Value of in-force business (life/health) 1 361.1 +12.9% 1 206.0 1 048.0 874.0 609.0
Dividend per share in EUR 0.95 +11.8% 0.85 – 1.21* 0.97
Previous year 2002 2001 2000 1999Figures in EUR million * Incl. bonus of EUR 0.08 ** Operating profit (EBIT)/net premiums earned
On the need to apply the "as-if-pooling" method under US GAAP cf. p.16 et seq.
Growth in financial reinsurance far outstripped our expectations. Gross and net premiums climbed markedly, and we more than tripled the operating profit (EBIT) year-on-year as clients increasingly required tailored products in the hard market climate. An additional, non-recurring effect was the initial consolidation of Hannover Reinsurance (Dublin) Ltd. – formerly HDI Reinsurance (Ireland) Ltd. – which we received as a contribution in kind from our majority shareholder, Talanx AG, as part of our capital increase in June of the year under review. To sum things up, I believe that in this business group, too, we can be highly satisfied with the result.
The protracted weakness of the US dollar left its mark not only on premiums and losses in our four business groups but also on investment income. The US currency shed a full 21.1% of its value against our balance sheet currency, the euro, in the course of 2003. Up to two-thirds of our gross premium volume and investment income are generated in US dollars. Although favourable despite the adverse currency effects, both these key figures would thus have been even more impressive if exchange rates had remained stable. However, since it has long been our practice to match liabilities in foreign currencies with assets in the same currencies, the impact of exchange rate movements on our year-end result was not severe.
The Hannover Re share again increased sharply in value in the year under review, gaining around 14% over the course of the year. The bulk of the price increase was recorded towards the end of the year under review as we twice revised our profit forecast upwards and published very strong figures for the first nine months. We also have no reason to shun comparisons with our competitors. Adjusted for exchange-rate effects, we again outperformed our benchmark index, the unweighted "Reactions" World Reinsurance Index, in the year under review. All listed reinsurers worldwide are included in this index.
All in all, then, we are in every respect highly satisfied with the year under review. We can also look to the current year with considerable confidence. During the renewals in property and casualty reinsurance as at 1 January – the date when we normally write around two-thirds of our business – it became apparent that, on balance, further slight improvements in rates and conditions could be obtained. The so-called hard market is thus by no means a thing of the past. In the few lines of property/casualty reinsurance where prices have already begun to fall, we reviewed our acceptances and as part of our systematic cycle management we selectively scaled back our premium volume and moved capital into other lines. Overall, we again anticipate a profitability in virtually all segments of property and casualty reinsurance that is good if not very good. It is our assumption that this will be sustained in further renewal negotiations as the year progresses.
We also look to the development of our investments with confidence in 2004. With a positive underwriting cash flow, our asset portfolios are expected to show further sizeable growth in the course of the year. Assuming normal movements on the financial markets, our net investment income should therefore improve in the year under review. This is, however, conditional upon there being no need to take significant write-downs on our securities portfolio in 2004. In this respect, the universally anticipated interest rate increase on global bond markets will have to be monitored very closely.
Overall, in the current year we again expect to surpass the very good result of the year under review. This should be made possible by another strongly favourable underwriting result in all business groups as well as higher net investment income. This forecast assumes, of course, that major losses in property and casualty reinsurance remain in line with the multi-year average and that the capital market is spared any erratic fluctuations.
It remains our conviction that our long-term success and economic independence are founded upon above-average, sustained profitability. Our actions in the current financial year will therefore be guided solely by these tried and trusted maxims, not only as regards the underwriting of risks in the various business groups and lines but also in the diversification of our business and in our capital management. In the year under review, as we had done in previous years, we also adjusted our equity base with an eye to commercial necessities: we increased our stockholders' equity through a capital increase of EUR 530 million – with minimal dilution for existing shareholders. As an additional measure, we issued further subordinated debt in the amount of EUR 750 million in February 2004. Just as important, however, was the fact that in the troubled years of 2001 and 2002 we did not suffer any erosion of our stockholders' equity. Our efficient capital management is reflected in very good ratings from the key rating agencies for our industry – namely "AA-" from Standard & Poor's and
"A" from A.M. Best. These ratings are well above the market average. We thus have access to all segments of the worldwide reinsurance market and are in a position to optimally diversify our portfolio and manage it with an eye to profit maximisation.
I would like to join my colleagues on the Executive Board of Hannover Re in thanking you most sincerely for your loyalty and your trust. As has always been and will remain our common goal, we shall strive to live up to both in the years to come by consistently enhancing the value of your company.
