Hannover Congress Centrum Theodor-Heuss-Platz 1-3 30175 Hannover, Germany 27 May 2003 Interim Report 1/2003 27 August 2003 Interim Report 2/2003 26 November 2003 Interim Report 3/2003 29 March 2004 Press conference on the annual results 2003 30 March 2004 DVFA Analysts’ meeting, Frankfurt 30 March 2004 Analysts’ meeting, London 17 May 2004 Interim Report 1/2004 2 June 2004 Annual General Meeting Beginning 10:30 a.m.
Combined ratio (property and casualty reinsurance) 96.3% 116.5% 107.8% 111.1% 108.1%
Value of in-force business (life/health) 1 206.0 15.1% 1 048.0 874.0 609.0 468.0
The 2002 financial year was as difficult as it was successful for your company. As you are aware, the burden resulting from the terrible terrorist attacks of 11 September 2001 in New York and Washington was considerable. Indeed, it was only thanks to our strategy of diversification that we were one of the few reinsurers in the world to close 2001 without posting a loss. I am all the more pleased to report that in 2002 we were able to fully resume our successful course and even surpass the results of recent years. We increased our gross premium income by 8.3% and – despite the exceptionally adverse trend on capital markets – generated an excellent result.
In property and casualty reinsurance the market upturn that was already emerging before the attacks in the USA gathered considerably stronger momentum thereafter. As early as the first treaty renewal negotiations in the autumn of 2001 we were able to benefit from significant market hardening and profitably enlarged our premium volume. In subsequent renewal phases during the year under review we achieved markedly better rates and conditions in virtually all countries and lines of business. Given this upswing in the market cycle, your company's strategy is to boost profits through systematic expansion of premium volume and market shares. In the year under review we were able to pursue this strategy with exceptional success.
In view of the extremely unfavourable conditions, especially on the German stock market, the Hannover Re share held up very well in relative terms. It reached its high for the year of EUR 28.30 on 21 March, but was then dragged down by the collapse of the markets in the autumn: it fell to its lowest level of the year – EUR 15.90 – on 9 October. By year-end, however, it had already recovered appreciably to EUR 24.30. This performance is significantly better than that of all the standard indices. Our preferred benchmark is the "Reactions " World Reinsurance Index, which includes the shares of all listed reinsurers worldwide. Your company's share outperformed this index by almost 24%, an achievement that we note with pride.
We expect 2003 to be a successful year, assuming that the capital markets at least show a modest recovery and provided our burden of catastrophe losses in property and casualty reinsurance remains within the bounds of multi-year expectations.
On behalf of my fellow members of the Executive Board and myself, I would like to thank you, our shareholders, for your confidence in Hannover Re. Our goal is to live up to your trust and to consistently enhance the value of your company.
Wolf-Dieter Baumgartl Chairman of the Executive Board Hannover of HDI Haftpflichtverband der Chairman Deutschen Industrie V.a.G.
Dr. Paul Wieandt Chairman of the Executive Board Hof/Saale of SchmidtBank AG Deputy Chairman
Dr. Horst Dietz Region Manager North and Southeast Asia Singapore of ABB Asea Brown Boveri AG (until 24 May 2002)
Bengt Pihl Member of the Executive Board Mannheim of ABB AG (from 24 May 2002) (until 31 December 2002)
Property and Casualty Treaty Reinsurance Germany, Austria, Switzerland and Italy; Credit and Bonds worldwide; Claims Management; Legal Department
tral banks repeatedly cut interest rates to record lows by year-end of 1.25% in the USA and 2.75% in Europe – albeit without any visible success. The degree of uncertainty was and still is too great.
Due to the often high equity allocation of their investment portfolios, insurers and reinsurers saw their shares particularly hard hit by the downward trend on the financial markets. The CDax for insurance stocks was down 60% at year-end, clearly the worst performer of all the benchmark indices. Although the Dax closed 2002 around 9% up at the end of the third quar-
Performance of the Hannover Re share compared with standard benchmark indices 2 Ja nuary 1Fe bru ary 1March 2 A pril 2 M ay 2002 3 Ju ne 2 1Ju ly 2002 1August 2002 2 Sep te mber 1Octo ber 1Nove mber 2 D ec em ber 2 Ja nuary 3 Fe bru ary 3 M arch
The Hannover Re share as a safe haven in troubled stock market times …
As the benchmark for our internal measurement of our share's performance we do not use the standard indices, but rather the unweighted "Reactions" World Reinsurance Index*.
The Hannover Re share in comparison with the unweighted „Reactions“ World Reinsurance Index *The unweighted „Reactions“ World Reinsurance Index combines all listed reinsurers worldwide. Our strategic objective is to achieve an increase in the share price which on a three-year moving average surpasses the performance of this benchmark.
Fe bru ary 1March 2 A pril 2 M ay 2002 3 Ju ne 2 1Ju ly 2002 1August 2002 2 Sep te mber 1Octo ber 1Nove mber 2 D ec em ber 2 Ja nuary 3 Fe bru ary 3 M arch
We use a system of management ratios to steer and document the sustained growth in our company's value creation. Our strategic objective is to increase the operating profit (EBIT) and the earnings per share by a double-digit percentage margin each year. Only in the exceptional 2001 year were we unable to achieve this goal because of the World Trade Center event. In the year under review, however – despite disappointing capital markets – we were able to generate earnings per share of EUR 2.75 and thus achieve our strategic goal on the basis of the previous year's target. With the exception of 2001, we have achieved this aim in every year since our company was first listed in 1994.
In the financial year just-ended we once more stepped up our Investor Relations activities. Our aim here is not only to raise awareness of our share and generate demand, but also – and especially in troubled stock market times – to provide international investors, private shareholders, and financial analysts with transparent, up-to-date and regular information about the positive growth of our business. We attend stocks forums and investor fairs organised by various banks and shareholder associations and we maintain direct contact with institutional investors. In the year under review we held almost 50 individual meetings at our offices in Hannover and presented our company at more than 30 international roadshows and company conferences.
Our current targets include not only the traditional financial marketplaces of Frankfurt, London and New York/Boston, where we are present on a regular basis, but also Switzerland, Scandinavia, the Benelux countries, France and Italy.
In addition, we promoted our share on marketing trips to the West Coast of the USA and Australia. Last but not least, we hold telephone conferences with analysts and investors to discuss significant new developments as well as in connection with the release of each quarterly report. Particularly during difficult times, we attach special importance to intensive, proactive Investor Relations.
The orientation of our Investor Relations activities is guided primarily by our shareholding structure. The information required in this regard is obtained from regular evaluations of our stock ledger. The breakdown of the shareholding structure into natural persons (private investors) and corporate entities (institutional investors) of course reveals a predominance of institutional investors. Although the number of Hannover Re shareholders rose by roughly 3,000 to altogether more than 25,000, the breakdown compared to the previous year remained virtually identical.
On 14 November 2002 at the first Extraordinary General Meeting convened specially for this purpose our shareholders approved an increase in the authorised capital as well as the possibility of using other capital market options as and when necessary. Additionally, a framework was created for the issue of convertible and warrant bonds, dividend bonds and participation rights. This authorisation empowers the Executive Board together with the Supervisory Board to move quickly and flexibly on the capital market. In view of the highly favourable prospects currently existing in reinsurance business, this amendment to the articles of association will enable us to participate to the fullest extent in the market upturn.
Under § 161 of the German Stock Corporation Act listed companies are required from 31 December 2002 onwards to submit an annual declaration of conformity with the German Corporate-Governance Code. We have therefore enlarged our Investor Relations Internet pages to include a section on Corporate Governance. In addition to the declaration of conformity, you will find there further information on our Corporate Governance commitment and measures as well as notifiable stock transactions ("Directors' Dealings" pursuant to § 15a WpHG Securities Trading Law).
The Internet has established itself as a state-of-the-art information tool for listed companies. We have set up extensive Investor Relations webpages in order to enable you to access the latest information about Hannover Re. Our annual financial statements are available here in digital formats, including an interactive HTML report. We additionally provide video clips of our analyst conferences and use online telephone conferences to convey information. Our Internet site also offers complete data on our share, answers to frequently asked questions (FAQs) and an overview of the latest prospects for our company 's development.
With the resegmentation of the Frankfurt Stock Exchange in January 2003 a new index model was launched. "Prime Standard" issuers satisfy transparency criteria that exceed requirements prescribed by German law and are comparable with international standards. Additional requirements include the compilation of quarterly reports, accounting in accordance with international standards (IFRS/IAS or US GAAP), a financial calendar, at least one analyst conference each year as well as ad hoc disclosure and regular reporting in both German and English. As an internationally oriented organisation these standards have already been second nature to us for quite some time, and we are therefore listed in the Prime Standard of the MDax selection index.
We think Hannover Re's investment story remains appealing, due to its low valuation. We also like the company because of its diversification, both in terms of business mix and geographical breakdown of premiums, its good growth prospects, capital management and high transparency.
In the current hard markets, Hannover Re uses the opportunity to increase the comfort level of its reserves from around 60% to 70%, bringing its reserves on the group level, which are built on the basis of US-GAAP accounting (requires at best estimate) in line with reserves of its German subsidiaries, which are required to follow German accounting rules and which require a more conservative reserving.
