Dividend (incl. corporation-tax credit and bonus*) in EUR million 100.0 39.9% 71.5 53.4
Dividend (incl. corporation-tax credit and bonus*) per share in EUR 3.64 25.1% 2.91 2.18
1 Address of the Chairman of the Executive Board 4 Boards and Officers 6 Executive Board 8 The Hannover Re share 16 Self-image and strategy 20 The Hannover Re Group's global presence 24 Report of the Hannover Re Group 24 Economic climate 25 Business development 28 Our business segments 28 Property and Casualty reinsurance 46 Life and Health reinsurance 53 Program business 56 Financial reinsurance 59 Investments 64 Risk management 67 Human resources 70 Outlook 73 Proposal for the distribution of profits 75 Consolidated accounts 76 Consolidated balance sheet 78 Consolidated statement of income 80 Cash flow statement 82 Segmental report 87 Notes 118 Auditors' report 119 Branch offices and subsidiaries 121 Glossary
Our gross premium income again rose sharply in the 2000 financial year by 24% to EUR 8.3 billion. Following a prolonged period of unattractive market conditions, we were able to exploit fresh opportunities for profitable growth that emerged in certain selected markets of property and casualty reinsurance. Consequently, in the year under review property and casualty reinsurance, financial reinsurance and program business made appreciable growth contributions. After factoring out a special effect from the previous year as well as the effects of US GAAP accounting rules, our fourth business segment – life and health reinsurance – again posted very successful growth.
Results in our four business segments varied widely in quality and confirmed the strategic importance of being able to draw on various sources of income. Thus, in a situation where the result of one business segment fell far short of expectations, we were once more able to show satisfactory overall bottom line results. In life and health reinsurance the investments of the previous years are now paying off. The operating profit in this segment rose by 78% to EUR 83 million, and after additionally factoring in the development of the present value of future profits the result is even more gratifying. The same is true of financial reinsurance – our most profitable segment surpassed the high operating profit of the previous year to post a result of EUR 54 million.
The financial markets gave us a bumpy ride over the past year. In the first quarter 2000, we exploited the sometimes extreme price rises – especially among technology stocks – to realise gains. The profits on disposals were therefore almost on a par with the high level of the previous year. In combination with considerably higher ordinary investment income, net investment income increased by a further 5%. In my opinion, however, it will be virtually impossible in the immediate future for insurers and reinsurers to offset inadequate technical income with profits on disposals – which are by their very nature unreliable. This trend will favour those market players who have hitherto set great store by a profit-orientated underwriting policy, and it necessitates the continued exercise of underwriting discipline – especially in property and casualty reinsurance.
Since 1999 had already been influenced by a favourable tax effect, it has become difficult for outsiders to assess the true earnings power of our Group and ascertain whether we are really achieving our corporate objectives. This is particularly relevant in the current year, which will reflect the considerable one-off effect in the year under review. For a number of years we have openly communicated our overriding goal of increasing the earnings per share by at least 10% annually. Given the fact that the last two years both provide a distorted basis, a long-term comparison can only be based upon the last "normal" accounts, i.e. for the 1998 financial year. Our goal for 2001, therefore, must be to increase the net income by three times 10% (representing three years) on the basis of the 1998 results. At the same time, we continue to pursue our objective of generating an attractive return on equity.
I am optimistic that in future years we shall continue to achieve our ambitious strategic objectives, provided that no exceptionally large catastrophes occur or there are no extraordinary events in the capital markets.
On behalf of my fellow members of the Executive Board and myself, I would like to thank you, our shareholders, for your confidence in our company. I can assure you that we shall live up to your trust; we shall do everything in our power to bring about a sustainable increase in the value of your company.
Wolf-Dieter Baumgartl, Hannover Chairman Chairman of the Executive Board of HDI Haftpflichtverband der Deutschen Industrie V.a.G.
Dr. Paul Wieandt, Königstein Deputy Chairman Former Chairman of the Executive Board of BfG Bank AG
Karl Heinz Midunsky, Munich (from 20 July 2000) Corporate Vice President and Treasurer of Siemens AG
Details of memberships of legally required supervisory boards and comparable control boards at other domestic and foreign business entreprises *staff represenative
Eberhard Wild, Grünwald (until 20 July 2000) Former Member of the Executive Board of Bayernwerk AG
Property and Casualty Reinsurance in North America, European Roman-speaking countries, Latin American and Arab countries, Northern and Eastern Europe, the United Kingdom and Ireland; Program Business
Property and Casualty Reinsurance Germany, Austria, Switzerland and Italy; Claims Services, Legal Department
Controlling and Information (Planning/Controlling, Investor Relations, Public Relations, Internal Auditing), Underwriting Service and Controlling, Corporate Development, Human Resources
Property and Casualty Reinsurance in English-speaking Africa, Asia and Australia, Facultative Reinsurance worldwide, Aviation, Space and Marine Business worldwide; Financial Reinsurance
from early summer onwards the picture changed dramatically. Triggered by falling prices in the USA, a worldwide slump set in – especially among TMT stocks – and gathered further momentum as the year progressed. In Germany, a "sell-off" began on the new market – exacerbated towards the end of the year by severe financial distress among the former stock market darlings of this segment – and by year-end the Nemax had dropped 70% from its peak high. Nor was the Dax – additionally burdened in the second half of the year by interest-rate concerns in the USA – able to divorce itself from this trend. By the end of the year under review it had lost 20% of its annual high and closed 5% lower overall than at the beginning of the year. Although it appeared for a while that at least the MDax might be able to withstand the disappointment surrounding the new technology stocks, the general slowdown in economic activity – not least due to rising oil prices – added to the strain on the market. Nevertheless, the MDax still showed a gain of 14% over the year.
The Hannover Re share profited from a recovery in the “Old Economy“…
The performance of the Hannover Re share was similarly affected by the aforementioned tendencies. Due to the structure of our portfolio of equity participations, we were unable to profit decisively from the new tax rules. Nevertheless, with the rediscovery of top-quality securities from
March 2000 onwards, our share posted a sharp upturn and on 15 November reached a high of EUR 118. Despite a subsequent decline in the price, we closed the year under review with a gratifying increase in value of 24%.
The Hannover Re Share in comparison with Reactions' World Reinsurance Index
It should, however, be noted that we do not use the CDax for insurance stocks to measure the performance of our share. Bearing in mind that this index weights companies according to their market capitalisation, it is very heavily dominated by the price trends of the two largest insurers and reinsurers and hence gives a somewhat distorted view. As part of our strategy we have therefore set ourselves the goal of achieving an increase in the share price which on a 3-year moving average surpasses the performance of the unweighted world reinsurance index. This index, which is published monthly in the international insurance journal "Reactions", increased in the year under review by around 29%. The performance of our share thus ran almost parallel to worldwide reinsurance stocks.
As a new component of our investor relations programme, we launched a seminar for analysts which was held for the first time in 2000. It is aimed specially at institutional financial analysts who have already gained solid knowledge of Hannover Re but wish to familiarise themselves more deeply with the principles underlying individual business segments. With this aim in mind, we invited for the first time analysts and investors to participate in a one-and-a-half-day seminar in Hannover in the summer. The topics of the 2000 event were life and health and financial reinsurance, and they were explained in detail by the responsible managerial staff at our company. The feedback we received for this seminar was positive in every respect, and seminars of this type will therefore continue to form part of our investor relations programme in the future.
In order to obtain a better insight into our shareholding structure, we unified our share structure in the year under review and subsequently effected a complete changeover to registered shares. As a first step, we therefore called the outstanding amounts on hitherto partially paid share capital in order to have those of our shares, which were unlisted at that time admitted to the German stock exchange.
By means of this action we significantly increased our weighting in the MDax and CDax for insurance stocks. On 16 October 2000, all Hannover Re shares were converted to registered shares. The newly gained detailed insights into our shareholder structure provide us with an important tool for organising our investor relations activities systematically and efficiently and enhancing still further the direct contacts we maintain with our shareholders.
holdings of the Executive Board and the designation of a Corporate Governance Officer – whose task is to monitor compliance with the defined principles – mean that we now satisfy around 80% of the corporate governance requirements contained in the German Association for Financial Analysis and Asset Management (DVFA – Deutsche Vereinigung für Finanzanalyse und Asset Management) scorecard.
"Hannover Re has one of the best portfolio mixes in the reinsurance industry, with the faster-growing segments of life and financial reinsurance accounting for more than 40% of total premium income… Overall, in that period, Hannover Re has transformed itself from a regional traditional non-life reinsurer into a welldiversified large global reinsurer and provider of related financial services."
