+++ Despite historically unprecedented natural catastrophe losses in property and casualty reinsurance breakeven result for 2005 achieved +++ Life and health reinsurance shows vigorous growth and strong profitability +++ Financial reinsurance highly profitable despite sharply reduced premium volume +++ Restructuring of specialty insurance business group progressing entirely as planned +++ Policyholders’ surplus + 10.1% +++ Investments (excluding funds held by ceding companies) +19.4% +++ Net investment income (excluding interest on deposits) +11.8% +++ Very good earnings prospects for 2006 +++ hannover re R
The Annual Report of the Hannover Re Group can also be obtained in German (printed version). Furthermore, the report is published in German, English and Spanish as PDF-format for downloading on the internet.
Earnings per share (diluted) in EUR 0.41 (82.3%) 2.32 3.24 2.75 0.11 11/66
Combined ratio (property and casualty reinsurance) 112.8% 97.2% 96.0% 96.3% 116.5% 19
Return on equity (after tax) 1.9% 11.5% 17.1% 15.7% 0.7% 12 1) 2001–2003 on the basis of US GAAP 2) Operating profit (EBIT)/net premium earned
Although I am proud that your company did not suffer any capital depletion despite these historically unprecedented strains, I cannot of course be satisfied with the result. As in 2001, the Executive Board and Supervisory Board are proposing that no dividend be paid for the year under review. Perhaps you are wondering why this is. It has already been put to me on several occasions that we are still in a position to distribute a dividend. That is indeed correct. But in so doing we would diminish our
In property and casualty reinsurance, our largest business group, I have only good news to report – once we look beyond the extreme catastrophe loss situation already mentioned above. Leaving aside for a moment the development of natural catastrophe reinsurance, the performance of our other business was exceptionally favourable. Almost all segments offered us attractive opportunities to write profitable business. Rates and conditions remained on a high level; they continued to improve in some areas, most notably in the property, marine and catastrophe lines that had been impacted by the hurricanes in 2004. Yet there was no way to make up for the unparalleled burden of catastrophe losses. Nevertheless, we very quickly turned our attention in property and casualty reinsurance – as we always do – to the future: hurricane "Katrina" clearly demonstrated that the simulation models used by insurers and reinsurers for risk analysis and pricing calculations had not functioned correctly. Immediately after the loss events we therefore made appropriate modifications and incorporated safety loadings into the models. In this way we were able to adjust our accumulation control in time for the treaty renewals as at 1 January 2006 and renegotiate prices to take account of the latest insights.
I am thoroughly satisfied with the development of life and health reinsurance. We now rank among the largest providers in the world. Following a weaker year in 2004, we are very much back on our expansionary course in this business group. Impetus derived primarily from European markets: in the United Kingdom, for example, we wrote an increased volume of new business – especially in the area of annuity insurance. Yet in Asian markets and in South Africa too the growth trend was vigorous. We have identified special products for senior citizens as a highly promising market for the future. Unlike in the Anglo-Saxon markets, this target group has hitherto been neglected by insurers in our domestic market.
The performance of our share, on the other hand, was a disappointment in the year under review. The news in November that we would only achieve a break-even result as a consequence of the heavy burden of hurricane losses came as a shock to the capital market: having recorded a thoroughly satisfactory price trend in the months up to August, our share slumped briefly by more than 7% before facing down the selling pressure despite extraordinarily heavy trading volumes and ultimately regaining ground. I see this as an indicator of the fact that sufficient investors appreciate our company’s true potential and make the most of such abrupt setbacks for additional purchases.
All in all, our business prospects for 2006 are highly favourable: if the major loss experience is within the bounds of the multi-year average and provided there are no downturns on capital markets, we expect to generate a very good overall result in the current financial year. We are looking to a return on equity of at least 15 percent – equivalent to consolidated net income in the order of EUR 450 million.
Dr. Paul Wieandt2) Liquidator of Königstein i. T. Resba GmbH i. L. Deputy Chairman
Herbert K. Haas 1) 2) Member of the Executive Board Burgwedel Talanx AG
Coordination of entire Non-Life Reinsurance; Property and Casualty Treaty Reinsurance North America and Englishspeaking Africa; Financial Reinsurance worldwide
Controlling, Internal Auditing; Investor Relations, Public Relations; Corporate Development; Human Resources Management; Underwriting & Actuarial Services; Specialty Insurance
Property and Casualty Treaty Reinsurance Arab, European Romance and Latin American countries, Northern and Eastern Europe, Asia and Australasia
The EuroStoxx50 lagged somewhat behind the two German indices, putting on 21.3%.
In 2005, as in the previous year, the MDax – the index for mid-caps listed on Deutsche Börse – outperformed the Dax with a gain of 36.0%.
Performance of the Hannover Re share compared with standard German benchmark indices since stock market listing 30 N ove mber 30 M arch 30 Ju ly 1995 30 N ove mber 30 M arch 30 Ju ly 1996 30 N ove mber 30 M arch 30 Ju ly 1997 30 N ove mber 30 M arch 30 Ju ly 1998 30 N ove mber 30 M arch 30 Ju ly 1999 30 N ove mber 30 M arch 30 Ju ly 2000 30 N ove mber 30 M arch 30 Ju ly 2001 30 N ove mber 30 M arch 30 Ju ly 2002 30 N ove mber 30 M arch 30 Ju ly 2003 30 N ove mber 30 M arch 30 Ju ly 2004 30 N ove mber 30 M arch 30 Ju ly 2005 30 D ez em ber
The Hannover Re share in comparison with the weighted ABN Amro Rothschild Global Reinsurance Index
The ABN Amro Rothschild Global Reinsurance Index combines all listed reinsurers worldwide. Our strategic objective is to achieve an increase in the share price which on a three-year moving average surpasses the performance of this benchmark.
Even in this difficult year the Hannover Re share outperformed – albeit by a small margin – our internal benchmark, the weighted ABN Amro Rothschild Global Reinsurance Index. Having beaten this index comfortably in 2004, our share maintained just a modest lead of +0.1 percentage points in the year under review.
In a comparison over a three-year moving average, to which we attribute crucial strategic importance, the Hannover Re share clearly outperformed our international benchmark by +6.4 percentage points.
2005 and 2006. We placed in the top ten of all listed German enterprises, coming in seventh and ninth in the two years in question. This success is our incentive to keep on constantly improving: as an additional service Hannover Re recently conferences (27) and visits from investor delegations and financial analysts to our offices in Hannover (33), we have held investor seminars every year since 2000. Not only that, in the financial year just-ended we regularly stayed in touch with around 2,000 contacts in the capital markets by telephone and e-mail. At our eighth "International Investors' Day" on 1 July we briefed around 60 international capital market experts on details of our Strategy Review as well as special features of our four business groups.
Shareholding structure Talanx AG: 51.2% as at 31 December 2005: Free float: 48.8%
Number of shares as at 31 December 2005: 120,597,134 no-par-value registered shares
Annual General Meeting: 12 May 2006, 10.30 a.m. Hannover Congress Centrum Kuppelsaal Theodor-Heuss-Platz 1–3 30175 Hannover, Germany
published its "Equity Story" on its Investor Relations website and in its IR Online Magazine. Entitled "The Somewhat Different Reinsurer", this
• return on equity and • annual growth in earnings per share.
Optimal diversification: We seek to: • generate maximum profits with our available equity • by making flexible use of capital in those business groups, regions and lines that offer the highest returns.
• geographical, line-of-business and product priorities 5. Growth • Primarily organic • Acquisitions only in life and health reinsurance • No equity participations in insurance enterprises 6. Invested assets • Mix guided by continuous dynamic financial analysis and the requirements of matching currency coverage
Strategy 10. Performance Excellence • Holistic management system for execution of our strategy
China again constituted another reliable engine of growth for the world economy. China has provided significant impetus for several years now, particularly for world trade – although indications can already be detected that a cooldown is setting in.
In Germany too cyclical activity began to gather steam in the year under review against the backdrop of sustained vigorous expansion in the global economy. This growth has primarily been driven by exports, although modest price and cost trends in the domestic market and the depreciation of the euro were also supporting factors. Domestic demand was slow to pick up, however, and the depressed level of private consumption was still evident. Continuing high unemployment and the rise in energy prices hampered any improvement on this front.
We have for the first time fully adopted International Financial Reporting Standards (IFRS) in the consolidated financial statement for the 2005 financial year. Figures cited for the previous year have similarly been adjusted to IFRS.
Hurricane "Katrina" goes down as the most expensive insured loss of all time
The gross premium income booked by the Hannover Re Group grew by 1.1% year-on-year to EUR 9.7 billion (EUR 9.6 billion). At 0.2% exchange -rate effects were only a minimal supporting factor in this increase. The major growth drivers in the year under review were our property and casualty reinsurance and life and health reinsurance business groups. Net premium climbed somewhat more sharply by 2.2% to EUR 7.7 billion (EUR 7.6 billion) due to the higher level of retained premium.
In May of the year under review Hannover Re issued subordinated debt in the amount of EUR 500 million and as a parallel move offered the holders of the EUR 350 million debt issued in 2001 the opportunity to exchange into the new bond. By way of this changeover to a more subordinated instrument with no time limit and through the issue of additional hybrid capital, we made the most of the low interest rate level and further optimised our capital base. The bond is recognised as an equity substitute by the rating agencies and by the Federal Financial Supervisory Authority (BaFin).
Having already absorbed heavy strains from natural catastrophes in the previous year, we faced even heavier losses in the year under review. The 2005 hurricane season was exceptionally intense, both in terms of the frequency and severity of the storms: hurricane "Katrina"
Hannover Re is active in altogether four strategic business groups: property and casualty reinsurance, life and health reinsurance, financial reinsurance and specialty insurance. In addition to the following explanatory remarks on the busi-
Management report property and casualty reinsurance has become the most expensive (natural) disaster of all time, producing a market loss currently estimated at at least USD 50 billion. It was joined by three other costly hurricanes by the names of "Dennis", "Rita" and "Wilma". Not only that, the industry suffered numerous other natural disasters and major losses. The year under review thus developed into the most expensive one in history for the insurance industry, also in terms of the proportion of catastrophe losses relative to total premium income.
For Hannover Re too these loss events resulted in a hitherto unprecedented burden of natural catastrophes. Hurricanes "Katrina", "Rita" and "Wilma" alone produced a strain of EUR 797.9 million for our net account. These and other major losses – such as the winter storm "Erwin" in Northern Europe, flooding in the Alps, damage to an oil platform in the Indian Ocean, several aviation claims and floods in Mumbai, India – left us with net loss expenditure of EUR 1.0 billion (EUR 287.2 million). This figure corresponds to 26.3% of net premium, as against 8.3% in the previous year. The fact that we still achieved a combined ratio of 112.8% (97.2%) reflects the good diversification and high quality of our property and casualty reinsurance portfolio.
Leaving aside the heavy major loss burden, we were highly satisfied overall with developments in property and casualty reinsurance; we achieved good results in business with no catastrophe exposure – one reason why our combined ratio did not climb higher despite the hurricanes.