We continue to believe that while not one of the biggest, Hannover Re is one of the best and cleanest ways to play the reinsurance cycle.
Hannover Re makes a convincing impression by means of high transparency and an experienced management.
Exchange listings: Germany Listed on all German stock exchanges and Xetra; Frankfurt and Hannover in official trading
Share information 1) For previous years' stock split of 15 July 2002 in a ratio of 3 for 1 taken into account 2) On each for the year 2000 fully paid-up share 3) Incl. bonus of EUR 0.08 4) DVFA earnings per share in accordance with German accounting principles
Strategy and self-image those business groups, regions and lines of business which offer the highest returns.
Economic independence: This means for us financing of growth with self-generated profits and avoidance of difficulties that would necessitate additional contributions by shareholders.
Our strategic objectives, principles and action fields are governed by three overriding goals, from which all others are derived: Above-average profitability: For us this means 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 value creation 2. Capital management • The target is an S&P rating of AA (A.M. Best: A+) • Debt before equity in order to keep capital costs as low as possible • Optimal use of equity substitutes (risk securitisation and retrocessions)
3. Share price • Price development surpassing the performance of the unweighted "Reactions" World Reinsurance Index on a moving three-year average. This facilitates - a sustained increase in the value of the shareholders' investment - the lowest possible costs of raising equity
In Germany the economy remained flat in 2002. Although the business climate brightened markedly at the beginning of the year and overall economic output began to gather fresh momentum, a real upswing failed to materialise. Here, too, one reason was the massive plunge in prices on international equity markets. The German Dax stock index, for example, lost 43.9% of its value, the sharpest decline since its launch in 1988. Particularly in the second half of the year the uncertainties surrounding the Iraq conflict as well as the depressed state of public finances and the tax increases planned by the Federal Government cast a cloud over the economic landscape. Exports, on the other hand, again supported business activity in the year under review. Whether or not the current year will see an upturn remains unclear. The present cyclical conditions in Germany do not appear especially stimulating, although favourable impulses should derive from the US economy.
The financial year witnessed again numerous natural catastrophes. Although the total economic losses were considerably higher than in the previous year, expenditure on insured claims held steady at EUR 11.5 billion. With around 700 recorded loss events, the number of natural catastrophes remained on a par with the previous year. Around 500 were attributable exclusively to windstorms and flooding. The most prominent event in this context was the disastrous flooding that hit Europe in August, causing estimated insured losses of EUR 3 billion. Further notable catastrophe loss events included the flooding in Indonesia, the storm "Jeanett" in western and central Europe and a fire at a Kuwaiti oil refinery.
Turmoil on the international financial markets and Iraq conflict hamper economic growth in industrialised nations
Having only achieved a result of EUR 11.1 million in 2001 owing to the terrorist attacks of 11 September, we returned to the profitability of previous years in the year under review. With net income of EUR 267.2 million we achieved the best result in the history of Hannover Re – leaving aside the year 2000, which was influenced by special tax effects. Earnings per share amounted to EUR 2.75.
Life and health reinsurance developed as planned. The reported premium growth was 4.2%. It should be borne in mind here, however, that in our US GAAP financial statements certain premium components – which under German accounting principles would be shown as such – are not recognised (so-called premium deposits). These premium deposits amounted to EUR 255.7 million gross and EUR 115.2 million net.
Financial reinsurance also performed in line with our expectations. The decline of 28.6% in gross premium income was due to extraordinary premium effects in the previous year. The 5.4% decrease in net premiums earned was disproportionately low due to the termination of a retrocession arrangement.
The development of program business was highly gratifying. We boosted gross premiums in this business group by 11.1% or EUR 271.7 million to EUR 2.7 billion. In view of the increased profitability of this business group we also sharply raised the level of retained premiums, which climbed by EUR 357.9 million to EUR 1,030.9 million (+ 53.2%). The Group's retention now stands at 37.8% (previous year: 27.4%).
Ordinary investment income grew by 18.9% to EUR 1.1 billion (EUR 942.0 million). With current yields declining worldwide in the year under review, this rise was primarily due to higher deposit interest income. On account of the difficult state of the capital markets, we took writedowns on investments of EUR 207.0 million; of this amount, EUR 164.6 million was attributable to equities. It is thanks to the scaling back of our equity allocation to less than 6% as at year-end 2002 – continuing a move initiated in 2001 – that these write-downs were not higher. The balance of realised price gains and losses increased compared to the previous year; net investment income fell from EUR 945.7 million to EUR
We conduct operations in altogether four strategic business groups. In addition to the explanatory remarks provided in this management report, the segmental reports show the profit components per business group and contain a breakdown of the key asset and liability items in each group.
virtually unchanged at EUR 57.5 million (EUR 56.1 million); the tax burden in the year under review totalled EUR 131.2 million (EUR 17.5 million ). After deducting the minority interest of EUR 15.0 million (EUR 24.6 million), consolidated net income of EUR 267.2 million (EUR 11.1 million ) was reported. This corresponds to earnings per share of EUR 2.75 (EUR 0.11).
On 15 July 2002 we implemented a 3 for 1 stock split in order to improve the liquidity of our share. In this context, the common stock was increased by EUR 14.4 million through a withdrawal from retained earnings.
Property and casualty reinsurance premium income would have grown by as much as 25.8% had it not been for this effect. The proportion of the total gross premium income attributable to property and casualty reinsurance thus rose to 48.3% (previous year: 42.9%).
Net premiums grew by 17.2% to EUR 3.5 billion; the retention rate at year-end was 62.7%, a slight decline compared to the previous year (67.8%). The profitability of the business written is impressively borne out by the change in the combined ratio. The losses associated with the terrorist attacks of 11 September 2001 should be factored out in order to arrive at a revealing comparison (including the losses from the attacks the decrease would be as much as 19.8 percentage points). Leaving aside this extraordinary burden, the combined ratio fell by 6.4 percentage points.
We enlarged our gross written premiums by an impressive 21.9% to EUR 6.0 billion. In the year under review the euro continued to rise steadily, especially against the US dollar. Gross
Proportion of total premium income attributable to property and casualty reinsurance sharply higher
The use of wind power is playing a growing role in energy policy around the world. The development of installations both on land and offshore is progressing rapidly. The existing technological capabilities can be illustrated by an example from the USA. Cape Cod/ Massachusetts is to be the site of the world’s largest offshore wind park and the first such facility in the United States. From 2005 onwards, 130 wind power installations with a total power output of 468 megawatts will provide energy for around 500,000 households. This corresponds to 75 per cent of the power required by the Cape Cod region.
Worldwide we prefer to write non-proportional business, since the profit margins here are significantly higher than with proportional treaties. In the year under review we were able to further increase the proportion of our property and casualty reinsurance portfolio accounted for by non-proportional treaties to 69.8% across all countries and lines of business.
The balance of catastrophe losses in the first half-year was dominated by a small number of large individual losses. The second half of the year was most notable for damage caused by the flooding in central Europe. Our account, too, was affected by the devastating damage in Italy, the Czech Republic, Austria, and Germany. The total net losses from this natural catastrophe were in the order of EUR 69.7 million. Nevertheless, the burden of catastrophes losses for our company in 2002 was in line with the multi-year average. It totalled EUR 182.0 million for net account. Catastrophe losses thus accounted for 5.2% of net premium income.
We continued to attach the utmost importance to ensuring the high quality of our retrocessionaires in the year under review. As can be seen from the adjacent chart, the vast majority of our retrocession partners are rated "A" or better by Standard & Poor's.
Overall, we are highly satisfied with the 2002 financial year in property and casualty reinsurance. We generated an underwriting profit of EUR 130.8 million (following a loss of EUR 481.3 million in the previous year). For the first time since 1995 we thus achieved a positive underwriting result in property and casualty reinsurance. The situation on the capital markets was an adverse factor in the year under review. Just as other market players throughout the industry, our company had to take write-downs on its equity portfolio. It was only thanks to our comparatively low equity allocation throughout the year – standing at just 5.7% as at year-end – that we fared better than numerous competitors in this respect, too. Overall, we succeeded in generating net income after tax of EUR 154.1 million, a figure EUR 229.7 million higher than in 2001. The earnings per share contributed by the property and casualty reinsurance business group to the consolidated result thus stood at EUR 1.59, following -EUR 0.75 in the previous year.
Insurers experienced an uneven development in motor business. Motor third party liability insurance was characterised by a steadily declining claims frequency, stable average claim costs and higher premiums. In own damage insurance the aforementioned flood and windstorm losses served to push up the loss ratio by 15 percentage points.
For the property insurance industry as a whole, the flood damage of last August produced a gross loss burden in the order of EUR 1.8 billion.
In Germany we concentrate on clients who have positioned themselves as insurers of mass business. Our most important line is motor third party liability insurance, which accounted for 47.0% of our total German premium income and had a loss frequency of roughly 70 ‰ – an all-time low over the course of a year. The growth in premiums outpaced the increase in risks. The average claim in the year under review was only marginally higher than in the previous year. Overall, our motor insurance portfolio is a highly profitable line in both proportional and non-proportional business.