"Hannover Re has an interesting exposure to high growth, high RoE niche businesses and is geared to a cyclical property and casualty reinsurance recovery. We believe this provides an attractive cocktail of newsflow catalysts and earnings momentum."
"Hannover Re is not only a well-managed company; it has also communicated all the good news to the capital market."
"Aware of the risk and difficulty of competing against world leaders..., as another global player, Hannover Re has favoured the so-called "specialty" segments over "mass-market" reinsurance. The group has clearly put profitability ahead of market share."
"With a worldwide market share of 7.5% Hannover Re is well positioned in the life and health reinsurance segment. In the light of the growth prospects and reliably calculable risks, we take a favourable view of the company's efforts to continuously expand its life reinsurance portfolio. "
"An innovative, diversified reinsurance group; dynamic management team with commitment to developing shareholder value."
"By the use of securitisation, Hannover Re is optimising its capital allocation and is also not compelled to slow down its fast pace of growth."
Number of shares as at 31 December 2000: 29,530,215 no-par value registered shares
20 July 2001 Report on the first quarter 2001 30 October 2001 Report on the second quarter 2001 31 January 2002 Report on the third quarter 2001 19 July 2002 Annual General Meeting Beginning 10:30 a.m.
In order to update or redefine these necessary visions and objectives, we draw up a strategy document setting out such goals roughly every three years. This document is – very deliberately – kept concise and is not printed on "glossy paper", rather, as a normal working paper, it is intended to serve as a guideline for our dayto -day actions.
With the aim of familiarising you more closely with these guidelines for the Hannover Re Group, we have set out below our self-image and the strategic objectives (our "ten commandments ") which apply to our Group as a whole.
As a "somewhat different reinsurer" we chart our own course. Its hallmarks are the power of innovation, a readiness to perform and, most notably, the quality of our services.
In order to ensure the attainment of our minimum return-on-equity target, our pricing always makes allowance for corresponding capital costs. These capital costs are determined and differentiated according to risk-based-capital considerations based on a degree of risk that tolerates the omission of the dividend payment not more than once in 25 years.
As a reinsurer whose roots are in the highly competitive, cyclical and volatile property and casualty treaty reinsurance sector, investments in the optimisation of the portfolio mix enjoy top priority. Within the individual strategic business segments, we identify geographical, lineof -business and product priorities which take precedence in the event of investment conflicts.
Quality enjoys a special status in our way of thinking and the way we do business. By means of specific actions and a constant process of quality improvement, we strive to become the quality leader in international reinsurance ("Clients prefer to work with us!") in order to attain competitive advantages.
Due to extraordinary tax effects associated with the change in the rates of corporation tax in 1999 and 2000, the target figures for 2000 and 2001 are based on the 1998 results.
Return on equity after tax 1) Based on the German Commercial Code (HGB) 2) Based on US GAAP
Particularly in the first half-year 2000 the industrialised nations recorded strong economic growth. As the year progressed, however, the economic cycle in many countries began to lose impetus and the increase in production fell away sharply. Rising oil prices were a notable restraining factor in this regard. In the USA, western Europe and Japan economic growth experienced a slowdown towards year-end. Developments in the USA were crucial to the increasing decline in economic activity around the world. Nevertheless, the weak euro and surging US demand enabled Europe to enjoy a welcome export boom.
Of the major industrial nations, the USA showed the strongest economic growth (at around 5%) and Japan – despite promising indications in the first half-year – the weakest (at 1.5%). In western Europe and the euro zone overall economic production rose by approximately 3.3%. While the pace of growth thus lagged behind the USA, it was the highest since 1989. The German economy recorded growth of 3.1% in 2000. This figure was double the average of the previous decade and the highest since the 1991 boom associated with German reunification.
The cyclical upturn in the euro zone stabilised, although economic activity peaked in the third quarter. The level of incoming orders was generally good. Compared to Japan and the USA, the euro zone profited particularly well from the economic growth of the emerging markets due to its high market share. The weak euro gave exports a further boost.
The financial markets started 2000 in turbulent mood. As the year progressed the euphoria on the stock markets surrounding "New Economy" stocks gave way to market disillusionment. Investors began to switch to fundamentally stable financial and pharmaceutical stocks. The restrictive interest rate policy – originating from the USA – gave rise to fears about the development of corporate profits, and share prices were therefore generally sluggish. Bond markets, too, looked to the USA for their lead. While the short end of the market initially saw interest rate increases, longer-range maturities experienced an impressive positive trend throughout the year. The interest rates on 10-year US Treasury Bonds, for example, fell from more than 6.8% in January to less than 5% in December.
The insurance and reinsurance markets posted moderate growth. Property and casualty (re-)insurance showed initial signs of an improvement in market conditions. The decline in prices was halted in major markets, and the first sporadic rate increases were achieved in the course of the year. These were, however, hardly sufficient to write business on a consistently profitable basis.
Life insurance generated disproportionately strong growth rates around the world. The German market in 2000 was still overshadowed by the previous year, in which private old-age provision had been affected by various extraordinary factors. Nevertheless, life insurance business can be considered satisfactory as a whole. Assetforming life insurance policies showed correspondingly lower growth in new business. Private annuity and pension insurances also showed a decline in new business in 2000. Unit-linked life insurance policies, however, benefited from the stock market euphoria and served to boost growth.
Gross premium income grew by a sizeable 24% to EUR 8.3 billion. Of this, around 9 percentage points were due to exchange rate factors. Following a sluggish and sometimes even declining trend in recent years, property and casualty reinsurance actually accounted for the highest share of growth in absolute terms in the year under review (12 percentage points). We also achieved vigorous growth in our newest segment – program business. This has now been expanded to include activities outside the USA, and it contributed growth of 9 percentage points. In relative terms, financial reinsurance – our smallest business segment – in fact showed the greatest year-on-year growth of 71%. Its share of overall growth was thus 5 percentage points.
The performance of the various business segments produced very differing – and sometimes even contradictory – effects on the technical result. The burden of major losses decreased dramatically in property and casualty reinsurance, following a record amount in the previous year. However, the inadequate terms and conditions of previous years continued to leave their mark, and the result therefore improved only slightly. Life and health reinsurance posted a gratifying development and the result increased sharply. Program business deteriorated appreciably. On balance, the Group's technical deficit increased from EUR 395 million to EUR 449 million. This deterioration was attributable primarily to financial reinsurance, although the segment was more than able to offset its technical deficit with higher investment income.
Above-average return on equity * Return on equity calculated in accordance with US GAAP ** After minority interests
The balance of cash flows from operating, investing and financing activities produced a positive overall balance of EUR 45 million.
The re-calculation of deferred taxes had a clearly favourable impact on the development of our stockholders' equity. Foreign currency conversion adjustments, on the other hand, led to a decline in other comprehensive income. On balance, our stockholders' equity increased from EUR 1.2 billion to EUR 1.6 billion.
The following sections describe the development of business, subdivided strictly according to our four strategic segments. The corresponding results are also shown in detail in our segmental report as part of the annual financial statement.
Ten years ago property and casualty reinsurance accounted for more than 95% of our total gross premium income. This figure has since decreased to just 41% in the year under review. Yet, in absolute terms this segment has grown sharply in this period and it continues to generate the greatest share of premiums. In property and casualty reinsurance we have no growth targets; rather, our premium volume is guided by the prevailing market conditions. Last year's conditions bottomed out and our premium income consequently declined; in the course of the year under review, selected markets showed a favourable development. We took advantage of these opportunities and expanded our premium volume by a sizeable 30%, around 6% of which derived from movements in exchange rates.
The burden of major claims and catastrophe losses decreased considerably and was lower than expected. On the other hand, an additional burden derived from losses in the previous year, most notably in connection with the winter storms "Lothar" and "Martin" at the end of 1999. The loss ratio and the technical deficit consequently decreased overall, but they were still adversely affected by the scarcely adequate premium level at the beginning of the year under review. In the previous year, expenses had been favourably influenced by performance-related reimbursements from retrocessionaires. Partly because this factor no longer applied, the expense ratio rose in the 2000 financial year. The investment income apportionable to this segment decreased sharply. All in all, the operating result before general expenses deteriorated slightly and was therefore unsatisfactory.
The German insurance industry was only able to a limited extent to pick up on the positive leads given by the economy as a whole. The premium volume grew by a mere 1.2% in 2000, a figure below the rate of inflation. The favourable effects deriving from a greater demand for insurance and the increase in insured values associated with the stepping up of economic activity were to some extent offset by opposing factors. These included mergers and acquisitions, the marked interest shown by banks in insurers' distribution networks and vice versa and the accelerated cultivation of new, more cost-effective sales channels such as the internet. The internationalisation of the German insurance industry featured prominently in these developments. Some providers believed that size was the key to their business opportunities while others saw their chances in independence or in a targeted niche policy. At the same time, insurance customers are becoming more sophisticated: the demand for products tailored to their individual needs at the right price is increasing. In a largely saturated market, this inevitably led to persistent cut-throat competition.