The underwriting result declined sharply year-on-year to -EUR 502.1 million (EUR 98.5 million) as a consequence of the enormous burden of catastrophe losses. Net investment income improved, on the other hand, by 22.7% to EUR 540.7 million (EUR 440.7 million) thanks to a stronger underwriting cash flow and realised gains. Below the line this was reflected in a drop
third party liability insurance. We thus generated a positive underwriting result.
Personal accident products with assistance benefits, which we had revamped last year in cooperation with a number of primary insurers and another cooperation partner, have established themselves successfully on the market.
Aside from these favourable market conditions, however, it was first and foremost our above-average financial strength that enabled us to further expand our position as one of the leading reinsurers in Germany in the year under review. This was due not least to the acquisition of new customer relationships. In addition to newly acquired business, we were also able to increase our participations under long-standing accounts, thereby enlarging our market share still further.
Our subsidiary E+S Rückversicherung AG, which operates exclusively in the German market, is a highly valued partner thanks primarily to its excellent financial standing and the continuity of its customer relationships. E+S Rück now ranks second in the German market, the second-largest non-life reinsurance market in the world.
Geographical breakdown of property and casualty reinsurance in % of gross premium income
United Kingdom of 107.5% in the operating result (EBIT), which stood at -EUR 34.8 million. Due to reduced tax expenditure the property and casualty reinsurance business group closed in positive territory at EUR 4.3 million (EUR 270.7 million), producing earnings of EUR 0.04 (EUR 2.24) a share.
Thanks to the favourable market climate, we were able to consolidate and indeed increase – in term of profitability – our market share in credit and surety reinsurance. E+S Rück is the thirdlargest provider in this line. The only major loss to report in the year under review was the insolvency of a construction firm, which impacted our account to the tune of around EUR 10 million.
The state of the reinsurance market, on the other hand, was stable. In property and casualty business, and especially in the motor third party liability segment, we were able to obtain slightly improved rates. Although not directly impacted by the hurricanes, property catastrophe business also saw modestly higher prices.
As in the previous year, the property business written on the London Market was hard hit by hurricane losses in the USA in the year under review. As a positive effect of these natural disasters, however, it was possible to push through significantly higher rates and markedly better conditions.
We wrote risks selectively and guided by strict profitability considerations, and we moderately reduced our volume. Hannover Re nevertheless remains one of the market leaders in aviation reinsurance. We continued to improve the diversification of our portfolio, thereby further scaling back the dominant role played by fleet business. All in all, the performance of our aviation reinsurance portfolio was thoroughly satisfactory. We were not affected by any exceptional major loss events in the year under review.
In marine business, too, we rank as one of the foremost reinsurers on the London Market. In this area both the insurance and reinsurance markets have come under increasingly exacting supervisory requirements. Most notably, the UK regulator – the Financial Services Authority (FSA) – has imposed very strict standards on the capital adequacy of enterprises with a view to precluding any risk of insolvency. These standards also apply to the other lines of business.
Western and Southern Europe Since 2004 the French insurance market has been subject to closer regulatory supervision. In view of a drop in the number of automobile accidents, the government sought to bring pressure to bear on insurers in the year under review to lower prices in motor business. We view this with a certain degree of concern, since – while the number of accidents is falling – spending on seriously injured victims of traffic accidents has risen dramatically, causing reinsurers' results to deteriorate sharply. Even though major inroads are un-
Percentage breakdown of gross written premium in the United Kingdom by line of business
Following on the heels of last year's heavy losses, the US market was once more overshadowed by a historically unprecedented and highly costly hurricane season. The hurricanes set new records – both economically and meteorologically. Hurricane "Katrina" alone caused a market loss of at least USD 50 billion and thus went down as the most expensive insured loss of all time.
Major upheavals in the reinsurance market were a hallmark of the year under review in North America, in some cases with favourable repercussions for our company: on the one hand, the wave of consolidation reached new heights with the impending merger between major competitors. This opened up further business opportunities for us through the broker market. On the other hand, several new reinsurers were established in Bermuda – in response to the hurricanes –, thereby providing additional capacity for catastrophe covers.
We continue to conduct our business on an opportunistic basis with a focus on profitability. With this in mind, a particularly notable success was the enlargement of our premium income despite the fact that we reorganised our portfolio even more heavily in favour of more profitable non-proportional treaties at the expense of highvolume, low-margin proportional business.
The severe flooding in Bulgaria and Romania, which caused considerable economic losses, did not give rise to any appreciable major claims for the insurance industry due to the low insurance density.
Very good rating gives access to longtail casualty business ness segments that no longer offered sufficiently attractive profitability and wrote smaller shares and/or stopped writing new business. This flexible approach has been made possible by the expanded market position that we have cultivated over the past five years and the better appreciation that our clients consequently have of our underwriting policy. Our cedants accept that we scale back market shares in less profitable lines and reduce peak exposures under catastrophe covers – where necessary – while at the same time stepping up our market penetration in appealing mid-sized customer segments.
Our underwriting policy in the casualty sector is geared predominantly towards non-proportional acceptances. We have maintained only a small number of proportional treaties under which we can expect adequate profitability. In addition to offering more attractive rates, improved accumulation control also encourages the writing of non-proportional business. Based on
Percentage breakdown of gross written premium in the USA by line of business
The South African insurance market was characterised by marked softening tendencies and declining margins in the year under review. The reinsurance industry, however, escaped substantially unscathed thanks to relatively solid discipline among the market players.
We write the bulk of our reinsurance business in South Africa as excess of loss covers, accepting only specialty business on a proportional basis. In the other African markets our strategy is to scale back non-proportional commitments; this goal can, however, only be achieved incrementally since bouquets are very much the norm on the African market.
The claims situation was satisfactory in the year under review. An earth tremor and hailstorm were, however, reminders of the considerable catastrophe exposure in southern Africa. The burden of losses for reinsurers from this year's events was nevertheless minimal.
Hannover Re's clear strategic positioning and disciplined underwriting policy were reflected in highly satisfactory loss ratios for gross and net account and a thoroughly gratifying performance.
Asia By far Hannover Re's largest market in Asia is Japan. In this country we enjoy the status of so-called "core reinsurer" with most of the major insurers. For our Japanese clients we write both proportional business and excess of loss covers.
Our reinsurance business in Japan developed very favourably overall; leaving aside a few treaties with overseas covers, most notably in relation to business interruption, we did not incur any significant major losses in the year under review. Indeed, it may be noted that business interruption losses have generally increased in recent years – a reflection of the growing complexity of production and supply processes.
In the Southeast Asian market we are one of the five largest providers of reinsurance protection. In the year under review we maintained our focus on profitable, non-proportional acceptances. This region once again fell victim to natural disasters that cost thousands of lives. The devastating earthquake of 8 October in Kashmir, which left more than 80,000 dead, was the greatest natural disaster in Pakistan's history. Owing to the poverty in this region the event was a human tragedy, but not a major insured loss. A further natural disaster befell India: flooding in Mumbai caused total insured damage currently estimated at around EUR 850 million; for Hannover Re this major loss represents a net strain of some EUR 6 million.
Despite the soft state of the insurance market in Hong Kong, terms and conditions for our company – as a reinsurer – were satisfactory. Although competition in the casualty sector is growing, the past three years have been very profitable for our company – especially in the workers' compensation and motor third party liability lines. No major losses were reported in the year under review.
The life and health reinsurance business group within the Hannover Re Group is responsible for the international reinsurance of life, annuity and health business and also handles the reinsurance of personal accident risks to the extent that these are written by life insurers.
Demographic trends throughout the world are constantly influencing the ratio of actively employed to those in retirement – a development that can be observed not only in the developed markets of Europe or the Anglo-Saxon economic sphere but also increasingly in the upand -coming countries of Asia and Latin America. This has had a considerable – and now irreversible – impact on the dynamics of provision for old age and surviving dependents, the field in which life and health insurers conduct their business.
The tax law provisions that came into effect in Germany on 1 January 2005 to a large extent abolished the preferential status long enjoyed by traditional endowment insurance, while at the same time making annuity insurance even more attractive to consumers from the tax standpoint. All in all, though, a marked drop in demand – for many German life insurers back to the level of 2002 and 2003 – can be observed since the boom of 2004.
In this context we placed a securitisation of life insurance risks with a volume of EUR 100 million in the fourth quarter of the year under review; the portfolio selected for this transaction was comprised of several years of unit-linked life policies from Germany and Austria. This transaction demonstrates that "embedded value" is more than just an actuarial measure. It constitutes the present value of future earnings and expenses from the portfolio and can be traded on attractive terms in a market which is only just opening up.
Gross written premium surged 11.4% yearon -year to EUR 2.4 billion in the year under review. This growth derived first and foremost from the European markets; we were able to write an increased volume of new business in this region, especially in the case of annuity policies in the United Kingdom. The South African and Asian markets are also generating dynamic rates of premium growth.
The devastating hurricanes "Katrina", "Rita " and "Wilma", which left a trail of destruction along coastal regions of the United States and Mexico in the year under review, had no impact on Hannover Life Re's portfolio. This is again a clear indicator of the fact that there is no significant correlation between life and health reinsurance and property and casualty reinsurance.
Lean structures and processes are the key to Hannover Life Re's cost situation. The administrative expense ratio stood at just 2.6% in the year under review, a level well below that of comparable competitors.
Lean structures and processes are the key to the cost situation
59.6 million (EUR 38.0 million). This was equivalent to earnings of EUR 0.49 (EUR 0.32) a share.
Our UK subsidiary Hannover Life Re UK based in Virginia Water near London bears responsibility for traditional reinsurance acquisition activities. The company assumes conventional risk-oriented business – mortality and critical illness – in close cooperation with its Irish affiliate Hannover Life Re Ireland in Dublin. The company is also active in the bancassurance sector and has for many years administered a portfolio of modest annuity policies on behalf of a major British bank.
Hannover Life Re International, Hannover, also operates in the UK market as a specialist reinsurer for enhanced annuity programmes. Our business in this line enjoyed an appreciable resurgence in the year under review thanks to a major account that we succeeded in acquiring in the autumn of 2004.
The operating profit (EBIT) was on a par with the previous year at EUR 15.0 million. Net income totalled EUR 13.3 million (EUR 10.5 million).
The gross premium volume from these regions amounted to EUR 180.3 million (EUR 204.8 million). Results continued to be highly gratifying.
Responsibility for these markets rests with our Stockholm branch, which concentrates on riskoriented individual and group life business as well as bancassurance relationships. It also assumes the financing of acquisition costs for subsidiaries of a major Swedish insurance group.
Gross premium from this region was roughly unchanged from the previous year at EUR 40.8 million. The bulk of the business (EUR 20.9 million ) was attributable to Swedish cedants, followed by Norway (EUR 10.3 million) and Israel (EUR 6.3 million). We were able to strengthen our position in the Finnish market and in the Baltic countries.
The North American market is served by our subsidiary Hannover Life Re America based in Orlando/Florida. It concentrates on block assumption transactions (BATs), Medicare Supplement covers for seniors and facultative risks from the Latin American markets. In addition, the office on Long Island/New York writes special group business.
Management report life and health reinsurance year (EUR 513.3 million). Net premium earned also contracted slightly to EUR 217.5 million (EUR 228.0 million).