Our personal accident business was again strongly profitable, not least because we were able to stimulate business with our own product developments tailored to specific target groups. Industrial fire insurance, which benefited from the lack of spectacular catastrophe losses, similarly closed with a profit thanks to our selective underwriting policy.
acities to disappear from the market. One major competitor discontinued its business activities, while others took an increasingly critical stance towards German business. This capacity shortage failed, however, to bring about an adequate improvement in reinsurance terms and conditions.
United Kingdom and Ireland In the primary insurance sector appreciable market hardening can be observed in virtually all lines. Only in motor insurance did the trend towards premium increases, which had been sustained for two years, begin to weaken.
We are well-positioned with an "AA" rating and were able to exploit the market situation to our advantage. In the year under review we systematically expanded our property business and benefited from the premium increases that followed in the wake of the World Trade Center attacks. Accounting for 72% of total gross premium income, the property insurance lines are by far the most important for our company in the UK market. In motor insurance, our second most important line, we profited from the restructuring of reinsurance programmes against the backdrop of an extraordinary individual loss in 2001.
France, Benelux In France and the Benelux countries, too, rates and conditions improved markedly in the primary insurance sector in the year under review. This was especially true of industrial fire insurance. On the reinsurance side the situation for providers was even more favourable than in the primary market. Market withdrawals and cutbacks in underwriting volume by a number of competitors also led to capacity shortages.
We were able to profit from this advantageous market climate. We considerably expanded our non-proportional portfolio, a highly gratifying move in light of the favourable rate trend. The dominant line here is property insurance, most notably covers for natural catastrophe risks. The only sizeable loss event recorded in the year under review was the disastrous flooding that affected the south of France in September 2002.
Overall, we were highly satisfied with our reinsurance business in France and the Benelux countries in the year under review.
We rank among the most prominent reinsurers in Italy. Given the environment described above, our underwriting policy remains selective. The significant improvement in market conditions has made it easier for us of late to push through our pricing requirements.
On the claims side our account was affected most notably by the hail and heavy rainfall of August 2002. Overall, though, the development of our Italian business was satisfactory.
Our primary focus in the Scandinavian markets is on the fire and motor lines. Denmark is our most important reinsurance market in northern Europe. In the course of the past year we secured the position of lead reinsurer for the mutual insurance societies and thereby almost doubled our premium income. As a consequence of this volume growth and the regrouping of our portfolio in favour of non-proportional treaties, in the year under review we achieved our best result in Denmark since commencing business in this market. Whilst we are less prominent in the other Nordic markets, our name is nevertheless well established among ceding companies. Premium income from these countries increased slightly and derives predominantly from non-proportional business.
Eastern Europe The insurance market in eastern Europe is increasingly converging with conditions in the rest of Europe, and competition is intensifying.
The most important countries in eastern Europe for our company are those that will be joining the European Union in the foreseeable future (Poland, the Czech Republic, the Slovak Republic, Hungary and Slovenia). Large proportional capacities are characteristic of these markets. The most significant loss event in this part of Europe was the disastrous flooding that affected the Czech Republic in August 2002. This event prompted considerable movement on both the primary and reinsurance markets. Improvements in original conditions could already be observed
The insurance industry can look back on a mixed year with limited natural catastrophe losses but substantial declines in investment income. The most prominent topic, however, was the failure of many insurers to make adequate allocations to their loss reserves during the soft market cycle. Losses caused by asbestos-related claims were a further factor here. In many instances, therefore, insurers found themselves compelled to constitute extensive additional reserves.
In contrast to some of our competitors, we had no need to constitute significant additional reserves for our US business. This was due in part to the fact that – as a general principle – we establish a high level of reserves in the year in which treaties are written. With regard to the World Trade Center losses, a further factor is that the reserves were calculated for every single treaty shortly after the attacks of 11 September. What is more, the bulk of our portfolio consists of non-proportional treaties, for which the full scope of cover has been reserved. Similarly, asbestosrelated claims have impacted our company much less heavily than other market players because Hannover Re only began to write a significant volume of US business relatively recently – namely in the 1980s. Nevertheless, we did make a further slight increase in the relevant reserves.
The market for natural catastrophe reinsurance coverage has hardened steadily since the attacks of 11 September. As a further consequence of these events, some ceding companies turned away from the London Market in favour of the newly established catastrophe reinsurers in Bermuda. We, too, established our own company here in 2001, Hannover Re (Bermuda) Ltd. It writes primarily the middle and upper layers of natural catastrophe reinsurance programmes. This com-
The reinsurance market experienced appreciable hardening in prices and conditions during the 2002 renewal season. However, these improvements are not yet considered adequate by the reinsurers. In South Africa we rank among the three largest reinsurers and are the most prominent writer of non-proportional treaties.
With the exception of the annually occurring tornadoes in the Midwest and southern United States, North American business was spared any sizeable natural catastrophe events. Given the higher retentions run by our clients, the strain on our account from these losses was strictly limited.
Geographical breakdown of property and casualty reinsurance in % of gross premium
Hannover Re one of the three largest reinsurers in South Africa
Nevertheless, these account for a mere 10% of our total portfolio, since the South African market is still composed first and foremost of proportional business.
Latin America Latin American business was overshadowed by the adverse economic conditions in Argentina and Venezuela. The Argentine peso slumped in value, the bankruptcy ratio climbed sharply and private consumption collapsed. This also took its toll on the insurance market, which was faced with substantial premium declines in both commercial and private customer business.
In Korea, too, the market environment changed in our favour, and we were similarly able to enlarge our premium volume. In Taiwan, despite the extraordinarily high exposure to natural hazards, we succeeded in boosting our premium income and enhancing profitability as the market hardened. Hong Kong offers a number of highly attractively priced excess of loss reinsurance programmes, in which we write substantial lines. We thus enlarged our premium volume in this market, too.
Australia, New Zealand The competitive pressure in the Australian insurance market increased sharply following the insolvency of one of the major market leaders. This insolvency exacerbated still further the liability crisis that had already emerged in 2001. This gave rise to dramatic increases in liability premiums, amounting to several hundred percent in the most extreme cases. Appreciable restrictions on coverage, including reductions in the limits of indemnity and far-reaching exclusions, were also observed in some instances.
Result of Latin American business boosted thanks to appreciably better terms and conditions
Both the premium income and the result of our business were considerably higher in the year under review than in 2001.
We need water to drink and use in our daily lives. Fertility and growth could not exist without water. Its potential as an energy source is enormous.
River dams collect water, facilitate its controlled distribution, and frequently also serve as power generators. Many are gigantic structures. The Aswan Dam, for example, is 3.6 kilometres in length and 111 metres high. The lake at the dam covers an expanse ten times that of Lake Constance. The hydroelectric plant can generate 8,000 megawatts of energy. The Three Gorges Dam currently being erected in China will produce more than 18,000 megawatts of power. Yet the future of these enormous structures is uncertain. The side effects, such as the loss of longstanding economic and settlement areas as well as the ecological impacts, are too detrimental.
In the summer of 2002 a "once-in-a-century" flood claimed lives and caused damage in the order of EUR 20 billion in Central Europe. The insurance industry suffered losses of EUR 3 billion. The devastation in China was even greater, where between June and August, 140 million people were affected by flooding and several thousand died by the end of 2002. While the aftermath of these events still lingers in our minds, experts are unable to agree whether we are actually seeing a statistical increase in the number of flood disasters.
Characterised by a shift in demand towards conventional products with guaranteed benefits and a sharp decline in the market value of dividend -bearing securities, the German life insurance market – served by around 120 companies – was a difficult climate in which to operate in 2002.
The German market's hopes of a resounding success with the partial privatisation of the state pension scheme – in the form of the socalled "Riester" pension – were not fulfilled, although in the second half of the year a modest upsurge was observed in this market segment.
By systematically maintaining our fundamental strategic positions, we asserted ourselves well in the year under review in a highly competitive climate. In vitally important insurance markets such as Germany, France, the United Kingdom, Italy, ASEAN and China we now rank among the top three reinsurers, while in Australia and southern Africa we have actually assumed the role of market leader. In the USA we consider ourselves a leading specialty provider for the reinsurance of already existing complete life and annuity portfolios.
In organisational terms, we are spread across a global network of seven "business centers " in which Hannover Life Re International – the life reinsurance division of Hannover Re – fulfils a central coordinating role.
The breakdown of the portfolio structure into the typical product lines of life, annuity, health and personal accident shifted further in favour of the preferred lines of life and annuity, which in sum now account for more than 68% of our total premium income.
Hannover Life Re's underwriting results are affected by a number of factors, including mortality, morbidity, persistency of the in-force business and investment income. In the first place, the observed claims experience for the assumed risks plays a role. In this context, we noted a certain deterioration in the mortality risk for major risks in some countries, such as Japan.
Gross premiums incl. premium deposits 2 728 2 660 2 495 2 220
Earnings per share in EUR* 0.31 0.24 0.61 0.25 *For previous years stock split of 15 July 2002 in a ratio of 3 for 1 taken into account
As in the previous years, we subjected the retained in-force portfolio of Hannover Life Re to detailed actuarial analysis in order to determine the present value of future technical profit flows before taxes – the so-called "value of inforce business". Compared to the previous year, the value of in-force business showed a gratifying increase of 15% to reach EUR 1.2 billion1.
