+++ Financial year overshadowed by the financial market crisis +++ Net investment income: EUR 278.5 million (EUR 1,121.7 million) due to writedowns and losses realised on equities of 640.9 million euro +++ Combined ratio in non-life reinsurance: 95.4% (99.7%) +++ Operating profit (EBIT): EUR 148.1 million (EUR 928.0 million) +++ Group net loss: EUR -127.0 million (Group net income: EUR 721.7 million) owing to negative tax effect +++ Very good earnings prospects for 2009 +++ hannover re R
Management report of the Hannover Re Group . . . . . . . . . . . . . . . . . . . . . . . 16
Consolidated statement of changes in shareholders' equity . . . . . . . 79
Earnings per share (diluted) in EUR (1.05) -117,6% 5.98 4.27 0.41 2.32 11/157
Book value per share in EUR 23.47 -15.5% 27.77 24.03 21.57 20.93 9
Dividend per share in EUR – 1.80+0.50 2) 1.60 – 1.00 158
Share price at year-end in EUR 22.50 -28.7% 31.55 35.08 29.93 28.75 8
Return on equity (after tax) -4.1% 23.1% 18.7% 1.9% 11.5% 13
In the year just-ended the global financial system was shaken to its core with a severity that could not have been foreseen. Doubts about its stability triggered a collapse in equity prices around the world. Your company's balance sheet was also not left unscathed by all this turmoil. I therefore have no hesitation in describing 2008 as a lost year.
Looking at things from a rather different perspective, however, I would also like to highlight another aspect for you, our valued shareholders. If we leave aside the strains that had to be absorbed on the investment side, the crisis on financial markets will have a number of thoroughly positive consequences for our business: the loss of capital incurred by primary insurers is leading to a greater need for reinsurance, prompting prices on reinsurance markets to begin rising again! In the case of the United States, alone, it is anticipated that the insurance industry has lost around USD 80 billion in capital.
Your company is well equipped to make the most of these opportunities. For in spite of its negative result Hannover Re has no solvency issues. Our financial resources are strong and solid. This was reinforced by the rating agency Standard & Poor's, which confirmed our very good rating of "AA-" with a stable outlook following the profit warning that we issued in October. Similarly, the rating agency A.M. Best – which is of particular importance for the US market – confirmed our "A" rating with a positive outlook. We thus continue to be a preferred partner for our clients. For a reinsurer, a top rating is a prerequisite for being offered and awarded the full spectrum of business to
underwrite, while at the same time it is also the key to being able to select those treaties that promise the strongest profitability.
In view of our stable financial standing, our business prospects for 2009 are therefore exceptionally bright.
Firstly, however, I would like to return to the year under review: I am satisfied with the technical development of our non-life reinsurance business group, even though the burden of major claims and catastrophe losses – principally due to the severe hurricane "Ike" – was somewhat higher than our expectations. Although prices in the year under review were notable for softening tendencies in some major markets, conditions were very largely acceptable. All in all, the prices that we obtained in 2008 were commensurate with the risks.
We remained true to our maxim of "profit before growth" in the year under review; in areas where we did not consider rates to be adequate, such as US casualty business, we reduced our involvement – while at the same time tapping into new market and product niches. In Brazil, the largest insurance market on the South American continent, we established a representative office following the abolition of that country's reinsurance monopoly. As an "admitted reinsurer", we thus enjoy an optimal platform for participating in this up-and-coming market.
As you, our valued shareholders, are aware, your company has long made a name for itself with the innovative transfer of (re)insurance risks to the capital market – both in non-life and life/health reinsurance. In the year under review we went one step further and are now enabling our clients to access the capital market by appropriately packaging and structuring risks that do not lend themselves to such transactions on a stand-alone basis. We successfully completed the first project of this type in June 2008 through "Globe Re". As far as our own risk management is concerned, we again transferred catastrophe risks to the capital market in the year under review so as to better protect our equity base against exceptional major losses.
In life and health reinsurance, too, we were able to place a portfolio on the international capital markets in 2008. By way of this transaction – designated "L7" – we continued to diversify our risk and secured for our company greater financial flexibility with an eye to the further expansion of our life and health portfolio.
I am similarly satisfied with the development of our life and health reinsurance business: premium growth was by no means as vigorous as in previous years, reflecting the restraining effects of exchange rate movements – especially in the pound sterling and US dollar. Nor was the result entirely convincing in comparison with the outstanding previous year, which had been influenced by a number of special effects. Nevertheless,
The next point that I would like to discuss is, understandably, a particularly disappointing one for you, our valued shareholders: the dividend. Given the negative result in the year under review, the Executive Board and Supervisory Board will propose to the Annual General Meeting that no dividend should be paid. Why is this? It has been pointed out to me on several occasions that in view of our retained earnings we would be in a position to make a distribution. That is true. Such a step would, however, reduce our capital base and hence restrict our opportunities to write profitable business in an increasingly attractive market. For your company it has always proven worthwhile to grow when rates are rising. In order to expand in this way we need capital that we can put to profitable use. With this in mind, therefore, I hope that you will endorse our dividend proposal.
The business environment in life and health reinsurance is similarly favourable: here, too, the financial market crisis will raise awareness among the urban middle classes of the need for private provision, hence generating significant growth stimuli worldwide. What is more, with the acquisition of a US individual life reinsurance portfolio we have taken a major step towards accomplishment of our global objectives in life and health reinsurance. This acquisition will not only boost our premium volume to a level in excess of USD 1 billion, it will also enhance the diversification of our earnings streams. Following this transaction, life reinsurance business – which is notable for its greater stability – will account for a considerably larger share of the total portfolio going forward.
On behalf of all my colleagues on the Executive Board I would like to thank you, our valued shareholders, for your trust. Rest assured: we shall do everything in our power to equip Hannover Re to handle the opportunities and risks that lie ahead. Our goal, as always, is to consistently improve the value of your company. With this in mind I look forward to the challenges of 2009.
Wolf-Dieter Baumgartl 1) 2) 3) Chairman of the Supervisory Board Berg Talanx AG Chairman HDI Haftpflichtverband der Deutschen Industrie V.a.G.
Dr. Klaus Sturany 1) Former Member of the Executive Board Dortmund RWE Aktiengesellschaft Deputy Chairman
Herbert K. Haas 1) 2) 3) Chairman of the Executive Board Burgwedel Talanx AG
Karl Heinz Midunsky 3) Former Corporate Vice President and Treasurer Gauting Siemens AG
Dr. Erhard Schipporeit 2) Former Member of the Executive Board Hannover E.ON Aktiengesellschaft
Controlling; Internal Auditing; Risk Management; Investor Relations, Public Relations; Corporate Development; Human Resources Management
Coordination of entire Non-Life reinsurance; Quotations Non-Life reinsurance; Non-Life Treaty Reinsurance North America and English-speaking Africa; Structured Products worldwide
The international financial market crisis dictated events on the world's stock markets in 2008. At the very outset of the year massive write-downs taken in the portfolios of international financial institutions brought about a steep collapse on equity markets. News of the urgent need for capital at some US bond guarantors and German regional banks as well as the forced sale of the fifthlargest investment bank in the United States prompted further price declines in the first quarter of 2008.
In the wake of the reporting season on the fourth quarter of 2007 equity markets steadied thanks to positive signals until the end of May 2008, before growing fears of recession and reports about the funding needs of various financial institutions triggered a fresh downward slide. In mid-September news of the fire sale of another US investment bank, the looming collapse of the world's largest insurer and above all the insolvency of the fourth-largest US investment bank unleashed outright panic on the markets: despite moves by central banks to slash interest rates, the Dax and Dow Jones had shed 20% by the end of October, while the Nikkei 225 Index lost as much as 30%.
The movement of the Hannover Re share in the year under review was to a large extent similarly shaped by the crisis on financial markets. After the sharp fall in January, however, our business figures for the record year of 2007 initially prompted an upward climb and a clear decoupling from the general market trend. Our share reached its highest point of the year on 5 May 2008 at EUR 35.79. In early June, however, a downward trend set in against the backdrop of the aforementioned crisis news and gathered impetus from mid-September onwards. Shortly after the release of our profit warning – motivated primarily by write-downs on equity investments – our share touched its lowest point of the year of EUR 15.70 on 28 October 2008. A rally followed, boosted by positive expectations for the upcoming treaty renewals. Our share was listed at EUR 22.50 on 30 Decem-
In a three-year comparison (see chart) the Hannover Re share including reinvested dividends delivered a performance of -15.9%. It thus surpassed the MDax and Prime Insurance Performance Index, but fell just short of the Dax. In 2008 we did not achieve our strategic objective of outperforming the weighted ABN Amro Global Reinsurance Index in a three-year comparison.
DaxHannover Re share 2 Ja nuary 30 M arch 3 Ju ly 2006 29 Sep te mber 14 N ove mber 2 Ja nuary 2 A pril 5 Ju ly 2007 3 O cto ber 16 N ove mber 8 Ja nuary 9 A pril 9 Ju ly 2008 22 A ugust 7 O cto ber 30 D ec em ber
Performance of the Hannover Re share in comparison with standard indices and the ABN Amro Global Reinsurance Index*
The market capitalisation of the Hannover Re Group totalled EUR 2,713 million as at year-end. With a free float market capitalisation of EUR 1,253 million our company ranked eighth in the MDax at the end of December, while our share came in at number 13 according to the criterion "Trading volume over the past 12 months" with a traded volume of EUR 4,962 million for the year. According to both criteria, therefore, the Hannover Re Group ranks among the 50 largest listed companies in Germany.
With a book value per share of EUR 23.47 the Hannover Re share recorded a price-to-book (P/B) ratio of 0.96 as at the end of December, compared with a higher MDax average of 1.01.
Interest in our company among analysts remained lively in the year under review. According to Bloomberg and Reuters, analysts handed down altogether 140 opinions for Hannover Re in 2008. Despite the turmoil on stock markets they recommended the Hannover Re share as "buy" or "overweight" on forty-two occasions. The vast majority of opinions (67) were a "hold". Recommendations to "underweight" or "sell" were issued thirty-one times. At the outset of the new 2009 financial year the price target for our share – averaged across all analysts – was around EUR 23.
Our annual Investors' Day is another highlight of our Investor Relations activities. In 2008 we held this event in London and were again pleased to welcome numerous financial analysts and investors. We use this gathering as an opportunity to provide our guests with firsthand insights from the Executive Board. Topics covered in the year under review included risk management as it relates to our non-life reinsurance business as well as explanations of our securitisation transactions, although a presentation on the growth potential inherent in life and health reinsurance was by no means neglected.
• One of the three most profitable reinsurers in the world
• Increasing our profit and the value of the company by a double-digit percentage every year
Strategic Objectives 1. Profitable Growth: Return on equity of at least 750 basis points above the "risk-free" interest rate – Triple-10 target – Allocation of capital to generate the maximum risk-weighted profit – Increase in the share price > Global Reinsurance Index – Lowest cost of capital in the industry 2. Capital Protection: Positive return on equity in at least nine out of ten years 3. Preferred Business Partner: Highly capable – Rating of at least "AA-" from S&P and "A+" from A.M. Best.
4. Motivated Employees: Skills and motivation just as crucial to success as capital resources 5. Lean Organisation: Effective and efficient organisation geared to business processes – Safeguarding of know-how and cost leadership
Hitherto sound banks had to rely on state assistance in order to stay afloat. The rescue packages put together by governments in the major industrial nations sought to defuse the crisis and restore the trust in the financial system that had been lost. The crisis on financial markets did, however, signal the end for the "investment bank" as a business model: in September the last two remaining institutions relinquished their special legal status and were transformed into commercial banks.
The German economy initially stayed on its growth track in the year under review despite the turmoil on capital markets. Particularly in the second half of the year, however, a plethora of bad news in connection with the difficult state of financial markets cast a heavy shadow over economic prospects. Eventually, as German financial institutions also got into difficulties over the course of the year, the federal government responded with the Financial Markets Stabilisation Act in October. In a further step to consolidate the German economy it also adopted a package of measures designed to safeguard jobs.
With just a few exceptions, the impact of the financial market crisis on the insurance industry was nowhere near comparable with the toll it took on the banking sector. Rather, against the backdrop of wide-ranging uncertainties it again emerged as an important factor in economic stability. In this context the Solvency II Directive Proposal of the European Commission is also taking on increasing significance: it is intended to provide Europe with riskbased regulatory legislation in order to secure the financial market and strengthen the continent's own role as a global location for the insurance business.
In view of the high volume of write-downs taken, we published an ad hoc disclosure on 21 October 2008 in which we reported on a substantial profit decline for the third quarter.
Irrespective of the appreciable value adjustments on our equity portfolio, however, Hannover Re does not – unlike the various banks that got into difficulties – have any liquidity or solvency problems whatsoever. Our long-term financial strength remains robust. This was also reaffirmed by the rating agency Standard & Poor's, which confirmed our very good rating of "AA-" with a stable outlook in October after the issue of our profit warning.
The repercussions of the financial market crisis on our reinsurance business were as follows: In life and health reinsurance the income statement took a charge from derivatives embedded in US modified coinsurance contracts. The total charges here amounted to EUR 72.1 million.
In non-life reinsurance the effects of the financial market crisis were particularly notable in the directors' and officers' (D&O) and professional indemnity lines. The number of our directly exposed D&O contracts in the United States – at nine – was minimal in 2008; this was also true of the maximum amount of liability. The premium volume was in the order of EUR 35 million. Our exposure was even more modest in professional indemnity business. Other contracts that could be affected in the widest sense by the financial market crisis cover attorneys, auditors, architects, small banks and real estate brokers. The exposures under these contracts are appropriately reflected in our IBNR reserves.
Development of operating business Reinsurance business developed satisfactorily in the year under review: the market environment for non-life reinsurance was softer overall, as expected, and rates declined in most lines. Nevertheless, for the most part we were able to obtain prices that were commensurate with the risks.
The balance of major claims and catastrophe losses was burdened by a number of severe natural disasters – especially hurricane "Ike" – in the year under review and came in slightly higher than the multi-year expected level.
Following the withdrawal from specialty business at the beginning of 2007 and in the face of weak exchange rates – especially the US dollar and pound sterling in the first half-year – gross written premium in total business contracted by 1.7% to EUR 8.1 billion (EUR 8.3 billion). At constant exchange rates the premium volume would have grown by 3.9%. The level of retained premium increased to 89.1% (87.4%) as a consequence of appreciable savings on the costs of our own protection covers and reduced proportional cessions; net premium earned fell by 3.2% to EUR 7.1 billion (EUR 7.3 billion).
A large portion of the realised gains totalling EUR 379.2 million (EUR 244.0 million) can be explained by the tactical modification of durations in the US dollar portfolio undertaken in the first quarter as well as the liquidation of the hedge on around one-fifth of the equity portfolio in the fourth quarter. This contrasted with realised losses of -EUR 492.8 (-EUR 69.7 million) attributable largely to the sharp reduction of the equity allocation in the fourth quarter. The necessary write-downs of altogether EUR 479.9 million (EUR 71.4 million) were due in very large measure to the downslide on equity markets during the first three quarters, while write-downs on fixed-income securities accounted for an amount of EUR 96.9 million. The unrealised gains reported in the statement of income derived primarily from US quota share reinsurance treaties with a retained deposit, under which the partial assumption of default risks is envisaged and appropriately recognised. Total net investment income contracted by 75.2% to EUR 278.5 million (EUR 1.1 billion).
+++ Financial market crisis leaves a clear mark on investment income +++
Compared to the position as at 31 December 2007, shareholders' equity decreased by EUR 519.0 million in the year under review to EUR 2.8 billion. The book value per share consequently fell by 15.5% to EUR 23.47. The total policyholders' surplus – consisting of shareholders' equity, minority interests and hybrid capital – amounted to EUR 4.7 billion (EUR 5.3 billion).
Alongside traditional retrocessions we also conserve our capital by transferring insurance risks to the capital market.