Africa Our subsidiary Hannover Life Re Africa, which is based in Johannesburg with a branch office in Cape Town, writes predominantly riskoriented business in the life, disability and critical illness lines in South Africa and certain Englishspeaking African markets.
Having completed our planned withdrawal from South African health business last year, we further optimised our portfolio in the life – primarily individual life – and critical illness lines.
Gross premium income climbed by 19.7% to EUR 61.3 million (EUR 51.2 million); the claims experience in all markets was good.
Re Australasia bears responsibility for the business written in Australasia – i.e. the markets of Australia, New Zealand and Oceania. It has enjoyed the role of market leader in this region for many years.
In addition to risk-oriented reinsurance business in the life, critical illness and disability pension lines, the company has built up special expertise in the assumption, administration and claims management of group covers. This business is written in close cooperation with the trustees of occupational pension funds in Australia.
The difference between financial reinsurance and traditional property/casualty reinsurance principally rests in the nature of the individual client's reinsurance needs: whereas in property and casualty reinsurance the sole concern is the unlimited risk transfer between insurer and reinsurer in the context of a single portfolio or various lines of business, in financial reinsurance the risk transfer is accompanied by a financing component; the primary emphasis, therefore, is on the optimisation of the client's overall balance sheet situation. Such requirements – which are usually of a highly specific nature – give rise to solutions that are specially tailored to the particular client.
Following a decline in premium volume in the early quarters of the year – especially in the USA – surplus relief contracts emerged as a real driver of growth in the fourth quarter. Given the fact that in the aftermath of the hurricanes the market hardened and growth prospects improved, there was a resurgence in demand for our products among numerous small and mid-sized insurers in the USA. Compared to the beginning of the year, when the higher solvency margins of many insurers and reinsurers – due to their improved equity resources – caused demand for solvency-stabilising products to diminish, the situation was now reversed: for many clients without access to the capital market, financial reinsurance is the best way to make the most of the business opportunities that have opened up in
The investigations currently being conducted by the New York Attorney General, the US stock exchange regulatory agency (Securities and Exchange Commission = SEC) and other regulators continued in the year under review. On occasion Hannover Re was also asked to cooperate by providing information – requests with which we complied without exception voluntarily. In all cases we were asked to appear merely as witnesses, not as the defendant. In this context we have always made it clear to our customers that we have never been nor are we involved in any of the potentially problematic areas taken up by the Attorney General's office, such as informal understandings or backdating of contracts etc. Our underwriting guidelines map out a very tight framework in this regard and fundamentally exclude the possibility of such activities. We shall in future continue to adhere to these internal standards, which we are continually expanding and refining. What is more, since April 2005 an internal Compliance Committee that plays no part in underwriting decisions has scrutinised all acceptances, thereby further safeguarding the reputation of our company.
Hannover Re's activities in specialty insurance are conducted principally through four subsidiaries. By far the largest share of the total portfolio is written by the US Clarendon Insurance Group, Inc., New York. We are further prominently represented in the market by the similarly USbased Insurance Corporation of Hannover (ICH), Chicago, the UK company International Insurance Company of Hannover Ltd. (Inter Hannover ), Bracknell/Berkshire, and Compass Insurance Company Ltd., Johannesburg.
The bulk of our financial reinsurance business is written by our three Irish companies that can offer strong capitalisation, good ratings and considerable expertise. Financial reinsurance business is, however, also written in Germany. The enlargement of our portfolio as a consequence of the integration of Hannover Re (Dublin) Ltd. has clearly benefited our market position. In November 2005 Hannover Re Ireland acquired E+S Re Ireland, as a result of which all three Irish-based reinsurance companies are now wholly owned by the Hannover Re Group. In the medium term we intend to further simplify the business structure in Ireland by merging the companies.
Hurricanes in the USA were responsible for major losses in the year under review, with a strain running into the double-digit million euros for the financial reinsurance business group. Nevertheless, the multi-year design of the affected reinsurance contracts still leaves room to hope that in subsequent years we can recoup some of the losses through premium that will become payable.
(EUR 1,206.1 million). The retention retreated slightly to 90.6% (93.3%). Owing to the sharply lower premium and the expenditure on major losses, the operating profit (EBIT) fell by 37.7% to EUR 76.8 million (EUR 123.3 million); similarly, the Group net income of EUR 49.4 million in the year under review could not be compared with the previous year's figure of EUR 88.9 million. The financial reinsurance business group nevertheless contributed earnings of EUR 0.41 (EUR 0.74) a share to the Group result.
Clarendon's gross written premium by line of business in % (before consolidation)
Clarendon – which is licensed to transact business in all US states – is one of the few companies in the country to concentrate exclusively on specialty insurance. What is more, it is the leader in a market worth some USD 25 billion. The individual contracts are written by around 50 managing general agents (MGAs) that have links with Clarendon. A key focus is on hard-toplace risks, the underwriting criteria for which are not tailored to the mass market. However, in what is currently an attractive market climate we also renewed routine business on an opportunistic basis, including for example workers' compensation covers.
In the year under review Clarendon made further successful progress with the rehabilitation of its portfolio and other restructuring activities. On the one hand, the roll-out of new IT systems caused unforeseen expenditures and the run-off of more than 200 old, insufficiently profitable programs proved to be more cost-intensive than originally anticipated. On the other hand, however, new business developed highly favourably and for the most part generated EBIT margins comfortably in excess of the 10% minimum requirement.
European and Japanese equity markets outstripped the bellwether US market with their highly positive performance in the year under review: while the Dax put on 27.1%, the EuroStoxx50 21.3% and the Nikkei 40.2%, the US market – measured by the broad S&P 500 In-
In view of the further heavy burden of catastrophe losses and the expenses incurred in connection with Clarendon's reorientation, the specialty insurance business group reported a Group net loss of EUR 2.4 million (-EUR 90.7 million). This corresponds to earnings of -EUR
In February 2006 the next restructuring steps within the specialty insurance business group were completed: with the establishment of a new entity, Praetorian Financial Group, Inc., the separation of current business is now moving forward from the standpoint of company law too. While the two operating companies Insurance Corporation of Hannover (ICH) and Redland Insurance Company will transact Clarendon's specialty business within Praetorian, Clarendon National
Insurance Company will attend to the professional handling of non-renewed business.
Having incurred appreciable losses in the previous year Clarendon posted better figures in the year under review: gross premium income contracted by a further 20.6% to EUR 1.4 billion (EUR 1.8 billion) on account of the progressively more rigorous focus on profitable business. Current business consequently did not entirely offset the additional costs incurred in connection with extensive capital spending on infrastructure as well as the hurricane-related losses. Overall, though, Clarendon closed the year under review with a virtually break-even result.
Within the scope of our asset/liability management activities, the allocation of investments by currency is guided by the development of underwriting items on the liabilities side of the balance sheet. This ensures extensive currency matching of assets and liabilities, thereby keeping the effects of currency fluctuations within manageable bounds. As at year-end 48.4% of our asset portfolio was held in US dollars, 35.6% in euros and 6.1% in pounds sterling.
The quality of our fixed-income securities – measured in terms of the average rating of the instruments – was maintained on a consistently high level. The proportion of securities rated "A" or better – at 91.8% – was roughly on a par with the previous year (93.0%).
An amount of EUR 292.7 million was invested in alternative investments in the year under review. Of these total holdings, which have been built up consistently over the years, an amount of EUR 139.2 million was apportionable to private equity funds, EUR 62.3 million to highreturn bond funds, EUR 46.5 million to structured real estate investments and EUR 44.8 million to CDO equity tranches. The fair value of the portfolio showed favourable growth.
Unceasing dedication to customers' needs coupled with the commitment and professionalism of our staff have made Hannover Re what it is today: one of the most successful reinsurance groups in the world. The constant fostering of our employees' skills and motivation therefore ranks as one of the most vital tasks in safeguarding our company’s future and forms the basis of our personnel management policy. In 2005 therefore, in order to translate this aspiration into the day-to-day practice of personnel management and staff leadership on a systematic and consistent basis, the Central Division of Human Resources Management moved forward with the interlinking of its departmental strategy with Hannover Re's holistic management system "Performance Excellence" (PE). Following its successful certification in 2003, the Central Division was subjected to an IBEC assessment (IQNet Business Excellence Class) last year in accordance with the model of the European Foundation for Quality Management. Our human resources management thus received a further seal of quality approval on the European level from an independent, external institute.
Our staff – the key to enhancing the value of the company
Our long-established, highly popular and without reservation favourably rated English-language courses (Presentation/Negotiation Techniques ) as well as the seminars covering time management and memory training continue to enjoy strong demand.
Bearing in mind that the reinsurance of catastrophe risks is part of our core business, one of our concentrations – along with the analysis of such risks by way of accumulation control, for example, – is on a constant knowledge transfer between business and research that enables our company to apply the very latest insights. With this in mind we support the highly respected Geo Research Center in Potsdam in its systematic research into earthquakes and their early identification. We also seek to maintain an ongoing dialogue with universities and, last but not least, our own experts are welcome speakers at conferences and institutions of higher learning.
For the eighth time our subsidiary E+S Rück organised a so-called "examination concert" in cooperation with Hannover University of Music and Drama in the year under review. By holding this concert – which features three or four "master students" accompanied by a large orchestra – the company enables a number of music students to embark on their career as soloists, while at the same time offering its clients a musical highlight as part of the "Hannover Forum" seminar event. Were it not for the involvement of E+S Rück these advanced students would face a long wait until their final examination, since opportunities for them to play with a large orchestra are few and far between.
– Local risk controllers bear primary responsibility for the monitoring of risks and riskpolicy measures within their specific areas.
• Continuous monitoring of critical performance factors in order to detect undesirable developments at an early stage and facilitate implementation of appropriate countermeasures.
Level of receivables due from reinsurers split by external rating classes in %
We counter these risks, inter alia, by means of the following measures: • monitoring of claims trends,
• tracking of relevant legal trends and changes in pertinent accounting standards by specialised service units within Hannover Re.
The aforementioned risks can manifest themselves in a number of ways, including for example: • inaccurate or incorrect calculation assumptions within risk models (risk of errors),
• permanent change in the actual claims experience as a consequence of changes in court practice, e.g. US liability business (risk of change).
Despite this definition, it is in practice difficult to allocate a random claim materialisation precisely to these risk types. After each significant claim materialisation it is therefore incumbent on responsible risk management to review the extent to which the risk assessments made prior to the event remain valid.
Generally speaking, the business that we accept is not always fully retained, but instead portions are retroceded as necessary. In order to minimise the default risk it is essential to select retrocession partners carefully in light of credit considerations. Our receivables from reinsurance business are in large measure secured by deposits or letters of credit. What is more, for the majority of our retrocessionaires we also function as reinsurer, meaning that in principle receivables can potentially be set off against our own liabilities. The breakdown of accounts receivable from reinsurers as at the balance sheet date was as follows: 1) Strengths, Weaknesses, Opportunities and Threats
Default risks also arise in connection with the high level of broker business (e.g. loss of the premium paid by a ceding company to the broker or double payment of claims). We minimise this risk inter alia by monitoring payment patterns and treaty settlement.