Sensitivity analyses reveal the influence of changes in the discount rate and exchange rates on the value of in-force business. It should be noted that our portfolio is highly robust due to the relatively short amortisation period of the financing transactions. For the business center Hannover Life Re International, for example, the value of in-force business varies by around EUR -27 million with a change of +/- 100 basis points in the interest rate, while a change of +/- 5% in foreign exchange rates against the euro produces variation of roughly EUR 12 million. We have constituted a valuation reserve of approximately EUR 50 million for future risks arising out of an increase in interest rates.
If we compare the calculated value of the in-force business, which has been audited by highly reputed firms of external actuaries, with the deferred acquisition costs (DAC) determined
South African rand 15.50 16.25 1 In the case of participations < 100% the full amount is indicated
Great Britain With our clear strategic concentration on risk-oriented life and critical illness business as well as simple annuity products sold through banks (bancassurance), we have now advanced to become a recognised force in the UK reinsurance market. We boosted gross premiums by 17% to GBP 283.7 million (EUR 451.8 million), while net premiums similarly grew by 17% to GBP 270.2 million (EUR 430.4 million).
The underwriting performance based on the mortality and persistency risk remained favourable. Thanks to the typical structure of our contracts, which guarantees us interest income on the benefit reserves, we were not unduly impacted by the turmoil on the financial markets.
Expansion of our position in Germany as leading reinsurer for financing transactions
The client base for our life and health reinsurance activities in North America is composed primarily of small and mid-sized US life insurers with good ratings, for whom we provide strategic support in the optimal allocation of capital and liquidity. In this context, by way of retrocessions we are able to apply the know-how available at our Irish life operation on a targeted basis to the benefit of our clients.
We concentrate our coverage on individual life and annuity risks. In the year under review, as in previous years, we did not participate in derivative risk components in the area of unitlinked annuities. In contrast to many of our competitors, we adopted a highly restrictive approach to the writing of long-term US term life insurance policies, which under the regulator's so-called "Triple-X regulations" trigger high reserving requirements.
Thanks to strict cost management, enabling us to boast the lowest expense ratio of all reinsurers operating in Australia, we were pleased to see a further improvement in profitability.
dollar and the euro. Consequently, our portfolio closed with only a slight profit.
Fire is not only a source of light and heat. It also provides energy and enables steam engines and motors to work – it has given us mobility.
In this context it is the Australian continent, considered the most arid on earth, that is most often mentioned in the media. In late 2002, the area around Sydney was the scene of desperate efforts to control the worst fires in 30 years. In early 2003, the capital city of Canberra fell victim to the blazes. The damage in euros ran into the triple-digit millions. In Central Australia approximately 150,000 square kilometres of bushland have been destroyed since September 2002. By way of comparison, it should be remembered that England covers a total area of roughly 130,000 square kilometres.
Yet fire also repeatedly costs lives and causes property damage on an enormous scale.
Developments on the reinsurance markets paralleled events on the insurance side. Particularly in the USA, substantial premium increases were recorded. They were triggered by the losses resulting from the terrorist attacks on the World Trade Center, with corresponding implications for the reinsurance of exposures in property business. The surprising scale of the need for additional reserves in almost all areas of liability business was also of great concern to reinsurers. What is more, there was another rise in the number of liability claims relating to asbestos-related illnesses. Against the backdrop of these events the rating agencies increasingly began to question the sustained profitability of this business. The entire process left traditional reinsurers no alternative but to implement substantial rate increases and improvements in terms and conditions, hence boosting demand for financial reinsurance solutions.
Due to a number of flagrant accounting scandals, the credibility and accuracy of the information contained in financial statements were repeatedly at the centre of public debate. In this context supervisory authorities are discussing new directives aimed at preventing misuse of financial reinsurance arrangements without curtailing the advantages offered by such products for insurers and reinsurers.
Most countries do not as yet have explicit directives regulating financial reinsurance. This has tended to deter potential clients from taking out such contracts due to the uncertainties surrounding balance sheet disclosure. In a number failure by many insurers to constitute adequate reserves. The strong growth in premium volumes led to a squeeze on solvency margins, especially for mid-sized and smaller insurers. Ratings came under appreciable pressure.
An additional factor was the decline in investment income suffered by insurers and reinsurers across the world. In an otherwise favourable climate for primary insurers this development adversely impacted balance sheets.
Figures in EUR million 2002 2001 2000 1999 * For previous years stock split of 15 July 2002 in a ratio of 3 for 1 taken into account
Preparations are being made for the implementation of International Accounting Standards (IAS) in Europe in 2005. Although not all the details of these standards have yet been finalised, considerably higher volatility of results is to be anticipated than was the case with the currently applicable local standards. This, in turn, is likely to generate stronger demand for reinsurance concepts designed to reduce such volatility.
In the environment described above Hannover Re Advanced Solutions, our well-established brand for financial reinsurance products, has positioned itself among the world’s three largest providers. It continues to enjoy a high level of brand recognition and can draw upon many years of expertise. Our underwriting policy was and remains conservative in the assessment of risks and it restricts itself to the simpler forms of financial reinsurance, such as large-volume quota share reinsurance treaties and multi-year catastrophe excess of loss programmes. We have consciously decided against participating in capital -market-driven transactions, assuming loss reserve portfolios or taking on financing projects. For the most part, Advanced Solutions writes the business out of the International Financial Services Centre in Dublin. The Irish companies are adequately capitalised to meet market requirements, have excellent ratings and can draw on considerable expertise.
Overall, gross written premiums in financial reinsurance declined by 28.6% to EUR 1.2 billion. This decrease was the consequence of extraordinary premium effects in the previous two years. In particular, considerable additional premiums were booked due to experience – based contracts as an after-effect of the losses of 11 September 2001.Net premiums earned in this business group totalled EUR 1.2 billion (previous year: EUR 1.3 billion), while the operating result (EBIT) stood at EUR 47.8 million (EUR 65.7 million). The performance of financial reinsurance business has been gratifyingly favourable. The portfolio is dominated even more heavily than before by contracts that are less prone to volatility. Earnings per share amounted to EUR
As part of these restructuring activities we also implemented organisational changes and significantly enlarged and strengthened the infrastructure. Controlling and auditing tasks were expanded and actuarial monitoring of the business was considerably enhanced.
The quality of the company is also borne out by the fact that A.M. Best, the most significant rating agency with respect to US business, has awarded Clarendon an "excellent" ("A") rating for a number of years now.
Overall, Clarendon developed very favourably under its new management. Gross premiums grew by 7.2% to EUR 2.4 billion, while net premiums were expanded by as much as 88.1% to EUR 568.1 million. Net income amounted to EUR 44.6 million.
profitability of the business. As a first step, we significantly tightened up the selection, assessment and controlling of the managing general agents. This led to far-reaching rehabilitation of the portfolio. Around 50% of the programs were terminated, corresponding to roughly 30% of the premium volume. On the other hand, new programs were written that promise considerably improved profitability.
The International Insurance Company of Hannover Ltd. (Inter Hannover) in London also transacts program business. Inter Hannover writes the bulk of its business in the United Kingdom and on the European Continent. Motor insurance is by far the most significant line. The market situation in this line remains satisfactory, although the rate increases in the hard market climate are flagging more quickly here than anticipated. In the year under review Inter Hannover substantially expanded the number of programs written in the United Kingdom; a promising foundation was also laid in France as well as in Norway and Sweden. This should be reflected for the first time in the 2003 financial year. In Germany, too, our attempts to open up the market reaped their first rewards.
Across all the companies operating in the program business segment under the Hannover Re umbrella, we generated gross premium income of EUR 2.7 billion (EUR 2.5 billion) in the year under review. Net income after tax totalled EUR 43.3 million (EUR 17.8 million). Earnings per share in this business group thus reached
Along with the aforementioned companies, Compass Insurance Co. Ltd., Johannesburg, another member of the Hannover Re Group, conducts program business. This company was consolidated for the first time in the year under review. Compass established the program model on the South African market and has already achieved notable successes. The company generated gross premiums of ZAR 337.1 million (EUR 34.2 million) in the year under review. Net premiums of ZAR 212.0 million (EUR 21.5 million) were retained after reinsurance. Due to expenses incurred for restructuring, Compass closed the year with a net loss of ZAR 47.4 million (EUR 4.8 million) – a significant improvement on the previous year.
The first quarter of 2002 was one of general consolidation on the international equity markets, with share prices for the most part caught in a sideways movement. Subsequently, a decline set in, however, dragging the major indices down to fourth-quarter levels even lower than those witnessed after 11 September 2001. This slump was triggered not only by the general uncertainty concerning the future direction of the economy, but also – and more specifically – by the erosion of confidence due to certain manipulations of financial statements and by the fear of further terrorist attacks. An additional adverse factor was that numerous companies were compelled to revise their profit forecasts downwards. The markets remained unsettled until yearend.