Non-life reinsurance is our largest and most important business group. Overall, business developed satisfactorily in the year under review. Although some major markets and lines exhibited softening tendencies (for example North America and marine business), the treaty renewals as at 1 January 2008 – the time of the year when around two-thirds of our treaties are renegotiated – passed off largely favourably. The rate reductions proved to be smaller than had been anticipated, and by and large we continued to obtain prices and conditions that were commensurate with the risks. These tendencies were reaffirmed in the mid-year treaty renewals as at 1 July 2008 in the United States; profitable acceptances were still possible based on the appropriate selection. Similarly, we were broadly satisfied with the renewal of treaties in Australia and New Zealand at the same point in time. Rates in non-proportional property business held stable; price increases were pushed through under programmes that had suffered losses.
Cornerstones of our underwriting continue to be our active cycle management and profit-oriented underwriting policy, according to which we concentrate on those segments that promise the greatest profitability. In the year under review we were able to largely offset more pronounced premium declines in some areas with increases in the German market and in worldwide credit and surety reinsurance.
Our so-called retakaful business continues to fare well: thanks to the strong economic growth recorded to date in Southeast Asia and the Near East, we were able to substantially enlarge our premium volume in the year under review.
In the year under review Hannover Re was the recipient of several distinctions: the highly respected international trade magazine "The Review" crowned us Reinsurance Company of the Year, and our Chief Executive Officer
Management report non-life reinsurance oly in Brazil we established a representative office in Rio de Janeiro and received a licence as an "admitted reinsurer " in July of the year under review.
Following the withdrawal of Clarendon Insurance Group, Inc. from active specialty business, only International Insurance Company of Hannover Ltd., London, and Compass Insurance Company Ltd., Johannesburg, continue to transact primary insurance. Both companies again significantly boosted their premium income in the year under review. On account of several major loss events, however, the result posted by International Insurance Company of Hannover declined, while Compass Insurance Company's performance was highly gratifying.
In the year under review we again took steps to ensure that our equity base is not strained by exceptionally large losses. On the one hand, for example, we further scaled back our peak exposures, while on the other we topped up our "K5" capital market transaction by an extra USD 10 million.
+++ Further capital market transactions in the year under review +++
Percentage breakdown of gross premium income in non-life reinsurance by line of business
market in several tranches. A special purpose entity named "Globe Re", which is capitalised at USD 133 million, was established in Bermuda for this transaction.
The underwriting result improved to EUR 184.7 million, compared with a deficit of EUR 26.7 million in the previous year. Net investment income fell by 98.6% in the year under review to EUR 11.1 million (EUR 783.3 million) owing to the heavy write-downs that had to be taken on equities. It should be mentioned in this context that our equity investments are traditionally allocated to non-life reinsurance, and the strain in this business group was therefore disprportionately higher than in life and health reinsurance. The operating profit (EBIT) in non-life reinsurance consequently fell sharply by 99.7% to EUR 2.3 million (EUR 656.7 million). Group net income contracted by 129.3% to -EUR 160.9 million (EUR 549.5 million); the previous year's result included a positive
Earnings per share in EUR (1.33) -129.3% 4.56 3.97 0.04 2.24
The domestic market is served by our subsidiary E+S Rück. As the dedicated reinsurer for the German market, the company has for decades been a sought-after partner thanks to its excellent financial standing, highly developed customer orientation and the continuity of its business relationships. E+S Rück continues to rank second in Germany, the second-largest non-life reinsurance market in the world.
Terms and conditions were also gratifying in casualty insurance, and here too we were able to post a good result.
Personal accident insurance, which remains one of our target lines, continued to develop favourably. In addition to the traditional assumption of risks in treaty and facultative reinsurance, our clients again benefited from our product innovations in the year under review; by way of example, we may cite here the combined personal accident annuity product designed by our company that also provides benefits in case of severe illnesses. Furthermore, we complemented our range of services in the year under review through our cooperation with external providers.
By way of increased treaty shares under existing accounts and new customer relationships we were able to further enlarge our market share in the year under review and extend our position as one of the leading reinsurers in the profitable German market.
Our premium volume in the year under review remained stable; all in all, the loss experience was moderate.
Management report non-life reinsurance ations are therefore of major significance in relations between insurers and reinsurers.
+++ Hannover Re posts very good result in credit and surety reinsurance +++
Despite the worsening economic environment in Europe primary insurers again increased their retentions. An oversupply of reinsurance capacity continues to prevail, although ceding companies are placing greater emphasis on the financial strength of their reinsurers. The rate decline on the primary insurance side was halted in the wake of the financial market crisis. In some regions, such as Italy and Spain, rates even increased significantly. Although conditions on the reinsurance side deteriorated somewhat, they are still adequate. Demand for protection in the political risks segment rose worldwide.
A rising claims frequency was observed in the credit line, especially in Spain and Italy. While a slight increase in claims was also witnessed in other countries, the previous year had been notable for a record historic low. The claims experience in surety business and the political risks segment was favourable.
When the hype has subsided and the glamour faded, true values shine through once again. Experience and knowledge regain their former status. Solidity is back in demand, and tailored solutions are more impor tant than ever.The vir tues of old are also those of tomorrow. And a crisis opens up new oppor tunities.
In the year under review we continued to optimise our portfolio in builder's risk insurance and pursued a longterm strategy of consistent expansion. Operations at our Paris office for life reinsurance business were extended in 2008 to include facultative and treaty reinsurance in the personal accident line.
Our premium volume was slightly scaled back in the year under review.
All in all, we were satisfied with the development of our business in the Netherlands.
The Italian non-life market again generated only very marginal growth in the year under review in the face of an onerous economic climate; there were no significant shifts in market shares. The volume of business ceded contracted in 2008 as insurers raised their retentions. The consolidation phase on the Italian market has been largely completed; under currently applicable anti-trust laws the present market leaders cannot take over any further competitors.
The positive claims trend in motor and industrial business fanned fierce competition in these lines, putting rates under appreciable pressure. On the other hand, in private customer business – with the exception of motor insurance – rates and conditions were adequate. Thanks to our selective underwriting policy we were able to achieve
Denmark launched a new insurance product on the market in the year under review in the form of liability coverage for latent construction defects. For new building projects it must now be demonstrated that such a policy has been taken out at the time of applying for a construction permit. We expect this regulation to generate attractive new business opportunities.
Insurers in Northern Europe, in common with players in other markets, had to take heavy write-downs as a consequence of the financial crisis – with Iceland being particularly hard hit. The nationalisation of that country's three largest banks and the associated problems for Icelandic captives – as owners of the major insurers – are enormous issues, and the repercussions of these developments cannot as yet be clearly grasped. It is likely that the companies will sell foreign-based insurance subsidiaries. Hannover Re does not, however, expect these circumstances to have any adverse implications for its reinsurance operations.
Premium income in Northern Europe contracted slightly in 2008. On the claims side we were thoroughly satisfied with the situation: fire claims decreased in frequency in the year under review, and our basic loss ratio in fire business therefore fell. Based on the loss information currently available, we expect a major fire claim in Finland to produce a strain in the lower single-digit millions for our account.
The situation on the reinsurance side was more favourable: conditions and rates held stable with few exceptions.
Our underwriting policy in these markets is opportunistic, and we prefer non-proportional treaties. It is gratifying to note that ceding companies are increasingly showing technically acceptable prices overall. We enlarged our premium volume.
2008 was notable for an increased number of small and mid-sized claims. A severe fire claim occurred in Russia. Winter storm "Emma" caused relatively heavy losses in the Czech Republic, Slovakia and Hungary, while Slovenia was impacted by heavy hailstorms in July and August. The strain for Hannover Re's account was moderate, however, enabling us to generate another gratifying profit in this region.
The North American (re)insurance market is the world's largest single market and currently the second-most important for Hannover Re's portfolio. It accounted for 27.0% of our premium volume in non-life reinsurance.
The economic climate in North America was stretched to breaking point in the year under review. Consumers exercised considerable restraint in the face of the financial market crisis, and the economy slipped into recession. The real estate sector continued to be particularly heavily overshadowed by the crisis. Yet a number of the market's largest ceding companies also found themselves in financial difficulties – most strikingly the market leader in the United States. As a consequence of a reduced capital base, not all insurers were able to run retentions on their customary level.
Of special relevance here is the contraction in equity resources on the primary insurance side. The situation as at the end of the year under review was almost back on a par with the starting point in 2005. What this means is de facto zero growth in equity capital opposed by four years of exposure increases. Surplus capital has been largely exhausted, and the excess reserves of the hard market have been released; declining investment income is another factor. All these considerations will serve to push up prices in 2009. On the reinsurance side too a significant surge in demand and hence more attractive rates can therefore be expected, especially in the area of catastrophe reinsurance.
With a view to optimising the diversification of our portfolio we again scaled back larger shares with some cedants in the year under review, while at the same time expanding our business relationships with mid-sized regional players and mutual insurers. This business segment has been progressively enlarged over the past five years and now accounts for around 20% of our total portfolio. Going forward, the focus of our activities in North America will be on systematic adherence to our client segmentation, with greater weight attached to strategically oriented customer relationships.
Management report non-life reinsurance back our market shares in property and casualty business – which at the end of the harder market cycle in 2004 and 2005 had still been in excess of 3% – to the current levels of around 2.5%. We nevertheless continue to form part of the small group of reinsurers that are approached for placement and pricing.
In view of the general economic environment we scaled back our involvement, albeit without relinquishing our place as the third-largest reinsurer. We selectively expanded our market position in the political risks segment.
Percentage breakdown of gross written premium in the US by line of business
Particularly in the first half of the year most lines saw rate reductions, although slight improvements were recorded thereafter. All in all, prices were commensurate with the risks.
Following the abolition of Brazil's reinsurance monopoly in 2008, we opened a representative office in Rio de Janeiro and are now able to operate in the Brazilian market as an "admitted reinsurer". This gives us an optimal platform for acquiring a satisfactory market share in Latin America's largest market. The business written in Brazil encompasses both obligatory and facultative acceptances in all lines, including motor, aviation, credit and surety, agricultural risks, structured products and life reinsurance.
Our premium volume from Latin American markets grew slightly in the year under review. On the claims side the severe hurricanes "Ike" and "Gustav" were the most notable events in the year just-ended, causing the loss ratio to rise somewhat.
Africa Our most important market on the African continent is South Africa, where we are represented by our Johannesburg -based subsidiary, Hannover Re Africa.
The South African insurance and reinsurance markets were again notable in the year under review for fierce competition among foreign providers. The technical results posted by ceding companies came under appreciable pressure on account of a number of sizeable fire claims, and prices in this area climbed. Insurers nevertheless again raised their retentions and demand for facultative covers fell.
In Africa Hannover Re predominantly reinsures specialty risks – such as building insurance for thatched homes – written by managing general agents. A portion of this specialty portfolio is assumed from our subsidiary Compass Insurance Company.
Our strategic objective in South Africa is to expand our business accepted through underwriting agencies. We accomplished this goal in the year under review and were able to significantly boost our premium volume. In addition to setting up a new MGA in the year under review we acquired MUA Insurance Company, in which we already held a 49% stake. It is envisaged that the company – which has hitherto focused on the insurance of luxury automobiles – will be transformed into a managing general agent.
Given the increased strategic importance of Hannover Re Africa within the Group, Standard & Poor's upgraded its rating in the autumn from "BBB+" to "A" with a stable outlook. This reflects our subsidiary's very good capitalisation as well as the favourable development of its operational business.
We therefore enjoy the status of "core reinsurer" with most major primary insurers.
In the year under review the Japanese insurance market recorded negative growth as automobile and real estate sales declined. Although the financial market crisis did not affect Japanese insurers as severely as it did providers in other countries, investment portfolios were nevertheless adversely impacted by the volatility on stock markets.
Despite the generally difficult environment, our premium income in Japan remained virtually unchanged in the year under review. All in all, we were thoroughly satisfied with the development of our business in this market.
Further rate reductions were recorded throughout Southeast Asia in 2008 in both the insurance and reinsurance sectors. Our main markets in this region are Malaysia, India, the Philippines and Indonesia.
Our portfolio here is composed principally of property business, which we further diversified in the year under review. Lines such as personal accident, crop and livestock insurance, motor with limited liability as well as structured covers were systematically expanded. Overall, we observed sustained demand in the year under review for structured products in Asian markets, including for example in India, Indonesia, Thailand, South Korea and the Philippines. In China the global financial market crisis was a key driver of our business opportunities in the area of structured covers.
In facultative reinsurance we are a sought-after partner in Southeast Asia for non-proportional property business and liability covers.
The number of primary insurers in the Philippines and Pakistan decreased in the year under review in the face of new solvency regulations (risk capital requirements). In Malaysia, too, a number of providers have disappeared from the market – in this case due to mergers and acquisitions. The situation was quite different in India, where new competitors entered the arena.
Retakaful business – that is to say, insurance business transacted in accordance with Islamic law – once again generated dynamic growth for our portfolio both in Southeast Asia and on the Arabian peninsula: this can be attributed to the favourable state of the economy in the Gulf States, which was supported by high oil prices – at least until the autumn – as well as a boom in public and private investment. The effect of the financial market crisis on economic growth in the Gulf States has hitherto been at most marginal.
Both regions saw appreciable rate reductions in the year under review. In China, however, reinsurance rates held stable in view of the inadequate results recorded in 2007; conditions improved slightly.
Hannover Re pursues an opportunistic underwriting policy in the aforementioned markets. We accept primarily non-proportional business that meets our profitability standards; this is especially true of China, where the market is dominated by proportional treaties. We stood by this strategy in the year under review and enlarged our non-proportional portfolio, while at the same time stepping up our involvement in casualty lines. Our premium volume consequently showed modest growth.
+++ Natural disasters are the dominant feature of the financial year in China +++
The loss scenario was more favourable in Hong Kong and Taiwan, where our account incurred only small and mid-sized claims.
Australia Hannover Re still ranks third in the Australian non-life reinsurance market. For more than 20 years we have been represented by a branch office in Sydney. Our clients value us as a reliable and attractive partner on account of this local presence as well as our very good rating.
In accordance with a decision of the Australian insurance regulator, from 31 December 2008 onwards non-local reinsurers are required to furnish collateral for their contracts; as a locally based provider we therefore enjoy an edge over some market players.
Following a very strained claims situation in Australia in the previous year, the losses incurred by Hannover Re in 2008 were moderate. A number of flood losses occurred in Queensland, although none of these developed into a major claim for our company. In addition, a gas explosion resulted in a business interruption claim, the effects of which for Hannover Re were, however, only minimal.
We’ve all seen them a thousand times. A roof somewhere down in the south of Europe. It preserves walls and rooms against storms, rain, heat and cold. It aver ts all risks, yet without being overly protective. It allows the air to circulate, affords cool escape in summer and comfor ting warmth in winter. It costs little and endures. Perfect protection.
The operating units of Hannover Life Re are active at more than twenty locations on all five continents in order to offer our clients optimal local service. We operate as a decentralised network through our subsidiaries, branches and service offices. This organisation safeguards the rapid and efficient transfer of knowledge in the interests of our clients at all times and all around the world.
Along with Hannover Life Re Bermuda, which is reporting on a full financial year for the first time after receiving its licence in October 2007, our new branches in Shanghai and Seoul commenced their operational activities; in the second half of 2008 we also established a service
Turning to the investments side, our life subsidiaries in the United States and Ireland took particularly heavy charges on account of the fair value adjustments made for reinsurance funds deposited with US cedants. These adjustments (prompted by the so-called DIG B36 provisions of FAS 133) reached a record level of EUR 72.1 million – in particular due to the substantial widening of risk premiums on corporate bonds in the course of the year – and were charged to the operating result (EBIT) accordingly. It should, however, be noted that from today's perspective this involves unrealised losses that may be significantly reduced over the remaining term depending upon movements on capital markets.
Hannover Life Re's tried and trusted business model is based on a range of five structurally distinct product and service offerings that are known as the "five pillars". Unique expertise is the feature of each pillar, and this enables us to provide our cedants with solutions tailored to their specific needs.