• Run-off triangles show how the assessment of a reserve has changed over time as a consequence of paid claims and the recalculation of the reserves that are to be established as at each balance sheet date. Adequacy is monitored using actuarial methods.
• The diversification of our portfolio is a further risk-minimising measure. Diversification promotes risk-spreading across business groups and also reduces the capital adequacy otherwise required in property and casualty reinsurance by altogether around 50%. The diversification effect is calculated using mathematical methods (DFA model) and makes allowance for the individual features of the various business groups as well as the correlations between them. It was thanks to Hannover Re's optimal diversification across four business groups that we were able – despite the extreme loss burden from hurricanes "Katrina", "Rita" and "Wilma" – to show a positive, albeit reduced year-end result.
Hannover Re is not the subject of any investigations. We have transacted financial reinsurance for more than 25 years and over the years we have continuously enhanced our underwriting guidelines and defined them more tightly. In the year under review we further refined our underwriting guidelines, while standing by our underwriting policy. It should, however, be noted that even in the past controversial practices – such as backdated contracts, informal understandings and contracts with insufficient risk transfer that were booked as reinsurance business – were prohibited under our underwriting guidelines. As a further step we set up a Compliance Committee in 2005. Inter alia, this body monitors compliance with legal, accounting and underwriting standards, deals with official inquiries and thereby protects against risks to our company's reputation.
Specialty insurance Our specialty insurance business group concentrates on niche and non-standard business.
Key functions, such as new business acquisition, underwriting and claims settlement, are handled by independent specialised managing general agents (MGAs) and other third-party administrators (TPAs). We regularly review whether these partner companies are in compliance with Hannover Re's restrictive standards.
Since investment income is a major revenue source for a reinsurance enterprise, severe volatility on the capital markets can have a similar impact on the statement of income to natural disasters. Our investment policy is therefore not geared first and foremost to maximising returns at any cost. Rather, investment income should be optimised on a lasting basis subject to a limited and clearly defined risk. The investments are comprised to a very large extent of inflows (premiums ) that are put aside for future claim payments. For this reason, investments too are guided by the requirements of our reinsurance business, for example with respect to currencies and maturities. In this context our management and control mechanisms take their lead from the standards adopted by the Federal Financial Supervisory Authority (BaFin) and foreign regulators.
The failure of our data processing infrastructure and associated disruptions in the availability of applications pose a major risk for our company. We invest systematically in the security and availability of our information technology in order to minimise these risks. High availability of mission-critical IT applications is ensured. Contingency plans are in place to facilitate systematic and rapid restoration of the data-processing infrastructure in crisis situations. Controlling
Government bonds Securities issued by semigovernmental entities Corporate bonds Asset-backed securities in % in EUR million in % in EUR million in % in EUR million in % in EUR million 1) Calculated on a fair value basis
The guidelines for our investments – for the Hannover Re Group and for the individual portfolios – are defined on the basis of our asset/liability management approach.
Management report forecast these risks consequently constitutes a key competitive factor. The existing risk management measures were therefore expanded in the year under review.
Further information on our risk management system is provided in Section 7 of the Notes, "Management of technical and financial risks".
The cyclical momentum of the world economy is likely to be sustained in the current year, despite continuing high oil prices. Estimates suggest growth of four percent in global output. Monetary policy, which still shows expansionary tendencies throughout the world, should also have a positive effect on the global economic situation in 2006.
In Euroland the moderating impacts of high oil prices are gradually receding. Despite meagre growth in disposable incomes, the way is therefore open for stronger domestic demand. Capital spending is also expected to pick up again as corporate profits rise. The trend will be fostered by continued very low interest rates – provided the European Central Bank leaves prime rates at their current level. In general terms, the economy should also gain impetus from rising export prices and enjoy a revival as 2006 progresses.
The updating of pricing models to take account of the experience gained in the wake of last year's hurricanes has also contributed to this favourable rate trend: the market fully accepted the enhancement of pricing models to include loadings for previously omitted or inadequately modelled components such as cyclical climate fluctuations, flood and inundation losses, business interruption and demand-driven price increases for restoration services.
The most marked changes, however, were observed in this year's marine reinsurance renewals, and especially in offshore business. The severe losses incurred as a consequence of last year's hurricanes prompted wide-ranging restructuring of the reinsurance programmes. As a further step, risks located in the Gulf of Mexico were removed from the programmes. Many programmes are now split into catastrophe-exposed (Gulf of Mexico) regions and those areas with no correlation to catastrophe events (other exposures ). We were able to substantially reduce our peak risks across the board in our marine portfolio while at the same time achieving significant double-digit price increases.
In credit and surety reinsurance the situation continues to be favourable in the current year. There has been no significant price erosion despite extremely low loss ratios in the year under review and adequate rates. Although the level declined slightly in credit insurance, it remains high. Rates for surety business were more or less unchanged. All in all, in this line too it is evident
The treaty renewal season for our property and casualty business in Germany went off better than expected. Ceding companies have generally retained a higher level of premium for own account, hence causing our premium volume to contract slightly. On the other hand, we were able to further enlarge our customer base. In the year just-ended we observed increasingly fierce competition among insurers – especially in the industrial fire and motor lines, but also to a limited extent in industrial liability business. We therefore scaled back our proportional acceptances in these lines so as to write more non-proportional business. The renewals in German catastrophe business were also satisfactory. The anticipated erosion of conditions failed to materialise, doubtless in part due to the tense state of retrocession markets already overtaxed by the hurricanes in the Gulf of Mexico. Provided there are no exceptional strains from major loss events, we are looking forward to another pleasing result in the current financial year.
Developments in the Northern European markets are expected to be favourable. Rates increased in catastrophe reinsurance as a consequence of the losses from winter storm "Erwin", while in other lines they held steady. The state of the UK market was also stable. Non-proportional reinsurance saw modest rate increases, although they fell short of our expectations. The renewal phase passed off satisfactorily in France, and in Italy we were able to profitably expand our portfolio – thanks in part to our very good rating.
Treaty renewals for East Asian markets take place predominantly as at 1 April. In Taiwan, however, most treaties were renegotiated on 1 January. Although the market suffered a major fire loss, rates did not show the improvement that we had anticipated. Since they declined slightly for proportional business, we stepped up our writing of non-proportional business. In Japan we expect stronger demand for earthquake covers. The price level for windstorm and flood risks should remain stable. All in all, business in the Asian markets should develop favourably.
What is more, we expect a number of trends to continue from the year under review: our clients' preparations for the adoption of International Financial Reporting Standards (IFRS) have now gathered pace. In our assessment, the greater volatility of results associated with IFRS convergence is likely to lead to stronger demand for financial reinsurance products. This will be especially true of clients that have hitherto reported solely in accordance with local national accounting standards.
Work is currently ongoing in several jurisdictions to draw up guidelines governing the risk transfer under reinsurance contracts and the supervision of such contracts. It is our assumption that these efforts will put an end to the uncertainties that still exist in some quarters concerning the handling of financial reinsurance products. The numerous industry probes conducted in the year under review have prompted some competitors to withdraw from this business, enabling us to improve our positioning. We shall continue to offer our clients bespoke solutions, while always stressing the critical importance that we attach to product transparency.
All in all, this will mean double-digit percentage increases in both gross and net premium volume for Hannover Re in this business group. Consolidated net income should continue to be highly attractive.
We have already reaped the first rewards of this reorientation and our intensified cooperation with managing general agents that can boast considerable expertise in their specific markets: as at 1 January 2006 we wrote around 14 new niche programs with a premium volume of some USD 300 million. In view of the present highly favourable market environment – due to recent hurricane events – we shall renew a number of profitable programs in routine business on an opportunistic basis. On the whole, though, we shall continue to scale back such routine business.
In general terms, the premium decline in primary insurance on the US market is likely to be halted by the heavy losses recorded in the year under review. Indeed, conditions should actually improve somewhat, especially in property business. In our other markets specialty insurance is forecast to continue its favourable development. Overall, we expect to see a contraction in gross premium volume just running into the double digits; net premium should be higher, however, thanks to an increased retention in the USA. In 2006 we shall continue to be guided strictly by the profitability of the business written, and we therefore anticipate a positive result significantly above the cost of capital.
In view of the attractive market opportunities that are opening up to us – especially in property/casualty and life/health reinsurance – we are looking forward to a very good 2006 financial year. In financial reinsurance too we can see very promising earnings prospects. In the specialty insurance business group it should be possible to turn the corner towards profitability in the year under review. For the portfolio as a whole we anticipate modest premium growth.
We define our long-term objectives as follows: In property and casualty reinsurance we are guided exclusively by profit rather than growth targets. In this respect we seek to increase our operating profit (EBIT) by at least 10% each year. Our goals in the financial reinsurance and speciality insurance business groups are also purely profit-oriented. In financial reinsurance our targeted EBIT margin is at least 7.5%, while in specialty insurance the goal is 10%.
In life and health reinsurance, on the other hand, we have defined an annual growth target of 12%–15% for both gross premium income and the operating profit (EBIT). This is the only business group in which we are interested in value-enhancing acquisitions.
Fixed-income securities – held to maturity 8.1 458 717 480 503
Fixed-income securities – loans and receivables 8.1 745 982 654 946
Equity securities – available for sale 8.1 1 213 291 1 100 568
Reinsurance recoverables on unpaid claims 8.2 4 739 026 4 163 138
Other changes in cumulative other comprehensive income 8.10 (1 582) (1 597)
Profit/loss from investments in associated companies 8.1 3 863 2 239
Income/expense on funds withheld and contract deposits 8.1 343 121 382 055
Commission and brokerage, change in deferred acquisition costs 8.2 1 902 722 1 623 037
Changes without effect on income – – 106 343 35 002 15 5 787 9 078 156 225
Net realised gains and losses on investments (162 240) (167 383)
Cash and cash equivalents at the beginning of the period 481 051 390 512
Change in cash and cash equivalents according to cash flow statement (15 890) 90 539
Cash and cash equivalents at the end of the period 465 161 481 051
At fair value through profit or loss 52 564 63 603 34 338 32 332
Funds held by ceding companies 206 646 161 804 6 497 292 5 706 555
Reinsurance recoverables on other reserves (1 087) 10 226 5 353 (323)
Loss and loss adjustment expense reserves 12 513 061 9 161 851 1 284 403 1 054 320
From insurance business with other segments 151 890 124 099 18 369 68
Minority interest in profit or loss 10 738 32 061 9 421 8 577
Our secondary segmental reporting for the investments and gross written premium is based upon regional origin.
