◆ Net loss avoided despite heaviest burden in history of insurance industry
4 Boards and Officers 6 Executive Board 8 The Hannover Re Share 18 Self-image and strategy 22 The Hannover Re Groups's global presence 24 Management report of the Hannover Re Group 24 Economic climate 25 Business development 27 Our business segments 30 Property and casualty reinsurance 40 Life and health reinsurance 48 Program business 50 Financial reinsurance 53 Investments 58 Risk report 62 Human resources 64 Outlook 71 Consolidated accounts 72 Consolidated balance sheet 74 Consolidated statement of income 76 Cash flow statement 78 Segmental report 83 Notes 117 Auditors' report 118 Report of the Supervisory Board 120 Branch offices and subsidiaries 123 Glossary 128 Index of key terms
Present value of future profits (life/health) 1 048.0 19.9% 874.0 609.0
Despite the losses associated with the terrorist attacks, our portfolio continued to record gratifying growth in the year just–ended. For the first time the gross premium income generated by your company surpassed EUR 10 billion – by a comfortable margin. Following the unattractive market cycle in property and casualty reinsurance in the years up to 2000 which we described in several previous annual reports, a significant market recovery set in during the first half-year; this was given considerable added impetus subsequent to 11 September. We optimally exploited the opportunities presented by this trend, and our growth in profitable submarkets was well in excess of the market average.
In our business, as in so many others, there is often a fine line between light and shade. 2001 was for the most part spent in the shade; nevertheless, I can report on the remarkably favourable outcome of the renewal of a large portion of our property and casualty reinsurance portfolio as at 1 January 2002. The events of 11 September and their repercussions on conditions and rates, combined with the general trend towards hardening markets even before the terrorist attacks, have created extraordinarily promising business prospects. Assuming that the major loss experience and capital markets develop within normal bounds, we expect to recoup the losses of 11 September within at most 3 years. Since we were quick to recognise the new market opportunities, we already took steps in the fourth quarter of the year under review to strongly expand our acceptances in property and casualty reinsurance. In addition to increasing the profitability of our portfolio, we substantially enlarged our market share in the most important market segments.
In the London Market, which was also heavily impacted outside the aviation line of business and where we rank as one of the market leaders, we shall succeed in doubling our premium volume in the current year. In our largest market – North America – we similarly expect to increase our premium income by more than 70% in 2002. We are well-placed here for the first time in some years to considerably improve the profitability of our business.
On behalf of my fellow members of the Executive Board and myself, I would like to thank you, our shareholders, for your confidence in Hannover Re. I can assure you that we shall live up to your trust; we shall do everything in our power to bring about a lasting increase in the value of your company and thereby establish a solid foundation for the favourable performance of your investment.
Dr. Horst Dietz Region Manager North and Southeast Asia Singapore of ABB Asea Brown Boveri AG
Dr. Klaus Sturany Member of the Executive Board Essen of RWE Aktiengesellschaft
Wilhelm Zeller Program Business; Planning/Controlling, Burgwedel Investor Relations, Public Relations, Internal Chairman Auditing, Underwriting Service and Controlling; Corporate Development; Human Resources
Jürgen Gräber Coordination of entire Non-life Reinsurance; Ronnenberg Treaty Business of Property and Casualty
Reinsurance North America and Englishspeaking Africa, Credit and Bonds worldwide; Financial Reinsurance worldwide
Herbert K. Haas Finance and Accounting, Burgwedel Asset Management; Information Technology; (until 31 January 2002) Facility Management
Dr. Michael Pickel Treaty business of Property and Casualty Gehrden Reinsurance Germany, Austria, Switzerland (from 1 January 2002 and Italy; non-life reinsurance of the HDI Group, full member) Retrocessions; Claims Management; Legal Department
Dr. Elke König Finance and Accounting, Hannover Asset Management; Deputy Member Information Technology; (from 1 January 2002) Facility Management
Yet the stock markets were relatively quick to recover from this panic reaction. By the beginning of October the Dax had already climbed back to its early September level of 4,500 points. In December, however, the Enron bankruptcy began to cast a cloud over the market. This latest wave of bad news further eroded investor confidence and generated discussion of more transparent accounting methods on an international level.
All leading indices lost ground heavily in the year under review. At their lowest point on 21 September 2001 the Dax, Euro-Stoxx and CDax for insurance stocks had shed almost 40% of their value relative to the beginning of the year, and at year-end they closed down by around 20%. By contrast, the MDax (in which the HNR share is listed) performed relatively favourably, posting a temporary decline of 24% and closing the year down by just 8%.
Insurance stocks were softening as 2001 got under way. Despite the favourable climate created for insurers and reinsurers by taxation reform and the so-called "Riester" pension scheme, the prevailing negative trend reached its lowest point with the terrorist attacks in September. Along with the airline and transportation industry, the insurance sector was particularly hard hit by the repercussions on the stock markets. Uncertainty about the true amount of the insured loss and fears of further attacks on a similar scale fundamentally shattered confidence in the stability of the industry. Insurers reacted by excluding terrorism risks from standard insurance policies. This measure, coupled with the initial loss estimates published by the reinsurers, helped to win back lost investor confidence. Indeed, investors took the now very favourably priced (re-)insurance equities back into their portfolios. Many of the stocks – principally the top-rated heavyweights – then recovered within a short time, and by November 2001 they had completely made good the ground lost directly in the wake of 11 September, although the price level of the first half-year remained out of reach.
On the world's capital markets 2001 will go down as one of the most difficult years in stock market history. With equity markets continuing the downward slide which had begun in March 2000, the worst "bear market" since the first oil crisis almost 30 years ago eroded the total market value of listed stocks on a hitherto unprecedented scale.
All the leading indices entered the new year in 2001 on an upbeat note with prospects of an impending recovery on the equity markets. This hope, however, failed to be fulfilled. Although falling capital market rates coupled with taxation and pension reforms in Europe created a favourable general climate, companies were repeatedly compelled to adjust their profit expectations downwards. With increasingly gloomy economic data emerging from the USA and many investors turning away from the stock market, equity prices embarked on a downward slide of sometimes dramatic proportions. This trend was further exacerbated by the 11 September terrorist attacks on New York and Washington. The resulting sell-out on the equity markets left no in-
Only in the year under review – as an exception to this general pattern – were we unable to meet our target due to the losses associated with the
The Hannover Re share in comparison with the unweighted "Reactions" World Reinsurance Index
The Hannover Re share profitably deploy the capital made available to us. In this respect, our strategic objective is to generate a minimum return on equity of 750 basis points in excess of the average 5-year yield on 10-year government bonds. We were compelled to reduce our targeted rate of return on invested capital of 12.6% substantially for the year under review in the wake of 11 September. Given the excellent business prospects in the current year, we are confident that – assuming normal circumstances regarding major claims occurrences and in the capital markets – we shall once again be able to generate a substantially above-average return on equity.
Return on equity after tax teleconferences with analysts and investors to discuss significant new developments as well as in connection with the release of each quarterly report.
