitute any risk of loss for Hannover Re.
Since November 2000 Hannover Re has held voting equity interests in as well as a share of the capital market bonds issued by a special purpose entity for the securitisation of reinsurance risks in France and Monaco. The total volume of the bonds issued stands at EUR 94.6 million (EUR 102.3 million ). Based on its variable interests, the maximum risk of loss for Hannover Re from this transaction is EUR 14.5 million (EUR 15.7 million). Hannover Re is not the primary beneficiary in this relationship.
Investments Within the scope of asset management activities Hannover Re has participated since 1988 in numerous special purpose entities, which for their part transact certain types of equity and debt capital investments. The variable interests associated with such structures consist largely of participations sold on the capital market to numerous investors.
In the case of property and casualty reinsurance, acquisition costs directly connected with the acquisition or renewal of treaties are deferred and amortised in line with the unearned portion of the premiums. In life and health reinsurance, the capitalised acquisition costs under life and annuity policies with regular premium payments are determined in the light of the period of the contracts, the expected surrenders, the lapse expectancies and the anticipated interest income. In the case of life reinsurance treaties classified as "universal life-type contracts" pursuant to SFAS 97, the capitalised acquisition costs are amortised on the basis of the estimated gross profit margins from the reinsurance treaties, making allowance for the period of the insurance contracts. A discount rate based on the interest for medium-term government bonds was applied to such contracts. In the case of annuity policies with a single premium payment, these values refer to the expected policy period or period of annuity payment.
Technical provisions The loss and loss adjustment expense reserves are in principle calculated on the basis of the information supplied by ceding companies. IBNR reserves are also included. The total amount of the reserves corresponds to the "principle of best estimate" under US GAAP. This estimate is based on past experience and estimations of future development. In one subsegment of financial reinsurance technical provisions were discounted at interest rates of between 2.3% and 8.6%. The interest rates are determined by the contractual agreements. These treaties are discounted over a period of at least four years, which represents the period from inception to expiry of the respective contracts. The discounted amount totals EUR 356.1 million (EUR 697.9 million). As at year-end 2004 the discounted provisions amounted to EUR 2,197.8 million (EUR 2,857.3 million).
Reserve as at 31 December of previous year (gross) 18 703 170 19 919 830
Net reserve as at 1 January of year under review 13 707 280 12 037 083
Reserve as at 31 December of year under review (retro) 4 162 630 4 396 564
The following table shows the net loss reserve (loss and loss adjustment expense reserve) for property and casualty reinsurance in the years 1994 to 2004 as well as the run-off of the reserve. The loss reserves for this business group are thus covered almost in their entirety. The figures for the years 1994 to 1997 have been drawn up in accordance with German accounting standards. The data from 1998 onwards is based upon United States Generally Accepted Accounting Principles (US GAAP).
The development of the euro relative to major foreign currencies is also a significant influencing factor in this context. Most notably, the depreciation of the US dollar against the euro compared to the previous year (-8.2%) led to an appreciable decrease in the loss and loss adjustment expense reserve.
The run-off triangle shows the run-off of the reserve established as at each balance sheet date, this reserve comprising the provisions constituted in each case for the current and preceding occurrence years. The run-off of the reserve for individual occurrence years is not shown in this regard, but rather the run-off of the reserve constituted annually in the balance sheet as at the balance sheet date.
Unearned premiums derive from the deferral of ceded reinsurance premiums. They are geared to the period during which the risk is carried and were established in accordance with the information supplied by ceding companies. In cases where no information was received, the unearned premiums were estimated using suitable methods. Premiums paid for periods subsequent to the date of the balance sheet were deferred from recognition within the statement of income.
Staff The average number of staff at the companies included in the consolidated financial statement of the Hannover Re Group was 2,009 (previous year: 1,970). Of this number, 826 were employed in Germany in the year under review. The majority of staff were employed at the consolidated Group companies abroad.
Reconciliation of the expected expense for income taxes with the actual provision for income taxes
Number of employees (excluding board members) 1 970 1 997 2 011 2 031 2 035 2 009
Effective 1 December 2002 Group employees have an opportunity to accumulate additional old-age provision by way of deferred compensation through membership of HDI Pensionskasse AG. The benefits provided by HDI Pensionskasse AG are guaranteed for its members and their surviving dependants and comprise traditional pension plans with bonus increases as well as unit-linked hybrid annuities.