Karl Heinz Midunsky Corporate Vice President and Treasurer Munich Siemens AG
Dr. Klaus Sturany 1) Member of the Executive Board Essen RWE Aktiengesellschaft
Bodo Uebber Deputy Member of the Executive Board Berlin DaimlerChrysler AG (since 25 September 2003) Chairman of the Executive Board
The German insurance industry is back on an expansionary course. With capital markets recovering somewhat in the year under review, (re-)insurers were again able to invest more heavily in equities. The German Insurance Association (GDV) reported a modest increase in the average equity allocation from 7% to 8%. Particularly for reinsurers, 2003 offered an unusually profitable economic environment. This trend is 2003: Year 1 after the slump …
In the course of 2003 our share, too, developed clearly favourably, putting on 14% relative to the beginning of the year to close at EUR 27.72 on 31 December 2003. Although the performance of the MDax was even better, our share thus kept pace by industry standards as reflected in the CDax for insurance stocks. A marked upswing was observed following the publication of each set of quarterly results. The capital market thus recognised our favourable, consistent earnings trend. Our share has surged particularly strongly in the current financial year after the release of our profit forecasts for 2004 and 2005, climbing to a closing price of EUR 30.70 on 11 February 2004.
Our quantitative strategic objectives help us – based on a system of management ratios – to steer and document the sustained growth in our company's value creation. One of our strategic objectives, for example, is to increase the operating profit (EBIT) and the earnings per share by a double-digit percentage margin each year. With earnings per share of EUR 3.24 in the year under review, we have been able to achieve this goal every year since our company was first listed – with the exception of 2001 (specifically: due to the terrorist attacks in New York and Washington, D.C.).
Following the sharp price increases of the past year some indices – particularly those comprised of second-tier stocks – seem to be in need of consolidation. The average 2003 price/earnings (P/E) ratio of the MDax, to which the Hannover Re share also belongs, was 22.6. At a price of EUR 30 the Hannover Re share, on the other hand, is trading at a P/E ratio of 8.5 on the basis of the consensus profit estimate for 2005. The considerable potential still inherent in our share is also clearly demonstrated by another key ratio: a leading European brokerage house calculates the average price/book value ratio for European reinsurers at 1.8, while the Hannover Re share – priced at EUR 30 – stands at just 1.5. Most analysts therefore put the fair value of our share currently at around EUR 35.
The Hannover Re share centres as well as the Midwest and the West Coast of the United States, Australia and new markets, e.g. in the Arab-speaking world. In addition, we conduct international telephone conferences with analysts, investors and the business press in connection with the publication of each quarterly report as well as on special occasions. Particularly in troubled times on the stock markets, our consistent, proactive Investor Relations activities have proven their worth. An international analysts ' seminar held each year also forms part of our current standard repertoire. On 25 July in Berlin we welcomed around 40 international financial analysts and investors to our International Analysts' Day, an opportunity which we used to provide information on the topics "Analysing the Hannover Re balance sheet", "Hannover Life Re" and "Advanced Solutions". This information can of course be accessed at our website www.hannover-re.com.
The Hannover Re share erated by the company, the relative price stability of its share and its expert capital management – not least in view of the capital increase implemented in June of the year under review.
Hannover Re has responded to the growing importance of the German Corporate Governance Code by providing a detailed Corporate Governance section on its Investor Relations Internet pages. All information required pursuant to § 161 of the German Stock Corporation Act is published there. In addition, in the current financial year we are already fully implementing the financial reporting deadlines recommended by the Corporate Governance Code: the consolidated annual financial statements will be published within 90 days of the end of the financial year and the interim reports within 45 days of the end of the reporting period.
The German Corporate Governance Code also provides for variable remuneration of management based on corporate performance. We live up to this standard with our virtual stock option plan for the Group's managerial staff worldwide, a scheme which we launched as long ago as 2000.
Following our capital increase in June 2003 the number of Hannover Re shareholders grew from more than 25,000 to around 28,000. The placement of a 20.6% shareholding with institutional investors through our parent company Talanx AG in February 2004 boosted Hannover Re's free float by a further 24.8 million shares to its current level of 48.8% of the capital stock. The proportion of the free float attributable to institutional investors (corporate entities) increased substantially to 84%. The number of Hannover Re shareholders as at 27 February 2004 stood at 32,529. Both measures had an extremely favourable effect on the liquidity of our share. The average value of the shares traded doubled after the capital increase to roughly EUR 5 million and then tripled after the reduction in the share held by Talanx to more than EUR 15 million per day.
In September Hannover Re was awarded the title "Reinsurance Company of the Year 2003" by the highly reputed UK trade journal "Reactions". The selection was made by the magazine's readership, namely the employees of insurance and reinsurance companies around the world, insurance and reinsurance brokers as well as financial analysts, rating agencies and other service providers. Among the reasons for awarding Hannover Re with the prize, "Reactions" cited the consistently high return on equity gen-
Shareholding structure by natural persons/ corporate entities (as % of free float)
We see Hannover Re as the highest quality reinsurer in our universe. It is the only company that we feel espouses disciplined cycle management and has a track record to prove it. (...) Hannover Re is the only reinsurer in our universe to have not destroyed value with its underwriting activities over the past ten years.