The concentration in the insurance markets brought about by mergers and alliances also impacted the reinsurance industry. On the one hand, the number of (potential) clients has decreased, while on the other hand the reinsurance requirements of large, international insurance groups differ from those of small or medium-sized companies with a purely national orientation. Given this state of affairs, reinsurers are obliged to show a high level of adaptability and must offer new products based on a holistic approach to a company's risk situation. In some areas there is also a demand for considerably higher exposures, which have corresponding implications for the potential volatility of technical results and place greater strains on capital resources.
Despite the dramatic decrease in natural catastrophe losses, results in the reinsurance markets were by no means satisfactory. In motor reinsurance it was merely possible to halt the downward trend of the previous years, while industrial fire insurance again produced heavy losses for insurers and reinsurers alike. These insights hardly came as a surprise, however, and we had already scaled back our participation in this market segment to an unavoidable minimum.
In the course of the year under review, however, it became evident that this phase of difficult market conditions was beginning to give way to an upturn. Efforts taken by insurers – in addition to those implemented by reinsurers – to restore business to profitability started to filter through positively to the reinsurance markets from the second half of the year onwards.
Particularly in property business, the growing number of mergers in all sectors of the economy is leading to ever-higher sums insured – a trend which runs parallel to an increase in the international exposure of the risks. The failure of the international reinsurance market in Australia also caused clients to attach even greater importance to their reinsurers' quality and credit ratings. Although reinsurance capacity con-
Towards the end of the year the UK market suffered the most severe flood losses in forty years. Numerous towns and villages were partially submerged for days or even weeks on end. Some locations were even hit by repeated flooding. Nevertheless, the insured loss marketwide was in the order of just GBP 500 million, and for the most part insurers therefore carried it in their retention.
Motor insurance performed well, with all insurers recording double-digit percentage increases in premiums. Due to the applicable premium limits in this sector, some Lloyd's Syndicates found that they were no longer able to carry risks on the same scale as had hitherto been the case without the support of reinsurers or co-insurers, as a consequence of which larger premium volumes were ceded to the reinsurers. Competitive pressure nevertheless remained intense, and results were adversely impacted by the so-called "Woolf Reform". This change in the law will sharply accelerate the speed with which liability claims are run off. It is, however, anticipated that in the long term the lost investment income can be offset by lower claims figures. Conditions in liability business remained virtually unchanged and were thus unattractive, despite the fact that here, too, results in previous years were in many cases inadequate.
A further important aspect is the potential extension of the scope of cover to include claims connected with loss of information and computer viruses. The goal here is to precisely define the additional exposure and either exclude it or incorporate it into the premium calculation.
The premium increases in the insurance market also generated substantially higher premium income for our portfolio, especially in the areas of motor and international property business – in both the proportional and non-proportional sectors. In addition, we were increasingly active as a leading reinsurer in various niche segments, such as international property per-risk business, thereby enabling us to push through our price expectations more frequently than had hitherto been the case. Contrary to the pleasing development of the 2000 financial year, however, we incurred run-off losses on the loss reserves of previous years. Numerous claims and increases in loss reserves were only reported by the ceding companies very belatedly, and these losses from previous years consequently burdened the year under review. Overall, the technical result therefore showed only a slight improvement and was just sufficiently satisfactory.
Although Ireland's almost unparalleled economic boom has of course favourably impacted the insurance industry, opportunities for reinsurers have remained few and far between. The attractive environment led to a wave of take-overs, ultimately leaving just a few domestic insurers in the market. Altogether, the market lost a further three insurers in 2000. As in the United Kingdom, this led to a struggle for market shares with the inevitable consequences for business results.
The French economy continued on its expansionary course in 2000 with growth in gross domestic product of 3.2%. Growth was particularly dynamic in two areas: exports, fostered by strong global demand, and investment activity.
Private household consumption, which had been growing steadily since 1997, was dampened by rising oil prices in the spring of 2000. At 1.2%, inflation was again lower than in most other eurozone countries.
For the insurance industry, the generally favourable economic environment was overshadowed by the effects of the winter storms "Lothar" and "Martin" at the end of 1999. In the course of the year under review, expenditures associated with these loss events increased from an initially estimated EUR 4.5 billion to EUR 7 billion, at the same time bringing to an end the downward slide in the premium level in all lines of business. The strained situation enabled large insurers to secure commensurate premiums not only in property business but also in the liability lines, where prices rose by around 5% on average. Even the consistently highly competitive motor insurance line, which initially suffered under increased motor vehicle repair costs, showed a premium increase of roughly 3% after five years of declining rates.
Showing a slight increase in gross premium income, our result for 2000 was still adversely affected by the additional reserves constituted for the windstorm losses and the poor conditions prevailing at the beginning of the year; even after allowing for the non-technical result, our French portfolio therefore closed with a deficit.
most notably with a sharp rise in the average loss amount. The largest single event was the explosion in Enschede, which caused an insured loss of EUR 250 million.
While the total reinsurance premium stood at EUR 1.5 billion, fire business continued its traditional dominance, accounting for an overall volume of around EUR 665 million. A trend towards non-proportional covers can be discerned.
As a consequence of the losses caused by the storm "Anatol", rates for catastrophe covers rose appreciably in Denmark. However, since some reinsurance programmes were placed as multi-year covers it was not always possible to translate these losses into premium increases. Overall, though, demand for windstorm covers rose sharply and favourably impacted the rate level. These effects also made themselves felt in the neighbouring countries of Norway and Sweden. Rate increases did not, however, spill over into other lines of business.
As was true of almost all continental European markets, reinsurance terms and conditions bottomed out in the year under review – having deteriorated steadily in previous years. Nevertheless, as the year progressed, the first premium increases ensued in the light of the windstorm losses experienced in France and Germany.
Despite a substantial loss burden associated with the Enschede disaster, our Dutch portfolio generated a positive technical result.
The Italian national economy grew by 2.9% in the year under review. The generally favourable economic trend was fostered by improved order books in industry and expansion in the service sector.
In this overall economic climate, premium growth in property and casualty reinsurance was slightly lower than in the previous year at 6.5%. While motor third party liability insurance, the largest line of business by volume, grew by 8.7%, increases in the other lines ranged from 2% to 4.5%. Surety insurance, on the other hand, showed a premium decrease of roughly 5% due to legal changes affecting value-added tax risks.
In other respects, the development of property and casualty insurance began the year on a bright note. In October, however, parts of northern Italy were hit by severe storms accompanied by prolonged rainfall. The heavy precipitation resulted in major flooding, which caused considerable property damage in numerous densely populated areas and metropolitan centres with high concentrations of values. Despite total economic losses of around EUR 12.5 billion, the insured losses from this event were in the region of just EUR 300 million.
This catastrophic event caused ceding companies to adjust conditions according to market requirements – especially in industrial business – and hence the demand for reinsurance capacity also rose. Towards the end of the year it was thus possible on a large scale to implement both long overdue premium increases and benefit restrictions, which we also exploited in order to expand our portfolio.
Overall, our Italian portfolio contracted slightly. Nevertheless, our selective underwriting policy enabled us to achieve an almost balanced business result in a year of heavy losses.
Geographical breakdown of property and casualty reinsurance in % of gross premium income countries in the eastern part of central Europe (Poland, Czech Republic, Slovenia, Slovakia and Hungary) recorded growth of between 3% and 5% in gross domestic product. Bulgaria and Romania also reverted to GDP growth in real terms. Given that crude oil and other mineral resources can currently be sold at adequate prices on the global market, the Russian crisis of 1998 would appear to have been overcome.
The business development in the insurance markets is largely founded on the expansion of obligatory motor insurance. Adjusted for inflation, the average annual growth in the non-life sector in recent years was a gratifying 7.6%. Measured as a percentage of gross domestic product, the premium volume now stands at around 1.7% – a level which is already roughly half that of western Europe.
First and foremost due to the entry into the market of foreign insurance companies, a properly functioning competitive environment has emerged. This could clearly be observed, for example, in the Czech Republic when the motor third party liability monopoly was abolished. The former holder of the monopoly lost business
We took advantage of various opportunities and systematically increased our acceptances in the areas of workers' compensation, commercial motor and professional indemnity. Now that conditions on some insurance markets have also become more attractive and commissions could be reduced, we began to expand our proportional portfolio. In previous years we had withdrawn to a large extent from this segment too. Overall, our casualty portfolio in the USA recorded substantial growth. In the short term, this always goes hand-in-hand with a deterioration in the combined ratio. However, since long-tail casualty business accounts for disproportionately large shares of the investment income, the profit contributions are positive.