Projected benefit obligation at the end of the reporting year 62 154 54 581
In the 2004 financial year further subordinated debt in the amount of EUR 750.0 million was again placed through our subsidiary Hannover Finance (Luxembourg) on the European capital markets. The bond was placed predominantly with institutional investors in Europe. The bond was priced at a spread of 163 basis points over the 10-year mid-swap rate and has a final maturity of 20 years. It may be redeemed by Hannover Re after 10 years at the earliest and at each coupon date thereafter. If the bond is not called at the end of the tenth year, the coupon will step up to a floating-rate yield of quarterly Euribor +263 basis points.
EUR 76.7 million at an interest rate of 7.55% and EUR 40.9 million at an interest rate of 7.75% respectively. Surplus debenture is shown as a liability with the amount repayable.
The common stock was strengthened in the previous year through a capital increase for cash. It now amounts to EUR 120,597,134.00. The capital stock is divided into 120,597,134 no-par-value registered shares.
Authorised capital of up to EUR 60,299 thousand is available with a time limit of 31 May 2009. New, no-par-value registered shares may be issued on one or more occasions for contributions in cash or kind. Of the total amount, up to EUR 1,000 thousand may be used to issue employee shares. In addition, conditional capital of up to EUR 48,500 thousand is available. It can be used to grant shares to holders of convertible and warrant bonds and has a time limit of 13 November 2007.
Weighted average of issued shares 120 597 134 116 224 758
The changes in the cumulative comprehensive income decreased by EUR 19.8 million to EUR 2.9 million in the year under review. This reduction was due in large measure to hedge-ineffective changes in the fair value of derivative financial instruments recognised in the statement of income.
By a resolution of the Annual General Meeting of Hannover Rückversicherung AG adopted on 2 June 2004, the company was authorised until 31 October 2004 to acquire treasury stock of up to 10% of the capital stock existing on the date of the resolution. The company did not hold treasury stock within the financial year or as at 31 December 2004.
Balance as at 1 January * The cumulative currency exchange-rate effects from previous years in the amount of EUR 88.4 million hitherto recognised under retained earnings will in future be shown under comprehensive income. The exchange-rate effects in question derive largely from the translation of foreign financial statements into euros.
Present value of future profits on acquired life reinsurance portfolios 9 704 12 098
SFAS 57 defines related parties inter alia as parent companies and subsidiaries, subsidiaries of a common parent company, associated companies, legal entities under the influence of management and the management of the company itself. The following substantial business relationships existed with related parties in the 2004 financial year.
Expenses for the company as a whole 35 233 25 433
HDI Haftpflichtverband der Deutschen Industrie V.a.G. (HDI) indirectly holds a majority interest in the shares of Hannover Re through the subsidiaries Talanx AG and HDI Verwaltungs-Service AG as well as through Zweite HDI Beteiligungsgesellschaft mbH, all based in Hannover.
On 1 March 2004 Hannover Finance (Luxembourg) extended to Hannover Re a loan in the amount of EUR 375.0 million for a term until 24 February 2014 at an interest rate of 6.3%. This loan and the loan taken up in 2001 in the amount of EUR 100.0 million were repaid ahead of schedule in the 2004 financial year together with interest totalling EUR 23.6 million.
Hannover Re has acquired receivables from Clarendon National Insurance Company and Clarendon America in a total amount of USD 18.4 million.
In the 2004 financial year Hannover Re extended time money of EUR 70.2 million to Hannover Re (Dublin) at an interest rate of 1.92%.
In accordance with the Supervisory Board resolution of 11 August 2004 Hannover Re implemented a capital increase of EUR 300.0 million at Hannover Re (Bermuda). The funds were allocated to the subsidiary 's additional paid-in capital.
As at 18 December 2002 Hannover Re and E+S Rück each took up a limited partnership interest of EUR 25.0 million in Hannover Euro Private Equity Partners III GmbH & Co. KG. Effective 1 September 2004 and in accordance with the articles of partnership and the certificates of subscription, HDI Industrie Versicherung AG, CiV Versicherung AG and CiV Lebensversicherung AG were included as additional limited partners. The total volume subscribed by these new partners amounted to EUR 22.0 million. Similarly with effect from 1 September 2004 the previously existing partners took up further limited partnership interests in a nominal amount of EUR 25.0 million each, thereby increasing the company's subscribed capital from EUR 50.0 million to altogether EUR 122.0 million. Due to the changes in the partnership Hannover Re and E+S Rück received capital equalisation payments in the amount of EUR 0.5 million each for the calls on capital already made. In the 2004 financial year both Hannover Re and E+S Rück paid five capitals of EUR 3.4 million each on the total amount subscribed. In addition, two cash distributions of EUR 0.9 million each were made to Hannover Re and E+S Rück in accordance with the articles of partnership.