Hannover Re is taking advantage of the current hard reinsurance market to strengthen underwriting discipline (the so-called "morefrom -less" programme) while at the same time taking a cautious approach to reserving, and this is now filtering through to the company's earnings via the improved combined ratio (...). Management also appears to be delivering on its promise to reduce the company's reinsurance recoverables asset by 30% by the end of 2005 (...) This, combined with the company's strong earnings performance means that Hannover Re is moving swiftly along the roadmap agreed with S&P to remove the negative outlook on its AA- rating.
Commercial treatment: on the need to apply the "as-if-pooling" method under US GAAP cf. p. 16 et seq.
Stock exchange ID: Share: Investdata: HNR1 Bloomberg: HNR1 GY Reuters: HNRGn.DE
USA American Depositary Receipts (Level 1 ADR Program) OTC (over-the-counter market)
Capital measure of Increase in common stock through a capital increase for cash against issuance 12 June 2003: of 9,716,392 new shares in conjunction with a capital increase against contribution in kind through issuance of 13,716,814 new shares to Talanx AG for shares in HDI Re (Ireland) Ltd. (with commercial effect from 1 July 2003).
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)
Target Actual 1) DVFA-calculation method(without adjustment for amortisation of goodwill) 2) Earnings per share calculated in accordance with US GAAP
(stock split of 15 July 2002 in ratio of 3 for 1 taken into account for all figures) 3) Commercial treatment: on the need to apply the "as-if-pooling" method under US GAAP cf. p. 16 et seq.
7. Organisation and infrastructure • An effective and efficient organisation oriented towards our business processes • Investment priority for information management as an increasingly significant competitive factor
• Fostering of entrepreneurial thinking by delegating tasks, authorities and responsibility wherever possible 9. Risk management • Ongoing monitoring of all risks that could jeopardise the continued existence of the Group or individual parts thereof
As part of our capital increase on 12 June 2003 our majority shareholder Talanx AG transferred its shares in Hannover Reinsurance (Dublin) Ltd. – formerly HDI Reinsurance (Ireland) Ltd. – to the Hannover Re Group effective 1 July 2003 as a contribution in kind against issuance of 13,716,814 new shares valued at EUR 310 million.
The effective commercial date of this transaction (1 July 2003) was deemed determinative for the first-time consolidation of the transferred company. It was therefore consolidated for the first time in the quarterly financial statements as at 30 September 2003 with effect from 1 July 2003. This accounting treatment was agreed with our auditors within the regular review of the consolidated financial statements for the third quarter.
As the year progressed, however, it became clear that under US GAAP the "as-if-pooling" accounting method would have to be applied to this transaction since Talanx AG – as the ultimate parent company of Hannover Re and Hannover Reinsurance (Dublin) Ltd. – formally exercised "common control" over both companies.
Fixed-income securities – held to maturity 5.1 498 695 356 333 498 695 356 333
Fixed-income securities – available for sale 5.1 11 119 567 9 140 755 11 119 567 9 414 098
Reinsurance recoverables on benefit reserve 5.2 206 717 489 784 206 717 489 784
Reinsurance recoverables on unpaid claims 5.2 4 396 564 6 179 896 4 396 564 6 181 645
Funds held by ceding companies 7 664 683 7 597 206 7 664 683 8 359 107 * On the need to apply the "as-if-pooling" method under US GAAP cf. p.16 et seq.
Loss and loss adjustment expense reserve 5.2 18 703 170 18 836 651 18 703 170 19 919 830
Policy benefits for life and health contracts 5.2 4 001 148 4 136 701 4 001 148 4 136 701
Funds held under reinsurance treaties 1 080 491 1 630 200 1 080 491 1 633 080
Unrealised appreciation/depreciation of investments, net of deferred taxes 157 569 43 127 160 862 43 930
Cumulative foreign currency conversion adjustment, net of deferred taxes (352 502) (100 276) (340 938) (92 086)
Change in ceded unearned premiums (3 421) (35 848) 10 206 (31 936)
Cumulative foreign currency conversion adjustments (252 226) (42 084) (248 852) (32 759)
Changes in prepaid reinsurance premiums (net) (25 002) 429 632 93 097 427 237
Changes in benefit reserves (net) 501 944 532 739 501 944 532 739
Changes in deferred acquisition costs (305 194) (208 275) (358 144) (313 069)
Net changes in contract deposits 294 123 (65 267) 294 123 (65 267)
Cash flow from financing activities 461 601 (35 093) 450 199 (61 193)
Change in cash and cash equivalents according to cash flow statement (285 732) (158 793) (286 710) (162 972)
In the following table we have allocated the underwriting assets and liabilities as at 31 December 2003 and 2002 to our business segments after eliminating intergroup transactions across segments.