Although conditions in the insurance markets languished at a low level in property business during the first two quarters of the year under review, the second half of 2000 witnessed a marked improvement in this area too. Insurers were then able to demand adequate prices much more systematically and to factor claims experiences and risks into the pricing process. In this segment, however, there is a particularly acute need to supplement proportional reinsurance cessions with additional non-proportional cover for risks. Although these segments were not unusually burdened by sizeable losses in the previous year, reinsurance prices developed favourably and we were therefore able to step up our participation in this business.
The rate level in (natural) catastrophe business had already been largely sufficient in previous years due to the heavy demand. Windstorm and tornado risks in the Midwest of the USA were an exception in this regard. Inadequate terms and conditions combined with an increased number of losses produced unsatisfactory results in this business, although these were taken into consideration at year-end and during the renewal season. On balance, our business again recorded profitable growth.
Following the general economic crisis of 1999 the situation has largely stabilised. The gross domestic product – spread across altogether 17 countries – grew by 0.1% overall to approximately 4%, while the inflation rate fell from 8.5% to around 7.1%. The balance of trade showed a surplus, and even foreign debt was reduced from USD 756 billion to USD 741 billion. Interest rate cuts in the USA also positively impacted the level of foreign debt, which in some countries was still high.
Mexico, for example, conducts 90% of its foreign trade with the USA, whereas the proportion in Argentina's case is just 10%.
Due to the different systems of government and the associated degree of state control, the political and economic environments confronted insurers and reinsurers with widely differing tasks.
In Japan the effects of the far-reaching process of deregulation have currently reached a high point. Fierce competition has ensued and a hitherto unparalleled wave of consolidation has been set in motion among insurers, with the result that here, too, the number of reinsurance clients is decreasing dramatically. It remains to be seen how this development will impact the demand for reinsurance capacity.
Our results in the year under review were adversely affected by several instances of flood damage, which impacted the performance of our property account. Thailand suffered the most severe flooding in its history, and the Malaysian capital Kuala Lumpur experienced its first-ever major flooding.
This was all the more disappointing because in 1999 Australia had suffered the largest insurance loss in the history of the continent – the Sydney hailstorm with an estimated market loss of AUD 1.9 billion. Even in natural catastrophe business the reaction to this event was restrained, especially because many customers had arranged multi-year policies which do not come up for renewal until the middle of 2001. At least in our proportional portfolio, however, we observed the first hopeful trends inasmuch as our clients were able to raise rates in the second half-year – in some cases by double-digit margins.
The general economic situation throughout Africa was difficult. Economic activity in central Africa was adversely influenced by political flashpoints. Hence, the growth achieved by the insurance industry in East Africa, Kenya, Tanzania and Uganda remained minimal.
Against the backdrop of economic growth of around 3.1% in 2000, the most significant insurance market on the continent – South Africa – was characterised by meagre growth and intense competition. In the year under review, as in previous years, it was difficult to secure adequate premiums in southern Africa. What is more, the high overall burden of losses hampered profitable operations. This state of affairs was exacerbated by extensive structural changes. The number of medium-sized insurance companies fell sharply. Four property and casualty insurers ceased trading or were taken over in the last year. This steady reduction in the number of potential clients had a detrimental impact on property and casualty reinsurance. The previously large number of insurers who ceded their premiums to the reinsurers also had a positive effect on risk spreading. Concentration undermined this balance of risks and made the reinsurers ' results more volatile. Particularly through its co-operation arrangements with South African insurance companies, our subsidiary Hannover Re Africa successfully adjusted to these new circumstances, thereby alleviating potential declines in premium income.
Due to fierce competition and overcapacity, however, the marine insurance market again failed to achieve any general improvement in the rate level in 2000. As a consequence of the poor results in recent years, various players withdrew from the market; efforts to restore business to profitability were therefore assisted by more restricted capacities. Certain lines, such as offshore business, recorded marked improvements in terms and conditions including premium increases and limitations on the scope of cover.
Owing to the unsatisfactory result in previous years, we exercised great restraint in our proportional acceptances. The focus of our obligatory acceptances was on non-proportional reinsurance. In facultative reinsurance our risk acceptances were concentrated on offshore business as well as on types of coverage in the hull and cargo lines where the only exposure is to major losses.
In aviation and space reinsurance high rates of increase continued to be recorded in the areas of tourism and goods-in-transit. In space business the demand for new telecommunications and science satellites continued unabated.
Although the year under review again witnessed a number of plane crashes, the total burden of losses was average. In both aviation and space business the insurance markets continued to suffer under insufficient rates and considerable overcapacity. Despite the fact that sizeable reinsurance capacity was still available, the deficits of previous years gave rise to rate increases averaging between 25% and 30%. Combined with greater airline activity and increased fleet values, the market premium for aviation fleets climbed from roughly USD 850 million to USD 1.2 billion. This level is nevertheless scarcely commensurate with the accepted risk.
As in marine and aviation reinsurance, owing to the special features of these lines we transact credit and surety business in a central department with worldwide responsibility, thereby concentrating our expertise and services in a single competence centre.
Following the successful rehabilitation of their German business in the previous years, German credit insurers saw premiums come under renewed pressure. Loss ratios also showed a striking deterioration, not least due to increased retail insolvencies shortly before year-end. German credit insurers were also adversely affected by the crisis in the building industry. Premium growth derived in large measure from the impressive export boom.
We attach strategic priority to credit and surety business, and our premium volume showed pleasing growth of around 6%. However, the otherwise satisfactory results were impaired by major losses in the USA, Mexico and Germany, and this line therefore closed with a slight technical deficit.
Key features of the 2000 financial year in the business segment of life and health reinsurance (Hannover Life Re) were the further expansion of international activities in our core markets and the launch of the global brand "Hannover Life Re – A Somewhat Different Reassurer". We also commenced business operations at our branch offices in Kuala Lumpur and Hong Kong and successfully established our Irish life and health reinsurance company in Dublin.
Certain premium components in life and health reinsurance (e.g. savings elements under unit-linked life insurance policies) are not reported as premium under US GAAP. In order to reflect our business development as realistically as possible, the premium income shown below always includes such "premium deposits". Defined in these terms, our consolidated gross premium income grew to EUR 2,494 million. Nominally, this constitutes an increase of 12% compared to the previous year's figure of EUR 2,220 million. However, this latter amount includes a special transaction in Australia with a single premium of approximately EUR 200 million. Once this aspect is factored out, the actual growth amounted
By contrast, in many of our markets the influence of the traditional risk segments of life, personal accident and disability insurance as well as of critical illness covers is limited. The results of our health reinsurance portfolio improved markedly over previous years – particularly in the USA – but overall they were still unsatisfactory.
In the year under review we devoted special attention to the longevity risk. Our greatest involvement here is in the United Kingdom through our product partnerships in the area of annuity policies for aggravated risks and other enhanced annuities. On the basis of our analyses and in close co-operation with our clients, we significantly raised the conditions applicable to certain risk groups for acceptance of these risks.
The USA again witnessed a substantial number of take-overs of reinsurers in 2000. We too participated in several auctions; however, in no instance did our price expectations correspond with those of the sellers, with the result that none of these acquisition opportunities came to fruition.
These values are audited and certified separately for each Hannover Life Re company by an internationally renowned firm of actuaries.
Of which already capitalised as present value of future profits 597 374 323
The business model of Hannover Life Re is based on a network approach, under which seven reinsurance companies currently work together on an equal footing as independent risk carriers. In this context, the companies in Hannover, London, Dublin, Orlando, Johannesburg and Sydney pool their financial resources, risk capacities, expertise and knowledge base as well as their system structures.
Since the mid-nineties, especially in the USA, we have concentrated on a speciality product. We assume entire portfolios of new business by way of proportional reinsurance treaties – socalled block assumption transactions (BATs).
The following sections describe activities in our most important markets and highlight the relevant areas of concentration.
L2 128 1998 In-force business – life, 1 (4) health, personal accident Europe, North America
L3 50 1999 New and in-force business – life, 14 46 health, personal accident Developing markets in Asia
The US life insurance market is served by Hannover Life Re of America. In this market we have specialised almost exclusively in the aforementioned "block assumption transactions". We continued to conclude such financing arrangements on an ongoing basis. Five new transactions, primarily consisting of life and annuity insurance portfolios, were completed in the year under review.