In the previous year, for example, we introduced variable remuneration based on the company's performance. One element here is a virtual stock option plan which extends to our managerial staff worldwide. The most important target variable here is the earnings per share, which is defined in advance by the Supervisory Board and the over- or underfulfilment of which determines the number of stock option rights. The development of our share price relative to the unweighted World Reinsurance Index is also taken into account, with superior or inferior performance being treated as a further multiplier for the number of option rights.
It goes without saying that we are also committed to implementing further Corporate Governance requirements. We are currently enhancing our controlling concept by components of an EVA (Economic Value Added) calculation within a VBM (Value Based Management ) framework, which is to be used as a basis for managing and measuring the growth in the company's value.
The breakdown of the shareholding structure into corporate entities and natural persons of course reveals a predominance of the number of institutional investors. Compared to the previous year, however, the strong growth of almost 10 percentage points among private investors reflects not only the special measures which we have taken to attract this group of investors but also the increasing profile of our share.
Our Investor Relations activities are also closely attuned to our shareholding structure. This orientation has been assisted by the complete changeover to registered shares and the use of a stock ledger.
"EUR 1.3bn WTC loss, EUR 400m net, EUR 920m recoverable are all secure: well done, Hannover Re! HNR’s retrocession result from the WTC loss shows its excellent capital management. Immediately after September 11 HNR signed highly attractive property and casualty covers especially in aviation and US property, leading us to believe the firm should benefit above market average from the hardening market. With strong growing life and financial reinsurance, HNR owns a highly attractive portfolio ".
"An unusually bullish walk-through of the renewal season also reflects well on the group’s 2002 prospects.".
"While being just outside of the „bulge bracket" category, Hannover Re has sizeable nonlife reinsurance operations with a strong position in certain attractive and defendable niches. Its life reinsurance business is by far the largest among the mid-tier players and its product range can rival that of most industry leaders. Its ART operations have produced spectacular returns in the past, and while we conservatively expect the returns to decline significantly, ART is likely to continue to be a high value generator for the company".
"Its niche strategy makes Hannover Re the most profitable reinsurer in our universe, and in normal years the broadly diversified portfolio serves to smooth results".
Stock exchange ID: Share: Investdata: HNR Bloomberg: HNR1 GY Reuters: HNRGn.DE
Exchange listings: Germany Listed on all German stock exchanges; Xetra, Frankfurt and Hannover in official trading
Annual General Meeting: 24 May 2002, 10:30 a.m. Hannover Congress Centrum Kuppelsaal Theodor-Heuss-Platz 1-3 30175 Hannover, Germany
Hannover Congress Centrum Theodor-Heuss-Platz 1-3 30175 Hannover, Germany 24 May 2002 Interim Report 1/2002 21 August 2002 Interim Report 2/2002 20 November 2002 Interim Report 3/2002
liberately – 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.
In addition, our goal is to increase the earnings per share by at least 10% annually.
In the light of the increasing "flight to quality", the ratings which have a bearing on our industry are assuming greater importance. Consequently, our capital must ensure a sustainable Standard & Poor's rating of at least AA (equivalent to A+ from A.M. Best).
The general objective of our investment strategy is to generate an optimal profit contribution to the overall business result. Due to the already high degree of risk inherent in our principal business of reinsurance, however, risk limitation takes precedence over yield maximisation.
US GAAP is invested on a long-term basis (preferably in equity securities), with the technical reserves being invested on a short and mediumterm basis. More advanced optimisation of the structure of our invested assets is to be achieved by way of sophisticated asset liability management.
Information management is increasingly evolving into a crucial competitive factor. Our information and communication systems must therefore optimally support our business processes and, after cost/benefit considerations, be based on state-of-the-art technological developments. Investments required to accomplish this goal are given priority.
For a globally active financial services organisation with a professional clientele, the skills and motivation of our staff are just as important success factors as capital resources. For this reason, we offer a working environment that is designed to appeal to performance-minded employees who identify with our corporate objectives. Our human resources development and leadership activities are geared to the constant enhancement of our staff's skills and motivation.
By delegating tasks, authority and responsibility wherever possible and by setting demanding performance targets, we foster entrepreneurial thinking at all levels. In the case of members of the international management team, this principle is also reflected in performance-related remuneration components and in attractive stock options.
Due to extraordinary tax effects associated with the change in the rates of corporation tax in 1999 and 2001, the target figures for 2001 and 2002 are based on the 1998 results, the last "normal year".
2001 was a difficult year for the economy. The cyclical downturn that had already set in during the middle of 2000 gathered strength in the first half of 2001. Companies saw their sales and earnings expectations deteriorate despite the stimulating monetary policy adopted by central banks. The downward trend was exacerbated by the slump in the technology sector, where considerable surplus capacities added to the strain on corporate profits.
The terrorist attacks in the USA on 11 September 2001 thus had a particularly damaging effect on the global economy during a period of cyclical decline. In addition to the short-term impact of the terrorist attacks, they also had sustained repercussions on the behaviour of consumers and corporations. Uncertainty about future political and economic developments deterred consumers from making already intended purchases and prompted companies to budget more cautiously and to put capital expenditures on hold.
Overall economic output in Germany lost significant impetus in the course of 2001. The decline, which had already begun in the middle of the previous year, was triggered inter alia by the rising price for oil. Hopes of a recovery in late summer were ultimately dashed by the terrorist attacks of 11 September. Forecasts of economic growth had to be revised sharply downwards over the year. In spring 2001 gross domestic product had been expected to grow by 2.1%, whereas by year-end an increase of just 0.7% was anticipated.
The international reinsurers were impacted by one single event to an extent unparalleled by any previous year: At the cost of at least USD 50 billion, the effects of 11 September went down as the largest insurance loss in the industry’s history. The largest-ever loss event up to that point had been Hurricane Andrew in 1992 resulting in insured losses "merely" half of those of the 11 September event. The scale of the loss suffered by the insurance sector in the 2001 financial year becomes thus clearer. Yet at the same time the ability of the insurance and reinsurance industry to shoulder such a once-in-a-hundred-years burden has also been clearly demonstrated. The events of 11 September also bore out the exceptional role of reinsurance as an instrument of security for national economies and highlighted the importance of its risk minimisation function for primary insurers.
A loss of such extreme dimensions naturally causes changes in the reinsurance market. On the one hand, there is a streamlining of the market: weaker insurers and reinsurers, which are unable to meet their payment obligations or have insufficient capital and reserves, will disappear from the market. On the other hand, the accompanying improvements in rates and conditions - with premiums doubling or even increasing several times over in some subsegments - has opened up enormous growth and profit opportunities for reinsurers in the fourth quarter.
lines planes destroyed by terrorist attacks in Sri Lanka, and the explosion at a fertiliser plant in Toulouse – along with the associated destruc-
These losses completely eroded our anticipated after-tax profit of EUR 230 million. Had it not been for these catastrophic events we would have been able to fully live up to our planned figures and – after factoring out the special tax effects in the years 1999 and 2000 – we would have generated another highly satisfactory result in line with our long-term profit targets.
extremely high, hitherto unparalleled losses associated with the terrorist attacks in the USA.
tion of an entire suburb – placed further exorbitant strains on the insurance industry.