Reinsurance recoverables on benefit reserves – – – 206 717 489 784 489 784
Funds held by ceding companies 176 330 252 479 252 479 3 257 988 3 329 560 3 329 560
Loss and loss adjustment expense reserve 8 396 999 8 954 985 8 954 985 929 396 934 142 934 142
Policy benefits for life and health contracts – – – 4 001 148 4 136 701 4 136 701
Change in policy benefits for life and health contracts – – – – (297 797) (574 123) (297 797) (574 123)
SFAS 141 "Business Combinations" Para. 11 in conjunction with Appendix D 11 to 18 sets out standards governing the accounting of transfer transactions between entities under common control. This Statement requires that the assets and liabilities of the transferred entity be carried over with the book values at the transferring parent company. The consolidated financial statement of the acquiring entity is to be drawn up as if the transferred entity had already been part of the consolidated group since the commencement of the financial year. The comparative figures presented for previous reporting periods must also be adjusted according to this treatment. The consolidated financial statement was drawn up in accordance with these requirements, which we refer to in their entirety as the "as-if pooling" method, and supplemented with certain additional information (cf., p. 16 f. as well as sections 3 and 4 of these Notes). All figures provided in the Notes are based upon application of the "as-if pooling" method.
In April 2003 the Derivative Implementation Group (DIG) of the FASB issued SFAS 133 Implementation Issue No. B 36 "Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments" (DIG B 36). The Statement defines standards for the accounting of "Modified Coinsurance" (Modco) and "Coinsurance With Funds Withheld" (CWFW) reinsurance contracts. It states that such contracts contain embedded derivatives that must be accounted separately from the underlying reinsurance arrangements at fair value. The changes in fair value between two accounting dates are to be recognised in the statement of income. SFAS 133 DIG B 36 was to be applied for the first time on 1 October 2003.
In December 2003 the FASB issued FASB Interpretation No. 46 (FIN 46) (revised December 2003) "Consolidation of Variable Interest Entities" (FIN 46R), clarifying the consolidation of so-called "variable interest entities". The Standard sets out how an entity must analyse whether it controls another entity through means other than majority voting rights and hence whether it must consolidate the said other entity. The revised Interpretation supersedes FIN 46 "Consolidation of Variable Interest Entities", which was published in January 2003.
In May 2003 the FASB published SFAS 150 "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". This Standard governs the accounting treatment of certain financial instruments that issuers have hitherto classified as equity. SFAS 150 requires that certain stand-alone financial instruments with characteristics of both liabilities and equity be classified as liabilities. In most cases, the corresponding changes in fair value are to be recognised in the statement of income. The Standard may influence certain repurchase transactions involving equities as well as management ratios and key balance sheet figures.
In March 2003 the EITF reached a consensus on the outstanding items of EITF 02-9 "Accounting for Changes That Result in a Transferor Regaining Control of Financial Assets Sold". EITF 02-9 requires that financial assets previously accounted by the transferor as sold be recognised at fair value insofar as it has regained control of such financial assets. The accounting treatment is the same as would be applied in the event of repurchase by the transferor. At the same time, the transferor must recognise a corresponding liability to the acquiror. In the event of a regaining of control the transferor may not realise any gains or losses. No bad debt provisions may be established for receivables as at the date when control is regained. The rules are to be applied from April 2003 onwards to all changes through which the transferor regains control over previously sold financial assets.
In November 2002 the FASB published FIN 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness to Others – an Interpretation of FASB Statements No. 5,57 and 107 and Rescission of FASB Interpretation No. 34". The Interpretation clarifies the disclosures to be made by a guarantor in its financial statements with respect to obligations under guarantees that it issues. In addition, FIN 45 requires that at the time when a company issues a guarantee it must recognise an initial liability for the fair value of the obligations it assumes under the guarantee. The disclosure requirements are effective for financial statements of interim or annual periods ending after 15 December 2002 (the reader is referred here to our remarks in section 7.2 "Contingent liabilities"). The recognition provisions apply to guarantees and contingent liabilities entered into after 31 December 2002. They do not apply to guarantees given with a group of companies or by a group company to third parties on behalf of another group company.
The application of this Standard did not have any significant impact on the consolidated financial statement.
In July 2002 SFAS 146 "Accounting for Costs Associated with Exit or Disposal Activities" was published. This Statement requires that costs associated with exit or disposal activities be recognised as liabilities when the costs are incurred, provided the fair value can be reasonably measured. It had previously been the case that such liabilities could be recognised at the date of an entity's commitment to a restructuring plan. SFAS 146 is to be applied to exit and disposal activities initiated after 31 December 2002.
The application of the Standard did not have any significant impact on the consolidated financial statement in the 2003 financial year.
Hannover Re is the parent company of the Group. The consolidated financial statement includes nine German and seventeen foreign companies, as well as three foreign consolidated entities. Three German and three foreign companies were consolidated using the equity basis of accounting.