To a growing extent, it is the case that multiple business centers of Hannover Life Re participate in the implementation of reinsurance solutions for our key account relationships. In this way we are able to optimise our risk and financial resources in the best interest of the customer and efficiently bundle the worldwide capacities of Hannover Life Re. In this context, our two subsidiaries Hannover Life Re Ireland and Hannover Life Re Bermuda play a particularly pivotal strategic role.
The leading international rating agencies are also displaying growing interest in Hannover Life Re's unique risk and business model. In this connection Standard & Poor's recognised most foreign life subsidiaries of Hannover Life Re as core companies of the Hannover Re Group in the fourth quarter of 2008.
Breakdown of gross written premium according to the “five pillar model” (in %)
company in Mumbai – concentrating on life and facultative non-life business – to serve the Indian market.
With a view to the further cultivation of this vital threshold market we were able to agree upon a strategic partnership with the leading Indian reinsurer GIC Re; this was cemented in June 2008 with the official signing of the cooperation agreement in Mumbai. We also established a service company in Rio de Janeiro in the middle of the year under review, thereby completing our entry into the Brazilian life market.
Net premium incl. premium deposits 4,911.8 +37.2% 3,579.0 3,457.8 2,532.1 2,223.5
The gross premium income booked by Hannover Life Re totalled EUR 3.1 billion (EUR 3.1 billion) in the year under review; this corresponds to growth of 1.7% year-on-year. The strength of the euro against our three most important foreign currencies – namely the pound sterling, US dollar and Australian dollar – means that the real increase in the international portfolio is not fully reflected; at constant exchange rates growth would have stood at 7.9%. Net premium earned contracted by 0.4% to EUR 2.8 billion (EUR 2.8 billion) owing to a slight reduction in the level of retained premium.
Our preferred lines of life and annuity – in which the biometric risks of mortality and longevity are of primary relevance from the standpoint of risk considerations –
The situation as regards the biometric risk of mortality, to which we are exposed principally through our acceptances in the United Kingdom, South Africa, Australia and the Asian markets, was highly satisfactory overall, although we did observe a slightly increased loss ratio at some UK cedants in connection with the "Treating Customers Fairly" initiative.
The morbidity factor is constituted by a combination of different risk profiles from critical illness covers, US senior health medicare supplement plans, long-term care annuities and the usual occupational disability riders
from the German and French markets as well as Australian disability covers. Involuntary unemployment insurance, which is offered in many markets in conjunction with protection for consumer loans, also belongs in this category. The claims experience here varied widely: it was very good under critical illness covers and long-term care annuities, slightly poorer for US supplementary health products and less favourable for disability annuities on the Australian market.
We do not offer reinsurance protection for long-term financial guarantees in connection with deferred unitlinked annuities.
The longevity factor has been of special relevance to our company for many years due to our market leadership in the UK; working closely together with our clients, we continuously analyse the short-, medium- and long-term trends of this risk category using an extensive range of actuarial methods. The claims experience in the year under review was in line with our projections.
The risk associated with the persistency of the in-force reinsured portfolios and the counterparty risk did not exhibit any peculiarities in the year under review –
Implementation of the reform tied up considerable resources at providers, especially for the conversion of internal processes; the restructuring of sales processes was similarly reflected in a drag on new business that was particularly visible in the first half of 2008.
On the other hand, new business profited from government -assisted "Riester" annuity products, for which the
E+S Rück, which serves the German market within the Hannover Re Group, saw its premium income in life and health reinsurance decline to EUR 381.9 million (EUR 428.6 million) in 2008. Key factors in this development were the further planned run-off of a large transaction from 2004 and the reduction of our involvement in financing new business acquisition costs on the German market. In the fourth quarter of 2008 a mid-sized block assumption transaction with a planned term of ten years was written with a life insurer in western Germany. The operating profit (EBIT) in 2008 was positive.
As in the past, we attach considerable importance to lean processes and a flat management structure at all our operating units. With internal administrative expenses of EUR 70 million – corresponding to an expense ratio of 2.2% relative to gross written premium – we were again the cost leader among highly reputed international life and health reinsurers in the year under review.
While traditional reinsurance relationships were adversely impacted by slowing new business on the back of the mortgage crisis, the vitality of the private annuity segment was undiminished. We significantly extended our customer base in this area and have considered ourselves the market -leading reinsurer for many years.
Ireland significant strain on the company's profitability was incurred in the investment sector, however, as a consequence of fair value adjustments (B36) in excess of EUR 29 million for securities deposits furnished to US cedants.
Gross written premium contracted by 7.6% to EUR 857.1 million (EUR 927.4 million) on account of the weakness of the pound sterling; of this amount, 43.0% was attributable to business written by Hannover Re, 21.4% to Hannover Life Re United Kingdom, 32.8% to Hannover Life Re Ireland and 2.8% to Hannover Life Re Bermuda.
With net premium of EUR 100.7 million (+7.8%) and an operating profit (EBIT) of EUR 22.8 million (EUR 26.3 million), our UK subsidiary Hannover Life Re United Kingdom based in Virginia Water outside London delivered a very pleasing result; net income after tax came in at EUR 16.5 million (EUR 19.7 million).
In the Scandinavian markets we support first and foremost life insurers that focus on unit-linked products and bancassurance models, while in Israel long-term morbidity policies such as long-term care and critical illness dominate.
France, Maghreb and Arab countries this region we were able to use structural changes at some competitors as opportunities to initiate new business contacts within traditional reinsurance.
Total premium income came in at EUR 70.4 million (EUR 76.3 million) in the year under review; technical results can be described as satisfactory.
This company too was significantly affected by fair-value adjustments to securities deposits (B36), as a consequence of which the operating result (EBIT) slipped into the red at -EUR 17.7 million (after an operating profit of EUR 8.7 million in the previous year); net income after tax came in at -EUR 12.6 million (EUR 4.9 million).
The gross written premium generated by Hannover Life Re Africa contracted to EUR 92.2 million (EUR 105.2 million) due to the strength of the euro against the South African rand. Results were thoroughly satisfactory, however, producing an operating profit (EBIT) of EUR 6.9 million (EUR 5.7 million).
In the year under review, despite growing competitive pressure, we succeeded in cementing a leading position in most of our target markets – especially the bancassur-
ance sector – and winning over clients through our clear commitment to loyalty and continuity.
Premium income in 2008 climbed by 40.7% to EUR 98.8 million, and profitability – as in previous years – can be described as good.
Asia The Asian life markets in the Far East – encompassing the Chinese-speaking economic region, Korea and Japan – are served by our regional centre in Hong Kong, while responsibility for the markets of Southeast Asia and South Asia rests with our branch office in Kuala Lumpur.
In China we have been represented by a fully operational life branch in Shanghai since May 2008. We made the most of the extended opportunities opened up by the status of a locally licensed reinsurer to acquire several new customer relationships and thus moved closer to attaining our goal of ranking among the market's three leading life reinsurers.
In the Korean market, the largest life reinsurance market in Asia, we have also made significant progress since our new life branch in Seoul commenced business operations in May 2008.
Australia and New Zealand Business written in Australia and New Zealand is the responsibility of our subsidiary Hannover Life Re Australasia. The company concentrates on risk-oriented treaty business in the areas of life, critical illness and disability annuities.
Occupational retirement provision is becoming an increasingly important segment in Australia; in this context the company participates in the assumption of biometric risks but plays no part in the capital accumulation process.
The return on ten-year US treasury bonds declined appreciably to less than 2.8% in view of the economic outlook. In Europe, too, ten-year bonds paid a return of less than 3.0%, while highs markedly in excess of 4.0% were recorded by the middle of the year. As the fourth quarter progressed corporate bonds were listed with considerable risk premiums – against a backdrop of extensive illiquidity. The euro slipped slightly against the US dollar in the course of the year, but held its ground – in some cases forcefully – against other currencies.
Hannover Re's investment policy continues to be guided by the following core principles: • generation of stable, plannable and tax-optimised returns while at the same time maintaining the high quality standard of the portfolio; • ensuring the company's liquidity and solvency at all times; • high diversification of risks; • limitation of currency exposures in accordance with the principle of matching currencies.
With these goals in mind we engage in active risk management on the basis of balanced risk/return analyses.
In this context we observe centrally implemented investment guidelines and are guided by the insights of dynamic financial analysis. These measures – in combination with a positive technical cash flow – ensure that at all times we are able to meet our payment obligations.
The balance of our deposit interest and expenses was largely unchanged at EUR 199.6 million (EUR 220.1 million ). Write-downs of EUR 479.9 million (EUR 71.4 million) were taken on securities. Gains of EUR 379.2 million realised on disposals were attributable to the tactical modification of durations in the US dollar portfolio undertaken in the first quarter as well as the liquidation of a hedge on around one-fifth of the equity holdings in the fourth quarter. This contrasted with realised losses of EUR 492.8 million (EUR 69.7 million) that resulted principally from the significant reduction of the equity allocation in the fourth quarter. In light of the developments described above, net investment income contracted appreciably to EUR 278.5 million (EUR 1,121.7 million).
For years we have actively managed the average duration of our fixed-income portfolio, thereby conserving our shareholders' equity. In the course of the year under review we initially reduced the modified duration of our bond portfolio. As at 31 December 2008 it was roughly back on a par with the previous year at 3.8.
The portfolio of fixed-income securities climbed sharply to EUR 17.9 billion (EUR 15.7 billion), primarily as a consequence of the reduced equity allocation but also due to inflows of cash from the technical account. The funds were invested predominantly in government bonds. Hidden reserves for fixed-income securities recognised in
shareholders' equity totalled EUR 101.7 million, compared to hidden losses of EUR 103.4 million in the previous year. The quality of the bonds – measured in terms of rating categories – was maintained on a consistently high level. The proportion of securities rated "A" or better – at 92.9% – was slightly higher than in the previous
We held a total amount of EUR 1.2 billion (EUR 1.3 billion) in short-term assets and current assets as at the end of the year under review. Funds held by ceding companies amounted to EUR 10.1 billion (EUR 9.2 billion).
The downward trend on equity markets that had started in the first half of the year gathered pace on a massive scale in the fourth quarter. As a result, we were compelled to take write-downs of EUR 356.1 million (EUR 34.2 million ). In addition, the equity allocation was reduced to a minimum in the fourth quarter, and it now stands at less
Holdings of alternative investments continued to grow. As at 31 December 2008 an amount of EUR 751.8 million (including uncalled capital) was invested in private equity funds, a further EUR 294.5 million in high-return bond funds and loans as well as CDOs and altogether EUR 139.1 million in structured real estate investments.
Net investment income from assets under own management 78.9 -91.3% 901.6 967.0 764.3 697.8
We generate liquidity primarily from our operating reinsurance business, investments and financing measures. Regular liquidity planning and a liquid investment structure ensure that Hannover Re is able to make the necessary payments at all times. Hannover Re's cash flow is shown in the consolidated cash flow statement on page 80 et seq. in the notes.
A crucial factor in the outflow of funds from financing activities in the year under review was our dividend payment of EUR 318.9 million. Hannover Re's debt financing was composed of subordinated loans and bonds that we issued in past years to ensure lasting protection of our capital base. The total volume of loans and subordinated capital amounted to EUR 1,420.0 million (EUR 1,414.9 million) as at the balance sheet date. In addition, unsecured syndicated guarantee facilities exist with a number of financial institutions. For further explanatory information please see our remarks in Section 7.8 "Debt and subordinated capital" and 7.9 "Shareholders' equity and minority interests".
Our overriding strategic objective is to be one of the three most profitable reinsurers in the world and to increase our profit and the value of the company by a doubledigit percentage every year.
In life and health reinsurance we use the Market-Consistent Embedded Value (MCEV). The MCEV is defined as the intrinsic value of an enterprise, measured as the discounted profit flow until final run-off of the in-force portfolio – from the standpoint of the shareholder and after taxes. Both concepts reflect the specific characteristics of the individual segments. Together, they constitute the basis for our central management tool: Intrinsic Value Creation (IVC).
With the aid of IVC it is possible to compare the value contributions of the Group as a whole, its two business groups and the individual operating units. This enables us to reliably identify value creators and value destroyers. In this way, we can
Performance Excellence Check The PE Check (consisting of Output, Strategy and Input Checks as well as Activity Planning) is used by the treaty departments and service units to develop – making allowance for the strategic parameters – detailed strategies and activity plans. These central documents also serve as a basis for the planning cycle – both for the operational planning and for the planning of resources and costs. The PE Check is carried out at closed-door meetings of the individual units.
Planning process The planning process spans the three levels of Results, Risks and Resources, which are closely interrelated. Results, Risks and Resources are planned by the responsible officers with the support of Group Controlling Services and Corporate Development and they are reconciled by the Executive Board. Key pivot points are the detailed strategies and activity plans drawn up by all treaty departments and service units. The planning is approved by the Executive Board and subsequently communicated within the Group.
Net catastrophe loss ratio up to 10% 10.7% 6.3% 2.3% 26.3% 8.3%
Value of new business growth ≥ 10% n.a.5) 65.7% (24.2%)6) 54.8%
Growth in book value per share ≥ 10% (15.5%) 15.6% 11.4% 3.0% 6.3%
Profit growth targets 1) Figures for 2005 and 2004 in accordance with old segmentation 2) Operating profit (EBIT)/net premium earned 3) 750 basis points above the risk-free interest rate 4) Embedded value after consolidation, before minority interests
For 2005 to 2007 the European Embedded Value (EEV) was established according to the EEV principles of the CFO Forum. For 2006 and 2007 market-consistent assumptions were already used as a basis For 2008 a Market Consistent Embedded Value (MCEV) was calculated on the basis of the principles of the CFO Forum published in June 2008 5) The MCEV as at 31 December 2008 will be published on our website at the same time as the quarterly financial report for the first quarter of 2009 6) The decrease in the value of new business was due to three special effects: details are provided in the EEV report for 2006 published on our website 7) Risk-free interest rate + cost of capital 8) Excl. tax effect
Intrinsic Value Creation and excess return on capital allocated 1) 2004 the present value components is based on the value of in-force business. from 2005 to 2006 they are based on the European Embedded Value (EEV).
We use the following formula to calculate the IVC (Intrinsic Value Creation): Adjusted operating profit (EBIT) – (capital allocated x weighted cost of capital) = IVC
Value management is not limited to the specification and determination of a value-based ratio, but also encompasses the definition of so-called value drivers.
These describe action fields through which the Intrinsic Value Creation can be influenced.
The IVC for the Group should be defined as close to the annual financial statements as possible so that it can also be used for external reporting. On the other hand, the IVC calculation of the operational units is geared to the explicit identification of value drivers that require a more detailed breakdown of the IVC.
Even in the global era a real understanding of markets is still the key to conquering them. A player like Hannover Re that strives for worldwide success adopts the bamboo strategy – by displaying flexibility and offering reliability. Where some just see a wall, others find an opening.
Hannover Re strives to be an attractive employer for ambitious, performance-minded individuals who identify with the company's goals. With this in mind we offer a flexible, receptive working environment as well as latitude for self-reliant decision-making. Our human resources staff, systems and structures put in place the framework
In this way, our junior staff were not only able to get to know other areas and perspectives within Hannover Re and hence broaden their own working horizon; with the questions and ideas that they had developed they also seized the chance to make a significant contribution to our company's strategy process – and what is more, they did so in a direct dialogue with the responsible experts.
The Hannover Re Group employed 1,812 (1,825) staff as at 31 December 2008. The turnover ratio at Home Office in Hannover of 3.3% (4.4%) was lower than in the previous year. The rate of absenteeism – at 2.7% – was slightly higher than in the previous year (2.5%). The turnover ratio and rate of absenteeism thus continued to be comfortably below the industry average.
Demographic changes are leading to a shortage of managers and junior executives. Hannover Re, just like its competitors, must position itself in this battle for managerial recruits. Our offer to qualified young applicants therefore encompasses not only attractive compensation and above-average development opportunities, but also the possibility to strike a healthy balance in their professional and private lives. After all, the range of possible living and working models has multiplied in comparison with the traditional allocation of roles. We seek to enable our staff to combine their individual life plans with their work for our company.