With an increase of EUR 483.0 million (24.5%) program business also recorded gratifying growth. Of this amount, EUR 85.4 million derived from European program business. We substantially increased our retention, and in view of the profitability of the business written we anticipate that the level of premiums retained in this segment will continue to rise steadily in the future. Overall, the Group’s retention climbed from 14.5% to 27.4%. Net premiums earned grew by 66.1% to EUR 486.1 million (previous year: EUR
For the first time, the strategy of diversification that we have pursued over a number of years proved that we are able to compensate for heavy losses in one business segment with profits in others. The considerable loss on ordinary activities recorded in property and casualty reinsurance was completely offset by our other business segments.
Result saved by diversification 2001*2000*1999*1998199719961995 * Return on equity calculated in accordance with US GAAP ** After minority interests 1 Premium effects causally related to the events of 11 September were not included in %
Overall, net income before taxes fell from EUR 304 million to EUR 53 million; minority interests in the result were sharply lower.
In contrast to the previous year, our result was not assisted by a recalculation of deferred taxes. The tax burden in the year under review amounted to EUR 17.5 million (previous year: tax yield of EUR 129 million). Overall, therefore, consolidated net income fell by 97.0% year-on-year to EUR 11.1 million.
The following sections describe the development of business in our four strategic segments. In addition to explanatory remarks, the segmental report also shows the profit components per segment and contains a breakdown of the key asset and liability items in each segment.
An increased investment portfolio boosted net investment income in the year under review
"I think it was one of the tragic ironies that the 11th of September, when the bombing took place, was the International Day of Peace. On that day, we usually ring a peace bell, and of course we had to postpone it on the 11th of September. We did it subsequently. This year is also the International Year of Dialogue Among Civilisations, which is intended to bring the Member States and religions and various societies together, to discuss culture, what they have in common, rather than what divides them."
Overall, the proportion of our total business volume attributable to property and casualty reinsurance rose by 2% to 43%.
The burden of major losses in the first half of the year was moderate. Notable events included the loss of a drilling platform off the coast of Brazil and tropical storm "Allison“, which caused heavy flooding in the southwestern United States. Despite these losses, the first half-year closed with a relatively low combined loss/expense ratio of 105%.
We have no concerns that the retrocession of more than two-thirds of this loss may give rise to a significant credit risk, since a large proportion of the receivables are secured (e.g. those deriving from the securitisation of risks) or have already been collected. The bulk of the other receivables is due from companies rated A or better by Standard & Poor’s.
In the year under review we took account of all losses reported to us in connection with the terrorist attacks and made appropriate provision for possible belated loss advices. In subsequent years we therefore do not anticipate further strains associated with this event.
Due to the exorbitant losses caused by the terrorist attacks on 11 September, property and casualty reinsurance produced a sharply negative profit contribution over the course of the year. This resulted in a tax yield, as a consequence of which the segment closed with an overall aftertax deficit of EUR 75.5 million.
In addition, the after-effects of the December 1999 storms "Lothar"and "Anatol"continued to make themselves felt. Having been unable to sufficiently adjust rates for the year 2000, we were able to push through substantial rate increases for catastrophe covers in the year under review. Despite this, premiums still fell short of a level commensurate with the risk.
As in the past, the focus of our underwriting in the German market was on our proportional and non-proportional motor business. Thanks to increased premiums and a massive decrease in the claims frequency, the year under review proved highly satisfactory.
In liability business, major claims – such as the widely publicised serial loss of a large pharmaceutical corporation as well as other product liability claims – imposed a considerable strain on our liability portfolio. The loss ratio was therefore markedly higher than in previous years.
Overall, the development of the UK and Irish market was favourable. The liability market recovered appreciably due to the elimination of primary insurers through bankruptcy. The steps we took to restore our business to profitability bore fruit, and we are highly satisfied with the development of our own portfolio. In the property lines of insurance we primarily cover natural catastrophe risks. Our result was gratifying thanks to the absence of major loss events.
Motor business recorded a particularly marked improvement. Prompted by an accident in North Yorkshire, when a car fell from a bridge onto railway lines and was hit by a passenger train, the rates for insurance coverage came under review. We assumed very substantial participations in non-proportional covers for major claims. As a consequence of the aforementioned accident the rates for these covers increased much more sharply than the original premium rates of the primary insurers. We significantly enhanced the profit opportunities offered by our portfolio.
On the London Market we write first and foremost property business as well as major por-
Even before 11 September we had noted a general rise in premium rates for property business. This trend, which was fostered inter alia by a contraction of the capacity offered on the London Market, gained substantial momentum
We used the prevailing market conditions to significantly restructure our portfolio in favour of non-proportional covers. Following storm "Anatol" we were able not only to vigorously expand natural catastrophe reinsurance in Denmark, but also to secure substantial rate increases in the other Scandinavian countries.
Return to a satisfactory rate level in property business in the year under review
In March 2000 the Italian government caused a stir when it accused market players of price collusion in motor insurance business. It prohibited rate adjustments in the discounted categories and thus interfered in the companies’ freedom to set prices. This led to a continued deterioration in market conditions and hence caused our technical result in this line of business to decline still further. Although we support the insurers primarily via non-proportional treaties, the policy described above also left our company with inadequate premium rates. Only in the year under review did the government’s twelve-month moratorium come to a close. Following its expiry the insurers raised their premiums market-wide by around 15% on average.
In industrial business, too, original rates moved upwards for the first time in many years. Due to the devastating flooding in October 2000 – especially in northern Italy – conditions for catastrophe covers, in particular, were adjusted.
These positive signals in the primary insurance sector were echoed on the Italian reinsurance market. The shortage of reinsurance capacity on the market added further impetus to these trends. Various reinsurers, for the most part US companies, stopped writing business in the Italian market. We were able to exploit some of the resulting gaps in coverage and enlarged our market share. In the year under review we established business relations with a number of target clients. At the same time, the terms and conditions prevailing on the market enabled us to enhance the quality of our portfolio.
The reinsurance market developed well in the year just-ended. Market hardening could be discerned, which in some sectors gave rise to substantial rate increases – especially for catastrophe covers.
The combined loss/expense ratio of many market players was already in excess of 120%
before 11 September. With loss ratios skyrocketing in the wake of the terrorist attacks, the largest loss in insurance history made 2001 a black year for the reinsurance industry.
In spring 2001 we established Hannover Re (Bermuda) Ltd., Hamilton/Bermuda, an operation which primarily writes worldwide catastrophe business. As a new market player Hannover Re Bermuda benefited from our strong position in the US market. It provides substantial capacities for middle and upper layers of natural catastrophe programmes. Prior to the terrorist attacks in the USA reinsurance conditions had already shown signs of hardening in the natural catastrophe sector. The events in the USA simply fostered this trend. The inflow of fresh capital into the reinsurance market, however, served to put the pressure back on prices as early as the fourth quarter. Overall, rates in US catastrophe business increased by just 20 to 25% as a consequence of this development – although this was by no means disappointing given the already high midyear rate level. The profit potential for Hannover Re Bermuda can thus be assessed as good to very good.
In this market we normally follow the leading reinsurers. In the course of the year under review we further scaled back our proportional commitments and at the same time sought to expand our non-proportional premium volume. Despite
We substantially scaled back our proportional reinsurance commitments for natural hazards in the year under review. In certain subsegments we were still unable to obtain satisfactory rates, and we consequently reduced our acceptances – especially in business with windstorm exposure.