1. General information 78 2. Accounting principles and first-time adoption of IFRS 78 3. Transition from US GAAP to IFRS 79 4. Summary of major accounting policies 87 5. Consolidated companies and consolidation principles 92 6. Major acquisitions, new formations and other corporate changes 96 7. Management of technical and financial risks 97 7.1 General risk management 97 7.2 Technical risks 99 7.3 Investment risks 102 8. Notes on the individual items of the balance sheet and statement of income 104 8.1 Investments including income and expenses 104 8.2 Technical assets and liabilities 116 8.3 Contracts without sufficient technical risk 122 8.4 Goodwill; present value of future profits on acquired life reinsurance portfolios 122 8.5 Taxes and deferred taxes 123 8.6 Staff and expenditures on personnel 126 8.7 Provisions for pensions and other post-employment benefit obligations 127 8.8 Loans and long-term liabilities 130 8.9 Shareholders' equity and minority interests 131 8.10 Other comprehensive income 132 8.12 Earnings per share 132 8.13 Other assets and liabilities 133 8.14 Technical statement of income 137 8.15 Other income/expenses 138 9. Related party disclosures 138 9.1 Transactions with related parties 138 9.2 Remuneration and shareholdings of the management boards of the parent company and further information with respect to the German Corporate Governance Code 140 9.3 Share-based payment 141 9.4 Mortgages and loans 144 10. Other notes 145 10.2 Contingent liabilities 145 10.3 Long-term commitments 146 10.4 Rents and leasing 146 10.5 Currency translation 147 10.6 Fee paid to the auditor 148 10.7 Events after the balance sheet date 149
Pursuant to EU Regulation (EC) No. 1606/2002, the present consolidated financial statement and group management report of Hannover Re have been drawn up for the first time in accordance with the International Financial Reporting Standards (IFRS) that are to be used within the European Union. The EU Regulation requires all capital-market-oriented enterprises that have their registered office in the EU to prepare their consolidated financial statements for financial years commencing after 31 December 2004 solely on the basis of IFRS. We have also made allowance for the supplementary regulations applicable pursuant to § 315a Para. 1 German Commercial Code (HGB) and the supplementary provisions of the parent company's Articles of Association as amended on 14 June 2005.
The consolidated financial statement for the 2004 financial year was drawn up and published in accordance with United States Generally Accepted Accounting Principles (US GAAP). A supplementary consolidated financial statement was prepared in accordance with IFRS for the 2004 financial year.
The transition to IFRS was effected in compliance with the application rules contained in IFRS 1 "First-time Adoption of International Financial Reporting Standards". We have therefore applied in full all IFRS in force as at 31 December 2005 as well as all interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) and we have adjusted the comparative period of the previous year accordingly. On this basis the opening balance sheet of Hannover Re according to IFRS refers to 1 January 2004, which therefore constitutes the date of transition to IFRS for the Hannover Re Group. The cumulative effects of changes arising out of the transition were recognised directly in shareholders' equity (cf. Section 3 "Transition from US GAAP to IFRS").
earlier years still bear the name "International Accounting Standards (IAS)". Standards are cited in our Notes accordingly; in cases where the Notes do not make explicit reference to a particular standard, the term IFRS is used.
The present consolidated financial statement was examined by the Supervisory Board, adopted at the meeting of the Supervisory Board held on 22 March 2006 and hence released for publication.
The significant options of which Hannover Re availed itself are discussed below.
Reporting of certain assets and liabilities at fair value or deemed cost
All intangible assets, non-current assets from property, plant and equipment and investment property recognised using the cost method are to be measured at the amortised costs calculated in accordance with IFRS. Hannover Re has not availed itself of the facilities contained in IFRS 1.16 to 1.19, under which non-current assets may be recognised at fair value or the deemed cost determined under IFRS.
Hannover Re has complied with the exceptions to the basic requirements of the IFRS standards deemed mandatory under IFRS 1. Specifically, this involves the following requirements: Derecognition of financial assets or financial liabilities prior to 1 January 2004
The requirements governing derecognition of financial instruments under IAS 39 are to be applied prospectively with effect from the date of the opening balance sheet as at 1 January 2004. This means that financial instruments derecognised prior to this date under previous accounting principles should not be recognised in accordance with IFRS, unless they need to be recognised again due to a later transaction or subsequent event.
Common shares and additional paid-in capital 845 159 – – – 845 159
Transition of consolidated shareholders' equity and consolidated net income 31.12.2004 Transition
Unrealised gains/losses on investments 170 496 19 893 – – 190 389
In contrast to US GAAP, IAS 1 "Presentation of Financial Statements" requires that the minority interest be recognised separately within Group shareholders' equity. A minority interest was therefore allocated to shareholders' equity in the amount of EUR 485.2 million in the IFRS opening balance sheet and EUR 531.3 million after tax as at 31 December 2004.
Whereas under US GAAP the minority interest reduces the net income or loss, IFRS require that it be shown separately as profit appropriation following the net income ("thereof" note). This difference in presentation caused the net income for the 2004 financial year to increase by EUR 53.4 million to EUR 333.3 million under IFRS compared to the net income reported for the same period under US GAAP.
IAS 39 "Financial Instruments: Recognition and Measurement", in the version to be used for the 2005 financial year, requires a change in the applicability criteria previously used by Hannover Re to determine a need for impairments of equities. Impairments are to be made if objective evidence suggests that the acquisition cost cannot be realised. Hannover Re considers securities to be impaired under IAS 39 if their fair value falls significantly, i.e. by at least 20%, or prolonged, i.e. for at least nine months, below acquisition cost. Under US GAAP we deemed equities to be impaired if their fair value was consistently below 80% of acquisition cost during the previous six months.
As part of the first-time adoption of IAS 39 we recognised certain fixed-income securities in the category of loans and receivables and measured them at amortised cost. Under US GAAP these instruments were included in the available-for-sale portfolio and measured at fair value. The total changes in this category were reflected in a reduction in the unrealised gains on investments of EUR 0.6 million after tax in the IFRS opening balance sheet.
The decrease of EUR 42.1 million in retained earnings shown in the IFRS opening balance sheet was largely attributable to higher accumulated impairments of equities as well as the fair value measurement and foreign currency valuation of our participating interests in private equity firms in an amount of EUR 13.7 million after taxes and minority interests. In addition, the decrease was due to exercise of the so-called "fair value option" through the reclassification of certain fixed-income securities to the category "at fair value through profit or loss". Under US GAAP such securities were for the most part recognised as available for sale. As a consequence of the transition the cumulative changes in the value of these instruments since the date of acquisition therefore had to be netted with retained earnings.
These changes resulted in a charge of EUR 34.6 million after tax to retained earnings as at 31 December 2004.
The improvement in the result for the 2004 financial year deriving from the retrospective application of IAS 39 can principally be attributed to the higher realised price gains on investments. Based on the reduction of EUR 17.4 million in the book values recognised in the IFRS opening balance sheet as a consequence of impairments, increased realised gains of EUR 3.3 million were reported in the financial year together with a decrease of EUR 2.0 million in write-downs.
As an additional factor, the fluctuations in value of the newly introduced asset category of financial assets at fair value through profit or loss – a category not recognised under US GAAP – also played a part in the change in the result.
All in all, this produced an improvement of EUR 7.5 million in net income.
optional exemptions of IFRS 1.21 and 1.22, all translation differences arising on consolidation of foreign consolidated entities may – in a departure from the basic standard – be realised outside the statement of income in the IFRS opening balance sheet. Hannover Re has applied this exemption.
This effect was reflected in an unchanged amount as at 31 December 2004.
The aforementioned modified treatment of translation differences on monetary items within the scope of application of IAS 21 gave rise to a reduction of EUR 38.7 million in the Group net income for the 2004 financial year compared to the US GAAP result recognised for the same period.
Hannover Re has applied the standard to the 2005 financial year and the previous year. IFRS 4 contains fundamental rules governing specific circumstances, such as the separation of embedded derivatives and unbundling of deposit components. In conformity with these basic rules of IFRS 4 and the IFRS Framework, Hannover Re is availing itself of the option of retaining the previously used accounting policies for underwriting items (US GAAP). This similarly extends to our credit reinsurance division, which we shall continue to include in the technical account as has hitherto been the case.
In accordance with the requirements of IFRS 4.7 to 4.9, some derivatives embedded in reinsurance contracts are to be removed from the underlying insurance contract and accounted separately at fair value pursuant to IAS 39. Fluctuations in the fair value of derivative components are to be recognised in the statement of income in subsequent periods.
On the basis of the outcome of the aforementioned contract-by-contract analysis, it was necessary to adjust estimates from previous years in the life and health reinsurance segment. This gave rise to an increase of EUR 17.6 million before tax in the benefit reserves and a decrease of EUR 11.1 million before tax in the deferred acquisition costs. The necessary adjustments of EUR 17.2 million after tax were recognised outside the statement of income in retained earnings in the IFRS opening balance sheet in accordance with the requirements of IFRS 1.31 and 1.32.
The recognised investments increased by EUR 171.2 million in the context of the transition to IFRS. Of this amount, EUR 168.5 million is attributable to the modified presentation of accrued interest, which is now to be shown directly with the investment portfolios. Under US GAAP accrued interest was presented in a separate item outside the investments.
Furthermore, embedded derivatives separated from insurance contracts were – as described above – recognised under investments for the first time.
Loans and receivables are non-derivative financial instruments that entail fixed or determinable payments on a defined due date and are not listed on an active market or sold at short notice. They are carried at amortised cost; premiums or discounts are deducted or added within the statement of income using the effective interest rate method until the amount repayable becomes due. Depreciation is taken only to the extent that repayment of a loan is no longer to be expected.
Intangible assets: in accordance with IFRS 3 "Business Combinations" scheduled depreciation is not taken on goodwill; instead, unscheduled depreciation is taken where necessary after an annual impairment test. For the purposes of the impairment test, goodwill is to be allocated pursuant to IAS 36 "Impairment of Assets" to so-called "cash generating units" (CGUs). Each CGU to which goodwill is allocated should represent the lowest level on which goodwill is monitored for internal management purposes and may not be larger than a primary or secondary segment. Following allocation of the goodwill it is necessary to determine for each CGU the recoverable amount, defined as the higher of the value in use and the fair value less costs to sell. The recoverable amount is to be compared with the book value of the CGU including goodwill. When the latter exceeds the recoverable amount, an impairment expense is to be recognised. The other intangible assets largely consist of purchased and self-developed software. This is recognised at acquisition cost less scheduled depreciation. The other intangible assets also contain – within the scope of corporate acquisitions – the expected present value of future profits (PVFP) at the time of acquisition of already existing life reinsurance portfolios; amortisation is taken according to the periods of the underlying acquired contracts. Intangible assets are regularly tested for impairment and unscheduled depreciation is taken where necessary.
Technical reserves: the technical reserves are shown for gross account in the balance sheet, i.e. before deduction of the share attributable to our reinsurers; cf. here the remarks concerning the corresponding assets. The reinsurers' portion is calculated and accounted for on the basis of the individual reinsurance contracts.
Loss and loss adjustment expense reserves are constituted for payment obligations from reinsurance losses that have occurred but have not yet been settled. They are subdivided into reserves for reinsurance losses reported by the balance sheet date and reserves for reinsurance losses that have already been incurred but not yet reported (IBNR) by the balance sheet date. The loss and loss adjustment expense reserves are based on estimates that may diverge from the actual amounts payable. In reinsurance business a considerable period of time may elapse between the occurrence of an insured loss, notification by the insurer and pro-rata payment of the loss by the reinsurer. For this reason the best estimate of the future settlement amount is carried. With the aid of actuarial methods, the estimate makes allowance for past experience and assumptions relating to the future development. With the exception of a few reserves, future payment obligations are not discounted.
For further details, for example concerning the modelling of natural catastrophe scenarios and the assumptions relating to asbestos and pollution risks, the reader is referred to our comments in section 7 "Management of technical and financial risks". We would further refer to our explanatory remarks on the technical reserves in section 4 "Summary of major accounting policies" and section 8.2 "Technical assets and liabilities".