As at 18 December 2002 Hannover Re and E+S Rück held limited partnership interests of USD 75.0 million and USD 25.0 million respectively in Hannover America Private Equity Partners II GmbH & Co. KG. Effective 1 September 2004 the subscribed capital was increased by USD 150.0 million to USD 250.0 million. Hannover Re increased its capital contribution to USD 217.5 million (87% of the subscribed capital), while E+S Rück raised its contribution to USD 32.5 million (13% of the subscribed capital). Due to the changes in the partnership Hannover Re was obliged to render to E+S Rück a capital equalisation payment in the amount of USD 5.0 million for the capital calls made in the period up to 1 September 2004. In the 2004 financial year Hannover Re paid a further eleven capital calls totalling USD 20.6 million on the amount subscribed, while for E+S Rück the same number of capital calls added up to USD 5.4 million. In addition, four cash distributions of USD 6.5 million were made to Hannover Re and four cash distributions of USD 1.5 million were made to E+S Rück in accordance with the articles of partnership.
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.
Members of the Supervisory Board and Executive Board of Hannover Re as well as of the parent companies and their spouses or registered partners and first-degree relatives hold less than 1% of the issued shares. As at 31 December 2004 the total holding amounted to 0.03% of the issued shares, i.e. 35,882 shares. The total volume of stock appreciation rights held by members of the Executive Board on the basis of the virtual stock option plan amounted to 1.87% of the capital stock as at the balance sheet date. The value of these stock appreciation rights was EUR 2,263 thousand. Further information is provided in section 6.3 "Stock appreciation rights".
André Arrago Buy Call warrant DE 000743 488 8 17.05.2004 100 000 0.28
André Arrago Sell Call warrant DE 000743 488 8 07.12.2004 200 000 0.28
The internal performance criterion is accomplishment of the target performance defined by the Supervisory Board, expressed in terms of the "diluted earnings per share" (EPS) under US GAAP. If the target performance is surpassed or undershot, the provisional basic number of stock appreciation rights initially granted is increased or reduced accordingly to produce the EPS basic number. The external performance criterion is the development of the share price in the allocation year. The benchmark used in this regard is the unweighted "Reactions" World Reinsurance Index. This index encompasses the performance of all listed reinsurers worldwide. Depending upon the outperformance or underperformance of this index, the EPS basic number is increased – albeit by at most 400% of the basic number – or reduced – although by no more than 50% of the EPS basic number.
The maximum option period is ten years, commencing at the end of the year in which the SAR is awarded. Stock appreciation rights expire if they are not exercised by the end of the respective option period. Stock appreciation rights may only be exercised after a vesting period and then only within four exercise periods each year. For 40% of the stock appreciation rights (first tranche) the vesting period is two years, for each additional 20% (tranches two to four) of the stock appreciation rights the vesting period is extended by one year. Each exercise period lasts for ten trading days, in each case commencing on the sixth trading day after the date of publication of the quarterly report of Hannover Rückversicherung AG.
In the event of cancellation of the employment relationship or termination of the employment relationship as a consequence of a termination agreement or a set time limit, a holder of stock appreciation rights is entitled to exercise all such options in the first exercise period thereafter. Stock appreciation rights expire if they are not exercised within this period or if the vesting period has not yet elapsed.
The existing stock appreciation rights are valued on the basis of the Black/Scholes option pricing model.
As at 1 January 2004 the existing number of stock appreciation rights stood at 1,673,499 with an average exercise price of EUR 24.78 each. In accordance with the resolution of the Supervisory Board dated 25 March 2004 a further 904,234 stock appreciation rights were granted at an average exercise price of EUR 24.00 each.
177,313 stock appreciation rights expired in the year under review at an average exercise price of EUR 24.40. The total number of stock appreciation rights existing as at year-end stood at 2,320,283. The average exercise price amounted to EUR 24.48. Of the total number of stock appreciation rights, 477,453 were exercisable at an average exercise price of EUR 25.50.
On this basis provisions were established for the stock appreciation rights existing as at 31 December 2004 in the amounts of EUR 1,653 thousand for the 2003 allocation year, EUR 2,669 thousand for the 2002 allocation year and EUR 3,484 thousand for the 2000 allocation year.