The reinsurance market can be described as very defensive. Our goal in this environment is to write non-proportional covers at adequate prices. In addition, we are seeking to write proportional business on a highly selective basis and to persuade our clients to increase their original rates. Overall, we were able to slightly expand our premium volume and – helped by the absence of catastrophe losses – we closed the year under review in positive territory.
An earthquake in El Salvador and a hurricane in Belize significantly impacted the performance of our catastrophe business, thus causing our technical result to deteriorate year-onyear.
Business in the year just-ended was influenced by a number of factors, including the collapse of the second-largest Australian insurer. This caused the market to harden and has prompted customers to look more closely for financially secure insurers.
As a local reinsurer we are an established player in this market. Business is transacted via our Australian branch office in Sydney. We rank among the leading providers in catastrophe and liability reinsurance. With conditions on the market improving appreciably, we wrote a greater volume of proportional property business last year and stepped up our participation in natural catastrophe covers. We also enlarged our volume of liability business.
There were no major loss events - with the exception of the bush fires around Sydney, which, however, had no significant impact on our account.We therefore generated a very good result in the year under review.
We are one of the leading reinsurers in this market environment. South Africa is our most important African market. 92% of our premium volume derives from this country with a mere 8% of our business generated by other countries south of the Sahara. Contrary to the generally restrained development on the insurance market, we were able to obtain premium increases
We have established efficient and direct contacts with our clients and the major brokers in the ASEAN region through our branch office in Malaysia. Our highest level of market penetration is in Malaysia. In accordance with our strategy we increasingly wrote non-proportional business in the year under review. This policy is especially difficult to implement in the Malaysian market, which is still dominated by proportional reinsurance.
The bulk of our portfolio consists of property insurance. In Malaysia and Singapore we also wrote motor business. Overall, we were successful in improving the diversification of our portfolio – both geographically and in terms of lines of business – during the past year.
Improved premium volume and result in South Africa, our key market
"Freedom from fear is a basic human right. We need to reassert our right to live free from fear with greater confidence and determination than before here in New York City, across America and around the world. With one clear voice, unanimously, we need to say we will not give in to terrorism.
A number of market players have already withdrawn from the credit/surety line of business in the current year due to the events of 11 September. Whereas in the year under review overcapacity frequently had an adverse effect on the price level, the reduction in capacity has now led to substantial rate increases.
In the vast majority of insurance markets the general economic climate remains favourable for life and annuity insurers. They can be regarded as the beneficiaries of the far-reaching, long-term demographic changes in the population and age structure. Demand among private customers for products intended to provide for their surviving dependants as well as their own retirement is growing in virtually every market. In Germany, too, the partial privatisation of the statutory pension insurance scheme – the so-called "Riester" pension – generated fresh potential for life insurers and company pension funds in the year under review.
We are the global leader in our business model of financing reinsurer ("stochastic banker") and as a product partner for innovative life and annuity insurance solutions. Thanks to our position we are currently able to operate in a less intensely competitive market environment.
In the year under review Hannover Life Re (HLR) focused its activities on further expanding its position in the target markets of Europe,
In the US market we continued the restructuring initiated in 2000 – by withdrawing from the reinsurance of health business – and completed these portfolio optimisation measures in the fourth quarter of 2001. The same is also true of South Africa.
Gross premiums incl. premium deposits 2 660 2 494 2 220
Net premiums incl. premium deposits 1 869 1 723 1 485
Of the other European markets, the United Kingdom and Italy recorded exceptional growth with increases of 60% to 70%. This was due first and foremost to a number of substantial business relationships.
As in the previous years, the technical results in life insurance as well as in the areas of critical illness and lump sum disability coverage were favourable. However, results were only marginally positive for disability policies with a regular income and they remained unsatisfactory in health insurance. Other performance factors - such as the persistency of in-force business - were within the bounds of our expectations and the parameters of our actuarial simulation models.
We systematically monitor the actuarially determined increase in the net embedded value of the written portfolio – defined as the present value of future profit flows before taxes: Development of the net embedded value of the Hannover Life Re portfolio
The gross portfolio of business in force amounted to USD 28 billion (EUR 32 billion) as at 31 December 2001, while gross premium income totalled USD 845.2 million (EUR 944.2 million).
Hannover Life Re America positioned in the USA as a specialist reinsurer for financing transactions
Australasia, Sydney. In conventional risk-oriented business its activities are concentrated on the seg-
The claims experience remained favourable, enabling us to generate a profit of GBP 2.2 million (EUR 3.6 million).
In addition, Hannover Life Re International has written a portfolio of enhanced annuities on the UK market for many years. This business is concentrated on a small number of major accounts.
In the second full year of business operations we increased our gross premium income to EUR 127.5 million (+65.6%). The premium volume including premium deposits grew to more than EUR 270 million. Profitability remained gratifying, with a positive result of EUR 6.9 million.
Gratifying profit situation ments of life insurance, critical illness coverages and disability pensions. It also acquired a modest portfolio of direct Australian group life business as part of company pension schemes. Total gross premium income in the year under review was in the order of AUD 261.0 million (EUR 150.3 million).
Hannover Life Re Germany – the life, health and personal accident division of E+S Rück – is an operating entity responsible for the German market as well as the foreign, generally European subsidiaries of German clients.
We primarily provide financing arrangements for unit-linked life and annuity policies as well as risk-oriented covers in the bancassurance sector; both segments recorded strong growth in the German market which was not – in the case of unit-linked life insurance, for example – impaired by the rather unfavourable performance of European equity markets in the year under review.
Our gross premium income from these markets reached EUR 248 million in the year under review. Of this total amount, 47% derived from France, 49% from Italy and 4% from Spain. Results in this market segment have been very good for many years.
Established in 2000, our branch offices in Kuala Lumpur (covering the ASEAN markets) and Hong Kong (for the other countries of eastern and Southeast Asia) serve the Asian region. These offices focus on life business. The premium volume from this region surpassed the EUR 40 million threshold for the first time in the year under review, and results were gratifying. Japan was a strong driver of growth in this context.
Responsibility for Central American markets rests with our office in Mexico City; premium income here totalled EUR 14 million in the year under review.
Premium volume in Asia surpassed EUR 40 million for the first time
In 1999 we expanded the Hannover Re Group to include program business as a fourth strategic segment, thereby systematically pursuing our strategy of portfolio diversification. This step was initiated by the acquisition of the Clarendon Insurance Group, New York. Already one of the market leaders in US program business at the time of its acquisition, Clarendon impressively consolidated and extended its position in this market in the year under review.
Program business in its current form was developed in the USA. Highly specialised managing general agents concentrate on niche business which traditional insurers do not normally write or accept for own account. These managing general agents are independent companies that sell highly individual products tailored to their own special group of customers.