The projections, which cover various model scenarios ("conservative assumptions" versus "best estimate"), constitute the starting point for numerous areas of application encompassing quotation, the determination of carrying values and embedded values as well as contract-specific analyses, e.g. regarding the appropriateness of the recognised reinsurance liabilities ("liability adequacy test"). In this context we would refer the reader to our comments on technical assets and reserves in section 4 "Summary of major accounting policies" and on the "liability adequacy test" in section 8.2 "Technical assets and liabilities".
Hannover Rück Beteiligung Verwaltungs-GmbH, Hannover/Germany 100.0 EUR 2 465 000 92 285
Hannover America Private Equity Partners II GmbH & Co. KG, Hannover/Germany1) 94.3 EUR 58 663 42
GbR Hannover Rückversicherung AG/ E+S Rückversicherung AG Grundstücksgesellschaft, Hannover/Germany 70.1 EUR 61 000 987
Hannover Finance (Luxembourg) S.A., Luxembourg/Luxembourg 100.0 EUR 18 842 (19 089)
Hannover Life Reassurance Company of America, Orlando/USA 100.0 USD 113 145 3 406
International Insurance Company of Hannover Ltd., Bracknell/United Kingdom 100.0 GBP 74 669 1 328
Hannover Finance, Inc. compiles its own sub-group financial statement, including the following major companies in which it holds the following shares: Praetorian Financial Group, Inc.,
Hannover Reinsurance Group Africa (Pty) Ltd., Johannesburg/South Africa 100.0 ZAR 127 629 24 450
Hannover Reinsurance Group Africa (Pty) Ltd. compiles its own sub-group financial statement, including the following major companies in which it holds the following shares: Hannover Life Reassurance Africa Ltd., Johannesburg/South Africa2) 100.0 ZAR 84 067 15 717
Hannover Reinsurance Africa Ltd., Johannesburg/South Africa2) 100.0 ZAR 448 788 71 919
Hannover Re Real Estate Holdings, Inc., Orlando/USA 5) 94.0 USD 131 776 3 700
Hannover Re Real Estate Holdings, Inc. holds a sub-group including the following major companies in which it holds the following shares: Hannover USA Real Estate Corporation, Orlando/USA 5) 100.0 USD 51 998 2 098
WRH Offshore High Yield Partners, L.P., Wilmington/USA 5) 86.7 USD 50 190 2 866
Oval Office Grundstücks GmbH, Hannover/Germany 50.0 EUR 63 092 1 428
HANNOVER Finanz GmbH Beteiligungen und Kapitalanlagen, Hannover/Germany6) 25.0 EUR 76 654 6 857
Within the scope of the portfolio-linked securitisation of certain reinsurance risks under transactions concluded in the years 1993 to 1999, Hannover Re retroceded business on a proportional basis to an insurance enterprise in the form of a special purpose entity that finances the business via the international capital markets. The company has been undergoing winding up since February 2003, a process that is likely to be completed in the first quarter of 2006. The residual assets of the special purpose entity as at 31 December 2005 remained unchanged at EUR 1.3 million and do not give rise to any risk of loss for Hannover Re.
In the period from March 2002 to December 2004 Hannover Re retroceded natural catastrophe risks (including hurricanes and earthquakes in the USA, windstorms in Europe and earthquakes in Japan)
Notes major acquisitions as well as worldwide aviation on a proportional basis to a special purpose entity that financed the business via the international capital markets. The transaction was terminated as per the contractual agreement effective 31 December 2004. The entity's liable equity capital was repaid in full to investors in the second half of the 2005 financial year.
Investments Within the scope of asset management activities Hannover Re has participated in numerous special purpose entities since 1988, which for their part transact certain types of equity and debt capital investments. On the basis of our analysis of our relations with these entities we concluded that the Group does not exercise a controlling influence in any of these transactions and a consolidation requirement therefore does not exist.
DSP Deutsche-Senior-Partner AG, Bonn, which was established in the 2004 financial year, was included in the consolidated financial statement in the 2005 financial year using the equity method of consolidation.
In November 2005 E+S Rück AG returned its shares in its subsidiary E+S Reinsurance (Ireland) Ltd., which had been converted to redeemable preference shares, to E+S Reinsurance (Ireland) Ltd. after the latter had increased its common shares by EUR 39.0 million. Hannover Re (Ireland) Ltd. subscribed to the capital increase and contributed a premium of EUR 128.0 million. Following reduction of the nominal capital of E+S Reinsurance (Ireland) Ltd. by EUR 39.0 million, Hannover Re (Ireland) Ltd. is now the sole shareholder of E+S Reinsurance (Ireland) Ltd.
Zweite Hannover Rück Beteiligung Verwaltungs-GmbH was established in September 2005. The company has been included in the consolidated financial statement since the third quarter of 2005. Hannover Re contributed the share capital of the company in kind through the transfer of its shares in Hannover Life Reassurance (Ireland) Ltd. In addition, Hannover Re transferred its shares in Hannover Life Reassurance Company of America to the company in December 2005 by way of a capital increase in the form of a contribution in kind.
Relief afforded by diversification (compared to linear addition of the business groups)
Risks of error derive from divergences in the collective actual amount of claims from the estimated empirical value due to an inaccurate estimation of the probability distribution of the total loss.
The loss reserves in non-life business are determined using actuarial methods. The point of departure is the information provided by our cedants. In addition to the losses reported to us by our clients, we establish additional reserves where necessary on the basis of our own loss assessments. Furthermore, we constitute a so-called IBNR (incurred but not reported) reserve for claims that have probably already occurred but have not yet been reported to us. These claims primarily relate to the liability lines. The IBNR reserve established by the Hannover Re Group amounted to EUR 2,737.9 million in the year under review. It is calculated according to a breakdown into risk categories and regions. The anticipated ultimate loss ratios are determined in altogether 53 subsegments with the aid of statistical run-off triangles and actuarial methods. The calculations of our own insurance actuaries are regularly reviewed by external actuaries and auditors.
The exact allocation of claim materialisations to the aforementioned risk categories often gives rise to problems of differentiation.
The combined ratio is tracked over time in order to monitor the risk of losses exceeding premiums in property and casualty reinsurance.
The business that we accept is not always fully retained, but instead portions are retroceded as necessary. In order to minimise the default risk it is important to select our retrocession partners carefully in light of credit considerations. 93.2% of our retrocessionaires have a so-called investment grade rating (AAA to BBB), and 90.1% thereof are rated "A" or better. The average default rate over the past three years was 0.8%. In terms of the Hannover Re Group's major companies, less than 6.2% of our accounts receivable from reinsurance business were older than 90 days as at the balance sheet date.
The retention, i.e. the portion of assumed risks that we do not retrocede, developed as follows in recent years: The controlling of aggregate limits is a risk management tool that serves to avoid concentrations of risks and conserve shareholders' equity. The purpose of aggregate controlling is to specify the strain on the Hannover Re portfolio for defined natural catastrophe scenarios and return periods. In this connection, the sum total of the expected exposures from one or more treaties is calculated for a specific combination of countries and hazard zones and a defined probability (e.g. 1% probability = 100-year return period).
Risks in the investment sector consist primarily of market, credit and liquidity risks. The most significant market price risks are share price, interest rate and currency risks. The "value at risk" (VaR) is a vital tool used for managing market price risks. The VaR is determined on the basis of historical data, e.g. for the volatility. As part of these calculations the probability of losing a certain portion of our portfolio is calculated. The calculation of this maximum loss potential is performed with a confidence level of 95 % and a holding period of ten days. Our range of tools is complemented by stress tests and sensitivity analyses. Detailed investment guidelines and defined loss limits are in force for the entire Hannover Re Group, compliance with which is monitored by risk controlling.
Share price risks derive from unfavourable changes in the value of equities and equity or index derivatives due, for example, to downward movements on particular stock indices. We spread the equity price risks through systematic diversification across various sectors and regions.
For detailed remarks on our risk management system please see the risk report contained in the management report.
The fair value of our securities would develop as follows as at the balance sheet date subject to the following assumptions:
8. Notes on the individual items of the balance sheet and statement of income 8.1 Investments including income and expenses
Investments are measured in accordance with IAS 39 "Financial Instruments: Recognition and Measurement".
For further explanation please see Section 4 "Summary of major accounting policies".
Held to maturity due after one through two years 49 301 51 086 62 212 63 879 due after two through three years 23 118 23 176 48 525 51 768 due after three through four years – – 3 479 3 479 due after four through five years 10 538 10 986 – –
Available for sale due after one through two years 1 419 412 1 397 314 1 676 649 1 678 117 due after two through three years 2 037 995 2 028 214 1 763 640 1 764 534 due after three through four years 1 638 228 1 617 552 2 162 671 2 173 521 due after four through five years 1 557 596 1 568 347 1 379 736 1 395 164 due after five through ten years 5 175 331 5 208 951 1 596 496 1 642 121
Other foreign government debt securities 20 948 117 – – 21 065
Other foreign government debt securities 21 062 – – – 21 062
Debt securities issued by semi-governmental entities 115 226 12 217 – 3 608 131 051
Other foreign government debt securities 323 305 3 554 1 425 3 735 329 169
Debt securities of semi-governmental entities 3 471 957 37 331 39 336 40 520 3 510 472
Other foreign government debt securities 212 817 4 006 276 3 519 220 066
The fair value of the trading portfolio as at 31 December 2004 amounted to EUR 2.5 million. These financial instruments reported in the previous year under derivatives consisted of index options that have since been terminated.
Interest income on funds withheld and contract deposits 371 273 424 806
Allocation to gains/losses from the fair-value measurement of the available-for-sale portfolio 92 326
Fixed-income securities – held-to-maturity 23 386 140 887 199 423 94 976 45 – – – 458 717
Fixed-income securities – available-for-sale 8 435 903 2 456 396 2 401 855 666 605 46 082 274 791 8 403 93 141 14 383 176
Fixed-income securities – available-for-sale 6 405 601 2 719 225 1 814 758 538 045 45 559 189 034 7 483 51 340 11 771 045
Fixed-income securities – at fair value through profit or loss 1 341 43 715 16 986 19 342 2 541 6 835 – 6 318 97 078
Investments were held in the following currencies: Figures in EUR thousand 2005
Fixed-income securities – held to maturity – – 414 042 – – 1 902 42 773 – 458 717
Fixed-income securities – held to maturity – – 436 316 – – 1 548 42 639 – 480 503
Fixed-income securities – available-for-sale 575 456 308 258 4 369 890 1 015 646 95 705 5 151 500 58 985 195 605 11 771 045
Fixed-income securities – at fair value through profit or loss – – 13 900 – – 83 178 – – 97 078
The valuation of the derivative components of another group of contracts was performed on the basis of stochastic considerations. The pre-tax improvement in investment income amounted to altogether EUR 4.0 million as at the balance sheet date.
Since Hannover Re concludes reinsurance transactions worldwide in numerous international currencies, the Group is exposed to currency fluctuations.