Since we continue to view equity markets with scepticism, we further reduced the proportion of dividend-bearing securities in our portfolio in the year under review. Our investment universe remains unchanged, comprising liquid Blue Chips listed on major indices (EuroStoxx, Nikkei, S&P 500). As at year-end a mere 5.7% of our investments were in listed stocks. Thanks to this approach, we suffered considerably less heavily than many of our competitors under the depressed state of the equity markets. Yet, our account, too, was not spared diminutions in value. In accordance with the accounting principles prescribed by the Security Exchange Commission for enterprises that draw up US GAAP-compliant financial statements, we tested all securities listed for six months at more than 20% under their book value for impairment. With an eye to the depressed state of the capital markets at the beginning of the current year, too, we wrote these securities down to fair value without exception. Total write-downs on exchange-listed equities thus amounted to EUR 164.6 million in the year under review, with EUR 67.7 million attributable to the fourth quarter. We realised losses of EUR 52.5 million on the sale of shares; the balance of unrealised losses on our equity portfolio totalled -EUR 141.3 million as at yearend.
Poor performance of equity markets offset by favourable development of our bond portfolio
We were able to maintain the high quality of our portfolio of fixed-income securities. The proportion of securities rated "AA" or better was 78%, a figure roughly on a par with the previous year. The minimal strain produced by the spectacular business failures witnessed in the year under review demonstrated that our corporate bonds, too, are of a high quality.
Total net investment income declined from EUR 945.7 million to EUR 928.4 million. However, this includes the effects of currency fluctuations that placed a strain on our investment income in the year under review. Bearing in mind the current market climate, we are entirely satisfied with the income from our asset portfolio. As in the previous year, our strategic positioning was proven to be correct.
Appreciable rise in our extraordinary income compared to the previous year
Of the 20 per cent of the earth’s surface that could be agriculturally cultivated, just over one third is used for farming. Mankind uses the remaining areas as living space and for roads and industrial plants. Yet much of what we can reap from the soil lies not on the surface but deep below ground: the currently indispensable energy resources of oil, coal and natural gas, as well as precious metals and mineral ores, gemstones and diamonds.
The overall surface of the earth is constantly in motion, the effects of which are felt most intensely at the edges of the 14 large tectonic plates. Immense forces at work under the earth’s surface create mountain ranges and seas, but also trigger earthquakes and volcanic eruptions. In the last hundred years alone, more than one million people have been killed by earthquakes. Particularly significant for our industry was the great quake of 1906 in San Francisco, which flattened the city to its foundations. Settling these immense claims brought many insurers to the very brink of insolvency. This event and its consequences highlighted with the utmost urgency the essential role played by reinsurers in protecting the insured risks.
Yet our living space also gives rise to life-threatening hazards that manifest themselves in earthquakes or volcanic eruptions.
Our company's risk situation can be comprehensively described by the following risk categories: • global risks, • strategic risks, • operating risks, which we subdivide into - technical risks, - investment risks, - operational risks.
The acceptance of risks and their professional management constitute our core business as an internationally operating reinsurance company. To this extent, the professional assessment and handling of risks is a major competitive factor for our company and a crucial element in steering
The loss reserves in property and casualty reinsurance are determined on an actuarial basis.
The figures for the years 1993 to 1997 were compiled in accordance with the German Commercial Code (HGB). Since 1998 the data have been based on United States Generally Accepted Accounting Principles (US GAAP).
Additional Survival ratio Additional Survival ratio reserves in in years reserves in in years
The following table illustrates in the form of a run-off triangle 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 previous 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 balancesheet date.
The run-off triangle – as an indicator used to quantify the loss and loss adjustment expense reserves – shows how the assessment of the reserve has changed over time due to the payments rendered and how the reserve that is to be established as at the corresponding balance sheet date has been reappraised.
In accordance with SFAS 60 the total expenses for settlement of a loss including inflationary and other social and economic factors are to be stated on the basis of empirical values and taking into account current trends. The loss and loss expense adjustment reserves are of course based to some extent on estimations that normally entail an element of uncertainty. The difference between original and current estimates is reflected in the net run-off result. The development of the euro relative to major foreign currencies also is a significant influencing factor in this context.
Net reserve for the year in question and previous years plus the payments made to date on the original reserve
Combined and catastrophe loss ratio *Based on figures reported in accordance with the German Commercial Code (HGB)
When assessing the risk of losses exceeding premiums in property and casualty reinsurance we also take into account the combined ratio over time. This analysis is performed both inclusive and exclusive of catastrophe losses (natural and manmade ).
A fundamental instrument of risk limitation and stabilisation of results is retrocession. Whereas premiums are always payable at the beginning of a contract, risks derive from the fact that long periods – sometimes decades – may elapse until losses are paid. It is therefore particularly important to carefully select retrocession partners. Our assessment of our retrocessionaires is guided by the opinions of internationally recognised rating agencies and supported by our own balance sheet and market analyses. Our Security Committee classifies the reinsurers used by Hannover Re with binding effect for the Hannover Re Group.
It can thus be seen that more than 96% of our retrocessionaires have a so-called investmentgrade rating (AAA to BBB). A mere 4% of our retrocessionaires do not fall into this category.
The average default rate over the past three years was 0.4%. With respect to the major companies belonging to the Hannover Re Group, 9.2% of our accounts receivable from reinsurance business were older than 90 days as at the balance sheet date.
A further key component of our risk management across business groups is the use of scenarios in US GAAP-based financial analysis. These analyses simulate the effects of hypothetical scenarios (e.g. loss events and capital market developments) on the Group's assets, financial situation and net income. Depending upon the simulation results, the findings produced by our financial analysis enable us to prioritise risk-policy measures.
Level of receivables due from reinsurers split by external rating classes in percent
Asset portfolios are based to a significant extent on insurance premiums that are set aside for future loss payments. Asset/liability management provides the linkage between reinsurance and investment activities. A strict separation of functions – i.e. keeping a distinction between trading, settlement and risk controlling – supported by defined reports and analyses is just one of the ways in which compliance with the investment guidelines adopted by the Executive Board is ensured.
Risks in the investment sector are countered using a broad range of efficient management and control mechanisms which are geared to the rules adopted by the Federal Financial Supervisory Authority (BAFin).
Rating Government bonds Corporate bonds Other fixed-income securities in % in EUR million in % in EUR million in % in EUR million
Operational risks include, inter alia, human error, inadequate controls and organisational shortcomings. A major integral component of our safeguards and controls is the Internal Controlling System (ICS), which encompasses all harmonised and interlinked checks, activities and rules. Internal Auditing regularly verifies that the ICS is working correctly in all functional areas of our company.
The technological dependence of the company 's core processes on information technology is growing sharply – a trend which goes hand-inhand with a commensurately increasing risk potential. Ensuring high availability of our IT applications and protecting the integrity of mission -critical corporate data are tasks to which we attach fundamental economic importance. In the year under review we initiated an "Information-
Security" project in order to ensure that the existing high level of security will be maintained in the future. This project investigates and, where necessary, supplements the already existing security measures within the Hannover Re Group.
In the year under review the number of staff employed within the Group increased by 13.2% to 2,016 (previous year: 1,781). We thus created 235 new jobs worldwide with 81.7% of these at offices outside of Germany. The increase in absolute terms was strongest in the USA (+27.7%) with 165 additional jobs, followed by the United Kingdom with 10 (+16.9%) staff added. We thereby continued the strategy pursued in recent years aimed at purposefully strengthening and enlarging our international organisation. The workforce in Hannover grew to 750 (707) (+ 6.1%). The proportion of female employees worldwide stands now at 55.2% (53.4%).
Personnel management tools are an important element of our holistic management strategy
The 270° feedback process launched in 2001 was extended to include all levels of management in the year under review. The potentials for improvement identified here provide a basis and opportunity for the further personal growth of our managerial staff.
The complexity of reinsurance business means that our staff must always be ready to learn
We summarised the ideas that were obtained from the employee and 270° feedback as well as from job evaluations in a three-part seminar aimed at promoting the personal growth of our new managerial staff. After all, the ability to manage oneself is a precondition for the management of others. In addition to conveying basic know-how relating to the manager's role, this seminar focused on guiding principles and skills needed to realistically assess one's own situation. Further issues that were considered centered on how to interact in groups and how to lead teams effectively as well as conflict management and the shaping of change processes. Executives also were able to draw on the support of an experienced coach of their own choosing.
Our management simulation game designed in 2000 is now a firmly established part of a complex, holistic system of learning. It provides an excellent learning environment for participants and tutors from our own ranks.
With the introduction of "Employee SelfService " at our Hannover home office in the year under review, we took another decisive step towards electronic human resources management.
We would like to thank the staff of all our Group companies for their considerable dedication and loyalty in the 2002 financial year. Our gratitude also extends to the employee council and the senior management committee.
As the engine of growth for the global economy, the USA has lost momentum. Capital spending has declined markedly due to the low utilisation of industrial production capacity. Even the availability of cheap loans may not remedy this situation. Private consumption and the real estate market have to date been the major pillars of the US economy. As the jobless rate rises, however, the impetus from these factors is also fading.