The performance of our program business is heavily dependent on Clarendon. Following the unsatisfactory results in 2000 the company terminated various programs in the year under review, causing their total number to decrease the year under review. This was all the more gratifying because program business once more made a significant contribution to our company’s performance and helped us to generate a positive overall result in the year under review despite the losses due to terrorism in the USA. We view this as confirmation of our policy aimed at optimising diversification within the Group. Total gross premium income in the segment rose by 24.5%. 3.6 percentage points of this increase were due to exchange rate movements. The combined loss/expense ratio and the operating result both developed favourably.
Hannover Re transacts program business in two business models 199920002001Figures in EUR million
Most notably, premiums were increased by up to 20% in workers’ compensation insurance. We now consider this area to be profitable again. Workers’ compensation programs, which still failed to produce massive premium increases – and hence remained unprofitable – were systematically cancelled. Only in California did the competitive situation prevent vigorous expansion of our business. The pricing situation here continued to be unattractive and inadequate due to the conduct of the market leader.
In Florida our substantial building insurance program was spared any natural catastrophes. Yet the rate level was too low to achieve adequate results even in years with a normal burden of claims. Our efforts to restore this business to profitability led to significant rate increases in the year under review.
Now that the International Insurance Company of Hannover Ltd., London (Inter Hannover), has established itself as a cooperation partner for European managing general agents, we have increasingly written program business in Europe too. After we had laid the technical and administrative foundations in 2000 and 2001, various opportunities for expansion opened up on the European market in just the second year of operations. A market study conducted in 13 European countries found that the business model of Inter Hannover enjoys broad approval and considerable interest among managing general agents. In the United Kingdom we generated a premium volume of GBP 124.3 million (EUR 200.6 million) in the year under review, with business stemming from the property, mo-
Gross written premiums of Inter Hannover by lines of business counting practices become increasingly oriented towards fair market values, the volatility of the results shown in financial statements is growing. The focus of financial reinsurance is therefore directed not exclusively towards risk transfer; rather, equal attention is given to the possibility of spreading special charges across several quarters or years so as to limit the volatility of our clients’ results.
We continue to transact financial reinsurance predominantly through two risk-carriers based at the International Financial Services Centre (IFSC) in Dublin – Hannover Reinsurance (Ireland ) Ltd. and E+S Reinsurance (Ireland) Ltd. Further expansion of this segment through the management company Hannover Re Advanced Solutions Limited is planned. Our goal in this respect is to consolidate our position for the long term as one of the three leading global providers of alternative reinsurance products and to safeguard a sustained, stable profit contribution to the Group’s overall performance. A number of our previous competitors withdrew from the market for non-traditional reinsurance solutions in the year under review or reassigned their specialist units to traditional segments. This situation should also help us to accomplish our strategic objectives.
Hannover Re Advanced Solutions consolidates position as one of the three leading global providers of alternative reinsurance products
Operating result before general expenses 67 54 38 combined loss/expense ratio 123% 114% 108%
The following sections describe in greater detail the business developments in a number of selected financial reinsurance markets.
Especially in Japan, where the primary concern used to be the reinsurance of natural catastrophe losses, the issue of balance sheet continuity has now also moved to centre-stage in corporate management. We expect this new focus to generate stronger demand in the future.
In the Australian market the insolvency of a major insurance company has currently prompted a review of the regulatory framework for financial reinsurance. We expect new business opportunities to emerge in the course of 2002.
Our activities in this region have yielded initial successes with newly concluded contracts. We consider the increased interest shown by the supervisory authorities in financial reinsurance to be an extremely positive sign. In the medium term this will reduce the uncertainties harboured by some ceding companies with respect to financial reinsurance and will help to stimulate demand. The anticipated consolidation in Latin American markets will offer new business opportunities, since it is frequently the case that companies emerging from a consolidation process have a particularly pressing need for innovative solutions. Consequently, while the demand for non-traditional reinsurance solutions will change, it will not decline.
The year under review was once again remarkable in many respects for the international financial markets. While the cyclical trends of the leading national economies were still viewed with cautious optimism at the beginning of the year, a marked slowdown in growth could be discerned as the year progressed. Towards year-end the events of 11 September ushered in the deepest industrial recession in post-war history.
Given this extremely difficult and volatile global scenario, our investment portfolio and the net investment income generated from these holdings developed highly satisfactorily in the year just-ended.
increased sharply in the reporting period by 18.9% or EUR 1.9 billion to EUR 12.1 billion. This strong growth was due not only to movements in exchange rates but also – and more importantly
In light of our unfavourable assessment of the stock markets, we systematically continued the reduction of our equity holdings, which we had initiated towards the end of the previous year. Our equity portfolio thus decreased substantially in both absolute terms and relative to total assets. Whereas around EUR 1.6 billion of our assets were invested in dividend-carrying securities at the beginning of the year, this figure was cut to roughly EUR 1.0 billion by year-end. The equity allocation consequently fell from 15.6% to 8.5% as at 31 December 2001. We continue to limit our equity exposure to liquid Blue Chips listed on major indices such as the Euro Stoxx 50,
EUR 50.4 million as against EUR 101.9 million in the previous year.
In view of the very difficult and volatile state of the financial markets, we were highly satisfied with the extraordinary income from investments. Realised profits on disposals of EUR 190.0 million contrasted with losses on the disposal of investments totalling EUR 134.1 million, thus generating another positive balance of EUR 55.9 million – a figure which was, however, substantially lower than in the previous year (EUR 180.6 mil-
We understand global risks to mean external risks upon which we are unable to exert any direct influence. They may arise, for example, as a result of changes in the legal framework (including changes in the general regulatory or tax situation ), through social trends or as a consequence of developments in the insurance industry.
By way of illustration, a significant decline in demand for reinsurance coverage, especially in developed markets such as the USA, Japan, the United Kingdom and Germany would constitute
A central risk coordinator ensures that all risk management activities are monitored, documented, and co-ordinated. The coordinator also bears responsibility for describing the risk situation of the company as a whole within the scope of the reporting system.
As an internationally operating reinsurer, our business naturally involves economic risks of various types in the individual strategic segments and geographic regions. The acceptance of risks and the professional management of this risk portfolio constitute the core business of a reinsurance company. Our risk management is based upon a corporate strategy geared to generating a sustained increase in the value of the company. This means that we purposefully enter into entrepreneurial risks provided the associated opportunities promise an appropriate increase in the value of the company. We have at our disposal a large number of efficient management and control systems that vary in their design and degree of reporting detail. The core risk management elements are set out in guidelines, which apply to the entire Hannover Re Group. Within the scope of our risk management system all conceivable risks from the current perspective, which could jeopardise the performance and survival of our company, are recorded systematically and comprehensively. The up-to-date status of our risk portfolio, both on the level of individual risks and accumulation risks, is ensured by means of defined reporting procedures and an annual risk inventory. Risks are quantified with an eye to their probability of occurrence and the potential loss. This approach also takes into consideration the effectiveness of the implemented control measures.
One key component of our risk management – applicable not only to global risks – is the use of scenarios in US GAAP-based financial analysis. These analyses simulate the effects not only of growth but also – and most significantly – of specific loss events and capital market developments on the company’s financial situation and net income. The change in stockholders’ equity caused by a defined scenario can thus be contrasted with a normal situation. Depending upon the simulation results, the findings produced by our financial analysis enable us to prioritise risk-policy measures.