Furthermore, building on the many years of wide-ranging experience with management feedback on various levels of management, the Executive Board also decided to use the tool for itself and have an assessment performed by directly subordinate staff worldwide. This project too was translated into practical reality in the year under review – with a very high rate of participation among the staff concerned.
In the year under review we completed the companywide roll-out of the new SAP module "Personnel Development " at Hannover Home Office. The goal is to optimally track and utilise our employees' existing skills throughout the organisation: staff potentials are to be identified and cultivated, while shortcomings can be alleviated with targeted training activities.
Going hand-in-hand with the new module we have implemented self-assessment as a further criterion; in
Performance management is embedded into the Performance Excellence process at our company. Departmental and individual goals are derived from the strategic corporate objectives. By linking agreements on objectives and Performance Excellence criteria we ensure that the efforts of our staff contribute directly to the success of the business strategy.
Word of thanks to our staff press our appreciation to the representatives of staff and senior management who participated in our codetermination bodies for their critical yet always constructive cooperation.
Profit and value creation are prerequisites for sustainable development in the interests of our clients, shareholders, staff and business partners as well as for the fulfilment of our social responsibility. This includes the responsible underwriting of risks and diligent risk management, since these are vital conditions for assuring the quality of our business over the long term. Hannover Re consequently strives to be one of the three most profitable reinsurers in the world and consistently enhances its position. In so doing, our premise of achieving growth through self-generated profits and wherever possible avoiding imbalances that could necessitate capital measures continues to apply unchanged. We thus act guided solely by profitability considerations and concentrate on attractive segments of reinsurance business.
High ethical and legal standards are the platforms for our strategy and daily actions alike. We recognise that the public image of the Hannover Re Group is shaped by the manners and conduct of every single member of staff.
Successful, responsible and above all sustainable business management forms the basis for playing a positive role in society. It establishes the foundation that enables our company to continuously foster and advance its staff and support projects that are in the public interest.
Employee shares are another means of enabling the labour force to share in the company's success. For the fifth time Hannover Re arranged an employee share purchase scheme in the year under review, which offered 841 members of staff the opportunity to acquire Hannover Re shares at a preferential price; 389 employees took up the offer and purchased altogether 13,984 shares.
We are aware of our responsible role as a major employer and contractor in the city of Hannover and surrounding region, and we strive to award contracts locally where possible so as to foster businesses based here.
In Africa, too, Hannover Re has been active for a number of years, inter alia in the project "Food for homeless children ": twice a week employees at our South African subsidiary donate food to a centre for homeless children.
Hannover Re also supports the Kestnergesellschaft in Hannover through its participation in the latter's partner programme: in our role as a "kestnerpartner" we are able to promote the society's work on a continuous and lasting basis. In addition, our Chief Executive Officer has set up a Board of Trustees for this art institution – whose reputation extends far beyond Hannover – under his own chairmanship. The revenue from donations brought in by this Board of Trustees will at least partially offset the sharp reduction in public subsidies.
The risk strategy is an expression of Hannover Re's fundamental approach to the identification and handling of risks. It is derived from the company strategy and constitutes a self-contained set of rules. At the same time it serves as the point of departure for the Group-wide practice of risk management. Applicable right across the Group, the risk strategy is an integral component of entrepreneurial actions and is reflected in the detailed strategies of the various divisions.
Risk conception the possibility of non-attainment of an explicitly formulated or implicitly deduced goal, are of special importance for risk management. The conservation of capital is a decisive criterion for our risk tolerance. This necessitates a conscious approach to dealing with risks, both in non-life and life/health reinsurance and in the investment sector.
With a view to conserving capital, we seek to control and manage our specified individual risks in such a way that the total risk remains within the permissible, defined tolerances. Risk management therefore forms an integral component of our value-based enterprise management and hence of all higher-order decision-making processes. In addition to conserving capital, we are careful to allocate our scarce equity resources flexibly to those areas that promise the highest risk-weighted profit. Our insights from the risk management system provide an overview at all times of the Group's current and expected future overall risk situation. These insights thus establish a framework for decision-making on all levels of management by bringing transparency to the relationship be-
Hannover Re's risk management draws on quantitative simulation models. The purpose of risk quantification is to calculate – with the aid of the internal risk capital model – the risk capital on the basis of a Value at Risk (VaR) with a confidence level of 99.97% for an observation period of one year. This consciously high confidence level ensures – as a vital subsidiary condition – that future regulatory capital requirements (confidence level of 99.5%) will also be exceeded. Our qualitative processes and controls for risk identification, quantification and
Quantitative and qualitative risk management steering are based upon recognised, advanced methods. Centrally defined guidelines, methods and processes as well as systems of limits and thresholds provide the framework for decentralised implementation, monitoring and reporting. In addition, the central risk monitoring function quantifies and aggregates all risks on the Group level. It performs central reporting and monitors measures taken across the organisation to control risks that could potentially jeopardise the Group's existence.
As far as technical risks affecting the non-life reinsurance business group are concerned, we make a fundamental distinction between risks that result from business operations in past years (reserving risk) and those stemming from activities in the current or future years (price/premium risk). The catastrophe risk is especially important in the latter case.
Business units • Primary risk responsibility, inter alia responsible for risk identification and assessment on the departmental level
In life and health reinsurance biometric risks are of special importance to our company. This term refers to all risks directly connected with the life of an insured person, such as miscalculation of mortality, life expectancy, morbidity and occupational disability. Since we also prefinance our cedants' new business acquisition costs, lapse and catastrophe risks – e.g. with an eye to pandemics – are of significance too.
Technical risks in life and health reinsurance tential counterparty risk stemming from an inability to pay or deterioration in the credit status of cedants. We review the risk feasibility of new business activities and of the assumed international portfolio on the basis of a series of regularly performed, holistic analyses, inter alia with an eye to the lapse risk. Quality is further assured – especially at the level of the subsidiaries – by the actuarial reports and documentation required by local regulators. A key tool of our value-based management and risk management in the area of life and health reinsurance is the European Embedded Value (EEV). This is calculated as the present value of future earnings from the worldwide life and health reinsurance portfolio plus the allocated capital. In this context appropriate allowance is made for all risks underlying the covered business. Since the 2006 financial year the EEV has been calculated on a market-consistent basis. In future, this Market Consistent Embedded Value (MCEV) is to be established on the basis of the principles of the CFO Forum published in June 2008. We publish the MCEV on our Internet website at the same time as the quarterly report for the first quarter. The interest guarantee risk, which is important in life business in the primary insurance sector, is of only minimal risk relevance to our business owing to the structure of our contracts.
The share price risk results from volatilities on equity markets. Fixed-income securities are exposed to the interest rate risk when market interest rates change. Declining market yields lead to increases and rising market yields to decreases in the fair value of fixed-income securities portfolios. Real estate risks derive from unfavourable changes in the value of our own real estate. This may be caused by a general downslide in market values (as seen with the present US real estate crash) or a deterioration in the particular qualities of the property.
Real estate risks are of subordinate importance for our company owing to our minimal real estate portfolio. Currency risks result from fluctuations in exchange rates – especially if there is a currency imbalance between the technical liabilities and the investments. By systematically adhering to matching currency coverage, i.e. extensive matching of currency distributions on the assets and liabilities side, we are able to minimise this risk. The spread risk refers to the risk that the interest rate differential between a risk-entailing bond and risk-free bond may change while the quality remains unchanged.
• Elimination of all counterparty risks with respect to existing options for equity hedging.
• Despite the already high diversification of the portfolio, further tightening of issuer limits for all investments of the Hannover Re Group in September 2008 in order to minimise potential accumulation risks.
• Thorough review of the existing investment guidelines in December 2008. Scarcely any adjustments were necessary even in the present circumstances; the limits, especially in respect of covered bonds, ABS and MBS, were nevertheless further refined.
• Making available of a minimum level of liquidity or assets that can be realised at any time in an amount of at least EUR 4 billion or around 20% of the investments under own management as the prevailing illiquidity of secondary markets that had begun in September 2008 continued and in view of the risks arising in connection with the acceptance of LOCs by ceding companies.
Credit risks all, these tools support diversification within the total portfolio and promote risk reduction. Credit risks are also relevant in life and health reinsurance because we prefinance acquisition costs for our ceding companies. Our investments similarly entail a credit risk. Our clients, retrocessionaires and broker relationships as well as our investments are therefore carefully evaluated and limited in light of credit considerations and are constantly monitored and controlled within the scope of our system of limits and thresholds.
Operational risks different management measures tailored to individual risks. Core elements of risk management are our contingency plans that ensure the continuity of mission-critical enterprise processes and systems (recovery plans, backup computer centre). The range of tools is rounded off with external and internal surveys of clients and staff, the line-independent monitoring of risk management by Internal Auditing and the Internal Control System (ICS).
The hallmark of emerging risks (such as obesity, nanotechnology ) is that the content of such risks is not as yet known with any certainty and their implications – especially for our portfolio – are difficult to assess. It is therefore vital to detect such risks at an early stage and determine their relevance. On this basis it is possible to decide which steps must be taken, e g. ongoing observation, the implementation of contractual exclusions or the devel-
Other risks opment of new reinsurance products. Strategic risks derive principally from an imbalance between the corporate strategy and changing general economic conditions. Such an imbalance might be caused, for example, by incorrect strategic policy decisions, a failure to consistently implement the defined strategies or by fundamental changes in court decisions or the regulatory environment. We therefore regularly review our strategy and systematically adjust our structures and processes as and when required. Our holistic management system of "Performance Excellence" ensures that our strategy is constantly reviewed and consistently translated into practice.
In our view, there is very little risk that tax assessments containing additional taxation of investment income at Irish companies will prevail.
Assessment of the risk situation risks that could jeopardise the continued existence of our company in the short or medium term or have a significant, lasting effect on our assets, financial position or net income. This remains true even against the backdrop of the recent upheavals on global financial markets. Further information on our risk management system, and in particular quantitative data on individual risks, is provided in Section 6 of the Notes, "Management of technical and financial risks".
Monetary policy is currently tending towards an expansionary stance worldwide. In view of the drastic slowdown in economic activity and the risk of deflation, central banks have sharply eased their policy on interest rates. In the United States the Federal Reserve moved to a zero interest rate policy in the middle of December 2008. Economic stimulus packages have already been launched in many countries with a view to alleviating the slumping economy. Further measures intended to revive the economy will probably be unveiled in the course of the year. Despite all the efforts of governments and central banks to stabilise the financial sector and stimulate business activity, the global economy will probably show only very minimal growth in 2009.
With consumption already on the wane in the United States, exports are now also declining. This is likely to be reflected in a sharp contraction in gross domestic product. The European Union is experiencing the most pronounced slump in manufacturing output in its existence. Domestic and foreign demand will drop significantly in 2009 and real gross domestic product will fall. Prospects for the emerging markets have also taken a considerably darker turn.
In Germany the recession is being driven first and foremost by a sharp decline in exports. It is still uncertain whether the steps taken by the federal government to boost the economy will begin to bite. Real gross domestic product will probably contract in 2009. Provided there is no further bad news to reinforce the downward trend, the economic situation is expected to stabilise gradually in the second half of the year.
We were thoroughly satisfied with the treaty renewals as at 1 January 2009 – the date on which a good twothirds of our treaties were renegotiated. The situation on the reinsurance markets has improved appreciably. This is due to the financial market crisis, which has led to a capital shortage throughout the worldwide insurance industry and hence fuelled demand for reinsurance covers. Hardly any further rate reductions were observed, and some rate increases pushed into the double digits. This is particularly true of catastrophe business, and especially those programmes that had suffered losses in 2008 – but it was also the case in worldwide credit and surety reinsurance, which saw rate increases of up to 50%. German business continued to be attractive.
We are very content with market conditions in Germany: our subsidiary E+S Rück enjoyed highly satisfactory treaty renewals in its domestic market.
Prices and conditions in personal accident insurance remained on a very pleasing level for E+S Rück. Going
Management report forecast forward, as in the past, we shall support our clients in this line not only by assuming risks in treaty and facultative reinsurance but also by offering them product innovations.
In the United Kingdom, too, we were satisfied with the treaty renewals; in both motor insurance and casualty business we enlarged our portfolio on the back of increased rates.
In Northern European countries, too, the rate erosion came to a halt in view of the repercussions of the financial market crisis. Insurers are buying additional reinsurance capacity in order to protect their balance sheets. Given the fact that smaller insurers are likely to struggle to improve their strained capital position through their own efforts alone, the current financial year is expected to bring market consolidation.
The outlook for rates in France has brightened. Further improvement in prices for natural catastrophe risks should be attainable on the back of the severe winter storm "Klaus" in January. The net burden of losses for Hannover Re is in the mid- to high double-digit millions of euros.
In catastrophe-exposed US property business the market began to harden – both in terms of rates and conditions. It was also gratifying to note that the premium erosion in US casualty business was halted. Indeed, it was even possible to push through rate increases in directors' and officers' (D&O) and professional indemnity business. With the effects of the financial market crisis still reverberating, we expect to see further price rises in the middle of the year.
All in all, we are looking to a slightly enlarged premium volume for North America in the current financial year and stronger growth rates in 2010. In view of the favourable general climate, we shall set aside our cautious stance of the past year and step up our involvement. Our good market position and excellent contacts with all major market players should help us in this regard.
We are similarly very satisfied with the outcome of the treaty renewals in China. Both the crisis on financial markets and the losses from the 2008 snowstorm generated greater demand for reinsurance. Treaty conditions in proportional property business, which accounts for around 80% of the local market volume, showed substantial improvements – prompting us to appreciably expand our involvement. In non-proportional property business prices held stable, while they showed doubledigit gains under loss-affected programmes. We enlarged our premium volume in China by roughly 30%. Given the importance of the Chinese market, we stepped up our efforts to obtain a licence for a branch office serving non-life reinsurance business.
The renewals picture in the other Asian markets was a mixed one. The state of the market in Taiwan remained broadly unchanged; conditions in proportional treaties are largely stable. In Japan – where the bulk of contracts are renewed on 1 April – we also expect rates to rise owing to the effects of the financial market crisis.
In Latin America we extended our market presence by opening a new representative office in Brazil. The outcome of the treaty renewals as at 1 January, however, fell short of our expectations. Our interest is focused primarily on agricultural risks. Although only 15% of the treaty portfolio was up for renewal on 1 January, it may be observed that the trend in this segment is exceptionally favourable. We provide covers for agricultural risks not only in Latin America but worldwide. Substantial premium growth is anticipated for the current financial year.
In Australia we are looking to premium growth in the original currency for 2009. During the current financial year our subsidiary International Insurance Company of Hannover plans to open a branch office in Australia so as to further promote specialty business.
All in all, it may be stated that for our company – as a reinsurer – conditions in non-life reinsurance are once again favourable and should improve even further in
Life and health reinsurance be efficiently completed in a short space of time. To this end Hannover Life Re offers expert, proven models of varying levels of complexity that are enjoying growing popularity on the market.
The main drivers of our business will continue to be the developed insurance markets of the United Kingdom, United States, Germany and Australia. In the long term, though, we see considerable potential in the four BRIC markets of Brazil, Russia, India and China, and in 2009 we are planning to enhance our network by opening a representative office in Beijing.
In many countries the international financial market crisis has brought about a considerable shift in life insurers' demand for reinsurance solutions and hence created – to the benefit of globally operating reinsurers with a first-class rating – a continuously growing imbalance in the dynamics of supply and demand.
Owing to the visible weakening of their solvency position, primary insurers will find themselves compelled to adopt a significantly more cautious risk strategy and financial policy in the immediate future. This development is generating a wave of demand for both risk- and financially oriented reinsurance solutions – especially because direct access to the capital markets by way of securitisations is largely blocked.
In life and health reinsurance we expect annual growth of 12% to 15%. Due to our purchase of a US individual life portfolio we anticipate growth of 35% for the current year. This acquisition is forecast to generate a premium volume in the order of USD 1.2 billion for 2009. As early as 2009 the acquisition of this portfolio will help to boost Group net income.
As things currently stand, we expect to generate a return on equity in excess of 15%. This is subject to the premise that the burden of catastrophe losses does not significantly exceed the expected level and that there are no drastically adverse movements on capital markets. As in past years, the company is aiming for a dividend in the range of 35% to 40% of Group net income.