We use derivative financial instruments to a limited extent to hedge parts of our portfolio against interest rate and market price risks, optimise returns or realise intentions to buy/sell. In this context we take special care to limit the risks, select first-class counterparties and rigorously monitor the standards defined by investment guidelines.
Net book value at 31 December of the previous year 182 082 162 604
The decrease in goodwill was attributable to the sale of 10% of our shares in WeHaCo Unternehmensbeteiligungs -AG.
Gross book value at 31 December of the previous year 289 905 296 122
Gross book value at 31 December of the year under review 290 507 289 905
Net book value at 31 December of the year under review 198 122 205 755
The fair value of investment property amounted to EUR 240.0 million (EUR 265.9 million) as at the balance sheet date. The market value of the real estate was determined using the discounted cash flow method.
The disposals refer to the sale of a developed property by E+S Rück AG.
In the case of reinsurance treaties for unit-linked life insurance policies classified as "universal lifetype contracts" pursuant to SFAS 97, the capitalised acquisition costs are amortised on the basis of the estimated gross profit margins from the reinsurance treaties, making allowance for the period of the insurance contracts. A discount rate based on the interest for medium-term government bonds was applied to such contracts. In the case of annuity policies with a single premium payment, these values refer to the expected policy period or period of annuity payment.
Loss and loss adjustment expense reserve 20 210 041 4 739 026 15 471 015 18 247 706 4 163 138 14 084 568
The loss and loss adjustment expense reserves are in principle calculated on the basis of the information supplied by ceding companies. Additional IBNR reserves are established for losses that have been incurred but not as yet reported. The total amount of the reserves corresponds to the "principle of best estimate" under US GAAP. This estimate is based on past experience and estimations of the future development.
The development of the euro relative to major foreign currencies is also a significant influencing factor in this context. In particular, the upward revaluation of the US dollar against the euro compared to the previous year (+13.2%) led to an appreciable increase in the loss and loss adjustment expense reserve on a euro basis.
Net book value at 31 December of the year under review 5 779 169 94 089 5 685 080 5 277 529 101 634 5 175 895
IFRS 4 requires that insurance contracts be differentiated from contracts without sufficient technical risk.
The contract deposits increased by EUR 722.1 million in the 2005 financial year from EUR 1,720.9 million to EUR 2,443.0 million. The rise was due principally to growth in new business in the area of non-traditional life reinsurance.
Goodwill net at 1 January of the year under review 193 610 169 913
Net book value at 31 December of the year under review 193 098 173 315
Net book value at 31 December of the previous year 9 767 12 098
Net book value at 31 December of the year under review 7 472 9 767
This item principally includes the goodwill from the acquisition of the Clarendon Insurance Group, Inc. in 1999. For further information on the method used to test impairment the reader is referred to our explanatory remarks in section 4 "Summary of major accounting policies".
Based on the outcome of an impairment test, impairments of EUR 0.5 million were taken on the goodwill from the acquisition of a subsidiary of Clarendon National Insurance Company which no longer writes new business.
Unused tax loss carry-forwards of EUR 347.6 million (EUR 247.0 million) existed as at the balance sheet date. Corresponding loss carry-forwards were established on the assets side in accordance with local tax rates to the extent that their realisation is adequately secure.
Figures in EUR thousand 2005 2004 a) Wages and salaries aa) Expenditures on insurance business 98 096 92 332 ab) Expenditures on the administration of investments 8 721 8 148 b) Social security contributions and expenditure on provisions and assistance ba) Social security contributions 19 853 13 736 bb) Expenditures for pension provision 13 899 10 108 bc) Expenditures for assistance 367 332
As at 1 July 2000 the 2000 pension plan came into force for the entire Group. Under this plan, new employees included in the group of beneficiaries are granted an indirect commitment from HDI Unterstützungskasse. The pension plan provides for retirement, disability and surviving dependants' benefits.
In addition to these 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.
Additional similar obligations based upon length of service exist at some Group companies. The expenditures recognised for these commitments in the financial year under IAS 19.46 totalled EUR 5.3 million (EUR 2.9 million).
Provisions for pensions are established in accordance with IAS 19 "Employee Benefits" (rev. 2002) using the projected unit credit method. The pension plans are defined benefit plans. 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. The provisions for pensions in Germany were calculated according to uniform standards defined by Talanx AG.
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: 4.25% to 5.75%
• Projected long-term yield on plan assets (US plans): 7.00% to 8.00%
The commitments to employees in Germany predominantly comprise commitments financed by the Group companies. The pension plans are unfunded. Amounts carried as liabilities are recognised under other liabilities.
Present value of earned benefit entitlements, thereof granted directly by Group companies (without plan assets) 75 440 53 807 deposited with plan assets (before deduction of fair value of plan assets) 7 934 9 569
Current service cost for the year under review (2 906) (2 715)
Notes notes on the individual items 8.8 Loans and long-term liabilities
The aggregated fair value of the issued debts is based on quoted, active market prices. If such price information is not available, fair value was determined on the basis of the recognised effective interest rate method or estimated using other financial assets with similar rating, duration and return characteristics. Under the effective interest rate method the current market interest rate levels in the relevant fixed-interest-rate periods are always taken as a basis.
The shareholders' equity (share capital of the parent company) amounts to EUR 120,597,134.00. It is divided into 120,597,134 voting and dividend-bearing registered no-par-value shares with a nominal value of EUR 1.00. The shares are paid in in full.
Authorised capital of up to EUR 60,299 thousand is available with a time limit of 31 May 2009. New individual registered shares may be issued on one or more occasions for contributions in cash or kind. Of the total amount, up to EUR 1,000 thousand may be used to issue employee shares.
Cumulative other comprehensive income remained unchanged from the previous year at EUR 1.6 million. It resulted principally from the recognition as income of hedge-ineffective changes in the fair value of derivative financial instruments.
IAS 1 requires separate disclosure of treasury shares in shareholders' equity. By a resolution of the Annual General Meeting of Hannover Rückversicherung AG adopted on 14 June 2005, the company was authorised until 30 November 2006 to acquire treasury shares of up to 10% of the share capital existing on the date of the resolution. The company did not hold treasury shares at any time during the reporting period.
Fully diluted earnings per share – – – – – –
On the occasion of the Annual General Meeting to be held on 12 May 2006 it will be proposed that a dividend should not be distributed for the 2005 financial year. The dividend proposal does not form part of this consolidated financial statement.
The portfolio of own-use real estate, which remained unchanged from the previous year, was measured at cost of purchase less scheduled straight-line depreciation over useful lines of 10 to 50 years.
Gross book value at 31 December of the previous year 71 374 57 401
Gross book value at 31 December of the previous year 115 234 114 500
Net book value at 31 December of the previous year 24 676 26 146
Net book value at 31 December of the year under review 35 836 24 676
The additions can be broken down into EUR 6.4 million for purchased software and EUR 6.3 million for advance payments on self-provided software.
The other liabilities include sundry non-technical provisions of EUR 57.5 million (EUR 42.9 million), which developed as shown in the following table.
In accordance with SFAS 60 insurance contracts are to be classified as "short-duration contracts" or "long-duration 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. Premium from short-duration contracts is brought to account over the period of the underlying contract, and where appropriate unearned premium is deferred to subsequent years. By contrast, premium deriving from long-duration contracts is brought to account at the date payable.
Commissions and brokerage, change in deferred acquisition costs (net) 1 902 722 1 623 037
With regard to the claims and claims expenses and the change in benefit reserves the reader is referred to section 8.2 "Technical assets and liabilities".
Goodwill impairments 485 539 8.15 Other income/expenses 9. Related party disclosures 9.1 Transactions with related parties
IAS 24 defines related parties inter alia as parent companies and subsidiaries, subsidiaries of a common parent company, associated companies, legal entities under the influence of management and the management of the company itself. In the 2005 financial year the following significant business relations existed with related parties.
The major reinsurance relationships with related parties in the 2005 financial year are listed in the following table.
As part of long-term lease arrangements we rented out business premises in 2005 to HDI Service AG, Hannover Re Correduria de Reaseguros S.A., HDI Industrie Versicherung AG, HDI Privat Versicherung AG and Protection Reinsurance Intermediaries AG. We additionally performed IT and management services for the latter under three service contracts.
Total remuneration of EUR 3.7 million (EUR 3.6 million) was paid to the Executive Board and EUR 0.6 million (EUR 0.7 million) to the Supervisory Board in the year under review. Former members of the Executive Board and their surviving dependants received EUR 0.9 million (EUR 0.9 million), and a liability of EUR 9.9 million (EUR 9.8 million) was shown as at year-end.
André Arrago Sell Stock DE 000 8402215 16.12.2005 2 700 30.00
The remuneration received by the Supervisory Board comprises fixed and variable components. The latter are determined by the earnings before interest and taxes (EBIT) reported in the consolidated financial statement drawn up in accordance with IFRS. Appropriate allowance is made for the functions performed by the Chairman and Deputy Chairman when determining the level of remuneration paid to the members of the Supervisory Board. In the year under review the company did not pay any remuneration to members of the Supervisory Board for personally rendered services, e.g. consulting or mediation services.
The company did not enter into any contingent liabilities for members of the management boards. The names of the members of the management boards of the parent company are listed on pages 5 to 7 of this annual report.
The maximum period of the stock appreciation rights is 10 years, commencing at the end of the year in which they are awarded. Stock appreciation rights which are not exercised by the end of the 10-year period lapse. Stock appreciation rights may only be exercised after a waiting period and then only within four exercise periods each year. For 40% of the stock appreciation rights (first tranche of each allocation year) the waiting period is two years, for each additional 20% (tranches two to four of each allocation year) of the stock appreciation rights the waiting period is extended by one year. Each exercise period lasts for ten trading days, in each case commencing on the sixth trading day after the date of publication of the quarterly report of Hannover Rückversicherung AG.
In the year under review the waiting period expired for 80% of the stock appreciation rights awarded in 2000 and 40% of those awarded in 2002. 647,081 stock appreciation rights from the 2000 allocation year and 193,572 stock appreciation rights from the 2002 allocation year were exercised. The total amount paid out stood at EUR 5.0 million.
Number of options at 31.12.2001 – – – 1 138 005
On this basis the aggregate provisions for the 2005 financial year amounted to EUR 6.7 million. The expense for the 2005 financial year totalled EUR 3.8 million.
In July 2004 Hannover Re and the other shareholders sold the participation that they held through Willy Vogel Beteiligungsgesellschaft mbH in Willy Vogel AG. In order to secure the guarantees assumed under the purchase agreement, Hannover Re and the other shareholders jointly gave the purchaser a directly enforceable guarantee limited to a total amount of EUR 7.1 million. Furthermore, in the event of a call being made on the guarantee Hannover Re and the other shareholders agreed that settlement would be based upon the ratio of participatory interests.
As security for 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 2,668.5 million (EUR 1,748.7 million). The securities held in the master trust are shown as available-for-sale investments.
Outstanding capital commitments with respect to special investments exist in the amount of EUR 118.3 million (EUR 88.8 million) for E+S Rück AG and EUR 233.4 million (EUR 232.4 million) for Hannover Re. These involve primarily private equity funds and venture capital firms.