Number of SARs in EUR per SAR in EUR per SARin EUR per SAR
Total options remainingf at 31 December 2 320 283 24.48 1 673 499 24.78 1 097 235 25.50
In connection with the acquisition of Lion Insurance Company, Trenton/USA by Hannover Finance, Inc., Wilmington/USA – a subsidiary of Hannover Re –, a legal dispute exists with the former owners of Lion Insurance Company regarding the release of a portion of the purchase price at that time which is held in trust as well as a commitment to pay further portions of the purchase price and incentive compensation under management contracts and also regarding the release of a trust account that serves as security for liabilities of the previous owners in relation to a particular business segment.
Apart from the aforementioned proceedings, no significant court cases were pending during the year under review or as at the balance sheet date – with the exception of isolated out-of-court proceedings within the scope of ordinary insurance and reinsurance business activities.
The accounting of the "Modified coinsurance" and "Coinsurance funds withheld" reinsurance contracts, under which security deposits are held by the ceding companies and payments rendered on the basis of the income from certain securities of the ceding company, must comply with the standards of SFAS 133 DIG B 36. The derivatives embedded in such host contracts are to be reported separately from the underlying reinsurance arrangements at fair value.
A small number of treaties in life and health reinsurance meet criteria which require the application of SFAS 133 DIG B 36. Under these treaties the interest-rate risk elements are clearly and closely linked with the underlying reinsurance arrangements. Embedded derivatives consequently result solely from the credit risk of the underlying securities portfolio.
Hannover Re uses derivative financial instruments as a tool to control interest rate risks and market price risks as well as to some extent currency exposures arising out of the use of financial instruments. Derivative financial instruments are used within the Hannover Re Group solely for hedging purposes.
Fair value hedges In the case of a fair value hedge, the results of the fair valuation of the derivatives and the corresponding underlying transactions are recognised (subject to effectiveness) in the statement of income.
The fair value of derivatives used in cash flow hedges totalled -EUR 26.6 million. Derivatives recognised under other liabilities had a fair value of EUR 28.0 million.
Breakdown of nominal amounts of underlying hedged transactions by product type and period to maturity 2004 Figures in EUR thousand 1 to 5 years 6 to 10 years Total
Operating leasing contracts produced expenditures of EUR 8,092 thousand (EUR 5,563 thousand) in the 2004 financial year.
Rented property Hannover Re Real Estate Holdings rents out real estate in Florida; the period of the rental contracts ranges from three to ten years. Non-cancellable contracts will produce the income shown below in subsequent years: Rental income totalled EUR 14,330 thousand (EUR 15,265 thousand) in the 2004 financial year.
Key exchange rates 1 EUR corresponds to: Mean rate of exchange on the balance sheet date
We have audited the consolidated financial statements, comprising the balance sheet, the income statement and the statements of changes in shareholders' equity and cash flows as well as the notes to the financial statements prepared by Hannover Rückversicherung AG for the business year from 1 January to 31 December 2004. The preparation and the content of the consolidated financial statements in accordance with Accounting Principles Generally Accepted in the United States of America (US GAAP) are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit of the consolidated financial statements in accordance with German auditing regulations 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 it can be assessed with reasonable assurance whether the consolidated financial statements are free of material misstatements. Knowledge of the business activities and the economic and legal environment of the Group and evaluations of possible misstatements are taken into account in the determination of audit procedures. The evidence supporting the amounts and disclosures in the consolidated financial statements is examined on a test basis within the framework of the audit. The audit includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements give a true and fair view of the net assets, financial position, results of operations and cash flows of the Group for the business year in accordance with Accounting Principles Generally Accepted in the United States of America.
The Rules of Procedure for the Executive Board were updated and enhanced. The primary reason for the revision was to take account of the enlarged investment volume and to safeguard the flexibility of asset management, inter alia by setting adjusted authority limits. As part of the preparations for the Annual General Meeting, the Supervisory Board considered, amongst other things, an increase in authorised capital and a modification of the compensation arrangements for the Supervisory Board. By linking the variable compensation of the Supervisory Board to the earnings before interest and taxes (EBIT), a benchmark was proposed to the Annual General Meeting that for practical purposes – in contrast to the dividend payment hitherto used as a reference – is largely independent of resolutions adopted by the Supervisory Board. The Supervisory Board again devoted considerable attention to the issue of Corporate Governance. Details of the Supervisory Board's activities in this connection are provided in the Corporate Governance report printed in this annual report and the Declaration of conformity pursuant to § 161 Stock Corporation Act (AktG).
KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft (KPMG DTG), Hannover, was mandated to audit the consolidated financial statement and the Executive Board's report for the Hannover Re Group in accordance with United States Generally Accepted Accounting Principles (US GAAP). KPMG DTG issued an unqualified audit certificate. The Balance Sheet Committee discussed the financial statement and Executive Board's report at a meeting attended by the auditors. The auditors' report was distributed to all members of the Supervisory Board and scrutinised in detail – with the participation of the auditors – at the Supervisory Board meeting held to consider the annual results.
The report on the company's relations with affiliated companies drawn up by the Executive Board of Hannover Re has likewise been examined by KPMG DTG which has given the following unqualified audit certificate: "Having audited the report in accordance with our professional duties, we confirm that 1. its factual details are correct; 2. in the case of the transactions detailed in the report, the expenditure of the company was not unreasonably high."
• Up-to-date information was also provided on the Web and through press releases and newsletters.
Supervisory Board has thereby avoided any possible reproach to the effect that it is in a position to determine its own compensation (since by law it participates in the formation of a decision on the dividend distribution).
Continuing optimisation of our reporting processes also enabled us in 2004 to meet for the first time the publication deadlines for the annual report and the interim reports (Code Item 7.1.2, Sentence 2). The advances made in the area of Corporate Governance are also evident in the "Declaration of conformity pursuant to § 161 Stock Corporation Act (AktG) regarding compliance with the German Corporate Governance Code" submitted by the Executive Board and the Supervisory Board. While there were still three divergences in the previous year, the company now fails to comply with the recommendations of the Code in only one respect (Individualised specification of compensation received by the Executive Board and Supervisory Board) (Code Items 4.2.4 Sentence 2 and 5.4.5
The required disclosure regarding the recommendations of the German Corporate Governance Code that have still to be implemented by Hannover Re is provided in the following declaration of conformity.
Individualised specification of compensation received by the Executive Board and Supervisory Board (Code Items 4.2.4 Sentence 2 and 5.4.5 Para. 3, Sentence 1)
International Insurance Company of Hannover Ltd. 1st Floor L’ Avenir Opladen Way Bracknell Berkshire RG12 OPE
South Africa Compass Insurance Company Ltd. P. O. Box 37226 Birnam Park, 2015 www.compass.co.za Managing Director: Margaret Louw
Spain HR Hannover Re Correduría de Reaseguros, S.A. Paseo del General Martínez Campos 46 28010 Madrid
Sweden Hannover Rückversicherung AG Tyskland filial Hantverkargatan 25 P. O. Box 22085 10422 Stockholm
USA Clarendon Insurance Group, Inc. Seven Times Square, 36th and 37th Floor New York, NY 10036
Hannover Re Advanced Solutions U.S. Representative Office 500 Park Blvd., 13th Floor, Suite 1350 Itasca, Illinois 60143
Cedent: direct insurer or reinsurer which passes on (also: cedes) shares of its insured or reinsured risks to a reinsurer in exchange for premium.
Due diligence: activity generally performed as part of a capital market transaction or in the case of mergers and acquisitions, covering inter alia an examination of the financial, legal and tax situation.
Leader: if several (re-)insurers participate in a contract, one company assumes the role of leader. The policyholder deals exclusively with this lead company. The lead (re-) insurer normally carries a higher percentage of the risk for own account.
Mark-to-market valuation: the evaluation of financial instruments to reflect current market value or ➞ fair value.
Other securities, available-for-sale: securities that are not classified as "trading" or "held-to-maturity"; these securities can be disposed of at any time and are reported at their market value at the balance sheet date. Changes in market value do not affect the statement of income.
Portfolio: a) all risks assumed by an insurer or reinsurer in a defined sub-segment (e.g. line of business, country) or in their entirety; b) group of investments defined according to specific criteria.
Since we strive every year to optimise our annual report we would be very pleased to hear your views. We would therefore ask you to return the feedback sheet by fax (+49/5 11/56 04-16 48) or complete it online at www.hannover-re.com/media center/publications
Photographs: Corbis: Pages 24/25, 34/35, 48/49 | Gerry O'Leary, Dublin: Pages 42/43 | Zippo, Hamburg: Pages 1, 6/7 |