With effect from 31 December 2000, following two years of preparatory work, we concluded the largest life BAT in our history with a renowned life insurer from the US state of Oklahoma. From 2001 onwards it will bring in an annual premium of more than USD 80 million over the long term.
The total assets of Hannover Life Re of America amounted to USD 3,560 million as at 31 December 2000. This represents growth of 30.2% compared to the corresponding previous year's figure of USD 2,734 million. Gross premium income, on the other hand, showed only modest growth of USD 819 million (4.8%).
Hannover Life Reassurance (Ireland) develops and markets its financially orientated reinsurance solutions both directly for clients of Hannover Life Re and through the retrocessions of other Hannover Life Re companies. Gross premium income in the company’s first full financial year totalled EUR 77 million; of this amount, 86% stemmed directly from external clients, while the remaining 14% derived from other Hannover Life Re companies. As anticipated, the business accepted performed very favourably and generated an operating profit of EUR 4 million.
With 17 staff, our service centre in Paris is one of the larger offices abroad. The French market underwent further consolidation in 2000, which also impacted the demand for reinsurance. Contrary to the general market trend, however, we were highly successful in enhancing our market penetration and further enlarging our leading position in the French market. Particularly close contacts with marketing and consulting firms helped us to generate some business "at grassroots level". In addition, we have already succeeded in paving the way for several transactions, on the basis of which – in combination with changes in the law which are expected in France, e.g. in the areas of unemployment and long-term care insurance – we believe that this market offers favourable general prospects.
The Spanish life insurance market, responsibility for which rests with our service centre in Madrid, is currently heavily dominated by a number of savings products sold over the counter at banks. Purely from the risk perspective the reinsurance requirement associated with these savings products is relatively low, and the pressure of competition is correspondingly high. We nevertheless succeeded in asserting our position as one of the leading life reinsurers in the client segment consisting of banks and savings institutions.
A team of 16 staff in Stockholm is responsible for the markets of Scandinavia, central and eastern Europe as well as the south-eastern
Kong) and Taiwan as far as Japan. The sales activities of the ten local staff are supported by life specialists at our Shanghai, Tokyo and Taipei locations.
The most notable event in the year under review was the conclusion of a large-volume financing transaction with a medium-sized Japanese life insurer. This arrangement offered our client the desired solvency relief and has since been terminated as agreed. In Japan we also succeeded in establishing business relations with additional primary insurers. Consequently, we are now well positioned in what is – after the USA – the second-largest life insurance market in the world.
The Clarendon Insurance Group, New York, which has been part of the Hannover Re Group since 1999, is the market leader in US program business. Whilst this speciality of the US market technically constitutes primary insurance, this acquisition in no way signifies our entry into the insurance sector. In many respects program business reflects the principles and practices of reinsurance, and for this reason it constitutes a strategic segment in its own right within our Group. Program business is written in very close co-operation with highly specialised managing general agents (MGAs).
is still written by highly specialised managing general agents "on behalf of" the program insurer, but in line with more usual practice only a small portion is reinsured. In this case, the technical result and the investment income constitute the profits basis. This model is more appropriate for programs with modest premium volumes of less than EUR 5 million, and it is already in use in some markets outside the USA.
By far the bulk of our program business stems from Clarendon. Nevertheless, we have already positioned our Los Angeles-based subsidiary Insurance Corporation of Hannover to transact the retention model in the USA, while other international business is concentrated in the hands of our subsidiary International Insurance Company of Hannover in London. The latter two companies contributed 10% of gross premiums in program business and hence accounted for 14 percentage points of the overall growth, which totalled 45% to reach EUR 1.97 billion. Altogether, 17 percentage points were attributable to exchange-rate effects. The tendency here towards a higher retention produced a disproportionately strong increase in net premiums from program business.
Results were decisively influenced by the Clarendon Insurance Group, which looked back on a year of mixed fortunes. Despite parting with a sizeable portion of the business existing at the beginning of the year, gross premium income in the year under review grew by 30% to EUR 1.8 billion. This growth was generated through higher premiums – sometimes up by as much as 50% – as well as the expansion of current programs and the acquisition of new business. With various competitors in danger of losing business as a consequence of downgrades by the rating agencies, additional new business opportunities opened up. In these instances Clarendon benefited from its very good rating compared to its rivals and was able to take over such business. In this way it further expanded its position as market leader in US program business.
The year under review was spared any substantial loss events, and Clarendon's property business – which primarily consists of insurance for buildings in Florida and California – therefore closed with generally positive results. In workers' compensation business we focused on a smaller number of MGAs with a higher average premium as the year progressed. Due to the large proportion of business reinsured and the stable level of fees, the overall result of this line was satisfactory. Although our premium income in private motor insurance contracted by around 20% compared to the previous year, we improved results and met our profit requirements. Despite considerable regrouping within the portfolio, the volume of business in commercial motor insurance remained stable. This was also true of the current results situation. Due to a significant boosting of the reserves for losses from previous years, however, this line closed with a deficit. Personal accident and health business was also disappointing both with regard to terms and conditions – and hence growth prospects – and results. Consequently, we have begun to review our participation in this line of business.
Three years ago the Insurance Corporation of Hannover (ICH) began to develop program business based on the retention model, i.e. unlike Clarendon ICH runs most of the risk in its own retention or reinsures a large part of it within the Hannover Re Group. In the year under review the company's gross premiums from program business totalled USD 79 million, primarily from motor insurance. Despite the costs associated with building up this business and the unsatisfactory market conditions prevailing at the beginning of the year under review, the operating result of USD 5 million was highly satisfactory.
The International Insurance Company of Hannover Ltd. (Inter Hannover) began preparing the ground for the cultivation of program business in Europe around 18 months ago. The infrastructure has now been put in place, and a highly specialised, experienced team has been charged with implementing the plans. In the year under review we largely transferred existing European program business in the area of property and casualty reinsurance to Inter Hannover. In addition, based on an analysis of the most important European markets, we began to draw up a communication concept. Taking this as our starting point, the aim is to launch active marketing of our operation at the end of the third quarter 2001.
The framework conditions under which we offer our financial reinsurance products developed favourably in the year under review. The worldwide trend towards concentration in the insurance markets led to greater volatility in the risk situation in recent years and hence in insurers' results. In order to counteract the repercussions of both technical risks and general risks, insurers are increasingly calling for reinsurance products that spread these burdens over several years. What is more, the volatility of our clients' results was further exacerbated by the implementation of new accounting standards (IAS, US GAAP).
This increased the need and demand for reinsurance solutions that protect their balance sheets. As an additional factor, various market players purchased traditional reinsurance cover in those periods when it could be obtained at a reasonable price, despite the fact that they were not dependent on the risk transfer. Now that traditional protection has become harder to obtain and in some cases substantially more expensive, these clients too are increasingly seeking alternative solutions.
customer or product segment and whose infrastructure and business policy orientation promise a long-term successful co-operation. The goal is to establish business relations with no more than 30 MGAs Europe-wide. In accordance with the approved business plan, Inter Hannover is seeking to generate a premium volume of GBP 300 million from program business in the next five years.
This rising demand went hand-in-hand with a growth in the range of solutions now available from almost all established reinsurers. Not only that, various niche providers have specialised in customised solutions. Overall, there has been a considerable intensification in competition founded on a willingness to accept technical risks with varying degrees of risk transfer.
We made the most of this environment and vigorously enlarged our business; in accordance with our practice to date, we focused on individual and sometimes highly complex constructions, which are closely geared to our clients' specific needs but comprise only a minimal degree of risk transfer.
The training facilities offered to our clients with a view to passing on information about the benefits of innovative financial reinsurance solutions constitute a key aspect of our efforts to acquire new business. In many countries – most notably in Asia – even the supervisory authorities are now taking a positive view of our educational activities. Needless to say, it is also in our interest that these countries develop clear and transparent regulatory frameworks and rules for financial reinsurance. This will enable many still hesitant clients to shed their inhibitions when it comes to using new reinsurance solutions.
Thanks to the favourable general climate enjoyed by our financial reinsurance segment, we increased the previous year's high operating result before general expenses by a pleasing 42% from EUR 38 million to EUR 54 million.