Japan, the world's second-largest economy, has been sluggish for quite some time now. Germany is still relying on exports at the present time, while domestic demand has fallen off
In 2003, as in past years, the insurance industry will not be able to divorce itself from global economic developments and the difficult conditions prevailing on capital markets. The pressure to generate good underwriting results is thus particularly intense. Property and casualty insurance is generally characterised by low re-
We have set the future course for 2003 in a number of key strategic respects. Our business with HDI, for example, has been restructured. Henceforth, we shall no longer place HDI's entire reinsurance volume on the market, but instead we shall merely assume the role of preferred reinsurer and book only the premium volume that we actually retain. We shall thus preserve the option of reinsuring attractive portfolios without burdening our balance sheet with the business retroceded for HDI. In the medium term this restructuring will appreciably ease the strain on Hannover Re's capital resources.
In addition, we have implemented a farreaching reorganisation of the Insurance Corporation of Hannover (ICH), a move that will also reduce our capital requirements. In order to better bundle the Group's activities in both program business and the reinsurance sector, ICH was reoriented exclusively towards program business with effect from 1 January 2003. Some parts of the reinsurance portfolio were transferred to Hannover Re, while the remaining segments were discontinued.
insurance capacities as well as increased rates and improved conditions. From the reinsurers' perspective, therefore, it can be assumed that the favourable market conditions in property and casualty reinsurance will be sustained in 2003. In personal insurance lines a general trend can be discerned towards greater individual provision for retirement and health needs. This is likely to generate growth impetus for the reinsurance industry.
We continue to profit from favourable market conditions in property and casualty reinsurance
In Germany, too, the outcome of our treaty renewals was highly satisfactory. Amongst other things, we profited here from the withdrawal of a major competitor from the market. We succeeded in obtaining significant rate increases in nonproportional business and secured substantially better conditions.
Unit-linked life and annuity products will be able to defend a sizeable market share despite the poor performance of equity markets. Annuity products with guaranteed benefits will also continue to be a focus of consumer interest in a number of markets.
Financial reinsurance will remain an attractive and profitable business group in the current year. The pressure on companies to show a consistently positive business development will, if anything, only grow in the prevailing economic climate of nervousness and uncertainty. This is especially true of listed companies. It is for this reason that demand for the individually tailored solutions offered by financial reinsurance will rise. Based on our considerable experience and good reputation, and given the limited number of competitors, we expect a favourable development in this environment.
In Europe, too, we shall successfully move forward with Inter Hannover and establish the program business model in the Old World. Compass Insurance Company will similarly expand program business in South Africa.
As we take further steps to rehabilitate the portfolio, gross premium income for the current year is expected to remain unchanged from the previous year. Net income in this business group should develop favourably.
In the light of the expectations described above, we anticipate modest growth in our gross premium income for 2003. The level of retained premiums will probably increase.
Given the nature of the economic situation we are currently experiencing, our investment income is particularly difficult to forecast. Capital markets are likely to remain under strain. In view of the uncertain state of the equity markets, we shall keep our equity allocation low and continue to set great store by the high quality of our fixedincome securities. In the prevailing climate we expect current yields to stay on their present level. In the medium term, however, a significant increase is possible – especially in interest rates at the short end of the market. We therefore intend to reinvest primarily in securities with short to medium times to maturity.
Taking into account all the expectations for the development of our various business groups and the associated environment, assuming a normal burden of losses and provided there are no further adverse movements on the capital markets, we expect another marked increase in our overall net income for 2003.
Fixed-income securities – held to maturity 5.1 356 333 284 070
Equity securities – available for sale 5.1 717 745 1 021 451
Reinsurance recoverables on unpaid claims 5.2 6 179 896 6 758 763
Funds held by ceding companies 7 597 206 7 150 799
Unrealised appreciation/depreciation of investments, net of deferred taxes 43 127 31 164
Cash flows from investing activities (1 803 618) (1 468 891)
Change in cash and cash equivalents (I.+II.+III.+IV.) (158 793) 348 397
Change in cash and cash equivalents according to cash flow statement (158 793) 348 397
Cash and cash equivalents at the end of the period 671 866 830 659
Reinsurance recoverables on incurred claims and others 3 073 835 3 309 175 112 513 187 807
Loss and loss adjustment expense reserve 8 954 985 10 120 457 934 142 1 087 888
Policy benefits for life and health contracts – – 4 136 701 3 908 584
Change in policy benefits for life and health contracts – – (574 123) (297 973)
Hannover Re has applied the standards since 1 January 2002. The effects are described in section 5.4 "Goodwill; present value of future profits on acquired life reinsurance portfolios".
The annual financial statements included in the consolidated financial statement were drawn up as at 31 December.
Hannover Re is the parent company of the Group. The consolidated financial statement includes six German and sixteen foreign companies, as well as three foreign consolidated entities. Two German and three foreign companies were consolidated using the equity basis of accounting.
In the financial year Hannover Re transferred its shares in the Insurance Corporation of Hannover to Hannover Finance Inc. By simultaneously purchasing the interest held by E+S Rück in Hannover Finance Inc., Hannover Re is now the sole stockholder of Hannover Finance Inc. (further information is provided in section 6.1 "Transactions with related parties").
Compass Insurance Holdings (Pty) Ltd. was consolidated for the first time in the financial year with effect from 1 January 2002 (cf. section 5.4 "Goodwill"). Compass Insurance is a subsidiary of Lireas Holdings within the subgroup Hannover Reinsurance Group Africa.
Hannover Rück Beteiligung Verwaltungs-GmbH, 100.0 EUR 586 504 EUR 11 355 Hannover/Germany
Hannover America Private Equity Partners II GmbH & Co. KG, 89.2 USD 20 000 – Hannover/Germany
Hannover Euro Private Equity Partners III GmbH & Co. KG, 78.4 EUR 1 000 – Hannover/Germany
GbR Hannover Rückversicherungs-AG/ 70.6 EUR 58 799 EUR 1 265 E+S Rückversicherungs-AG Grundstücksgesellschaft, Hannover/Germany
Hannover Euro Private Equity Partners II GmbH & Co. KG, 55.2 EUR 9 581 EUR (89) Hannover/Germany
Hannover Finance (Luxembourg) S.A., 100.0 EUR 18 539 EUR (9 010) Luxembourg/Luxembourg
Hannover Finance (UK) Limited, 100.0 GBP 103 362 GBP (4) Virginia Water/United Kingdom
Hannover Life Reassurance Company of America, 100.0 USD 87 817 USD 1 430 Orlando/USA
Hannover Services (UK) Ltd., 100.0 GBP 680 GBP 343 Virginia Water/United Kingdom
Hannover Finance, Inc. compiles its own sub-group financial statement, including the following major companies in which it holds the following shares: Clarendon America Insurance Company, 100.0 USD 151 813 USD (3 759) Trenton/USA
Clarendon National Insurance Company, 100.0 USD 568 128 USD 10 742 Trenton/USA
Insurance Corporation of Hannover, 100.0 USD 147 008 USD (2 650) Chicago/USA
Hannover Life Reassurance Africa Ltd., 100.0 ZAR 35 173 ZAR 3 135 Johannesburg/South Africa
Hannover Reinsurance Africa Ltd., 100.0 ZAR 295 316 ZAR (48 322) Johannesburg/South Africa
Hannover Re Real Estate Holdings, Inc., 94.2 USD 119 835 USD 7 519 Orlando/USA
WRH Offshore High Yield Partners, L.P., 87.0 USD 40 634 USD 2 030 Wilmington/USA
Hannover Life Re of Australasia Ltd, 78.4 AUD 173 220 AUD 14 220 Sydney/Australia
Name and registered office of the company (Figures in currency units of 1000)
HANNOVER Finanz GmbH Beteiligungen und Kapitalanlagen, 25.0 EUR 106 907 EUR 37 100 Hannover/Germany2)
WPG Corporate Development Associates IV (Overseas), L.L.C., 26.9 USD 3 155 USD 2 809 Grand Cayman/Cayman Islands
Willy Vogel Beteiligungs GmbH, 15.0 EUR 57 664 EUR 2 637 Hannover/Germany1)
Special Risk Insurance and Reinsurance Luxemburg S.A., 18.2 EUR 291 230 EUR (8 770) Luxembourg/Luxembourg
HI Holdings, Inc., 16.3 USD 15 389 USD 2 095 Honolulu, Hawaii3) 6)
Inter Ocean Holdings Ltd., 10.0 USD 63 948 USD 5 318 Hamilton/Bermuda1) 3)
Results for the last financial year 1) Financial year as at 31 December 2001 2) Provisional (unaudited) figures 3) Consolidated figures 4) Financial year from 1 January 2001 to 31 October 2001 5) Financial year as at 31 July 2002 6) Voting shares: 16.27%
Receivables and liabilities between the companies included in the consolidated financial statement were offset against each other.
Hannover Euro Private Equity Partners II GmbH & Co. KG (HEPEP II)
HEPEP II commenced business operations on 28 January 2002. The company has capital resources of EUR 12.8 million, in which Hannover Re and E+S Rück each hold participations of 35.2%. The object of the company is to build, hold and manage a portfolio of assets comprising equity capital and quasiequity participations primarily in Europe.
Hannover America Private Equity Partners II GmbH & Co. KG (HAPEP II)
HAPEP II was established on 25 November 2002. The company has capital resources of EUR 20.0 million, in which Hannover Re holds a participation of 75% and E+S Rück a participation of 25%. The object of the company is to build, hold and manage a portfolio of assets comprising equity capital and quasi-equity participations primarily in the USA.