In life and health reinsurance, on the other hand, we have set ourselves an annual growth target of 12% – 15% for both gross premium income and the operating profit (EBIT).
The appointment and recall of members of the Executive Board are determined by §§ 84 et seq. Stock Corporation Act. Amendment of the Articles of Association is governed by §§ 179 et seq. Stock Corporation Act in conjunction with § 16 Para. 2 and § 21 of the Articles of Association of Hannover Re.
The following paragraphs explain major agreements concluded by the company that are subject to reservation in the event of a change of control following a takeover bid and describe the resulting effects.
In addition, the retrocession covers in non-life and life business known as the "K" and "L" transactions contain standard market change-of-control clauses which in each case grant the other contracting party a right of termination if a significant change occurs in the ownership structure and participation ratios of the affected contracting party.
Earnings per share in EUR 7.11 (1.05) 5.98 from continuing operations in EUR (1.05) 5.69 from discontinued operations in EUR – 0.29
Income and expense directly recognised in equity (147,395) 61,070 11,392 18,941 (119,087) (175,079)
Tax effects on income and expense directly recognised in equity 5,796 (23,874) (3,384) (21,462)
The reporting on cash flows within the Group is based on IAS 7 "Statement of Cash Flows". In addition, we observed the principles set out in German Accounting Standard No. 2 (DRS 2) of the German Standards Council regarding the preparation of cash flow statements, which were supplemented by the requirements of DRS 2–20 that apply specifically to insurance enterprises. In accordance with the recommendation of the German Standards Council for insurance enterprises, we adopted the indirect method of presentation. The amounts taken into consideration are limited to cash and cash equivalents shown under the balance sheet item "Cash".
Commission and brokerage, change in deferred acquisition costs and other technical income/expenses 915,339 1,016,676
The parent company Hannover Rückversicherung AG ("Hannover Re") and its subsidiaries (collectively referred to as the "Hannover Re Group") transact all lines of non-life and life/health reinsurance. The Group maintains business relations with more than 5,000 insurance companies in about 150 countries. With gross premium of approximately EUR 8.1 billion, Hannover Re is one of the largest reinsurance groups in the world. The Group's global network consists of more than 100 subsidiaries, affiliates, branches and representative offices in around 20 countries. The Group's German business is conducted exclusively by the subsidiary E+S Rück. We employ over 900 staff in Hannover and roughly 1,800 worldwide. The parent company is a joint-stock corporation, the registered office of which is located at Karl-WiechertAllee 50, 30625 Hannover, Germany.
In addition, the German Accounting Standards (GAS) adopted by the German Accounting Standards Committee (GASC) have been observed insofar as they do not conflict with currently applicable IFRS.
The annual financial statements of all companies were initially drawn up in compliance with the provisions of the respective national laws and then transformed to IFRS in accordance with standard Group accounting and measurement rules.
The present consolidated financial statement was examined by the Supervisory Board, adopted at the meeting of the Supervisory Board held on 10 March 2009 and hence released for publication.
In July 2007 the IFRIC published IFRIC 14 "IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction". The interpretation provides guidance inter alia for determining the limit on the amount of a surplus in a pension plan that may be recognised as an asset pursuant to IAS 19. Application of the interpretation had no implications for Hannover Re's consolidated financial statement.
With effect from the second quarter of 2008 onwards Hannover Re made use of the option provided for in the currently valid version of IFRS 3 to recognise outside income changes in shares in fully consolidated group companies with no change of control status. In accordance with IAS 8 the figures for the previous year have been adjusted retrospectively for the sake of comparison. As at 31 December of the previous year this change resulted in a profit reduction of EUR 12.0 million, which was attributable to the changes in shares held in E+S Rück. A reclassification was made in the same amount within retained earnings in the Group shareholders' equity of the previous year. The amount was reclassified from the net income recognised in shareholders' equity to the item "Income and expense directly recognised in equity".
Financial assets held to maturity are comprised of non-derivative assets that entail fixed or determinable payments on a defined due date and are acquired with the intent and ability to be held until maturity. They are measured at amortised cost. Payment of the corresponding premiums or discounts is spread across the duration of the instruments in the statement of income using the effective interest rate method. Depreciation is taken in the event of permanent impairment. Please refer to our comments on impairments in this section.
Loans and receivables are non-derivative financial instruments that entail fixed or determinable payments on a defined due date and are not listed on an active market or sold at short notice. They are carried at amortised cost; premiums or discounts are deducted or added within the statement of income using the effective interest rate method until the amount repayable becomes due. Depreciation is taken only to the extent that repayment of a loan is unlikely or no longer expected in the full amount. Please refer to our comments on impairments in this section.
OTC equity options Theoretical price Listing of underlying shares Implicit volatilities Money-market interest rate Dividend yield
Theoretical price Listing of underlying shares Implicit volatilities Money-market interest rate Dividend yield
Impairments: As at each balance sheet date we review our financial assets with an eye to objective, substantial indications of impairment. Permanent impairments on all fixed-income and variable-yield securities are recognised directly in the statement of income. In this context we take as a basis the same indicators as those discussed below for securities with the character of equity. Qualitative case-by-case analysis is also carried out. IAS 39.59 contains a list of objective, substantial indications for impairments of financial assets. In the case of fixed-income securities and loans reference is made, in particular, to the rating of the instrument, the rating of the issuer/borrower as well as the individual market assessment in order to establish whether they are impaired. When held-to-maturity instruments measured at amortised cost as well as loans and receivables are tested for impairment, we examine whether material items – looked at on their own – are impaired. The amount of the probable loss is arrived at from the difference between the book value of the asset and the present value of the expected future earnings flows. The book value is reduced directly by this amount and recognised as an expense. With the exception of value adjustments taken on accounts receivable, we recognize impairments directly on the assets side – without using an adjustment account – separately from the relevant items. If the reasons for the write-down cease to apply, a write-up is made in income up to at most the original amortised cost for fixed-income securities.
With respect to impairments on securities with the character of equity, IAS 39.61 (rev. 2003) states, in addition to the aforementioned principles, that a significant or prolonged decrease in fair value below acquisition cost constitutes objective evidence of impairment. Hannover Re considers securities to be impaired under IAS 39 if their fair value falls significantly, i.e. by at least 20%, or for a prolonged period, i.e. at least nine months, below acquisition cost. In accordance with IAS 39.69 the reversal of impairment losses on equities to the statement of income once impairment has been taken is prohibited, as is adjustment of the cost basis. Impairment is tested in each reporting period using the criteria defined by Hannover Re. If a security is considered to be impaired on the basis of these criteria, IAS 39.68 requires that a value adjustment be recognised in the amount of the fair value less historical cost and less prior value adjustments, meaning that depreciation is taken on the fair value as at the closing date – if available, on the publicly quoted stock exchange price.
Long-term liabilities principally consist of subordinated debts that can only be satisfied after the claims of other creditors in the event of liquidation or bankruptcy. They are measured at amortised cost. Liabilities to holders of minority shares in partnerships arising out of long-term capital commitments are measured at the fair value of the redemption amount as at the balance sheet date.
Disclosures about financial instruments: IFRS 7 "Financial Instruments: Disclosures" requires more extensive disclosures according to classes of financial instruments. In this context, the term "class" refers to the classification of financial instruments according to their risk characteristics. A minimum distinction between measurement at amortised cost or at fair value through profit or loss is required here. A more extensive or divergent distinction should, however, be geared to the purpose of the corresponding disclosures in the notes. In contrast, the term "category" is used within the meaning of the measurement categories defined in IAS 39 (held to maturity, loans and receivables, available for sale and financial assets at fair value through profit or loss with the subcategories of trading and designated financial instruments). Essentially, the following classes of financial instruments were established: • Fixed-income securities • Equities, equity funds and other variable-yield securities • Short-term investments • Other invested assets • Other financial assets – at fair value through profit or loss • Funds held and contract deposits (assets) • Accounts receivable • Other receivables • Funds held and contract deposits (liabilities) • Other liabilities • Long-term debt • Subordinated debt • Other long-term liabilities
For further details, for example concerning the modelling of natural catastrophe scenarios and the assumptions relating to asbestos and pollution risks, the reader is referred to our comments in Section 6 "Management of technical and financial risks". We would further refer to our explanatory remarks on the technical reserves in Section 3.2 "Summary of major accounting policies" and Section 7.2 "Technical assets and liabilities".
In life business too the calculation of reserves and assets is crucially dependent on actuarial projections of the covered business. So-called model points are defined according to the type of business covered. The main distinguishing criteria are the age, sex and (non-)smoker status of the insured, tariff, policy period, period of premium payment and amount of insurance. The portfolio development is simulated for each model point, in which regard the key input parameters are either predefined by the tariff (e.g. allowance for costs, amount of premium, actuarial interest rate) or need to be estimated (e.g. mortality or disability rates, lapse rates). These assumptions are heavily dependent on country-specific parameters and on the sales channel, quality of the cedant's underwriting and claims handling, type of reinsurance and other framework conditions of the reinsurance treaty. The superimposition of numerous model points gives rise to a projection, which incorporates inter alia assumptions concerning the portfolio composition and the commencement of covered policies within the year. Such assumptions are estimated at the inception of a reinsurance treaty and subsequently adjusted to the actual projection.
In determining the carrying values for certain financial assets it is sometimes necessary to make assumptions in order to calculate fair values. In this regard we would refer the reader to our remarks in Section 3.2 "Summary of major accounting policies" concerning financial assets at fair value through profit or loss and securities held as available for sale. Assumptions concerning the appropriate applicability criteria are necessary when determining the need for impairments on non-monetary financial assets held as available for sale. In this regard we would again refer the reader to our explanatory remarks in Section 3.2 "Summary of major accounting policies".
Hannover Rückversicherung AG is the parent company of the Group. The consolidated financial statement includes fourteen (fourteen) German and nineteen (nineteen) foreign companies, as well as three (three) foreign subgroups. Three (three) German and two (three) foreign associated companies were consolidated using the equity method.
In conformity with Item 7.1.4 of the recommendations of the German Corporate Governance Code as amended on 6 June 2008, the following table also lists major participations in unconsolidated third companies.
Hannover Rück Beteiligung Verwaltungs-GmbH, Hannover/Germany 1) 2) 100.0 EUR 2,627,154 EUR –
Hannover Insurance-Linked Securities GmbH & Co. KG, Hannover/Germany 1) 100.0 EUR 22,040 EUR (443)
HEPEP III Holding GmbH, Hannover/Germany 4) 67.3 EUR 8,229 EUR 1,369
HEPEP II Holding GmbH, Hannover/Germany 4) 57.8 EUR 7,604 EUR 5,028
E+S Reinsurance (Ireland) Ltd., Dublin/Ireland 6) 100.0 EUR – EUR –
Hannover Life Reassurance Company of America, Orlando/USA 1) 100.0 USD 128,073 USD (11,357)
Hannover Life Reassurance (Ireland) Ltd., Dublin/Ireland 1) 100.0 EUR 291,689 EUR (3,030)
Hannover Life Reassurance (UK) Ltd., Virginia Water/United Kingdom 1) 100.0 GBP 43,958 GBP (4,275)
Hannover Reinsurance (Ireland) Ltd., Dublin/Ireland 1) 100.0 EUR 430,704 EUR 18,395
Hannover ReTakaful B.S.C. (c), Manama/Bahrain 1) 100.0 BHD 20,138 BHD 515
Hannover Reinsurance Group Africa (Pty) Ltd. compiles its own subgroup financial statement in which the following major companies are included: Hannover Life Reassurance Africa Ltd., Johannesburg/South Africa 1) 100.0 ZAR 169,724 ZAR 60,091
Hannover Re Real Estate Holdings, Inc. holds a subgroup in which the following major company is included: 5115 Sedge Corporation, Chicago/USA 1) 95.2 USD 2,078 USD 200
Penates A, Ltd., Tortola/British Virgin Islands 1) 7) 90.4 USD 105,984 USD (2,315)
Oval Office Grundstücks GmbH, Hannover/Germany 1) 50.0 EUR 58,198 EUR 1,398
WPG CDA IV Liquidation Trust, Grand Cayman/Cayman Islands 10) 11) 27.3 USD 444 USD (461)
the purchase price is recognised as goodwill. Under IFRS 3 scheduled amortisation is not taken on goodwill. Instead, unscheduled amortisation is taken where necessary on the basis of annual impairment tests. Immaterial and negative goodwill are recognised in the statement of income in the year of their occurrence.
Minority shares in partnerships are reported under long-term liabilities in accordance with the applicable version of IAS 32.
Companies over which Hannover Re is able to exercise a significant influence ("associated companies") are normally consolidated "at equity" with the proportion of the shareholders' equity attributable to the Group. A significant influence is presumed to exist if a company belonging to the Hannover Re Group directly or indirectly holds at least 20% – but no more than 50% – of the voting rights. Income from investments in associated companies is recognised separately in the consolidated statement of income.
In June 2008 Hannover Re completed the first transaction as part of its extended Insurance-Linked Securities (ILS) activities. Property catastrophe risks of a number of US cedants were pooled and transferred to the capital market in several tranches. A special purpose entity named Globe Re was established in Bermuda for this transaction; it is capitalised at USD 133.0 million. Globe Re is funded through the issue of an equity tranche of USD 33.0 million and a further USD 100.0 million in bonds split into various rating categories. The term of the transaction is one year. Hannover Re has a stake of USD 5.0 million – or 15.2% – in the equity tranche. Hannover Re does not exercise a controlling influence over the special purpose entity through any of its business relations. Pursuant to IAS 28 "Investments in Associates" Globe Re is to be carried as an investment at cost or amortised cost and is recognised under other invested assets.
As a means of transferring peak exposures deriving from natural disasters to the capital market, Hannover Re issued a catastrophe ("CAT") bond that can be traded on a secondary market. The CAT bond, which has a volume of USD 150.0 million and a term of 3 years, was placed with institutional investors from Europe and North America by Eurus Ltd., a special purpose entity domiciled in the Cayman Islands. In the third quarter of 2008 Hannover Insurance-Linked Securities GmbH & Co. KG purchased catastrophe bonds issued by Eurus Ltd. with a nominal value of altogether EUR 6.0 million on the secondary market, which it holds in its asset portfolio. Hannover Re does not exercise a controlling influence over the special purpose entity through any of its business relations.
Hannover Re participates – primarily through the companies Hannover Re (Bermuda) Ltd. and Hannover InsuranceLinked Securities GmbH & Co. KG – in a number of special purpose entities for the securitisation of catastrophe risks by taking up certain capital market securities known as "disaster bonds" (or "CAT bonds"). Since Hannover Re does not exercise a controlling influence in any of these transactions either there is no consolidation requirement.
On 9 April 2008 the Cologne-based Hannover Re Euro PE Holdings GmbH & Co. KG commenced business operations. Hannover Re and E+S Rück hold interests of 75% and 25% respectively in the company. Payment of the limited partner's share in an amount of altogether EUR 4.5 million was made in the second quarter. The company's business object is to build, hold and manage a portfolio of assets.
On 23 May 2008 the Seoul-based Hannover Rückversicherung AG Korea Branch commenced business operations as a permanent establishment of Hannover Re. The business object of the branch is the writing of life and health reinsurance business.
Effective 29 May 2008 Hannover Re participated as the first investor in Secquaero ILS Fund Ltd., which is domiciled in the Cayman Islands. The fund in question is a so-called "Seed Money Fund", the business object of which is to underwrite, hold and sell insurance-linked securitisations. As at the balance sheet date Hannover Re had invested altogether USD 50 million in this fund by way of several tranches. Hannover Re will consolidate this fund until such time as other investors hold the majority stake in the fund.
Effective 3 March 2008 HRBV, which is wholly owned by Hannover Re, reached agreement with a third party outside the Group on the sale of 1% of its stake in E+S Rück – by way of a share reduction without a change of control status – in order to intensify the business relations. In the capital consolidation as at the balance sheet date this transaction was recognised directly in equity. Please see our explanatory remarks in Section 3.1 "Change in accounting policies".