The strong capitalisation of both companies – EUR 180 million for Hannover Re Ireland and EUR 144 million for E+S Re Ireland – enables us to assert our position in the competitive arena, not least by offering considerable underwriting capacities. The financial strength of the companies and their integration into the Han-
The financial markets were again highly volatile – and at times even turbulent – in the 2000 financial year. This was especially true of the stock markets; taking their leads from the USA, movements on the exchanges varied. The sustained bullish mood in the TMT (technology, media and telecommunications) sectors through into March 2000 pushed the leading indices in the USA and Europe to record highs which – viewed on the basis of fundamentals – were almost beyond comprehension. It was above all these stocks which then suffered an at times dramatic crash in the second half of the year. As the manifestly exaggerated price trends persisted into May, the US Federal Reserve Board responded with a restrictive interest rate policy in order to quickly counter the possible inflationary risks. Even during the summer the vast majority of market players were still unable to recognise that the economy would take such a
As one of the developed markets for financial reinsurance products, the United Kingdom constitutes the focal point of our activities in Europe. We eased our hitherto rather restrictive position in the year under review because the terms and conditions under which clients sought financially orientated covers improved appreciably. This applied inter alia to Lloyd's Syndicates, whose results for recent underwriting years had shown a sometimes alarming trend; demand for covers designed to stabilise results thus increased in step with a greater willingness to pay margins which were commensurate with the risk.
In other European markets, too, an upsurge in interest in innovative reinsurance solutions could be discerned. Many companies, however, were still at the stage of gathering information and building up the appropriate know-how. We supported these efforts with new training services.
The energy that we have invested in the Asian region over the past several years led to a number of relationships, most notably with the aim of creating balance sheet continuity and reducing the cost of capital. The increased demand also attracted the attention of various supervisory authorities, which are keen to develop appropriate regulatory frameworks.
Concepts are currently being designed in Japan for the financing of natural catastrophe risks. Tendencies towards the use of innovative products for balance sheet stabilisation can also be identified, particularly in the context of risks associated with the loss reserves of earlier years.
dramatic downturn, bringing stock prices down with it. In addition to the interest rate rises in the USA, the strength of the US dollar also served to cool down the American economy. What is more, energy prices rose sharply – especially for crude oil – and placed a strain on economic activity worldwide. It was thus evident that the high point in the economic cycle had finally passed, and the downward trends merely added to the pressure on companies' business prospects and hence their stock market value.
The focus of our investments continued to be on fixed-income securities, which accounted for an unchanged share of 67%. The high quality of the portfolio reduced the overall investment risk. With a comparable maturity pattern, the average yield on our fixed-income securities was slightly below that of 1999 due to the interest rate movements in recent years.
Our risk management system distinguishes between three risk categories: • Global, external risks,
• Operating risks, which we subdivide into – technical risks, – investment risks and – other operating risks.
– e.g. new liability risks associated with EMFs or the use of new media (so-called cyberspace liability ). With the aid of sophisticated simulation models, we also monitor centrally the increase in the frequency and extent of losses arising out of natural catastrophes induced by global climate changes. On the basis of these analyses, we then determine both the maximum liability which we are prepared to accept within the Group and our own retrocession requirements.
Our paramount strategic objective is to assert our position in the international reinsurance markets as an important, optimally diversified reinsurance group of above-average profitability in order to secure our long-term survival as an independent enterprise. Derived from this strategic mission, the individual business segments of Hannover Re are guided by further, inherently consistent detailed strategies which are subordinate to the overriding objective. In order to ensure that our strategic targets are also applied to at the operating level, we have, on the one hand, defined company-wide ratios and controlling processes which measure and control the contribution made by each business segment to the Group's overall performance. On the other hand, specific ratios have also been defined which facilitate the performance controlling of our strategic objectives for each segment, subsidiary etc. With a view to structuring these processes on an even more efficient and uniform basis, we have begun to implement a new worldwide standard system. Using a lean, top-down approach, strategic targets are translated into ratios, measured and communicated. In this context too, generally applicable parameters are combined with segment-specific standards. These defined target figures then serve as a basis for the measurement of results and the performance-based remuneration received by management.
A further key instrument of risk limitation and results stabilisation is our own reinsurance, referred to as retrocession. Whereas premiums are always payable at the beginning of a contract, risks derive from the fact that long periods – sometimes even decades – may elapse until losses are paid. An intensive credit investigation must therefore ensure that the business partner will be able to meet its obligations even after such long periods. Retrocessionaires are selected on the basis of a graded approach, which takes account of the probable run-off period of the business in question. In addition, we are guided by the opinions of internationally recognised rating agencies, whose assessments are supplemented by the analyses of our own internal dedicated service.
Our risks in the investment sector consist primarily of price, interest rate, default and exchange rate risks. Since investment income constitutes a major source of revenue for reinsurance companies, the repercussions of capital market fluctuations on the statement of income may be similar to those of natural catastrophes. For this reason, our investment policy is not geared first and foremost to yield maximisation at any price. Rather, the intention is to optimise investment income on a sustained basis subject to the condition that risks are limited and clearly defined. The investment portfolio is very largely based on inflows (premiums) which are set aside for future loss payments. Consequently, investment activities too are guided by the conditions of the reinsurance business. In order to eliminate exchange-rate risks, we invest funds in the currencies in which future losses will be paid (principle of matching currencies). Similarly, maturity commitments and the choice of investment categories take into account the probable periods until payment (principle of matching maturities ). Additional investment risks are limited by the selection of borrowers with a high credit standing.
The integration of different cultures and the existence of various political, social and economic environments pose a considerable challenge to an international organisation. They also offer opportunities to learn from one another. As a globally active company, we have taken up these challenges; we believe that the temporary exchange of staff within our organisation is a particularly appropriate way to foster integration. This takes place largely through delegation as well as co-operation on projects of worldwide scope.
The globalisation of our own organisation and the drive to ensure international comparability prompted us to implement new job titles and hierarchical structures in the year under review. We now use uniform English-language job titles and have redefined the group of staff with managerial duties. This project was conducted efficiently and successfully in co-operation with a renowned international firm of consultants. On the basis of workshops lasting several days the management positions – including those of the Executive Board – were also described in detail and evaluated. We have thus created the basis for classification, development planning and not least fair salary determination, while applying a high degree of objectivity and taking account of specific national factors. Not only that, we began to complement the skills appraisal of our managerial staff with bottom-up feedback. Last but not least, we refined our system of agreements on targets. We are now in a position to measure the performance of our staff on the basis of objective targets derived consistently from our corporate strategy.
For the purpose of training and fostering the development of both young and experienced managerial staff, we have introduced a business game, which simulates the complex correlations existing in the insurance markets. Participants are able to experience the market dynamics and consequences of management decisions interactively and "true to life". Following an intensive, highly successful test phase, we now use this business game worldwide and as a special service to our clients we also offer to use it for their own specific purposes.
Our human resources development programme also includes extensive internal and external training courses, the contents and goals of which are tailored to the results of staff interviews and needs analyses. Our managerial staff can receive coaching on a voluntary basis from seasoned trainers who work closely together in a coaching pool. We are thus able to exert a positive influence on the development of special skills, especially among younger executives. This is carried out on the job in concrete management and conflict situations, and is considerably more effective than the purely theoretical communication of management ABCs which can be gleaned from books.
We significantly stepped up our university marketing activities for the recruitment of qualified graduates and attend all the major "job fairs" in Germany. Furthermore, we have enjoyed great success with the qualification of certified insurance practitioners and are supporting the development and introduction of professional training in Lower Saxony.
time working also play a major role in this regard. Long before the enactment of new legislation in Germany, we used such models to keep employees – especially our young and welltrained staff – in their working lives and give them an opportunity to combine their family and career.
Workplace flexibility and individual management of working time are becoming increasingly important aspects of a successful human resources policy. The telecommuting pilot project, which we conducted in Hannover, produced very positive results and we shall therefore open up this facility for working "away from the office" to further members of staff.
We contribute to the expenses incurred by our staff for old-age provision. In addition to the contributions to the statutory pension insurance scheme, we initiated a pension plan in Germany with effect from 1 July 2000 in the form of an insured provident fund for all members of staff. The company provides the full amount of the contributions according to a fixed scale.
In Japan a new economic program is intended to halt the decline in public-sector investment, yet it is too early to speak of an economic recovery. In the developing markets of eastern and south-east Asia as well as South America the economic situation has improved markedly since the 1997/1998 financial crisis, but considerable structural problems nevertheless persist. The level of debt among businesses is too high in some areas, and price losses on the stock markets at the beginning of the year have caused the cost of capital for companies to rise. To make matters worse, in many developing markets the rise in oil prices has led to cuts in real income and a sharp deterioration in the balance of payments on current account.
In the countries belonging to the euro zone, economic growth – albeit on a more modest scale – in the second half of 2000 and the overall global economic environment have given rise to a mood of cautious optimism. Although the improvement in the euro will dampen the impetus for the export market, stimuli may derive from fiscal policy since several countries have cut taxes in 2001. Particularly in Germany, it is to be anticipated that the economy will benefit from the tax reduction. Bank base rates are unlikely to change significantly during the year, although depressed economic activity around the world may have an adverse effect on the currently strong level of exports.