Effective 12 December 2002 Hannover Rück Beteiligung Verwaltungs-GmbH was established as a wholly owned subsidiary of Hannover Rückversicherungs-AG. The object of the company is to hold, acquire and dispose of participations in other enterprises. The capital stock amounts to EUR 15.0 million and was furnished by way of a non-cash contribution of the shares in E+S Rück. The contribution was made at the current value of the E+S Rück shares.
Due after one through five years 173 937 187 824 197 670 206 654
Due after five through ten years 2 059 290 2 142 071 1 815 000 1 859 462
Amortised costs and unrealised gains and losses on the portfolio of investments classified as held to maturity
Government debt securities of EU member states 1 547 751 50 090 – 1 597 841
Other foreign government debt securities 451 613 13 883 1 310 464 186
Government debt securities of EU member states 1 696 999 20 010 8 453 1 708 556
Fixed-income securities – held-to-maturity 171 069 124 091 55 791 5 113 – – – 269 356 333
Fixed-income securities – held-to-maturity – – 235 193 – – 48 877 – – 284 070
Fixed-income securities – available-for-sale 403 571 334 705 2 707 193 939 217 63 424 3 812 330 19 984 142 454 8 422 878
Equity securities – available-for-sale 32 610 2 701 415 272 48 201 – 476 820 45 517 330 1 021 451
Fixed-income securities – held-to-maturity – – 354 545 – – 1 788 – – 356 333
Cash equivalents This item comprises investments with a life of up to one year.
Securitisation of reinsurance risks In January 2003 the FASB published FIN 46 "Consolidation of Variable Interest Entities – an Interpretation of ARB No. 51" addressing the consolidation by business enterprises of 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.
Since January 1999 Hannover Re has used a special purpose entity in order to retrocede a defined portfolio of life reinsurance treaties. The reinsurance treaties cover the underwriting years 1999 to 2001.
Within the scope of the portfolio-linked securitisation of certain reinsurance risks under transactions concluded in November 1993 and March 2002 Hannover Re has retroceded business on a proportional basis to various insurance enterprises in the form of special purpose entities that finance the business via the international capital markets.
The liable equity capital of these special purpose entities amounts to EUR 276.0 million. It is fully secured and thus does not constitute any risk of loss for Hannover Re. The securitised risks involve natural catastrophes (hurricanes and earthquakes in the USA, windstorms in Europe and earthquakes in Japan) as well as worldwide aviation business.
Based on our current assessment, Hannover Re is not the primary beneficiary in any of the transactions. Furthermore, as things presently stand the maximum risk of loss resulting from these interests is insignificant for the Group.
Underwriting assets The retrocessionaires' portions of the technical provisions are based on the contractual agreements of the underlying reinsurance treaties.
Reserve as at 31 December of previous year (gross) 18 859 679 12 782 710
Reserve as at 31 December of previous year (retro) 6 758 763 3 532 690
Reserve as at 31 December of previous year (net) 12 100 916 9 250 020
Reserve as at 31 December of year under review (net) 12 656 755 12 100 916
Reserve as at 31 December of year under review (retro) 6 179 896 6 758 763
Reserve as at 31 December of year under review (gross) 18 836 651 18 859 679
In addition, no unscheduled amortisation was necessary in the financial year.
Development of the present value of future profits (PVFP) on acquired life reinsurance portfolios 5.5 Taxes and deferred taxes
Policy benefits for life and health contracts 66 919 50 044
Staff The average number of staff at the companies included in the consolidated financial statement of the Hannover Re Group was 1,900 (previous year: 1,676). Of this number, 750 were employed in Germany in the year under review. The majority of staff were employed at the consolidated Group companies abroad.
a) Wages and salaries aa) Expenditures on insurance business 96 222 83 208 ab) Expenditures on the administration of investments 9 225 6 334 b) Social security contributions and expenditure on provisions and assistance ba) Social security contributions 11 356 10 120 bb) Expenditures for pension provision 12 013 6 418 bc) Expenditures for assistance 2 851 2 589
Additional similar obligations based upon length of service exist at some Group companies. Expenditures for these commitments in the financial year totalled EUR 767,400.
Provisions for pensions are established in accordance with actuarial principles and are based upon the commitments made by the Hannover Re Group for retirement, disability and widows' benefits. The amount of the commitments is determined according to length of service and salary level. The calculation of the provisions for pensions is based upon the following assumptions: • Discount rate: 5.75% to 7.25%
The commitments to employees in Germany predominantly comprise commitments financed by the Group companies. The pension plans are unfunded. Amounts carried as liabilities are shown as other liabilities.
Projected benefit obligation at the beginning of the reporting year 48 289 45 361
Loans On 31 March 1999 Hannover Finance Inc., Wilmington/USA, issued a floating-rate debt in the amount of USD 400.0 million with a term of 30 years. The due date of the loan is 31 March 2029. It may be redeemed by the issuer no earlier than 31 March 2009.
In order to hedge against the risk of interest rate changes associated with this loan, the issuing company purchased interest rate swaps in 1999 in the same amount which expire on 31 March 2009. In this way, the interest rate is converted from a floating rate to a fixed rate for a period ending commensurate with the first opportunity to redeem the loan. The interest rate arising after allowance is made for the interest rate swap amounts to an annual average rate of 6.69% until 31 March 2009.
In the event that interest incurred in connection with servicing the surplus debenture should in future no longer be deductible in Germany for the purpose of calculating taxable income, a right of premature repayment exists. Interest payments and repayment of the nominal amounts are dependent on the company's results. In the event of insolvency, the participating rights are serviced before the stockholders and after the claims of creditors.
Notes notes on the individual items 5.9 Stockholders' equity and minority interests
In addition, conditional authorised capital of up to EUR 48.5 million is available. It can be used to grant shares to holders of convertible and warrant bonds and to issue employee shares in the amount of EUR 1.0 million. It has a time limit of 13 November 2007.
The total number of fully-paid shares, the weighted average portfolio of treasury stock and the weighted average number of shares were adjusted for the 2001 financial year due to the 3 for 1 stock split implemented on 15 July 2002. This produced earnings per share of EUR 0.11 for the previous year.
The basic earnings per share and the fully diluted earnings per share as at 31 December 2002 shown in the statement of income are calculated as follows on the basis of the year-end result
Fully diluted earnings per share 267 172 97 163 928 2,75 11 084 97 158 219 0.11
HDI Haftpflichtverband der Deutschen Industrie V.a.G. (HDI) indirectly holds more than 75% of the shares of Hannover Re through HDI Verwaltungs-Service AG as well as through Erste HDI Beteiligungsgesellschaft mbH and Zweite HDI Beteiligungsgesellschaft mbH.
The Hannover Re Group provides reinsurance protection for the HDI Group. To this extent, numerous underwriting business relations exist with related parties in Germany and abroad which are not included in Hannover Re's consolidation. This includes business both assumed and ceded at normal market conditions.
E+S Rück implemented a capital increase of EUR 300.0 million in the year under review. The amount apportionable to Hannover Re totalled EUR 210.7 million. Hannover Re also called unpaid capital and acquired shares of E+S Rück worth EUR 25.0 million from third parties, most of which were resold to other stockholders. In November 2002 Hannover Rück Beteiligung Verwaltungs-GmbH was established by way of a non-cash contribution by Hannover Re as the sole stockholder, the latter contributing its interest of 56.78% in E+S Rück at current value. The object of the company is to hold, acquire and sell equity participations in other enterprises of the same or a similar type.
HDI Immobilienfonds Nr. 4 Nürnberg Bucher KG was wound up in January 2002 through accretion to Hannover Re for tax purposes. All assets and liabilities were transferred to Hannover Re. The book value prior to accretion was EUR 11.4 million.
HDI Asset Management GmbH manages the investments of Hannover Re and some of its subsidiaries. In this connection it renders services within the scope of an agreement on the outsourcing of functions and performs IT services and administrative tasks.
Total compensation of EUR 2,993 thousand was paid to the Executive Board and EUR 285 thousand to the Supervisory Board in the year under review. Former members of the Executive Board and their surviving dependants received EUR 772 thousand, and a liability of EUR 10,128 thousand was shown as at year-end.
The existing option rights were valued on the basis of the Black/Scholes option pricing model.
As at 1 January 2002 the existing number of stock options stood at 1,138,005; 40,770 option rights were forfeited in the year under review. The total number of stock options existing as at year-end stood at 1,097,235. The average exercise price per option amounted to EUR 25.50. All figures relating to the number of options and the exercise price are based on the situation after the stock split implemented on 15 July 2002.
As security for our technical liabilities, various financial institutions have furnished sureties for our company in the form of letters of credit. The total amount of the letters of credit as at the balance sheet date was EUR 3,754.5 million (previous year: EUR 3,314.4 million).
Outstanding capital commitments with respect to special investments exist in the amount of EUR 79.0 million for E+S Rückversicherungs-AG and EUR 144.3 million for Hannover Re. These involve primarily private equity funds and venture capital firms in the form of private limited companies. Further information is provided in section 4 "Acquisitions/new establishments".