Our profit target is to generate an above-average return on the equity made available to us by our stockholders and to ensure that our share remains a solid and attractive investment. A system of agreements on targets has been introduced for our managerial staff in order to ensure that the various strategic objectives are also pursued on the operating level. Under this system, individual targets are derived from the higher-order strategic objectives. We used company-wide ratios in order to measure the profit contribution made by each segment or unit to the Group’s overall performance. These key figures facilitate performance controlling and hence are also reflected in the remuneration received by our managerial staff.
Technical operating risks are of special significance to reinsurance companies. The technical risk lies first and foremost in the fact that cash flows, which are vital to the insurance business, may deviate from their expected values. Possible reasons here may be inaccurate pricing assumptions, incorrect estimations of the claims experience – especially with respect to the so-called risk of random fluctuations and change – or failures in accumulation controlling.
When assessing the risk of losses exceeding premiums in property and casualty reinsurance we also take into account the combined loss/expense ratio over time. This analysis is performed both inclusive and exclusive of the natural catastrophe loss ratio (i.e. the burden of natural catastrophe losses > EUR 5 million gross for the Hannover Re Group’s share expressed as a percentage of the premium income).
Combined loss/expense and natural catastrophe ratio * Based on figures reported in accordance with the German Commercial code (HGB)
Our assessment of our retrocessionaires is guided by the opinions of internationally recognised rating agencies and supported by our own research based on market knowledge and balance sheet analyses. The default risk on accounts receivable for the major companies belonging to the Hannover Re Group was reflected by bad debt provisions of 0.02% in 1999, 0.03% in 2000
The consistent principle underlying our investment activities is the goal of generating an optimal contribution to the business result. This is primarily accomplished by means of soundly based asset/liability management supported in part by actuarial models. Risks in the investment sector consist most notably of market, credit and liquidity risks. Company-wide investment guidelines are in force throughout the Hannover Re Group, and compliance is subject to constant monitoring. The principle of separation of functions – i.e. keeping a strict distinction between trading, settlement and risk controlling – is applied up to the level of management and constitutes a further integral element of our risk management. Risks in the investment sector are countered using a broad range of efficient management and control mechanisms which are geared to the rules adopted by the Federal Banking Supervisory Office and the Federal Supervisory Office for Securities Trading.
Subject to the following assumptions as at the balance sheet date, the fair market value of our investments would develop as follows: 80% of our retrocessionaires are rated A or better
Portfolio Scenario Portfolio change based on fair value in EUR thousand
Rating Government bonds Corporate bonds Other fixed-income securities in % EUR thousand in % EUR thousand in % EUR thousand
There was a marked shift in the relative proportions of the workforce assigned to the various areas of the company. Personnel growth was recorded principally at those locations and in those segments where our market opportunities and client intimacy required additional staff.
The number of employees at our headquarters in Hannover increased by 7% to 707 in the same period.
The overall trend is in line with our goal of systematically promoting the Group’s growth in individual markets on a targeted and profitoriented basis; a clear majority of the workforce is now employed abroad.
International co-operation within our Group was further strengthened by joint projects. Our goal is to give a growing number of our staff the international experience that is indispensable in our globalised business community. The number of delegations within the Group consequently also increased appreciably. During the current year the number of delegated employees is expected to almost double. Five members of our staff were seconded from Hannover to Bermuda purely to build up our competence centre for nonproportional catastrophe reinsurance. In this way we are able to invigorate the international culture that is necessary in reinsurance business. Exchanges and joint projects – across countries and cultures – promote the interlinking of our organisation and enhance cooperation and understanding of our common objectives.
In addition to the international preparation of job evaluations and descriptions, we defined for the first time in the year under review agreements on targets for our worldwide managerial staff on the basis of uniform parameters. The financial goals derived from our corporate strategy constitute the central elements in these agreements on targets. They are supplemented by individual targets. We have thus achieved a further key milestone in the implementation of our uniform worldwide management system.
The variable remuneration of our managerial staff is geared to the short-term operating targets, on the one hand, and – through the implementation of a virtual stock option plan with the long-term earnings opportunities it offers – to the long-term development of the Group as a whole, on the other. In this way, we place profit realisation and the performance of our share at the forefront of our mindset and actions.
Developed in 2000 and subsequently enhanced, the management simulation game was successfully conducted on several occasions and is now to be launched abroad. The decision game simulates the complex correlations existing in the insurance markets. Participants are able to experience "true to life" the market dynamics and consequences of management decisions. The interactive nature of the game fosters the learning experience. The simulation game is scheduled to be run during the current year with the participation of staff and clients in South Africa.
Economic activity is expected to revive somewhat during the first half of 2002. In the USA manufacturing output is likely to pick up appreciably, although growth in Japan will probably be very weak in the course of 2002. In the Eurozone economic recovery is anticipated, possibly gathering impetus from the United States. Overall, the global economy should show a marked revival during 2002, although the momentum is likely to be weaker than in the previous upswing.
In the future, then, property and casualty insurers are facing reduced reinsurance capacities and sharply higher rates, especially in property lines. We enjoyed exceptionally favourable treaty renewals for 2002. Following substantial losses not only in the year under review but also in previous years, property and casualty reinsurance returned to profitability in many markets thanks to significant rate increases and improved conditions.
In April of this year, in cooperation with other prominent insurers and reinsurers, we participated in the establishment of a specialist Luxembourg -based insurance company for property damage caused by terrorist attacks (Special Risk Insurance and Reinsurance Luxembourg S.A.). This insurer, which will fill the gaps in coverage for terrorism risks resulting from the events of 11 September, will offer insurance protection for facilities located in Europe.
As a further factor, the withdrawal of some competitors led to capacity shortages in certain areas. In credit and surety insurance, for example, we shall generate growth of around 40% due to this development.
In the current financial year we expect the situation on the life and health reinsurance markets served by Hannover Life Re to remain favourable. By refocusing our portfolio on life and annuity products we shall substantially enhance the profitability of Hannover Life Re. Our medium-term objective is to generate a return on equity of 5%.
In program business we shall continue our reorientation of Clarendon’s operating activities. What this means is that in the future our underwriting policy will be guided by the profitability of the gross business. We consequently expect our results to improve dramatically. At the same time, Clarendon will substantially increase our retention. We shall keep a very critical eye on the existing portfolio and intend to refrain from writing unprofitable business in the future.
Given the decimated state of the competition, we shall be able to extend our market leadership in the US market.
Now that the Acceptance team has been integrated into our organisation, ICH will systematically develop its activities in the current year. We shall continue to write only carefully selected business.
Inter Hannover generated an enormous increase in both its gross premium income and result in the year under review, and in 2002 we expect the favourable trend to be sustained. We shall strive to advance program business in Europe. Our emphasis will be on establishing new business relationships, which are compatible with the requirements of our business model.
The sharp price increase in traditional reinsurance has fostered greater interest in financial reinsurance solutions. In the future, this will lead to enlargement of our customer base and diversification of our product range. In this respect, we shall enhance the profitability of the segment in part through risk-oriented products, which are written with higher margins.
closely, thereby improving the general understanding of such products. Especially in emerging markets, this helps to generate demand.