The restrained forecasts also crucially determine the long-term growth expectations in property and casualty insurance, especially in the already largely saturated markets of the industrialised nations. Positive factors such as a greater need for security, the regional concentration of values and product innovations will not be sufficient to hold the promise of even high single-digit growth rates worldwide.
In financial reinsurance, the existing dependencies on property and casualty reinsurance are currently having positive repercussions. During periods of intense competition on the reinsurance markets large professional insurance companies, in particular, have exploited the situation and ceded risks which they could also have carried themselves purely from the risk management standpoint. However, now that the traditional risk transfer has become considerably more expensive again, the demand for more affordable innovative concepts with a limited risk
transfer is also on the rise. We have substantially increased our available capacity and expect to follow on from the very strong growth in the previous year with further high rates of increase and a corresponding rise in profits in the current year. Our teams in Ireland and Germany will be reinforced in order to handle this sustained growth.
The Clarendon Insurance Group can again extend its market leadership in program business in the current year. We will be able to exploit capacity shortages caused by the withdrawal of insurers who in recent years suffered sizeable losses. New opportunities to acquire business at appreciably improved, attractive terms and conditions are opening up in Californian workers' compensation business and in some areas of commercial motor insurance. In the future the Clarendon Insurance Group can continue to benefit from the fact that – as a member of the Hannover Re Group – it enjoys a superior credit rating from the rating agencies, thereby enabling it to become the partner of choice in its business segment.
The after-tax result will of course be impacted by the elimination of the special factor, which affected the previous year. For a number of years we have openly reported on our strategic objective of increasing the earnings per share by at least 10% annually. Since the two previous years constitute a distorted basis due to the massive tax effects, a consistent comparison can only be based upon the last "normal" financial statements, namely for the 1998 financial year. In the absence of extraordinary capital market strains or natural catastrophe losses, we currently anticipate that this profit target will be achieved.
Payment of a bonus of EUR 0.25 on each registered no-par value share fully paid-up for the entire year 2000 4 182 553.75
Payment of a dividend of EUR 1.94 on each registered no-par value share fully paid-up in 2000 which was partially paid in the amount of 62.5% until 31 May 2000 15 520 000.00
Payment of a bonus of EUR 0.21 on each registered no-par value share fully paid-up in 2000 which was partially paid in the amount of 62.5% until 31 May 2000 1 680 000.00
Payment of a dividend of EUR 1.90 on each registered no-par value share fully paid-up in 2000 which was partially paid in the amount of 58.33% until 31 May 2000 9 120 000.00
Fixed-income securities – held to maturity 5.1 267 031 258 414
Equity securities – available for sale 5.1 1 593 969 1 382 151
Reinsurance recoverables on unpaid claims 5.2 3 532 690 2 896 441
Funds held by ceding companies 3 995 706 2 955 629
Unrealised gains and losses on investments 5.1 (4 402) 35 483
Change in policy benefits for life and health contracts 5.2 37 494 496 124
Net realised gains and losses on investments (180 644) (217 315)
Cash and cash equivalents at the beginning of the period 437 266 251 073
Cash and cash equivalents at the end of the period 482 262 437 266
Reinsurance recoverables on benefit reserves – – 254 696 240 720
Policy benefits for life and health contracts – – 3 043 573 2 279 870
Funds held under reinsurance treaties 403 926 292 965 347 076 325 159
In the consolidated financial statement and the individual companies' financial statements it is to some extent necessary to make estimates and assumptions which affect the assets and liabilities shown in the balance sheet and the disclosure of income and expenses during the reporting period. The actual amounts may diverge from the estimated amounts.
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 US GAAP in accordance with standard Group accounting and valuation rules.
Hannover Re is the parent company of the Group. The consolidated financial statement includes three German and fourteen foreign companies, as well as two foreign consolidated entities. One consolidated entity (Hannover Finance, Inc.) was acquired in the previous year and therefore included in the consolidated financial statement for the first time in 1999. Two German and three foreign companies were consolidated using the equity basis of accounting. One German company is no longer part of the Group and was therefore consolidated for the last time.
Hannover Finance, Inc. compiles its own sub-group financial statement, including the following major companies in which it holds the following shares: Clarendon National Insurance Company, Trenton/USA 100.0
WPG Corporate Development Associates IV (Overseas), L.L.C., Grand Cayman/Cayman Islands 26.2
The capital consolidation is based upon the "purchase accounting" method (comparable to the German revaluation method). The purchase costs of the parent company have been netted with the proportionate stockholders' equity of the subsidiary at the time when it was first included in the consolidated financial statement after the revaluation of all assets and liabilities. The difference between the revalued stockholders' equity of the subsidiary and the purchase price is shown in the assets as goodwill and depreciated at a constant rate over the expected useful life. The anticipated useful life is between 15 and 40 years. Immaterial and negative goodwill were booked to earnings in the year of their occurrence. Where minority interests in the stockholders' equity exist, such interests are shown under other liabilities. The minority interest in the result is deducted from the net income in the statement of income and totalled EUR 68.421 million (previous year: EUR 48.108 million) in the 2000 financial year.
Expenses and profits within the Group were offset against each other and interim results were eliminated.
Fixed-income securities classified as held to maturity are valued at purchase costs plus/minus amortised cost. The amortised cost derive from the difference between the nominal value and purchase cost and they are spread over the time to maturity of the fixed-income securities.
Other foreign government debt securities 2 046 – 31 2 015
The contractual maturities of the fixed-income securities in the held-to-maturity portfolio, availablefor -sale portfolio and trading portfolio were as follows as at the balance sheets dates of 31 December 2000 and 1999: Held-to-maturity
Due after five years through ten years 84 007 89 010 120 455 126 590
Due after one through five years 2 720 974 2 779 964 2 942 742 2 957 905
Due after five years through ten years 1 350 009 1 371 195 1 355 413 1 328 716
Due after five years through ten years 45 251 40 869 – –
The amortised cost and the unrealised gains and losses on the portfolios of investments classified as available for sale and trading were as follows: Cost or amortised cost gains losses
Government debt securities of EU member states 770 228 14 805 4 219 780 814
The following table shows the investment income: 2000 1999Figures in EUR thousand
Equity securities – available-for-sale 51 876 – 57 201 23 260 2 290 8 820 992 1 449 530 1 593 969
Investments were held in the following currencies: Fixed-income securities – held-to-maturity – – – – 215 163 – 51 868 – 267 031
Fixed-income securities – held-to-maturity 188 944 50 139 16 956 2 375 – – – – 258 414
Equity securities – available-for-sale 39 848 3 903 55 063 22 743 – 11 490 – 1 249 104 1 382 151
Currency exchange rate differences between valuation at the average rate and the year-end rate (395) 1 141 2000 1999Figures in EUR thousand
A claims accumulation system has been set up to monitor our overall risk, particularly in the USA. As at year-end 2000 we recorded the following additional provisions on the basis of this data: Figures in USD million Gross Net
Overall, the deferred acquisition costs developed as follows in the year under review:
Reserve as at 31 December of previous year (gross) 10 776 704 7 583 531
Reserve as at 31 December of previous year (retro) 2 896 441 1 060 336
Effects of currency conversion as at 1 January of year under review 303 350 890 641
Net reserve as at 1 January of year under review 8 183 613 7 413 836
Reserve as at 31 December of year under review (net) 9 250 020 7 880 263
Reserve as at 31 December of year under review (retro) 3 532 690 2 896 441
Goodwill net as at 31 December 266 066 265 555 2000 1999Figures in EUR thousand 5.4 Goodwill; present value of future profits on acquired life reinsurance portfolios
The development of goodwill is shown in the following table: The primary factor here was the goodwill added as a result of the increases in the participation in Hannover Reinsurance Group Africa (Pty) Ltd.
Valuation differences arising out of property and casualty reinsurance 34 854 15 162
Valuation differences arising out of the portfolio of life and health reinsurance 189 091 251 826
The deferred tax assets and deferred tax liabilities of all Group companies are summarised in the following table: tax rates on which the calculation of the deferred taxes is based, appropriate allowance is made in the year in which the change in the tax rate is published. Deferred taxes at the Group level are booked using the Group tax rate of 40% (53%).
The average number of staff at the companies included in the consolidated financial statement of the Hannover Re Group was 1,525 (1,518). Of this number, 661 were employed in Germany in the year under review. The other staff were employed at the consolidated Group companies abroad.