In the financial year HEPEP II Holding GmbH, HEPEP III Holding GmbH and HAPEP II Holding GmbH, all based in Hannover/Germany, were consolidated for the first time. The interests in these companies were held by Hannover Euro Private Equity Partners II GmbH & Co. KG, Hannover Euro Private Equity Partners III GmbH & Co. KG and Hannover America Private Equity Partners II GmbH & Co. KG, which were also included in the consolidated financial statement. The object of the companies is to build, hold and manage selected portfolios of assets.
Hannover America Private Equity Partners II GmbH & Co. KG, 89.0 EUR 20 990 EUR (81) Hannover/Germany 8)
Hannover Euro Private Equity Partners II GmbH & Co. KG, 54.9 EUR 24 134 EUR 8 Hannover/Germany 8)
HEPEP II Holding GmbH, 54.9 EUR 16 593 EUR (9) Hannover/Germany 8)
Hannover Life Reassurance Company of America, 100.0 USD 84 958 USD (1 401) Orlando/USA 2)
Hannover Life Reassurance (UK) Ltd., 100.0 GBP 33 074 GBP 980 Virginia Water/United Kingdom 2)
Hannover Reinsurance (Ireland) Ltd., 100.0 EUR 536 952 EUR 46 430 Dublin/Ireland
International Insurance Company of Hannover Ltd., 100.0 GBP 70 970 GBP 6 365 Virginia Water/United Kingdom
Hannover Finance, Inc., 100.0 USD 400 773 USD 8 238 Wilmington/USA 1)
Clarendon National Insurance Company, 100.0 USD 518 515 USD 16 956 Trenton/USA
Clarendon Select Insurance Company, 100.0 USD 27 121 USD 3 537 Tallahassee/USA
Insurance Corporation of Hannover, 100.0 USD 197 044 USD 11 302 Chicago/USA
Hannover Reinsurance Group Africa (Pty) Ltd. compiles its own sub-group financial statement, including the following major companies in which it holds the following shares: Compass Insurance Holdings (Pty) Ltd., 100.0 ZAR 12 125 ZAR 2 333 Johannesburg/South Africa 3)
Lireas Holdings (Pty) Ltd., 100.0 ZAR 9 743 ZAR (3 421) Johannesburg/South Africa
Hannover Re Real Estate Holdings, Inc., 94.0 USD 124 787 USD 4 951 Orlando/USA
WPG Corporate Development Associates IV (Overseas), L.L.C., 26.8 USD 2 379 USD (12) Grand Cayman/Cayman Islands
Internationale Schule Hannover Region, 11.1 EUR 570 EUR 112 Hannover/Germany 6)
Mediterranean Re, PLC, 33.3 USD 3 927 USD 268 Dublin/Ireland 2)
Inter Ocean Holdings Ltd., 10.0 USD 74 297 USD 2 451 Hamilton/Bermuda 4)
Acte Vie S.A. Compagnie d‘ Assurances sur la Vie et de Capitalisation, 9.4 EUR 6 914 EUR 8 Strasbourg/France 3)
Results for the last financial year 1) Figures as per US GAAP 2) Provisional (unaudited) figures 3) Financial year as at 31 December 2002 4) Consolidated figures 5) Financial year from 1 November 2001 to 31 October 2002 6) Financial year as at 31 July 2003 7) Voting shares: 16.26% 8) Financial year as at 30 September 2003 9) Inactive company 10) Financial year as at 31 October 2003
Due after one through five years 114 953 123 384 173 937 187 824
Debt securities issued by semi-governmental entities 145 896 8 718 – 154 614
The other income includes interest on deposits of EUR 548.8 million (EUR 539.6 million).
Within the scope of the portfolio-linked securitisation of certain reinsurance risks under transactions concluded in the years 1993 to 2002, Hannover Re retroceded business on a proportional basis to an insurance enterprise in the form of a special purpose entity that finances the business via the international capital markets. The company has been in the process of winding up since February 2003. This transaction falls within the scope of applicability of FIN 46R. Since Hannover Re's relations with the company do not constitute variable interests as defined by FIN 46R, the transaction does not give rise to a consolidation requirement.
The residual assets of the special purpose entity as at 31 December 2003 amounted to EUR 1.3 million and thus do not constitute a significant risk of loss for Hannover Re.
Since March 2002 Hannover Re has retroceded natural catastrophe risks (including hurricanes and earthquakes in the USA, windstorms in Europe and earthquakes in Japan) as well as worldwide aviation on a proportional basis to a special purpose entity that finances the business via the international capital markets. Hannover Re's relations with this entity do not constitute variable interests, and there is therefore no consolidation requirement.