Hannover Re uses derivative financial instruments to control these currency exposures as well as interest rate risks and market price risks arising out of the use of financial instruments (e.g. investments in variable-yield and fixed-income securities). Derivative financial instruments are used within the Hannover Re Group solely for hedging purposes.
The fair values of the financial instruments were determined on the basis of the market information available as at the balance sheet date and by using the valuation methods set out below. If the underlying transaction and the derivative cannot be reported as a single unit, the derivative is recognised under the "trading-portfolio" item in the balance sheet.
Breakdown of nominal amounts by product type and period to maturity
Derivatives involving exposures were of minimal significance within the total asset portfolio of the Hannover Re Group. The fair value of unmatched positions used for hedging purposes was -EUR 3.3 million.
One contract matured in the year under review; this gave rise to losses on disposals of EUR 1.7 million.
No events with significant implications for the Group's assets, liabilities, financial position and net income occurred after the balance sheet date.
In the year under review Hannover Reinsurance Africa Ltd. concluded a sale-and-lease-back contract for land and business premises effective February 2002 for a period of eight years. SFAS 13 requires that this be recognised as an operating lease. A further lease agreement ending on 31 October 2005 exists for the business premises of Compass Insurance Holdings Ltd.
Rented property Hannover Re Real Estate Holdings rents out real estate in Florida; the period of the rental contracts ranges from five to seven years. Non-cancellable contracts will produce the income shown below in subsequent years: Figures in EUR thousand Payments
Foreign currency items in the individual companies' statements of income are converted into the respective national currency at the average rates of exchange. The individual companies' statements of income prepared in the national currencies are converted into Euro at the average rates of exchange and transferred to the consolidated financial statement. The conversion of foreign currency items in the balance sheets of the individual companies and the transfer of these items to the consolidated financial statement are effected at the mean rates of exchange on the balance sheet date. In the case of functional currencies, differences arising between the average exchange rate and the exchange rate on the balance sheet date lead to the establishment of a separate item in the stockholders ' equity, which is excluded from the statement of income. Differences arising with regard to nonfunctional currencies are recognised in the statement of income. Functional currencies are defined as those currencies in which investments are effected.
We have audited the consolidated financial statements of Hannover Rückversicherungs-Aktiengesellschaft for the business year from January 1 to December 31, 2002, comprising the consolidated balance sheet, the consolidated income statement, the consolidated statement of cash flow and consolidated statement of changes in stockholders' equity as well as the notes to the financial statements. The preparation and content of the consolidated financial statements in accordance with US Generally Accepted Accounting Principles (US GAAP) are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
Our audit, which also extends to the group management report prepared by the Executive Board for the year from January 1 to December 31, 2002, has not led to any reservations. In our opinion the group management report provides a suitable understanding of the Group's position and suitably presents the risks of future development.
In a difficult economic climate the deliberations of the Supervisory Board focused primarily on considerations of capital strength and the further development of our Corporate Governance. As part of its discussion of important individual projects the Supervisory Board considered, inter alia, the preparation of an Extraordinary General Meeting, at which the shareholders authorised the Executive Board to issue – with the consent of the Supervisory Board – bonds in the form of convertible and warrant bonds, dividend bonds and participation rights. In this connection it was also decided to create conditional and authorised capital each amounting to EUR 48.5 million. The purpose of these measures is to be able to quickly and flexibly strengthen the company 's capital resources as necessary in order to respond promptly to the latest market developments, enhance its competitive position and maintain its excellent ratings.
The Supervisory Board again devoted considerable attention to the issue of Corporate Governance, which it examined at length in two meetings. The Corporate Governance principles were approved at the Supervisory Board meeting on 9 December 2002. In this connection the Supervisory Board adopted procedural rules and set up its second committee – the Balance Sheet
Committee – within the meaning of § 107 Para. 3 German Stock Corporation Act. The Declaration of Conformity pursuant to § 161 German Stock Corporation Act regarding compliance with the German Corporate Governance Code was issued as at year-end. The recommendations of the Code have not been implemented in only one respect. Details of this issue are provided on pages 120 and 121 of the present annual report as well as in the company's publications on the Internet.
KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft (KPMG DTG), Hannover, was mandated – without the existence of any legal requirement to this effect – to audit the consolidated financial statement and the Executive Board's report for the Hannover Re Group (compiled in accordance with United States Generally Accepted Accounting Principles – US GAAP). KPMG DTG issued an unqualified audit certificate. The Balance Sheet Committee discussed the financial statement and Executive Board's report at an extensive 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 Executive Board's report on the company 's relations with affiliated companies has likewise been examined by KPMG DTG and 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, 3. in the case of the measures specified in the report, there are no circumstances which would point to an assessment which differs significantly from that of the Executive Board."
• The Executive Board receives variable remuneration linked to the growth in the company's value (stock option plan)
In the year under review we stepped up our Investor Relations activities, which are guided by the dictum of transparency and reliability: • We organised a total of six international telephone conferences for analysts and investors with live video transmission of our presentations to each telephone conference
• Our analyst conferences and telephone conferences are recorded and can be accessed online via video/audio streaming
• More than 30 roadshows and company conferences were held at various international financial marketplaces
• In the course of roughly 50 visits to Hannover we conducted personal discussions with international analysts and investors
Declaration of conformity pursuant to § 161 German Stock Corporation Act (AktG) regarding compliance with the German Corporate Governance Code at Hannover Rückversicherungs-AG
Australia Hannover Life Re of Australasia Ltd. Level 7 70 Phillip Street Sydney NSW 2000
Hannover Services (UK) Ltd. London Office 2nd Floor 69-70 Mark Lane London EC3R 7HJ
Mauritius Hannover Reinsurance Mauritius Ltd. Suite 335, Barkly Wharf Le Caudan Waterfront Port Louis 00230
Sweden Hannover Rückversicherungs-AG Tyskland filial Hantverkargatan 25 P. O. Box 22085
Taiwan Hannover Rückversicherungs-AG Taipei Representative Office Room A2, 12th Floor 296 Jen Ai Road, Section 4 Taipei, Taiwan R.O.C.
Hannover Re Advanced Solutions* US Representative Office 500 Park Blvd., 13th Floor Itasca, Illinois 60143 Tel. +1/630/327-99 10 Fax +1/630/773-99 37
Acquisition cost, deferred (DAC): cost of an insurance company that arises from the acquisition or the renewal of an insurance treaty (e.g. commission for the closing, cost of the transaction- or riskexamination, etc.).The capitalisation results in a distribution of the cost over the duration of the treaty.
American Depositary Receipt (ADR): share certificates written by US Banks on foreign shares deposited there. Instead of trading the foreign shares directly, US stock exchanges trade the ADRs.
Direct insurer (also: primary insurer): company which accepts risks in exchange for an insurance premium, and which has a direct contractual relationship to the policyholder (private individual, company, organisation).
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 and tax situation.
Financial Accounting Standards Board (FASB): committee in the USA whose task it is to determine and improve the standards of accounting and reporting.
Facultative reinsurance: participation on the part of the reinsurer in a particular individual risk assumed by the direct insurer. This is in contrast to ➞ obligatory (also: treaty) reinsurance.
International Securities Identification Number (ISIN): ten-character universal code used to identify securities internationally. It is prefixed by a country code that specifies the country where the issuer entity is legally registered or in which it has legal domicile, e.g. DE = Germany
Mark-to-market valuation: recording the price or value of financial instruments to reflect current market value or ➞ fair value.
Non-proportional reinsurance: reinsurance treaty under which the reinsurer assumes the loss expenditure in excess of a particular amount ( ➞ priority). This is in contrast to ➞ proportional reinsurance.
Obligatory reinsurance (also: treaty reinsurance): reinsurance treaty under which the reinsurer participates in a ➞ cedent's total, precisely defined insurance portfolio. This is in contrast to ➞ facultative reinsurance.
Portfolio: a) all risks assumed by an insurer or reinsurer in a defined subsegment (e.g. line of business, country) or in their entirety; b) group of investments defined according to specific criteria.
Price earnings ratio (PER): ratio between the market value of a share and the earnings per share of the publicly traded corporation.
Purchase cost, amortised: the cost of acquiring an asset item including all ancillary and incidental purchasing costs; in the case of wasting assets less scheduled and/or special amortisation.
Rate: percentage rate (usually of the premium income) of the reinsured portfolio which is to be paid to the reinsurer as reinsurance premium under a ➞ non-proportional reinsurance treaty.
Risk, insured: risk defines the specific danger, which can lead to the occurrence of a loss. The insured risk is subject of the insurance treaty.
Value of in-force business: Present value of expected future profit flows from the portfolio of inforce retained business, discounted by a currency-specific risk discount rate. It is determined in accordance with local accounting principles.
Variable Interest Entity: Legal structure with specific characteristics not bound to a particular form of organisation. It is used to conduct defined activities or to hold assets.
Compass Insurance Co. Ltd. (Compass) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47, 64, 96
Insurance Corporation of Hannover (ICH) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46f., 62
International Insurance Company of Hannover (Inter Hannover) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47, 64
"Reactions" World Reinsurance Index, unweighted . . . . . . . . . . . . . . . . . . . . . . 2, 9, 13, 16, 110, 111, 120