Number of employees (excluding board members) 1 518 1 526 1 521 1 526 1 528 1 525
a) Wages and salaries aa) Expenditures on insurance business 76 262 65 841 ab) Expenditures on the administration of investments 4 433 3 204 b) Social security contributions and expenditure on provisions and assistance ba) Social security contributions 8 162 5 988 bb) Expenditures for pension provision 5 475 2 818 bc) Expenditures for assistance 1 338 15
The expenditures on insurance business, claims expenses (claims settlement) and expenditures on the administration of investments include the following personnel expenditures: 2000 1999Figures in EUR thousand 5.7 Provisions for pensions and similar liabilities
Provisions for pensions are established in accordance with SFAS 87 (employers' accounting for pensions ) using the only method permitted for this purpose – the projected unit credit method. The basis of the valuation is the estimated future increase in the rate of compensation of the pension beneficiaries. The benefit entitlements are discounted by applying the capital market rate for highest-rated securities.
Provisions for pensions are established in accordance with actuarial principles and are based upon the commitments made by the Hannover Re Group for retirement, disability and widows' benefits. The amount of the commitments is determined according to length of service and salary level. The calculation of the provisions for pensions is based upon the following assumptions: • Discount rate 6.0% to 7.5%
On 31 March 1999 Hannover Finance issued a floating-rate debt in the amount of USD 400.0 million with a term of 30 years. The due date of the loan is 31 March 2029. It may be redeemed by the issuer no earlier than 31 March 2009.
In order to protect against possible future major losses, Hannover Re took out a new credit line of EUR 250 million in 2000 in the form of a syndicated loan; this replaced the facility in the amount of DM 250 million which became due in November 2000. The facility has a term of five years and is due in November 2005. E+S Rück has a credit line of EUR 40 million, which is extended on a halfyearly basis and can be drawn on as required.
The equity of the Group's parent company, Hannover Rückversicherungs-AG, was fully paid up in the financial year on 31 May 2000.
Dilution through payment of outstanding capital 2 018 585 4 836 856
Fully diluted earnings per share 364 880 29 464 467 12.38 201 559 29 363 154 6.86
By a resolution of the Annual General Meeting of Hannover Rückversicherungs-AG adopted on 30 July 1999, the company was authorised until 31 December 2000 to acquire treasury stock of up to 10% of the capital stock existing on the date of the resolution. The company did not hold treasury stock as at the balance sheet date, nor does it hold treasury stock at the current time.
The Hannover Re Group is responsible for the reinsurance of the HDI Group. To this extent, numerous underwriting business relations exist with affiliated companies in Germany and abroad which are not included in Hannover Re's consolidation. This applies to both assumed and ceded business.
Expenses for the company as a whole 18 024 16 829
Other non-consolidated affiliated companies 16.1 33.5 2000 1999Figures in EUR thousand
HDI Asset Management GmbH manages the investments of Hannover Re and some of its subsidiaries.
All transactions are conducted on the same basis as between independent and wholly unrelated third parties. We gave an account of these transactions with regard to Hannover Re and E+S Rück in our dependent company report.
6.2 Emoluments received by the management boards of the parent company and loans granted to them
No loans secured on mortgages or by land charges were granted to board members.
The company did not enter into any contingent liabilities for members of the management boards.
A liability of EUR 4,618 thousand was shown for the first time as at 31 December 2000.
No significant court cases were pending during the year under review or as at the balance sheet date.
As security for our technical liabilities, various financial institutions have furnished sureties for our company in the form of letters of credit. The total amount of the letters of credit as at the balance sheet date was EUR 2,060.0 million.
Several Group companies are members of the German aviation pool, the association for the reinsurance of pharmaceutical risks and the association for the insurance of German nuclear reactors. In the event of one of the other pool members failing to meet its liabilities, an obligation exists to take over such other member's share within the framework of the quota participation.
In 1998 the Financial Accounting Standards Board (FASB) approved Standard 113 "accounting for derivative instruments and hedging activities". Under the rules of this standard all derivatives are valued at fair value in the balance sheet irrespective of their intended purpose. SFAS 133 is to be applied by all companies which use derivatives – regardless of the sector in which they operate – for the first time in the financial year commencing after 15 June 2000. We have therefore continued to apply the existing specific standards in the present individual accounts.
The company holds derivative financial instruments solely for the purpose of hedging. For this reason, swaps are held for the conversion of interest flows and currencies. Swaps are valued at fair value. Changes in fair value are not included in the statement of income. The current value is shown in the unrealised gains and losses as a separate item under the stockholders' equity. As at year-end the fair value of the swaps totalled EUR 174.9 million (EUR 177.0 million), and the nominal value of the swaps amounted to EUR 169.4 million (EUR 177.4 million). In connection with these swaps we provided collateral of EUR 19.5 million (EUR 18.1 million) for the year ending 31 December 2000. The periods to maturity of the swaps vary between one year and thirteen years. Two contracts matured in 2000. The fixed interest rates are between 3.5% and 7.5%. Three instruments have a variable interest rate. As at year-end the portfolio did not contain any forward purchase options or forward exchange transactions.
PaymentsFigures in EUR thousand 7.5 Events subsequent to conclusion of the financial year
We have audited the consolidated financial statements of Hannover Rückversicherungs-Aktiengesellschaft for the business year from January 1 to December 31, 2000, comprising the consolidated balance sheet, the consolidated income statement, the consolidated statement of cash flow and consolidated statement of changes in stockholders' equity as well as the notes to the financial statements. The preparation and content of the consolidated financial statements in accordance with US Generally Accepted Accounting Principles (US GAAP) are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
Australia Hannover Life Re of Australasia Ltd Level 7 70 Phillip Street Sydney NSW 2000
Hannover Rückversicherungs-AG Chief Agency - Australian Branch G. P. O. Box 3973 Sydney NSW 2001
Great Britain International Insurance Company of Hannover Ltd. Hannover House Virginia Water Surrey GU25 4AA
Hannover Life Reassurance (UK) Ltd. Hannover House Virginia Water Surrey GU25 4AA
Hannover Services (UK) Ltd. Office in Virginia Water Hannover House Virginia Water Surrey GU25 4AA
Office in London 2nd Floor 69-70 Mark Lane London EC3R 7HJ
Ireland Hannover Re Advanced Solutions Ltd. No. 2 Custom House Plaza, IFSC Dublin 1
Japan Hannover Re Services Japan 7th Floor, Hakuyo Building 3-10 Nibancho Chiyoda-ku Tokyo 102-0084
Korea Hannover Re – Representative Office Seoul German Office Shintown Plaza Building 28-2 Hannam-dong Yongsan-ku Seoul 140-210
Mexico Hannover Services (México) S.A. de C.V. Bosque de Ciruelos 162 Bosques de las Lomas, 3rd Floor Apartado Postal 10-950 CP 11700 Mexico, D.F.
Insurance Corporation of Hannover 333 South Hope St. Suite 2400 Los Angeles, California 90071
Alternative risk financing: use of the capacity available on the capital markets to cover insurance risks, e.g. through the securitisation of natural catastrophe risks, if such risks are no longer fully insurable by the insurance and reinsurance industries.
Capital, reserves and technical provisions: an insurer's capital and reserves, also including the provisions committed to technical business and the equalisation reserve. Total maximum funds available to offset liabilities.
Derivatives, derivative financial instruments: These are financial products derived from underlying primary instruments such as equities, fixed-income securities and foreign exchange instruments, the price of which is determined on the basis of an underlying security or other reference asset. Notable types of derivatives include swaps, options and futures.
Funds held by ceding companies/funds held under reinsurance treaties: collateral provided to cover insurance liabilities which a (re-)insurer retains from the liquid funds which it is to pay to a reinsurer under a reinsurance treaty. In this case, the retaining company shows funds held under a reinsurance treaty, while the company furnishing the collateral shows funds held by a ceding company.
Hybrid capital: debt structure characterised by certain characteristics of both debt and equity.
Life and health (re-)insurance: collective term for the lines of business concerned with the insurance of persons, i.e. life, health and personal accident insurance.
Major loss: loss which has special significance for the direct insurer or reinsurer due to the amount involved; it is defined as a major loss in accordance with a fixed loss amount or other criteria.
Mark-to-market valuation: Recording the price or value of financial instruments to reflect current market value or ➞ fair value.
Program business: a speciality of the US insurance market written by insurers working in very close cooperation with reinsurers and highly specialised managing general agents. The segment is typically focused on niche and non-standard coverages and hard-to-place risks.
Rate: percentage rate of the reinsured portfolio which is to be paid to the reinsurer as reinsurance premium under a ➞ non-proportional reinsurance treaty.
Reserve ratio: ratio of (gross or net) technical provisions to the (gross or net) premiums.
STRATEGIC BUSINESS SEGMENTS of the Hannover Re Group * From April 2001 hannover re