Since November 2000 Hannover Re has held voting equity interests in as well as a share of the capital market bonds issued by a special purpose entity for the securitisation of reinsurance risks in France and Monaco. The total volume of the bonds issued stands at EUR 102.3 million. Based on its variable interests, the maximum risk of loss for Hannover Re from this transaction is EUR 15.7 million. Hannover Re is not the primary beneficiary in this relationship.
Investments Within the scope of asset management activities Hannover Re has participated in numerous special purpose entities since 1988, which for their part transact certain types of equity and debt capital investments. The set of variable interests associated with such structures consists largely of participations sold on the capital market to numerous investors. On the basis of our analysis we came to the conclusion that although – from Hannover Re's perspective – relations exist in the form of variable interests, there are no grounds to consider the Group the primary beneficiary in any of these transactions. A consolidation requirement therefore does not exist.
The extent of relations with entities other than those described above is presently being examined in the light of the scope of validity of FIN 46R. According to our current assessment, there is no requirement for consolidation. As things stand at this time, the total volume of these transactions and the resulting maximum risk of loss for the Group are insignificant.
Contrary to German accounting requirements, SFAS 60 "Accounting and Reporting by Insurance Enterprises" requires that acquisition costs be capitalised as assets and amortised via the statement of income in proportion to the earned premiums.
Currency exchange rate differences between valuation at the average rate and the year-end rate (7 752) (2 519)
Reserve as at 31 December of previous year (gross) 19 919 830 19 904 943
Reserve as at 31 December of previous year (retro) 6 181 645 6 768 442
Net reserve as at 1 January of year under review 12 037 083 11 582 571
Reserve as at 31 December of year under review (retro) 4 396 564 6 181 645
Reserve as at 31 December of year under review (gross) 18 703 170 19 919 830
We have identified insurance contracts which do not satisfy the requirements of SFAS 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts". These involve reinsurance treaties under which the risk transfer between the ceding company and the reinsurer is of merely subordinate importance. With the exception of the contractually agreed fee payable by the ceding company, these contracts were eliminated in full from the technical account. The profit components were netted under other income/expenses. The payment flows resulting from these contracts were reported in the cash flow statement under financing activities. Technical amounts were shown as net changes in contract deposits, the fair values of which corresponded approximately to their book values.
In accordance with SFAS 142 "Goodwill and Other Intangible Assets" scheduled amortisation is no longer taken on goodwill. Goodwill was tested for impairment in a two-step fair value process.
The disposals are attributable to the sale of the shares in E+S Rück.
The following table presents a reconciliation of the expected expense for income taxes with the actual provision for income taxes reported in the statement of income. The pre-tax result is multiplied by the Group tax rate in order to calculate the Group's expected expense for income taxes. The Group tax rate used is composed of the corporate income tax rate of 25%, the German reunification charge of 5.5% levied on corporate income tax and trade earnings tax of 13.625% calculated on the basis of this effective corporate income tax rate.
Notes notes on the individual items 5.7 Provisions for pensions and similar liabilities
Figures in EUR thousand a) Wages and salaries aa) Expenditures on insurance business 87 106 96 222 ab) Expenditures on the administration of investments 9 636 9 225 b) Social security contributions and expenditure on provisions and assistance ba) Social security contributions 11 255 11 356 bb) Expenditures for pension provision 12 601 12 013 bc) Expenditures for assistance 271 2 851
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 6.75% • Rate of compensation increase: 3.0% to 5.5% • Projected long-term yield on plan assets (US plans): 8.0%
Loans On 31 March 1999 Hannover Finance Inc., Wilmington/USA, issued subordinated debt in the form of a floating-rate loan in the amount of USD 400.0 million with a term of 30 years. The due date of the loan is 31 March 2029. It may be redeemed by the issuer no earlier than 31 March 2009.
In order to hedge against the risk of interest rate changes associated with this loan, the 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 annual interest rate arising after allowance is made for the interest rate swap amounts to 6.69% until 31 March 2009.
Hannover Re repurchased a large portion of the debt in the 2004 financial year. For further information the reader is referred to section 7.5 "Events subsequent to conclusion of the financial year".
In order to further safeguard the sustained financial strength of the Hannover Re Group, Hannover Re issued additional subordinated debt. A subordinated loan was placed via Hannover Finance (Luxembourg ) S.A. – a wholly owned subsidiary of Hannover Re – on the European capital market. The debt, which is secured by Hannover Re, was issued in the amount of EUR 350 million with a term of 30 years. It may be redeemed by the issuer after 10 years at the earliest.
Surplus debenture is shown as a liability with the amount repayable.
The stockholders' equity is shown as a separate component of the financial statement in accordance with SFAS 130 "Reporting of Comprehensive Income". The change in the stockholders' equity comprises not only the net income deriving from the statement of income but also the changes in the value of asset and liability items not recognised in the statement of income.