Effective 30 December 2008 Hannover Re sold its interest of 43.7% in ITAS Assicurazioni S.p.A. at book value. The proceeds from the sale totalled altogether EUR 26.4 million and were rendered in the form of a cash component amounting to EUR 7.4 million and a transfer of E+S Rück shares held by the purchaser worth EUR 19.0 million. Hannover Re transferred these shares to HRBV by way of a capital increase for a non-cash contribution. Please see our explanatory remarks in Section 5.1 "Acquisitions and new formations".
Major items in the statement of income of the discontinued operations
In the 2006 financial year Hannover Re reached agreement on the sale of its American subgroup Praetorian Financial Group, Inc., New York (PFG), to an Australian insurance group. Effective 31 May 2007 beneficial ownership of the assets and liabilities belonging to the subgroup classified in the previous periods as discontinued operations was transferred. They were therefore no longer recognised as at the balance sheet date. In compliance with IFRS 5 "Non-Current Assets Held for Sale and Discontinued Operations", we recognise the profit or loss of PFG in the consolidated statement of income for the previous period after tax in a separate line.
Effective 1 January 2008 the company name of Hannover Rückversicherung AG Succursale Française pour la Réassurance Vie, a branch of Hannover Re, was changed to Hannover Rückversicherung AG Succursale Française and the object of its business was expanded to include non-life reinsurance activities for the markets of France, Belgium and Luxembourg. The service company Hannover Re Gestion de Réassurance France S.A. was also merged into the new composite branch with effect from the same date.
With effect from 10 January 2008 the majority interest in Hannover Re has been held in an unchanged amount (50.22%) exclusively by Talanx AG, into which both HDI Verwaltungs-Service GmbH and Zweite HDI Beteiligungsgesellschaft mbH were merged with legal force on the same date.
Parallel upward shift in the overall interest rate curve by 100 basis points (423.7) (401.3)
Notes 6.2 Technical risks in non-life reinsurance 6.2 Technical risks in non-life reinsurance
The following catastrophe losses and major claims were of relevance to our company in the financial year: Catastrophe losses and major claims
Combined and catastrophe loss ratio over the past ten years 1) Based on figures reported in accordance with US GAAP 2) Figures from 2006 onwards in accordance with new segmentation 3) Natural catastrophes and other man-made major losses > EUR 5 million gross for the share of the Hannover Re Group as a percentage of net premium earned
Snow- and ice-storm in China, 10 January – 15 February 16.2 16.2
Industrial fire claim in the US, 5 – 6 January 8.1 8.1
Within the scope of accumulation control for natural catastrophe risks, the Executive Board defines the appetite for assuming natural hazards risks on the basis of the risk strategy derived from the overall corporate strategy. This specification of the risk appetite takes place once a year and thus constitutes a crucial basis for our underwriting approach in this segment.
St ru ct ure d pro duct s Non-lif e re insu ra nce
Based on the latest available data published on 6 May 2008, the following table shows the EEV and its sensitivity to selected scenarios in comparison with the corresponding figures for the previous year.
The "value at risk" (VaR) is a vital tool used for monitoring and managing market price risks. The VaR is determined on the basis of historical data, e.g. for the volatility of the fair values and the correlation between risks. As part of these calculations a decline in the fair value of our portfolio is simulated with a given probability and within a certain period. The VaR of the Hannover Re Group determined in accordance with these principles specifies the decrease in the fair value of our total portfolio that with a probability of 95% will not be exceeded within ten trading days.
The VaR is calculated using a multi-factor model designed by APT (Advanced Portfolio Technologies). The data basis consists of all asset classes of the investment portfolios. The APT model distinguishes between three different perspectives on the expected volatility: • Total risk: annualised volatility (expected volatility of the portfolio) • Systematic risk: expected volatility (can be explained by model factors) • Specific risk: residual (cannot be explained by model factors)
Normal market scenarios are used to calculate the Value at Risk. In addition, stress tests are conducted in order to be able to map extreme scenarios as well. In this context, the loss potentials are simulated on the basis of already occurred or notional extreme events.
In order to monitor interest rate risks and share price risks we also use stress tests that estimate the loss potential under extreme market conditions as well as sensitivity and duration analyses that complement our range of risk management tools. Interest rate risks refer to an unfavourable change in the value of financial assets held in the portfolio due to changes in the market interest rate level. Declining market yields lead to increases and rising market yields to decreases in the fair value of fixed-income securities portfolios. One of the central objectives of our strategy in this regard is to match cash flows on the assets and liabilities sides as closely as possible. Quantitative support for this strategy is provided by Hannover Re's internal capital model as well as a broad diversity of value at risk calculations. In addition, tightly defined tactical duration ranges are in place, within which asset managers can position themselves opportunistically according to their market expectations. The parameters for these ranges are directly linked to our risk-carrying capacity.
2008 Scenario Portfolio change based on fair value in EUR million
Currency risks are of considerable importance to an internationally operating reinsurance enterprise that writes a significant proportion of its business in foreign currencies. These risks are, however, largely neutralised since we systematically adhere to the principle of matching currency coverage.
We use short-call and long-put options as well as swaps to partially hedge portfolios, especially against price, exchange and interest rate risks. In the year under review we also used derivative financial instruments to optimise our portfolio in light of risk/return considerations. The contracts are concluded solely with first-class counterparties and compliance with the standards defined in the investment guidelines is strictly controlled in order to avoid risks – especially credit risks – associated with the use of such transactions.
Bad debt risks in reinsurance are of relevance to our company because the business that we accept is not always fully retained, but instead portions are retroceded as necessary. Our retrocession partners are therefore carefully selected in light of credit considerations. This is also true of our broker relationships, under which risks may occur inter alia through the loss of the premium paid by the cedant to the broker or through double payments of claims. The associated risks are therefore minimised with the aid of a number of mechanisms. For example, all broker relationships are reviewed once a year with an eye to criteria such as the existence of professional indemnity insurance, payment performance and proper contract implementation.
Hannover Re counters the risk of default on reinsurance recoverables by carefully selecting its partners with the aid of an expertly staffed Security Committee. The Security Committee continuously monitors the credit status of retrocessionaires and approves measures where necessary to secure receivables. The Group Protections unit is responsible for the Hanover Re Group's ongoing cession management. This process is supported by our "Cession Limits" Web-based risk management application. This assists with the Group's cession management by specifying cession limits for the individual retrocessionaires participating in protection cover programmes and determining the capacities still available for short-, medium- and long-term business. Depending on the type and expected run-off duration of the reinsured business, the selection of reinsurers takes account not only of the minimum ratings of the rating agencies Standard & Poor's (S&P) and A. M. Best but also internal and external (e.g. market information from brokers) expert assessments.
The key ratios for management of our bad debt risk are as follows: • 95.5% of our retrocessionaires have an investment grade rating (AAA to BBB), and 95.3% thereof are rated "A" or better.
• Since 2004 we have reduced the level of recoverables by altogether 50.0%.
• In terms of the Hannover Re Group's major companies, EUR 290.3 million (10.4%) of our accounts receivable from reinsurance business totalling EUR 2,801.8 million were older than 90 days as at the balance sheet date.
Retrocession, that is to say the passing on of portions of our assumed risks, gives rise to claims that we hold against our retrocessionaires. These reinsurance recoverables – i.e. the reinsurance recoverables on unpaid claims – amounted to EUR 2,079.2 million (EUR 2,471.6 million) as at the balance sheet date.
The following chart shows the development of reinsurance recoverables on unpaid claims: Notes 6.5 Credit risks
1) (Shareholders' equity + minority interests + hybrid capital)/net written premium 2) Hybrid capital/(shareholders' equity + minority interests) 3) EBIT/interest on hybrid capital 4) Net reserves/net premium earned (Group)
The retention, i.e. the portion of assumed risks that we do not retrocede, developed as follows in recent years: Notes 6.5 Credit risks
We counter the liquidity risk by means of regular liquidity planning and a liquid asset structure. In this way we ensure that Hannover Re is able to make the necessary payments at all times. We manage the liquidity risk inter alia by allocating a liquidity code to every security. Adherence to the limits defined in our investment guidelines for each liquidity class is subject to daily control. The spread of investments across the various liquidity classes is specified in the monthly investment reports and controlled by limits. The proportion of investment holdings that can be liquidated on any trading day without a mark-down was almost 60% as at the balance sheet date, a reflection of the high liquidity of our portfolio. Last but not least, active liquidity management in terms of portfolio regrouping and the continuing high level of diversification has helped us to safeguard our unqualified ability to meet our payment obligations at all times in periods of financial crisis.
On a fair value basis EUR 2,482.9 million of the corporate bonds held by our company were issued by entities in the financial sector. Of this amount, EUR 1,749.5 million was attributable to banks. The vast majority of these bank bonds (almost 90%) were rated "A" or better.
Bonds (direct holdings and investment funds) At least 50.0 89.0 79.1
Notes 7.1 Investments including income and expenses 7. Notes on the individual items of the balance sheet and statement of income 7.1 Investments including income and expenses
Maturities of the fixed-income and variable-yield securities 1) Including accrued interest 2) Including short-term investments and cash
Government debt securities of EU member states 41,342 3,181 – 641 45,164
The carrying amount of the investments held to maturity is arrived at from the cost or amortised cost plus accrued interest..
Government debt securities of EU member state 29,410 1,228 – 407 31,045
Government debt securities of EU member state 29,327 80 975 563 28,995
Amortised cost, unrealised gains and losses and accrued interest on the portfolio of investments classified as available for sale as well as their fair value
Under financial assets at fair value through profit or loss Hannover Re recognised as at the balance sheet date the derivative financial instruments originally allocated to this item in an amount of EUR 44.7 million (EUR 20.4 million) as well as fixed-income securities amounting to EUR 254.5 million (EUR 158.7 million) designated in this category. The growth in the portfolio of fixed-income securities at fair value through profit or loss in an amount of EUR 95.8 million derived largely from the commencement of investment activities in the year under review by two Group companies whose business object is to build, hold and manage portfolios of insurance-linked securities. Analysis of the portfolio indicated that the changes in the fair value of these financial assets were not due to changes in their rating.
For further explanatory remarks on the impairment criteria please see Section 3.2 "Summary of major accounting policies".
Financial assets – at fair value through profit or loss 8,808 12,284
Making allowance for the other investment expenses of EUR 41.4 million (EUR 52.0 million), net income from assets under own management of altogether EUR 78.9 million (EUR 901.6 million) was recognised in the year under review.
Transfer of gains/losses from the fair-value measurement of the available-for-sale portfolio to the result for the period (360,132) (48,513)
Fixed-income securities – held-to-maturity 724,534 343,951 333,878 72,838 – – – – 1,475,202
Fixed-income securities – available-for-sale 9,336,958 2,131,355 2,042,753 728,040 38,772 104,787 55,316 44,851 14,482,832
Fixed-income securities – held-to-maturity 708,730 319,476 379,793 80,817 – – – – 1,488,816
Fixed-income securities – available-for-sale 6,753,511 2,953,584 1,849,507 493,561 27,020 244,497 7,417 147,958 12,477,055
Equity securities – available-for-sale 13,939 3,160 1,517,465 8,561 – 434,455 20,290 2,520 2,000,390
Other financial assets – at fair value through profit or loss – – 20,385 – – – – – 20,385
In the course of the year put options and short positions on call options were entered into on stock indices. All positions were liquidated by no later than November 2008. The transactions gave rise to realised gains of EUR 85.1 million.
Derivative financial instruments in connection with reinsurance A small number of treaties in life and health reinsurance meet criteria which require application of the prescriptions in IFRS 4.7 to 4.9 governing embedded derivatives. These accounting regulations require that certain derivatives embedded in reinsurance contracts be separated from the underlying insurance contract ("host contract"), reported separately at fair value in accordance with IAS 39 and recognised under investments. Fluctuations in the fair value of the derivative components are to be recognised in income in subsequent periods.
Within the scope of the accounting of "modified coinsurance" and "coinsurance funds withheld" (Modco) reinsurance treaties, under which securities deposits are held by the ceding companies and payments rendered on the basis of the income from certain securities of the ceding company, the interest-rate risk elements are clearly and closely related to the underlying reinsurance arrangements. Embedded derivatives consequently result solely from the credit risk of the underlying securities portfolio.
Public price listings are not available for companies valued at equity. The net book value of associated companies includes goodwill in the amount of EUR 17.9 million (EUR 21.6 million). For further details of our major participating interests please see Section 4 "Consolidated companies and consolidation principles".
All in all, application of the standards governing the carrying of derivatives in connection with the technical account led to recognition of assets totalling EUR 44.7 million (EUR 18.5 million) as well as recognition of liabilities from the derivatives resulting from technical items in an amount of EUR 91.2 million (EUR 15.9 million) as at the balance sheet date. Increases in investment income amounting to EUR 30.7 million (EUR 5.8 million) as well as charges to income of EUR 76.7 million (EUR 23.7 million) were brought to account from derivatives in connection with the technical account in the year under review.
Net book value at 31 December of the previous year 170,839 166,646
The fair value of investment property amounted to EUR 23.9 million (EUR 21.3 million) as at the balance sheet date. The market value of the real estate was determined using the discounted cash flow method.
Gross book value at 31 December of the year under review 45,258 41,370
Cumulative depreciation at 31 December of the previous year 24,408 24,236
Cumulative depreciation after currency translation at 1 January of the year under review 24,556 23,934
Net book value at 31 December of the previous year 16,962 17,979
Net book value at 1 January of the year under review 17,245 17,324
Net book value at 31 December of the year under review 21,618 16,962
This item comprises investments with a maturity of up to one year.
Net book value at 31 December of the year under review 1,860,783 1,807,143
Within the scope of our management of receivables we expect to receive payment of accounts receivable within three months of the date of creation of the debit entry – a period for which we also make allowance in our risk analysis. Please see our comments in Section 6.5 "Credit risks".
The default risks associated with accounts receivable under reinsurance business are determined and recognised on the basis of case-by-case analysis.
The value adjustments on accounts receivable that we recognise in adjustment accounts changed as follows in the year under review: Figures in EUR thousand 2008 2007
The age structure of the accounts receivable which were unadjusted but considered overdue as at the balance sheet date is presented below: Notes 7.2 Technical assets and liabilities
Cumulative value adjustments at 31 December of the previous year 127,733 76,626
Cumulative value adjustments at 31 December of the year under review 125,573 127,733
Net book value of accounts receivable at 31 December of the year under review 2,801,762 2,525,871
Technical provisions were discounted at interest rates of between 6.5% and 8.5% (6.5% and 8.2%) with respect to a certain group of contracts relating to the Hannover Re Advanced Solutions division. The interest rates are determined by the contractual agreements. The period from inception to expiry of such contracts is at least four years. The discounted amount totalled EUR 0.2 million (EUR 3.3 million). The discounted provisions as at year-end 2008 amounted to EUR 4.2 million (EUR 25.9 million).
Loss and loss adjustment expense reserve 16,932,069 2,079,168 14,852,901 16,553,888 2,471,585 14,082,303
In the year under review specific value adjustments on retrocessions, i.e. on the reinsurance recoverables on unpaid claims, were on balance established in an amount of EUR 20.2 million (previous year: reversal of EUR 27.1 million). Consequently, cumulative specific value adjustments of EUR 46.7 million (EUR 26.4 million) were recognised in these reinsurance recoverables as at the balance sheet date.
The total amount of the net reserve before specific value adjustments, to which the following remarks apply, was EUR 14,806.2 million (EUR 14,055.9 million) as at the balance sheet date.
Reserve at 1 January of the year under review 16,469,354 2,515,812 13,953,542 16,406,711 2,782,894 13,623,817
Specific value adjustment for retrocessions – 20,212 (20,212) – (27,061) 27,061
Net book value at 31 December of the year under review
To some extent the loss and loss adjustment expense reserves are inevitably based upon estimations that entail an element of uncertainty. The difference between the previous year's and current estimates is reflected in the net run-off result. In addition, owing to the fact that the period of some reinsurance treaties is not the calendar year or because they are concluded on an underwriting-year basis, it is frequently impossible in reinsurance business to make an exact allocation of claims expenditures to the current financial year and the previous year. Consequently, the development of earlier years – and especially the immediately preceding year – may be distorted. In our assessment, therefore, informative analyses can only be performed after the elapse of at least two years.