Summing up, following the successfully implemented capital measures of the past twelve months we believe that we are superbly positioned. Consequently, we shall be able to profit disproportionately from the emerging market opportunities – especially those in property and casualty reinsurance – and enlarge our market share. Despite the capital increase in December 2001, our earnings per share should increase significantly relative to the adjusted 2000 result (after special effects associated with the tax computation are factored out).
Our goal with respect to our capital resources is to strengthen our AA rating with a stable outlook. With this rating we enjoy optimal positioning in the competitive environment. The 2002 renewals demonstrated that our capital strength gives us a clear competitive advantage. In the early months of 2002 we successfully concluded a further securitisation transaction. This transfer of technical risks – primarily consisting of natural catastrophe and aviation business – will substantially improve our equity position.
"The Twin Towers were so relevant to New York City, and to my work, as I live less than a kilometer from the site. This catastrophe has personally affected me; there were many New York City Firemen that I grew up with who were lost in the attack. The outpouring of help and the show of patriotism from all Americans will defeat the terrorists. New York City will remain the crossroad of the world."
Fixed-income securities – held to maturity 5.1 284 070 267 031
Fixed-income securities – available for sale 5.1 8 422 878 6 518 580
Reinsurance recoverables on unpaid claims 5.2 6 758 763 3 532 690
Funds held by ceding companies 7 150 799 3 995 706
Loss and loss adjustment expense reserve 5.2 18 859 679 12 782 71 0
Unrealised appreciation/depreciation of investments, 5.10 net of deferred taxes 31 164 71 413
Cumulative foreign currency translation adjustment, 5.10 net of deferred taxes (58 192) (8 800)
Unrealised gains and losses on investments 5.1 21 332 (4 402)
Changes in other assets and liabilities (net) 93 182 (567 173)
Cash and cash equivalents at the beginning of the period 482 262 437 266
Change in cash and cash equivalents according to cash flow statement 348 397 44 996
Cash and cash equivalents at the end of the period 830 659 482 262
IV. Exchange rate differences on cash (1 513) 1 1 552
In the following table we have allocated the underwriting assets and liabilities as at 31 December 2001 and 2000 to our business segments after eliminating intergroup transactions across segments.
Funds held by ceding companies 376 714 301 436 3 007 960 1 887 236
Policy benefits for life and health contracts – – 3 908 584 3 043 573
Funds held under reinsurance treaties 735 653 403 926 331 418 347 076
1. General accounting principles 84 2. Accounting principles including reporting and valuation methods 84 3. Consolidated companies and consolidation principles 84 4. Acquisitions /new establishments 86 5. Notes on the individual items of the balance sheet and statement of income 87 5.1 Investments including income and expenses 87 5.2 Underwriting assets and liabilities 95 5.3 Contracts with no technical risk 98 5.4 Goodwill; present value of future profits on acquired life reinsurance portfolios 98 5.5 Tax and deferred tax 99 5.6 Staff and expenditures on personnel 100 5.7 Provisions for pensions and similar liabilities 101 5.8 Surplus debenture and loans 104 5.9 Stockholders' equity and minority interests 105 5.10 Comprehensive income 106 5.11 Treasury stock 106 5.12 Earnings per share 107 5.13 Other assets and liabilities 107 5.14 Technical statement of income 108 5.15 Other income/expenses 109 6. Relations with affiliated companies 109 6.1 Relations with affiliated non-consolidated companies 109 6.2 Emoluments received by the management boards of the parent company and loans granted to them 111 6.3 Stock options 111 6.4 Mortgages and loans 112 7. Other notes 112 7.2 Contingent liabilities 112 7.3 Long-term commitments 113 7.5 Events subsequent to conclusion of the financial year 114 7.6 Rents and leasing 114 7.7 Currency translation 115
The parent company of Hannover Rückversicherungs-Aktiengesellschaft (Hannover Re) is HDI Haftpflichtverband der Deutschen Industrie V.a.G. (HDI). HDI is obliged to prepare consolidated annual accounts in accordance with §§ 341 i et seq. of the German Commercial Code (HGB). The annual financial statements of Hannover Re and its subsidiaries are included in these consolidated annual accounts. We have prepared our own consolidated financial statement, although there is no legal obligation to do so, in order to show the activities of the Hannover Re Group.
All Statements of Financial Accounting Standards (SFAS) issued by the Financial Accounting Standards Board (FASB) on or before 31 December 2001 with binding effect for the 2001 financial year have been observed in the consolidated financial statement.
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.
Hannover Reinsurance Group Africa compiles its own sub-group financial statement, including the following major companies in which it holds the following shares: Hannover Life Reassurance Africa Ltd., Johannesburg/South Africa 100.0
Hannover Finance, Inc. compiles its own sub-group financial statement, including the following major companies in which it holds the following shares: Clarendon America Insurance Company, Trenton/USA 100.0
With the adoption of two new standards (SFAS 141 "business combinations" and SFAS 142 "goodwill and other intangible assets") at the end of June 2001 the Financial Accounting Standards Board (FASB) fundamentally revised the reporting of goodwill in the balance sheet. The following new considerations relating to goodwill may be highlighted: • Goodwill can now only be created through business combinations
At the beginning of the year under review the Insurance Corporation of Hannover (ICH), Los Angeles, acquired significant parts of the program business of Acceptance Insurance Companies, Inc. This acquisition increased the premium income of ICH by EUR 78 million.
In order to safeguard the sustained financial strength of the Hannover Re Group, Hannover Re issued subordinated debt. For this purpose Hannover Re established Hannover Finance (Luxembourg) S.A. on 8 February 2001 as a wholly owned subsidiary with common stock of EUR 200 thousand. The company operates as a financing company.
Effective 30 March 2001 the new company Hannover Reinsurance (Bermuda) Ltd. was established. It has stockholders’ equity of EUR 250.0 million. The company commenced business operations on 1 April 2001. A participation wholly owned by Hannover Re, the company transacts reinsurance business and in particular writes natural catastrophe excess of loss coverages.
5. Notes on the individual items of the balance sheet and statement of income 5.1 Investments including income and expenses
Investments were valued in accordance with SFAS 115 (accounting for certain investments in debt and equity securities). The allocation and valuation of investments are guided by the investment intent.
Fixed-income securities classified as available for sale are valued at fair value. The difference between the fair value and amortised cost is booked to other comprehensive income.
Other foreign government debt securities 2 289 73 – 2 362
Contractual maturities of the fixed-income securities in the held-to-maturity portfolio, available-forsale portfolio and trading portfolio as at the balance sheet dates of 31 December 2001 and 2000
Due after one through five years 4 571 102 4 631 074 2 720 974 2 779 964
Due after one through five years 7 832 7 878 – –
Other foreign government debt securities 383 918 8 075 14 393 377 600
Government debt securities of EU member states 756 390 18 464 403 774 451
Other foreign government debt securities 327 667 4 380 2 287 329 760
The decrease in dividends was largely due to the fact that income from companies consolidated using the equity basis of accounting was lower than in the previous year.
The increase in other income derived largely from higher interest on deposits.