Authorised capital of up to EUR 25,067 thousand is available with a time limit of 13 November 2007. Of this amount, up to EUR 1,000 thousand may be used to issue employee shares. In addition, conditional capital of up to EUR 48,500 thousand is available. It can be used to grant shares to holders of convertible and warrant bonds and has a time limit of 13 November 2007.
The changes of EUR 31.6 million in the cumulative comprehensive income in the year under review resulted principally from the application of SFAS 133 "Accounting for Derivative Instruments and Hedging Activities". This development was due to changes in the fair value of interest rate swaps included in a cash flow hedge transaction used to hedge floating-rate loans.
The basic earnings per share and the fully diluted earnings per share as at 31 December 2003 shown in the statement of income are calculated as follows on the basis of the year-end result: Result (in EUR
Fully diluted earnings per share 418 321 116 224 758 3.60 243 113 110 880 742 2.19
Present value of future profits on acquired life reinsurance portfolios 12 098 14 621
Liabilities due to banks 4 502 5 775 5.14 Technical statement of income
Most of the contracts underwritten by our company are classified as short-duration contracts.
With effect from the 1997 financial year onwards all new business and renewals written on the German market have been the responsibility of E+S Rück, while Hannover Re has handled foreign markets. Internal retrocession arrangements ensure that the percentage breakdown of the business applicable to the previously existing underwriting partnership is largely preserved between these companies.
As at 31 December 2003 Hannover Re held 55.78% of the shares of E+S Rück through Hannover Rück Beteiligung Verwaltungs-GmbH (HRBV). With effect from 31 December 2003 1% of the shares in E+S Rück was sold to the Barmenia Group, as a consequence of which Hannover Re's shareholding through HRBV was reduced from 56.78% to 55.78% in the financial year.
As part of a capital increase for a contribution in kind Hannover Re increased its capital stock to EUR 120,597,134.00 through issuance of 13,716,814 new, no-par-value registered shares – each with an interest of EUR 1.00 in the capital stock. The new shares were taken up by Talanx AG and carry dividend rights with effect from 1 January 2003. Talanx AG transferred its shares in HDI Reinsurance (Ireland) Ltd. (HDIRI) to Hannover Re as a contribution in kind with commercial effect as at 1 July 2003. By means of a resolution dated 8 December 2003 HDIRI was transferred to Hannover Reinsurance (Ireland) Ltd. as part of a capital increase for a contribution in kind within the scope of restructuring activities.
Capital increases were implemented at Hannover Finance (UK) Ltd. (HF UK) on 24 June 2003 and 17 December 2003 though issuance of common stock to Hannover Re in the amounts of GBP 2.8 million and GBP 3.3 million respectively. HF UK used these funds to increase the capital of Hannover Life Reassurance (UK) Ltd. (HLR UK). Hannover Re granted a loan of GBP 1.0 million to HLR UK for a term until 20 December 2030 and at an interest rate of currently 5.4%.
In the financial year E+S Rück acquired a bearer bond of Talanx AG in the amount of EUR 40.0 million with a term until 8 July 2013 and a coupon of 5.43%.
In 2002 Hannover Re – along with HDI Privat Versicherung AG – acquired an interest of 50% in Oval Office Grundstücks GmbH (OOG) and in the financial year it contributed EUR 1.1 million as part of capital measures. By a partners' resolution of 21 February 2003 the partners individually committed themselves to contribute up to a total of EUR 31.7 million in additional cash payments to the company's equity capital.
Ampega Asset Management GmbH manages the investments of Hannover Re and those of 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.
The HDI Group grants the Hannover Re Group insurance protection inter alia in the areas of public liability, fire, group accident and business travel collision insurance. We received legal protection insurance coverage from HDI Rechtschutz Versicherung AG.
Total compensation of EUR 2,786 thousand was paid to the Executive Board and EUR 446 thousand to the Supervisory Board in the year under review. Former members of the Executive Board and their surviving dependants received EUR 823 thousand, and a liability of EUR 9,970 thousand was shown as at year-end.
The total compensation received by the members of the Executive Board included variable components of EUR 1,424.2 thousand. The variable remuneration of the Executive Board is determined on the basis of the year-end result and the value creation. The value creation is measured using an appropriate benchmark (the performance of the Hannover Re share relative to the unweighted "Reactions" World Reinsurance Index). The benchmarks cannot be retroactively changed.
Transactions implemented by Executive Board and Supervisory Board members of Hannover Re and by their spouses or registered partners and first-degree relatives involving shares, options or derivative financial instruments of Hannover Re as well as of the parent companies (so-called "Directors' Dealings"), which with effect from 1 July 2002 are to be reported in accordance with § 15a of the German Securities Act (WpHG), are set out in the table below: Name Type of transaction
With effect from 1 January 2000 Hannover Re set up a virtual stock option plan. Members of the Executive Board as well as the two further levels of management may choose to waive variable remuneration components and acquire stock options. The number of such options granted each year is based upon the diluted earnings per share under US GAAP. An additional performance criterion is the movement in the price of the Hannover Re share relative to an industry benchmark based upon the (unweighted ) Reactions World Reinsurance Index.