The average duration of the loss and loss adjustment expense reserves was 5.5 years (6.1 years), or 5.7 years (6.4 years) after allowance for the corresponding retrocession shares. The benefit reserve had an average duration of 14.2 years (13.2 years) – or 14.4 years (13.3 years) on a net basis.
The average duration of the reserves is determined using actuarial projections of the expected future payments. A payment pattern is calculated for each homogenous category of our portfolio – making allowance for the business sector, geographical considerations, treaty type and the type of reinsurance – and applied to the outstanding liabilities for each underwriting year and run-off status.
The payment patterns are determined with the aid of actuarial estimation methods and adjusted to reflect changes in payment behaviour and outside influences. The calculations can also be distorted by major losses, and these are therefore considered separately using reference samples or similar losses. The payment patterns used can be compared year for year by contrasting the projected payments with the actual amounts realised.
The values for the first two components differ according to the country concerned, product type, investment year etc. The mortality and morbidity rates used are chosen on the basis of national tables and the insurance industry standard. Empirical values for the reinsured portfolio, where available, are also taken into consideration. In this context insights into the gender, age and smoker structure are incorporated into the calculations, and allowance is also made for factors such as product type, sales channel and the frequency of premium payment by policyholders.
At the inception of every reinsurance contract, assumptions about the three parameters are made and locked in for the purpose of calculating the benefit reserve. At the same time, safety / fluctuation loadings are built into each of these components. In order to ensure at all times that the originally chosen assumptions continue to be adequate throughout the contract, checks are made on a regular – normally annual – basis in order to determine whether these assumptions need to be adjusted ("unlocked').
Reserve at 1 January of the year under review 1,170,191 91,823 1,078,368 1,449,495 306,116 1,143,379
Net book value at 31 December of the year under review 1,333,856 29,733 1,304,123 1,186,382 92,322 1,094,060
IFRS 4 in conjunction with SFAS 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" requires insurance contracts that transfer a significant technical risk from the ceding company to the reinsurer to be differentiated from those under which the risk transfer is of merely subordinate importance. Hannover Re adopts the same approach in its recognition of funds held / contract deposits by separating funds held under insurance contracts with a significant risk transfer from contract deposits in respect of which the risk transfer is of subordinate importance.
The funds held by ceding companies totalling EUR 9,776.1 million (EUR 8,610.6 million) represent the cash and securities deposits furnished by our company to our cedants that do not trigger any cash flows and cannot be used by cedants without our consent. The durations of these deposits are matched to the corresponding provisions. In the event of default on such a deposit our reinsurance commitment is reduced to the same extent. The rise in funds held by ceding companies was attributable principally to increased new business in the area of non-traditional life reinsurance.
The contract deposits on the liabilities side increased by EUR 1,477.6 million in the year under review from EUR 3,668.8 million to EUR 5,146.4 million. The contract deposits item on the liabilities side encompasses balances deriving from non-traditional life insurance contracts that are to be carried as liabilities. The rise was due principally to growth in new business in the area of non-traditional life reinsurance.
Of the disposals recognised in the previous year, an amount of EUR 107.5 million was attributable to the sale of Praetorian Financial Group.
Net book value at 31 December of the year under review 42,833 45,438
Breakdown of actual and deferred income taxes: Development of the present value of future profits (PVFP) on acquired life reinsurance portfolios
The PVFP, the period of amortisation of which is 15 years, is recognised under other assets. For further information please refer to our explanatory notes on intangible assets in Section 3.2 "Summary of major accounting policies".
Net book value at 31 December of the previous year 2,911 5,102
Net book value at 31 December of the year under review 1,823 2,911
Change in deferred taxes due to changes in tax rates (1,030) (193,253)
In addition, available tax credits of EUR 20.3 million (EUR 17.2 million) were not capitalised.
Availability of loss carry-forwards and tax credits that have not been capitalised
Expenditures on personnel The expenditures on insurance business, claims expenses (claims settlement) and expenditures on the administration of investments include the following personnel expenditures: The nationalities of the workforce as at the balance sheet date were as follows: 7.6 Staff and expenditures on personnel
Number of employees (excluding board members) 1,744 1,781 1,790 1,812 1,790 1,825 1,922
On 1 April 1993 (1 June 1993 in the case of managerial staff) the 1993 pension plan came into effect. This pension plan provides for retirement, disability and surviving dependants' benefits. The scheme is based upon annual determination of the pension contributions, which at 1% up to the assessment limit in the statutory pension insurance scheme and 2.5% above the assessment limit of the pensionable employment income are calculated in a range of 0.7% to 1% and 1.75% to 2.5% respectively depending upon the company's performance. The pension plan closed as at 31 March
From 1997 onwards it has been possible to obtain pension commitments through deferred compensation. Following the merger with Gerling-Konzern Lebensversicherungs-AG, Cologne, the employee-funded commitments included in the provisions for accrued pension rights are protected by an insurance contract with HDI-Gerling Lebensversicherung AG, Cologne, at unchanged conditions.
Projected benefit obligation at the beginning of the year under review 79,135 77,400
Projected benefit obligation at the end of the year under review 79,908 79,135
The actual losses on plan assets amounted to –EUR 1.1 million in the year under review, compared with actual gains on plan assets of EUR 0.2 million in the previous year.
Actuarial gains of EUR 0.1 million (EUR 0.4 million) were recognised as at the balance sheet date in other comprehensive income.
In May 2005 Hannover Re issued further subordinated debt in the amount of EUR 500.0 million through its subsidiary Hannover Finance (Luxembourg) S.A. As part of the transaction, holders of Hannover Re's EUR 350.0 million subordinated debt placed in 2001 were offered an opportunity to exchange their existing issue for holdings in the new bond, which has a term of 30 years and may be called in prior to maturity by the issuer after 10 years. Participation in the
Authorised capital of up to EUR 60,299 thousand is available with a time limit of 31 May 2009.
Management of capital The preservation and consistent enhancement of its capital is a key strategic objective for Hannover Re. As part of its approach to capital management Hannover Re considers the policyholders' surplus over and above the shareholders' equity recognised in the balance sheet. The policyholders' surplus is defined as the sum total of
• shareholders' equity excluding minority interests, composed of the common shares, additional paid-in capital, other comprehensive income and retained earnings,
The chart below illustrates the development of the policyholders' surplus over the last five reporting years: Hannover Re uses "Intrinsic Value Creation" (IVC) as its central value-based management tool. For more information on this concept as well as the objectives and principles in accordance with which we conduct our enterprise management and capital management the reader is referred to our remarks on value-based management on page 52 et seq. of this report.
Hannover Re satisfies the capital expectations of the rating agencies that assess the Group's financial strength. Some Group companies are subject to additional national capital and solvency requirements. All Group companies met the applicable local minimum capital requirements in the year under review. The parent company ensures that the local minimum capital requirements applicable to subsidiaries are always satisfied in accordance with the official requirements defined by insurance regulators.
Hybrid capital, no maturity 1) Hybrid capital: + EUR 750 million - USD 380 million repurchase - EUR 118 million repayment 2) Hybrid capital: +EUR 500 million new issue - EUR 212 million exchange in EUR million
Due to the reduction in the interest held in E+S Rück in the third quarter of the 2007 financial year – which was recognised retrospectively in equity – the Group net income for the comparable period of the previous year decreased by altogether EUR 12.0 million. As a result, both the earnings per share and the earnings per share from continuing operations for the previous period had to be reduced by EUR 0.10 per share. For further details please see our comments in Section 3.1 "Change in accounting policies".
Neither in the year under review nor in the previous reporting period were there any dilutive effects. On account of this year's employee share option plan Hannover Re acquired treasury shares in the course of the fourth quarter of 2008 and sold them to the eligible employees. The weighted average of shares in circulation during the reporting period was therefore insignificantly lower than in the previous year. For further details please see our comments in Section 7.10 "Treasury shares".
Effective 1 July 2003 Hannover Re took out insurance for pension commitments. The commitments involve deferred annuities with regular premium payment under a group insurance policy. In accordance with IAS 19 they were carried as a separate asset at fair value as at the balance sheet date in an amount of EUR 45.5 million (EUR 43.6 million).
Dividends and bonus dividends of EUR 277.4 million (EUR 193.0 million) were paid in the year under review for 2007.
Present value of future profits on acquired life reinsurance portfolios 1,823 2,911
Gross book value at 31 December of the previous year 95,352 83,344
Cumulative depreciation at 31 December of the year under review 62,808 69,571
Net book value at 31 December of the year under review 26,302 25,781
Gross book value at 31 December of the previous year 155,429 141,242
Cumulative depreciation at 31 December of the previous year 99,039 96,212
Cumulative depreciation at 31 December of the year under review 104,649 99,039
Value adjustments were taken on other receivables in an amount of EUR 3.8 million (EUR 0.2 million) in the year under review on the basis of specific impairment analyses.
The other liabilities include sundry non-technical provisions of EUR 57.6 million (EUR 67.4 million), which developed as shown in the following table.
Since 10 January 2008 HDI Haftpflichtverband der Deutschen Industrie V.a.G., Hannover, has held a majority interest in Hannover Re solely through Talanx AG, Hannover, into which both HDI Verwaltungs-Service GmbH, Hannover, and Zweite HDI Beteiligungsgesellschaft mbH, Hannover, were merged on the same date.
HDI HANNOVER International España, Cia. de Seguros y Reaseguros S.A. 22,740 679
In the 2007 financial year Hannover Re (Bermuda) Ltd. extended a loan due on 31 May 2012 with a coupon of 4.98% to Talanx AG, the volume of which as at the balance sheet date was EUR 51.5 million (EUR 51.5 million). The carrying amount includes accrued interest of EUR 1.5 million (EUR 1.5 million). This instrument was recognised under other invested assets.
The Group companies E+S Rück, Hannover Finance (Luxembourg) S.A., Hannover Reinsurance (Ireland) Ltd. and Hannover Re (Bermuda) Ltd. invested in an amount of altogether EUR 153.9 million in a bearer debenture of Talanx AG with a term until 8 July 2013 and a coupon of 5.43%. The carrying amount of the instrument, which is recognised under fixed-income securities held to maturity, was EUR 154.9 million and included accrued interest of EUR 3.9 million (EUR 3.9 million) as at the balance sheet date.
Under articles of partnership dated 7 December 2007 HAPEP II Komplementär GmbH, Hannover – as general partner – and AmpegaGerling Asset Management GmbH, Cologne – as limited partner with the power to conduct business – established Hannover Re Euro PE Holdings GmbH & Co. KG, Cologne. Additional limited partners are Hannover Re and E+S Rück. Please see our remarks in Section 5.1 "Acquisitions and new formations".
Within the contractually agreed framework AmpegaGerling Asset Management GmbH performs investment and asset management services for Hannover Re and some of its subsidiaries. Assets in special funds are managed by AmpegaGerling Investment GmbH.
In addition, divisions of Talanx AG also performed services for us in the areas of taxes and general administration.
The internal performance criterion is achievement of the target performance defined by the Supervisory Board, which is expressed in terms of the diluted earnings per share calculated in accordance with IAS 33 "Earnings Per Share" (EPS). If the target EPS is surpassed or undershot, the provisional basic number of stock appreciation rights initially granted is increased or reduced accordingly to produce the EPS basic number. The external performance criterion is the development of the share price in the allocation year. The benchmark used in this regard is the (weighted) ABN Amro Rothschild Global Reinsurance Index. This index encompasses the performance of listed reinsurers worldwide. Depending upon the outperformance or underperformance of this index, the EPS basic number is increased – albeit by at most 400% of the EPS basic number – or reduced – although by no more than 50% of the EPS basic number.
Fair Value at 31.12.2008 (in EUR) 2.45 2.86 4.48 3.62 3.43 1.73
Number of rights existing at 31.12.2008 926,565 805,931 161,146 135,159 10,607 8,028
Provisions at 31.12.2008 (in EUR million) 0.79 1.63 0.69 0.50 0.04 0.01
Expense in the 2008 financial year (in EUR million) 0.79 (0.06) (0.77) (0.13) 0.04 (0.03)*
Number of options at 31.12.2004 – – – 844,273 626,828 849,182
Hannover Re has secured by subordinated guarantee a subordinated debt in the amount of USD 400.0 million issued in the 1999 financial year by Hannover Finance, Inc., Wilmington/USA. In February 2004 and May 2005 Hannover Re bought back portions of the subordinated debt in an amount of altogether USD 380.0 million, leaving USD 20.0 million still secured by the guarantee. For further details please see Section 7.8 "Debt and subordinated capital".
On this basis the aggregate provisions for the 2008 financial year amounted to EUR 3.7 million (EUR 5.7 million).
As part of our business activities we hold collateral available outside the United States in various blocked custody accounts and trust accounts, the total amount of which in relation to the Group's major companies was EUR 1,388.8 million (31 December 2007: EUR 1,235.1 million) as at the balance sheet date.
Outstanding capital commitments with respect to special investments exist on the part of the Group in an amount of EUR 291.1 million (EUR 235.2 million). These primarily involve as yet unfulfilled payment obligations from participations entered into in private equity funds and venture capital firms.
Within the scope of a novation agreement regarding a life insurance contract we assumed contingent reinsurance commitments with respect to due date and amount. Hannover Re decided to exercise its right of novation early and assume the contract as at 31 December 2008. The payment of EUR 28.1 million due as a consequence of exercise of the right of novation encompasses both the repurchase of the estimated reinsurance commitment amounting to EUR 10.3 million and EUR 17.8 million in expected discounted repayments plus interest for the years 2009 to 2011.
By way of declarations dated 11 and 20 November 2008 E+S Rück participated in a counter-guarantee given by the insurance industry in a maximum amount of EUR 8.5 billion for the guarantee put up by the Federal Republic of Germany as part of a rescue package for Hypo Real Estate Holding AG, Munich, and its subsidiaries ("HRE Group"). In this connection the Federal Republic of Germany guarantees repayment of capital and interest to the German Bundesbank, which is to extend a loan to the HRE Group, as well as to the holders of newly issued debentures, through which further funds are to be made available to the HRE Group. The insurance industry assumes a portion of this guarantee amount put up by the federal government through the aforementioned counter-guarantee. The participating insurers are liable severally, but not jointly. E+S Rück's interest in this counter-guarantee is limited to a nominal amount of EUR 11.1 million (rounded).
Operating leasing contracts produced expenditures of EUR 2.7 million (EUR 3.5 million) in the year under review.
Rental income totalled EUR 1.5 million (EUR 1.7 million) in the year under review.
Foreign currency items in the individual companies' statements of income are converted into the respective functional 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 accordance with IAS 21 "The Effects of Changes in Foreign Exchanges Rates" differences from the currency translation of financial statements of foreign Group companies must be recognised in the consolidated financial statement as a separate item in shareholders' equity. Currency translation differences resulting from long-term loans or lendings without specified maturity between Group companies are similarly recognised outside the statement of income in a separate item of shareholders' equity.
Exchange differences from the translation of monetary assets and liabilities are recognised directly in the statement of income.
Exchange differences from non-monetary items – such as equity securities – classified as available for sale are initially recognised outside income in a separate item of shareholders' equity and only booked to income when such non-monetary items are settled.
Total fees of EUR 6.6 million (EUR 6.5 million) were incurred for accountants' services throughout the Hannover Re Group worldwide in the year under review. They were principally comprised of auditing and tax consultancy fees.
Of this total amount, EUR 2.2 million (EUR 1.5 million) was attributable to the fee paid to the appointed auditor of the consolidated financial statement as defined by § 318 German Commercial Code (HGB). The amount includes a fee of EUR 2.0 million (EUR 1.2 million) for the auditing of the financial statement, EUR 0.1 million (EUR 0.2 million) for tax consultancy services and EUR 0.1 million (EUR 0.1 million) for consultancy and other services performed for the parent or subsidiary companies.