Fixed-income securities – trading – – – – – – – 40 869 40 869
Fixed-income securities – held-to-maturity – – 215 163 – – 51 868 – – 267 031
Fixed-income securities – available-for-sale 352 835 163 005 2 491 153 610 788 68 172 2 724 523 7 732 100 372 6 518 580
Fixed-income securities – trading – – – – – 40 869 – – 40 869
Equity securities – available-for-sale 38 526 2 743 782 562 48 700 2 020 607 607 71 251 40 560 1 593 969
The retrocessionaires’ portions of the technical provisions are based on the contractual agreements of the underlying reinsurance treaties.
In the case of property and casualty reinsurance, acquisition costs directly connected with the acquisition or renewal of treaties are deferred and amortised in line with the unearned portion of the premiums. In life and health reinsurance, the capitalised acquisition costs under life and annuity policies with regular premium payments are determined in the light of the period of the contracts, the expected surrenders, the lapse expectancies and the anticipated interest income. In the case of annuity policies with a single premium payment, these values refer to the expected policy period or period of annuity payment.
Income and expenses from rental agreements are included in the investment income.
Currency exchange rate differences between valuation at the average rate and the year-end rate 206 (395)
Reserve as at 31 December of previous year (gross) 12 782 710 10 776 704
Reserve as at 31 December of previous year (retro) 3 532 690 2 896 441
Reserve as at 31 December of previous year (net) 9 250 020 7 880 263
Development of the present value of future profits (PVFP) on acquired life reinsurance portfolios 5.3 Contracts with no technical risk
Goodwill net as at 31 December 263 258 266 066 2001 2000Figures in EUR thousand 2001 2000Figures in EUR thousand
Valuation differences arising out of property and casualty reinsurance – 34 854
Valuation differences arising out of the portfolio of life and health reinsurance 214 821 189 091
Valuation differences relating to investments and other valuation differences 152 055 233 185 2001 2000Figures in EUR thousand
From 1997 onwards it has been possible to obtain pension commitments through deferred compensation. The employee-funded commitments included in the provisions for accrued pension rights are protected by an insurance contract with HDI Lebensversicherung AG, Hamburg.
In addition to these two pension plans, managerial staff and members of the Executive Board, in particular, enjoy individual commitments as well as commitments given under the benefits plan of the Bochumer Verband.
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%
The commitments to employees in Germany comprise commitments financed by the Group companies. The pension plans are unfunded. Amounts carried as liabilities are shown as other liabilities.
Projected benefit obligation at the beginning of the reporting year 45 361 37 317
On 2 November 1993 Hannover Re and E+S Rück issued surplus debentures in the amount of EUR 76.7 million at an interest rate of 7.55% and in the amount of EUR 40.9 million at an interest rate of 7.75%. Repayment is due in full on 2 November 2004.
Minority interests are established in accordance with the shares held by companies outside the Group in the stockholders' equity of the subsidiaries.
Authorised capital of EUR 0.8 million is available for the issue of employee shares until 31 August 2002.
In accordance with SFAS 60 insurance contracts are to be classified as "short-duration contracts" or "longduration contracts". The determinative criteria in this regard are, inter alia, the termination opportunities available to the insurer, the period of risk protection and the scope of the services provided by the insurer in connection with the contract. Premiums from short-duration contracts are brought to account over the period of the underlying contract, and where appropriate unearned premiums are deferred to subsequent years. By contrast, premiums deriving from long-duration contracts are brought to account at the date payable.
Other non-consolidated affiliated companies 12.4 16.1 2001 2000Figures in EUR million
The names of the members of the management boards of the parent company are listed on pages 4 and 5.
The concrete value of the stock option is calculated as the difference between the current stock market price of the Hannover Re share at the time when the option is exercised and the share price at the beginning of the year in which the stock option was granted. This value is paid out on exercise of the stock option.
The calculations were based on the year-end closing price of the Hannover Re share as at 28 December 2001 of EUR 67.39, volatility of 43.8 %, a dividend yield of 3.65% and a risk-free rate of interest of 5.16%.
On this basis a provision of EUR 2,648 thousand was established as at 31 December 2001 for stock options granted for the 2000 financial year.
As security for our technical liabilities to our US clients, we have established a master trust in the USA. As at the balance sheet date this master trust amounted to EUR 1,403.6 million (previous year: EUR 661.4 million). The securities held in the master trust are shown as available-for-sale investments.
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 the case of a fair value hedge, the results of the fair valuation of the derivatives and the corresponding underlying transactions are recognised in the statement of income. In the case of a cash flow hedge, the hedge-effective part of the changes in fair value is initially recognised under the stockholders’ equity (cumulative comprehensive income). It is only reported in the statement of income when the underlying hedged transaction has been recognised in the statement of income. The hedge-ineffective part of the changes in fair value is recognised in the statement of income immediately. Furthermore, derivatives embedded in host contracts are to be reported separately.
In the year under review Hannover Reinsurance Africa Ltd. concluded a sale-and-lease-back contract for land and business premises effective February 2002 for a period of eight years.
This transaction provided Hannover Re with an equity substitute in the amount of USD 230 million (EUR 261 million).
No other events with significant implications for the Group’s assets, liabilities, financial position and net income occurred after the balance sheet date.
Three contracts matured in the year under review; these gave rise to gains on disposals of EUR 3.5 million and losses on disposals of EUR 1.6 million.
Rental income totalled EUR 12,842 thousand in the 2001 financial year.
Hannover Re Real Estate Holdings rents out real estate in Florida; the period of the rental contracts ranges from five to seven years. Non-cancellable contracts will produce the income shown below in subsequent years: The following key exchange rates were used
In our opinion, the consolidated financial statements give a true and fair view of the net assets, financial position, results of operations and cash flows of the Group in accordance with United States Generally Accepted Accounting Principles.
Report of the Supervisory Board of Hannover Rückversicherungs-AG for the Hannover Re Group
Hannover Rückversicherungs-AG Australian Branch – Chief Agency G. P. O. Box 3973 Sydney NSW 2001
Hannover Re Advanced Solutions Limited No. 2 Custom House Plaza, IFSC Dublin 1
Sweden Hannover Rückversicherungs-AG Tyskland filial Stockholm Branch Hantverkargatan 25 P. O. Box 22085
International Insurance Company of Hannover Ltd. England filial Scandinavian Branch Hantverkargatan 25 P. O. Box 22085
Claims and claims expenses: sum total of paid claims and provisions for loss events which occurred in the business year; this item also includes the result of the run-off of the provisions for loss events from previous years; in each case, after the deduction of own reinsurance cessions.
Financial Accounting Standards Board (FASB): committee in the USA whose task it is to determine and improve upon the standards of accounting and reporting.
Financial Accounting Standards (FAS): cf. ➞ Statement of Financial Accounting Standards (SFAS)
Other securities, available-for-sale: securities that are not classified as "trading" or "held-to-maturity"; these securities can be disposed of any time and are reported at their market value at the balance sheet date. Changes in market value do not affect the statement of income.
Proportional reinsurance: reinsurance treaties on the basis of which shares in a risk or ➞ portfolio are reinsured under the prevailing direct insurer's conditions. ➞ Premiums and losses are shared proportionately on a pro-rata basis. This is in contrast to ➞ non-proportional reinsurance.