A present value of EUR 6.66 is assumed in order to determine the basic number of stock options. The basic number increases or decreases according to the over- or underperformance of the earnings per share. For each full amount of 3.33 cents by which the earnings per share exceeds the target performance the basic number of stock options is increased by 10%, while for each full amount of 6.66 cents by which the earnings per share falls short of the target performance it is reduced by 10%. These figures are based upon the amendment of § 3 Para. 1 of the Conditions for the Granting of Stock Options adopted by a resolution of the Supervisory Board on 11 April 2003 following the stock split of 15 April 2002.
The concrete value of the stock option is calculated as the difference between the current stock market price of the Hannover Re share at the time when the option is exercised and the reference price, i.e. the share price at the beginning of the year in which the stock option is granted. This value is paid out on exercise of the stock option.
Members of the Supervisory Board and Executive Board of Hannover Re as well as of the parent companies and their spouses or registered partners and first-degree relatives hold less than 1% of the issued shares. As at 31 December 2003 the total holding amounted to 0.027% of the issued shares, i.e. 32,601 shares. The total volume of stock options held by members of the Executive Board on the basis of the virtual stock option plan amounted to 0.55% of the capital stock as at the balance sheet date. The value of these stock options was EUR 662 thousand. Further information is provided in section 6.3 "Stock options".
The compensation received by the Supervisory Board comprises fixed and variable components determined by the paid dividend. Appropriate allowance is made for the functions performed by the Chairman and Deputy Chairman when determining the level of compensation paid to the members of the Supervisory Board. In the year under review the company did not pay any compensation to members of the Supervisory Board for personally rendered services, e.g. consulting or mediation services.
Following expiry of the waiting period a maximum of 40% of the granted stock options may be exercised. The waiting period for each additional 20% is one year. Stock options which are not exercised lapse after 10 years.
The existing option rights were valued on the basis of the Black/Scholes option pricing model using a trinomial tree method.
As at 1 January 2003 the existing number of stock options stood at 1,097,235 with an average exercise price of EUR 25.50 each. In accordance with the resolution of the Supervisory Board dated 11 April 2003 a further 710,429 option rights were granted at an average exercise price of EUR 23.74 each.
Total options existing at 1 January 1 097 235 25.50 1 138 005 25.50
In connection with the acquisition of Lion Insurance Company, Trenton/USA by Hannover Finance Inc., Wilmington/USA – a subsidiary of Hannover Re – a legal dispute exists with the former owners of Lion Insurance Company regarding the release of a portion of the purchase price at that time which is held in trust as well as a commitment to pay further portions of the purchase price and incentive compensation under management contracts.
Hannover Re has secured by guarantee a surplus note in the amount of USD 400.0 million issued in the 1999 financial year by Hannover Finance Inc., Wilmington/USA.
As security for our technical liabilities to our US clients, we have established a master trust in the USA. As at the balance sheet date this master trust amounted to EUR 1,664.2 million (EUR 1,491.9 million). The securities held in the master trust are shown as available-for-sale investments.
As security for our technical liabilities, various financial institutions have furnished sureties for our company in the form of letters of credit. The total amount of the letters of credit as at the balance sheet date was EUR 2,950.5 million.
Breakdown of nominal amounts by product type and period to maturity 2003 Figures in EUR thousand 1 to 5 years 6 to 10 years Total
Ten contracts matured in the year under review; this gave rise to profits on disposals of EUR 0.9 million and losses on disposals of EUR 0.1 million.
As part of the transaction Hannover Re bought back by 25 February 2004 under a tender offer altogether 92.5% of its USD 400 million subordinated debt issued in 1999 by Hannover Finance Inc., Wilmington, USA, so as to take advantage of the currently highly advantageous EUR/USD exchange rate. Given the fact that Hannover Re will also repay the surplus debenture of approximately EUR 120 million due in November 2004, the net interest burden will only marginally increase.
Operating leasing contracts produced expenditures of EUR 5,563 thousand in the 2003 financial year.
Rented property Hannover Re Real Estate Holdings rents out real estate in Florida; the period of the rental contracts ranges from three to ten years. Non-cancellable contracts will produce the income shown below in subsequent years: 7.6 Rents and leasing
We have audited the consolidated financial statements of Hannover Rückversicherung AG for the business year from January 1 to December 31, 2003, comprising the balance sheet, income statement, statement of changes in stockholders' equity and statement of cash flow as well as the notes to the financial statements, in accordance with the Accounting Principles Generally Accepted in the United States of America (US GAAP). The preparation and content of the consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
In our opinion, the consolidated financial statements give a true and fair view of the net assets, financial position, results of operations and cash flows of the Group in accordance with the Accounting Principles Generally Accepted in the United States of America.