Within the scope of a novation agreement regarding a life insurance contract we assumed contingent reinsurance commitments with respect to due date and amount. The financing phase was terminated effective 31 December 2004 as per the agreement. The level of Hannover Re’s liability as at the date of novation (31 December 2011) in relation to future balance sheet dates may change due to fluctuations in the EURIBOR and discrepancies between the actual settlements and the projections. As at the balance sheet date the estimated amount of the reinsurance commitments was EUR 27.7 million.
In 2002 Hannover Reinsurance Africa Ltd. concluded a sale-and-lease-back contract for land and business premises for a period of eight years. IAS 17 requires that this be recognised as an operating lease.
Foreign currency items in the individual companies' statements of income are converted into the respective functional currency at the average rates of exchange. The individual companies' statements of income prepared in the national currencies are converted into euro at the average rates of exchange and transferred to the consolidated financial statement. The conversion of foreign currency items in the balance sheets of the individual companies and the transfer of these items to the consolidated financial statement are effected at the mean rates of exchange on the balance sheet date.
Total fees of EUR 7.6 million were incurred for accountants' services throughout the Hannover Re Group worldwide in the 2005 financial year. They were principally comprised of auditing and tax consultancy fees.
In a press release dated 3 February 2006 we reported that Hannover Re had again made use of the capital market for the securitisation of reinsurance risks. Designated "K5", the transaction has a volume of USD 370 million. It was placed predominantly with institutional investors in North America and is initially limited to a term of three years. The portfolio assembled for the securitisation consists of non-proportional reinsurance treaties in the property, catastrophe, aviation and marine lines, including offshore business. Kaith Re Ltd., a special purpose entity based in Bermuda, was used for the transaction. With effect from 1 January 2006 the company has been registered under the Segregated Accounts Act 2000, and since that date Hannover Re has held the majority interest in the company.
In our function as the Supervisory Board we considered at length during the 2005 financial year – as in previous years – the position and development of Hannover Rückversicherung AG (Hannover Re), the parent company of the Hannover Re Group. We advised the Executive Board on the direction of the company and monitored the management of business on the basis of written and verbal reports from the Executive Board. The Supervisory Board held four meetings in order to adopt the necessary resolutions. Resolutions were adopted by a written procedure with respect to two matters requiring attention at short notice. The Standing Committee and the Balance Sheet Committee, both committees formed by the Supervisory Board within the meaning of § 107 Para. 3 German Stock Corporation Act, met on three and two occasions respectively. The Chairman of the Supervisory Board updated the full Supervisory Board on the Committees' major deliberations at its next meeting. Furthermore, we received quarterly written reports from the Executive Board on the course of business and the position of the Group pursuant to § 90 German Stock Corporation Act. These reports contain, inter alia, up-todate details of the current planned and expected figures for the individual business groups. The reporting also covers strains from major losses as well as the investment portfolio, investment income, the ratings of the various Group companies and the increase in the Group's global workforce. The quarterly reports with the quarterly financial statements and key figures for the Hannover Re Group constitute a further important source of information for the Supervisory Board. In addition, the Chairman of the Supervisory Board was constantly advised of major developments and impending decisions by the Chairman of the Executive Board. All in all, we were involved in decisions taken by the Executive Board as required by our statutory responsibilities and those placed upon us by the company's Articles of Association.
The Executive Board explained to us the profit expected for the 2005 financial year as well as the operational planning for the 2006 financial year. The focus here was on the strains associated with hurricanes "Katrina" and "Rita" and the resulting implications for our future strategy with respect to the reinsurance of natural catastrophe risks.
The Rules of Procedure for the Executive Board were again reviewed and the list of investmentrelated measures and transactions requiring approval was updated. As is the case every year, the Supervisory Board was also provided with details of significant pending legal procedures. The Supervisory Board again devoted considerable attention to the issue of Corporate Governance. Against the backdrop of new legal provisions, including for example the Investor Protection Improvement Act (Anlegerschutzverbesserungsgesetz ), Hannover Re's Corporate Governance principles were updated. With an eye to the amendment of Item 5.4.2 of the German Corporate Governance Code, the Supervisory Board determined that four of the six shareholders' representatives are "independent" as defined by the Code. In the opinion of the Supervisory Board it therefore includes a sufficient number of independent members. The considerable importance attached to the standards of good and responsible enterprise management set out in the Corporate Governance Code is also evident from the declaration of conformity given by the Executive Board and Supervisory Board pursuant to § 161 Stock Corporation Act regarding compliance with the German Corporate Governance Code. The company fails to comply with the recommendations of the Code only with respect to the individualised specification of compensation received by members of the Executive Board and Supervisory Board. The reader is further referred to the Corporate Governance report printed in this annual report and the company's publications in the Internet.
KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft (KPMG DTG), Hannover, was mandated to audit the consolidated financial statements and the Executive Board's management report for the Hannover Re Group in accordance with IAS/IFRS. The Supervisory Board selected the auditor for the 2005 audit and the Chairman of the Supervisory Board awarded the concrete audit mandate. In addition to the usual audit tasks, the audit focused particularly on the handling of current account transactions with ceding companies and retrocessionaires – including transactions within the Group – and the impairment of deferred tax assets. Collaboration with the auditors took place on a trusting and cooperative basis. The special challenges associated with the international aspects of the audit were met without reservation. Since the audit did not give rise to any objections KPMG DTG issued an unqualified audit certificate. The Balance Sheet Committee discussed the annual financial statements and the management report at a meeting attended by the auditors. The auditors' report was distributed to all members of the Supervisory Board and scrutinised in detail – with the participation of the auditors – at the Supervisory Board meeting held to consider the annual results. The auditors were present at the Annual General Meeting.
– in each case drawn up as at 31 December 2005 and awarded the auditors' unqualified audit certificate – and have no objections. The Supervisory Board has thus approved the annual financial statements and the consolidated financial statements; the annual financial statements are thereby adopted. We concur with the Executive Board's proposal regarding the appropriation of the disposable profit for 2005.
• In what has already become a regular fixture, a one-day seminar for analysts and investors was held in Hannover to meet the needs of the financial market for basic background information.
• Analyst conferences were held in Frankfurt and London to discuss the annual financial statements. These conferences, the press briefing on the annual results, the speech made by the Chairman of the Executive Board at our Annual General Meeting as well as the telephone conferences were all recorded and can be accessed online by interested parties via video/audio streaming.
The following additional activities are also particularly noteworthy: the Corporate Governance Principles of Hannover Re adopted by the Supervisory Board and Executive Board in 2003 – and regularly refined since that date – were adjusted in March 2005 in response to changes in laws and standards governing enterprise management and supervision. With the aim of further improving the close and constructive cooperation between the Executive Board and the Supervisory Board, the list of
Corporate Governance report measures and transactions requiring approval was defined more precisely in the Executive Board's Rules of Procedure. In compliance with Item 5.4.2 of the German Corporate Governance Code (DCGK) the Supervisory Board determined in August 2005 that in its assessment it included – with four of altogether six shareholder representatives – a sufficient number of independent members.
The company also had to adjust to a flood of new statutory regulations in the area of Corporate Governance in recent years. In the past two years alone they included the Investor Protection Improvement Act (Anlegerschutzverbesserungsgesetz), the Act on Corporate Integrity and Modernisation of the Right of Avoidance (Gesetz zur Unternehmensintegrität und Modernisierung des Anfechtungsrechts), the Auditing Reform Act (Bilanzrechtsreformgesetz), the Auditing Control Act (Bilanzkontrollgesetz), the Investor Model Proceedings Act (Kapitalanleger-Musterverfahrensgesetz), the Securities Prospectus Act (Wertpapierprospektgesetz) and the Act on Executive Board Remuneration (Vorstandsvergütungs -Offenlegungsgesetz). What is more, the German Corporate Governance Code (DCGK) underwent further revision, and the latest version of 2 June 2005 now contains 82 recommendations as well as numerous other suggestions.
The multitude of new regulations imposed numerous additional obligations on the company, which are reflected in new organisational standards and have given rise to considerable extra financial outlay. Two examples may be mentioned by way of illustration: • § 15 b of the Securities Trading Act (Wertpapierhandelsgesetz = WpHG) requires enterprises to keep insider directories of persons with access to insider information. At the parent company alone this list – which has to be constantly updated – contains around 250 names.
• § 15 a of the Securities Trading Act (WpHG) and Item 6.6 of the German Corporate Governance Code (DCKG) require an enterprise's managerial staff and their close relatives to publicly disclose dealings in the company's securities in excess of an amount of EUR 5,000 in a calendar year. This requirement necessitates innumerable notifications and mandatory disclosures with no significant informational value. After all, what greater insight does the capital market gain if a senior manager's relative buys and then sells shares of the company worth EUR 2,500 in a particular year? Such imposition of norms has insufficient relevance to the capital market and does not promote Corporate Governance, but it does create overregulation and additional bureaucracy.
Declaration of conformity pursuant to § 161 Stock Corporation Act (AktG) regarding compliance with the German Corporate Governance Code at Hannover Rückversicherung AG
The German Corporate Governance Code sets out major statutory requirements governing the management and supervision of German listed companies. It contains both nationally and internationally recognised standards of good and responsible enterprise management. The purpose of the Code is to foster the trust of investors, clients, employees and the general public in German enterprise management. Under § 161 Stock Corporation Act (AktG) it is incumbent on the Management Board and Supervisory Board of German listed companies to provide an annual declaration of conformity with the recommendations of the "German Corporate Governance Code Government Commission" published by the Federal Ministry of Justice or to explain which recommendations of the Code were/are not applied. Implementation of the recommendations by Hannover Rückversicherung AG diverges from the German Corporate Governance Code (amended version of 2 June 2005) in the following respects: Individualised specification of compensation received by the Executive Board and Supervisory Board (Code Items 4.2.4 Sentence 2 and 5.4.5 Para. 3, Sentence 1)
We were and are in conformity with all other recommendations of the Code.
Ireland E+S Reinsurance (Ireland) Ltd. No. 2 Custom House Plaza, IFSC Dublin 1
Hannover Life Reassurance (Ireland) Limited No. 4 Custom House Plaza, IFSC Dublin 1
Mexico Hannover Services (México) S.A. de C.V. Av. Santa Fé No. 170 Col. Lomas de Santa Fé German Centre
South Africa Compass Insurance Company Ltd. P. O. Box 37226 Birnam Park 2015 Johannesburg www.compass.co.za Managing Director: Margaret Louw
Taiwan Hannover Rückversicherung AG Taipei Representative Office 17F No. 167, Tun Hwa North Road Taipeh 105, Taiwan Life Dept.
Praetorian Financial Group, Inc. 7 Times Square, New York, NY 10036
Funds held by ceding companies/funds held under reinsurance treaties: cf. ➞ Deposits with ceding companies /deposits received from retrocessionaires
Life business: this term is used to designate business activities in our life and health reinsurance business group.
Glossary in the aforementioned expenses through payment of a reinsurance commission. This commission can amount to 15%–20% of the original premium depending upon the market and cost situation.
Hannover Congress Centrum Theodor-Heuss-Platz 1–3 30175 Hannover, Germany 12 May 2006 Interim Report 1/2006 08 August 2006 Interim Report 2/2006 14 November 2006 Interim Report 3/2006