As notified in a press release dated 23 February 2009, the acquisition announced on 23 January 2009 of a significant US individual life reinsurance portfolio under a reinsurance and asset purchase transaction with Scottish Re Group Limited, Hamilton, Bermuda, has been completed. Hannover Re will assume all technical liabilities associated with the business and will in turn receive assets to fund those liabilities from Scottish Re. In addition to assuming the business, Hannover Re will acquire the policy administration systems of Scottish Re as well as other assets supporting the US mortality reinsurance business. The acquisition includes all operating assets required to administer the business. Hannover Re will also employ part of Scottish Re's staff, thus ensuring operational continuity and a transfer of know-how. In 2009 this business is estimated to generate a premium volume of around USD 1.2 billion. The acquisition of the portfolio will be accretive to the Hannover Re's Group net income from 2009. The transaction has been approved by the competent regulatory authorities.
We have audited the consolidated financial statements prepared by the Hannover Rückversicherung AG, Hannover, comprising the balance sheet, the income statement, statement of changes in equity, cash flow statement and the notes to the consolidated financial statements, together with the group management report for the business year from 1 January to 31 December 2008. The preparation of the consolidated financial statements and the group management report in accordance with IFRS, as adopted by the EU, and the additional requirements of German commercial law pursuant to § 315a Para 1 HGB and supplementary provisions of the articles of incorporation are the responsibility of the parent company's management. Our responsibility is to express an opinion on the consolidated financial statements and on the group management report based on our audit.
REPORT BY THE SUPERVISORY BOARD of Hannover Re for the Hannover Re Group
In our function as the Supervisory Board we considered at length during the 2008 financial year the position and development of the company and its major subsidiaries. We advised the Executive Board on the direction of the company and monitored the management of business on the basis of written and verbal reports from the Executive Board. The Supervisory Board held four meetings in order to adopt the necessary resolutions after appropriate discussion. A resolution was adopted by a written procedure with respect to one matter requiring attention at short notice. Furthermore, we received quarterly written reports from the Executive Board on the course of business and the position of the company and the Group pursuant to § 90 German Stock Corporation Act. No audit measures pursuant to § 111 Para. 2 German Stock Corporation Act were required in the 2008 financial year. The reports provided by the Executive Board contain, inter alia, up-to-date details of the current planned and expected figures for the individual business groups. The reporting also covers strains from major losses as well as the investment portfolio, investment income, the ratings of the various Group companies and the development of the Group's global workforce. The quarterly reports with the quarterly financial statements and key figures for the Hannover Re Group constituted a further important source of information for the Supervisory Board. We received an analysis of the 2007 results in non-life and life/health reinsurance as well as a presentation from the Executive Board covering the profit expectations for the 2008 financial year and the operational planning for the 2009 financial year. In addition, the Chairman of the Supervisory Board was constantly advised by the Chairman of the Executive Board of major developments and impending decisions as well as of the risk situation within the company and the Group. All in all, we were involved in decisions taken by the Executive Board and assured ourselves of the lawfulness, regularity and efficiency of the company's management as required by our statutory responsibilities and those placed upon us by the company's Articles of Association.
In addition to its discussion of a sizeable planned acquisition, the Supervisory Board obtained information about the implications for the year-end result of the international financial crisis and the above-average burden of losses, about the effects of movements in exchange rates on the balance sheet and statement of income as well as about the impact of the Act on the Modernisation of Accounting Law (BilMoG) on the work of the Supervisory Board. The operational planning for 2009 was also the subject of intense discussion. The reasons for divergences in the course of business from the applicable planned figures and targets in the financial year just-ended were explained to us, and we reconciled these deviations accordingly.
Of the committees formed by the Supervisory Board within the meaning of § 107 Para. 3 German Stock Corporation Act, the Balance Sheet Committee met twice and the Standing Committee met on three occasions. The Chairman of the Supervisory Board updated the full Supervisory Board on the committees' major deliberations at the next meeting.
The accounting, annual financial statements, consolidated financial statements and the corresponding management reports were audited by KPMG AG Wirtschaftsprüfungsgesellschaft (KPMG AG), formerly KPMG Deutsche TreuhandGesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, Hannover. The Supervisory Board selected the auditor for the audit and the Balance Sheet Committee awarded the concrete audit mandate. In addition to the usual audit tasks, the audit focused particularly on the documentation of the internal control system for the preparation of the annual financial statements as well as the translation of foreign currencies in accordance with the German Commercial Code. In the context of the consolidated financial statements to be drawn up by Hannover Re in accordance with International Financial Reporting Standards (IFRS), the auditors were required to subject the implementation of IFRS 7 (Financial Instruments), the preparation for implementation of IFRS 8 (Operating Segments) and the definition of the scope of consolidation, especially with respect to special purpose entities (IAS 27, SIC 12), to particular scrutiny. The mandate for the review report by the independent auditors on the interim financial report as at 30 June 2008 was again also awarded. The special challenges associated with the international aspects of the audits were met without reservation. Since the audits did not give rise to any objections KPMG AG issued unqualified audit certificates. The Balance Sheet Committee discussed the annual financial statements and the management reports with the participation of the auditors and in light of the audit reports, and it informed the Supervisory Board of the outcome of its examination. The audit reports were distributed to all members of the Supervisory Board and scrutinised in detail – with the participation of the auditors – at the Supervisory Board meeting held to consider the annual results. The auditors will also be present at the Annual General Meeting.
We have examined a) the annual financial statements of the company and the management report prepared by the Executive Board, b) the consolidated financial statements of the Hannover Re Group and the Group management report prepared by the Executive Board and c) the report of the Executive Board pursuant to § 312 German Stock Corporation Act (Report on relations with affiliated companies)
There were no changes in the composition of the Supervisory Board or the Executive Board in the year under review. At its meeting on 5 November 2008 the Supervisory Board extended the appointment of Mr. André Arrago and Mr. Ulrich Wallin as members of the company's Executive Board until 31 August 2014. At an extraordinary meeting of the Supervisory Board held on 21 January 2009 Mr. Wallin was appointed as the new Chief Executive Officer of the company with effect from 1 July 2009. Mr. Wallin will succeed Mr. Zeller, who is stepping down from the company's Executive Board at the end of June 2009 at the age of 65.
The Supervisory Board thanks the members of the Executive Board and all staff for their work in the year under review.
An independent survey of acceptance of the Code's recommendations and suggestions conducted by the Berlin Center of Corporate Governance found that Hannover Re once again – as in previous years – ranked as one of the leaders among MDax-listed companies when it came to compliance with the provisions of the Code. On average, companies listed on the MDax satisfied just 74 of the 80 recommendations of the Code as amended 14 June 2007, leaving the level of acceptance unchanged at 92.4%.
As we had already explained at this juncture in the previous year, good enterprise management and supervision in the spirit of state-of-the-art Corporate Governance continues to be enshrined in Hannover Re's business practices as a matter of course. This is already evident from the fact that the Executive Board and Supervisory Board consistently address changes in the relevant legal framework conditions in a timely manner and the latest legal developments are promptly codified in internal corporate standards. The company's Business Principles, for example, were subjected to a thorough review in order to maintain Hannover Re's very good reputation and – by setting high standards – to shape a lasting and above all favourable image of our company in the perception of our shareholders, business partners and the public at large.
The resolutions adopted by the Government Commission on the German Corporate Governance Code on 6 June 2008 regarding the further refinement of the Code in the area of management board remuneration were discussed at length by the Supervisory Board. In this regard, it was agreed that the company should comply with the recommendation contained in Item 4.2.2 Para. 1 of the Code. At its first meeting of 2009 the full Supervisory Board will therefore decide upon the remuneration system for the Executive Board, including the major contractual components, and subsequently subject this to regular review.
The activities described here testify to the considerable significance that the Executive Board and Supervisory Board attach to the issue of Corporate Governance. All these efforts are driven by the goal of bringing about sustained growth in the value of the company and strengthening and consolidating on a lasting basis the trust placed in the enterprise by our shareholders, business partners, clients, employees and the general public. On this basis Hannover Re supports the principles of value-based and transparent enterprise management and supervision as defined in the German Corporate Governance Code (DCGK) and recognises their importance in guiding its activities.
Information in this respect is similarly provided in the remuneration report.
Responsibility The Supervisory Board has delegated responsibility for determination of the amount of the remuneration paid to Hannover Re's Executive Board to the Standing Committee.
The internal performance criterion is satisfied upon achievement of the target diluted earnings per share (EPS) calculated in accordance with IAS 33 "Earnings Per Share". The external performance criterion is the increase in the value of the Hannover Re share. The benchmark used to measure this increase in value is the weighted ABN Amro Global Reinsurance Index. The benchmarks cannot be retrospectively altered.
For further details of the virtual stock option plan please see the explanations provided in the notes to this Group Annual Report, Section 8.3 "Share-Based Payment".
Wolf-Dieter Baumgartl Chairman of the – Supervisory Board – Standing Committee – Balance Sheet Committee – Nomination Committee 243.0 185.6
Dr. Klaus Sturany Deputy Chairman of the Supervisory Board Member of the Standing Committee 71.6 49.7
Herbert K. Haas Member of the – Supervisory Board – Standing Committee – Balance Sheet Committee – Nomination Committee 163.9 107.9
Karl Heinz Midunsky Member of the – Supervisory Board – Nomination Committee 47.8 43.6
Dr. Erhard Schipporeit Member of the – Supervisory Board – Nomination Committee 42.9 3.6
In 2008 no loan relationships existed with members of Hannover Re's Executive Board or Supervisory Board, nor did the company enter into any contingent liabilities for members of the management boards.
Dealings in shares, options and derivatives of Hannover Rückversicherung AG effected by members of the Executive Board or Supervisory Board of Hannover Re or by other persons with managerial functions who regularly have access to insider information concerning the company and who are authorised to take major business decisions – as well as such dealings conducted by certain persons closely related to the aforementioned individuals – in excess of EUR 5,000 are to be reported pursuant to § 15a Securities Trading Act (WpHG). The following reportable transactions took place in the 2008 financial year.
The German Corporate Governance Code sets out major statutory requirements governing the management and supervision of German listed companies. It contains both nationally and internationally recognised standards of good and responsible enterprise management. The purpose of the Code is to foster the trust of investors, clients, employees and the general public in German enterprise management. Under § 161 Stock Corporation Act (AktG) it is incumbent on the Management Board and Supervisory Board of German listed companies to provide an annual declaration of conformity with the recommendations of the "German Corporate Governance Code Government Commission" published by the Federal Ministry of Justice or to explain which recommendations of the Code were/are not applied.
The Executive Board and Supervisory Board declare pursuant to § 161 Stock Corporation Act (AktG) that in its implementation of the German Corporate Governance Code Hannover Rückversicherung AG was in compliance with all recommendations contained in the version dated 14 June 2007, while it diverged in one respect in its implementation of the version of the Code dated 6 June 2008: Code Item 4.2.3 Para. 4; Caps on severance payments in Management Board contracts Premature termination of a service contract without serious cause may only take the form of cancellation by mutual consent. Even if the Supervisory Board insists upon setting a severance cap when concluding or renewing an Executive Board contract, this does not preclude the possibility of negotiations also extending to the severance cap in the event of a member leaving the Executive Board. Whilst it is true that the legal literature discusses structuring options that would permit the legally secure implementation of the recommendation contained in Item 4.2.3 Para. 4, it is, however, open to question whether qualified candidates for a position on the company's Executive Board would accept appropriate clauses. In addition, the scope for negotiation over a member leaving the Executive Board would be restricted, which could be particularly disadvantageous in cases where there is ambiguity surrounding the existence of serious cause for termination. In the opinion of Hannover Rückversicherung AG, it is therefore in the interest of the company to diverge from the recommendation contained in Item 4.2.3 Para. 4.
Hannover Rückversicherung AG Shanghai Representative Office Suite 1707, United Plaza 1468 Nan Jing Xi Lu 200040 Shanghai
Bahrain Hannover ReTakaful B.S.C. (c) Al Zamil Tower 17th Floor Government Avenue Manama Center 305 Manama
Colombia Hannover Rückversicherung AG Bogotá Representative Office Calle 98 No. 21–50 Office Number 901 Centro Empresarial 98 Bogotá
Italy Hannover Re Services Italy S.r.l. Via Mazzini, 12 20123 Milan
Korea Hannover Rückversicherung AG Korea Branch Room 414, 4th fl. Gwanghwamoon Officia B/D 163, Shinmunro-1ga, Jongro-gu Seoul, 110-999
USA Clarendon Insurance Group, Inc. Suite 1900 466 Lexington Avenue New York, NY 10017
Hannover Re Services USA, Inc. 500 Park Blvd. Suite 1360 Itasca, Illinois 60143
Credit status (also: creditworthiness): ability of a debtor to meet its payment commitments.
to pay to a reinsurer under a reinsurance treaty. In this case, the retaining company shows a deposit received, while the company furnishing the collateral shows a deposit with a ceding company.
Diversification: orientation of business policy towards various revenue streams in order to minimise the effects of economic fluctuations and stabilise the result. Diversification is an instrument of growth policy and risk policy for a company.
Earnings per share, diluted: ratio calculated by dividing the consolidated net income by the weighted average number of shares outstanding. The calculation of the diluted earnings per share is based on the number of shares including subscription rights already exercised or those that can still be exercised.
Excess return on capital allocated (xRoCA): describes the ➞ IVC in relation to the allocated capital and shows the relative excess return generated above and beyond the weighted cost of capital.
Free float: the free float refers to the part of the capital stock held by shareholders with a low stockholding in both absolute and relative terms.
International Financial Reporting Standards (IFRS): standards published by the International Accounting Standards Board on accounting and reporting (until 2002 they were named International Accounting Standards, IAS).
Obligatory (also: treaty) reinsurance: reinsurance treaty under which the reinsurer participates in a ➞ cedant's total, precisely defined insurance portfolio. This is in contrast to ➞ facultative reinsurance.
(Insurance) Pool: a risk-sharing partnership under civil law formed by legally and economically independent insurers and reinsurers in order to create a broader underwriting base for particularly large or unbalanced risks. The members undertake to write certain risks only within the scope of the insurance pool. They include such risks – while maintaining their commercial independence – in the insurance pool against a commission fee. Each insurer participates in the profit or loss of the insurance pool according to its proportionate interest. Reinsurance is often ceded or accepted in order to further diversify the risk. Pools can be divided into two types: coinsurance pools, in which all members take the role of primary insurers according to their interests, and reinsurance pools, in which a primary insurer writes the risks and then spreads them among the participating insurers by way of reinsurance.
Quota share reinsurance: form of proportional reinsurance under which the reinsurer assumes a contractually set percentage share of the written risk. Since the insurer is responsible for acquisition, pricing, policy administration and claims handling, the administrative expenditure for the reinsurer is very low. The latter therefore participates in the aforementioned expenses through payment of a reinsurance commission. This commission can amount to 15%–20% of the original premium depending upon the market and cost situation.
Value of in-force business (VIF): present value of expected future profit flows from the portfolio of in-force retained business, discounted by a currency-specific risk discount rate. It is determined in accordance with local accounting principles.
Credit and surety (re)insurance 4, 6, 21, 25, 28f, 33f, 72, 74f, 109 Critical Illness 43f, 46ff, 76
Life and health (life/health) reinsurance, business 1f, 4, 7, 10f, 15,
Marine (business, (re)insurance) 6, 21f, 28f, 33f, 73, 104, 109 Morbidity (risk, rate(s) 42f Mortality (risk, rate(s) 44, 98
Operating profit/loss (EBIT) 14, 20, 22, 24, 42f, 45ff, 55, 67, 72,
Property (re)insurance 6, 21f, 25, 28, 30ff, 36f, 72ff, 104, 109,
Hannover Congress Centrum Theodor-Heuss-Platz 1–3 30175 Hannover, Germany 05 May 2009 Interim Report 1/2009 06 August 2009 Interim Report 2/2009 06 November 2009 Interim Report 3/2009 04 May 2010 Annual General Meeting Beginning 10:30 a.m.