Letter of the Chairman of the Executive Board . . . . . . . . . . . . . . . . . . . . . . . 1
Report by the Supervisory Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
Book value per share 1) Figures for 2005 and 2004 before new segmentation
Market capitalisation at year-end 2,713.4 -28.7% 3,804.8 4,230.5 3,609.5 3,467.2 11
Large losses as percentage of net premium earned (non-life reinsurance)4) 10.7% 6.3% 2.3% 26.3% 8.3% 21/109
Return on investment (excl. funds held by ceding companies) 0.4% 4.6% 5.0% 4.4% 4.6% 51
1) Figures for 2005 and 2004 before new segmentation 2) Bonus 3) Incl. funds held 4) Natural catastrophes and other major losses in excess of EUR 5 million gross for the Hannover Re Group's share 5) Operating profit (EBIT)/net premium earned
Having presented a record profit for 2007, Hannover Re is now reporting a loss for the first time in its history. This is indeed painful. As a large investor with an asset volume of some EUR 20 billion, we were unfortunately unable to escape the effects of the crisis on financial markets: despite our prudent and diversified investment strategy, the third quarter, in particular, compelled us to take significant write-downs – first and foremost on equity holdings. The 2008 stock market crash – the German Dax index alone, as you know, shed around 40 percent of its value – took a corresponding toll on our investment income. As a further factor, write-downs taken on equities are not tax-deductible in Germany, with the result that the financial market crisis had a doubly negative impact, as it were, on our figures. This obscured what was, in fact, the gratifying development recorded by your company in its core business, with only very minimal losses.
what is important here is that we clearly strengthened our international market position in the year under review. In this context we have our sights set firmly on the Asian growth markets. We have been a locally licensed reinsurer in China since May 2008 and were able to acquire several new accounts through our branch in Shanghai. In Korea, too, Asia's largest life reinsurance market, we optimised our business opportunities by opening a new branch office. Last but not least, we have taken the first steps towards tapping into the Indian market by entering into a multi-year exclusive cooperation agreement with the leading local reinsurer. In a parallel move we opened a representative office in Mumbai to support our client relationships in life and facultative non-life business.
Having stood its ground superbly in the first half of the year, the Hannover Re share then fell sharply in value – especially at the peak of the financial market crisis in September. In October, too, after massive liquidity problems came to light at a German bank, all financials – hence including the Hannover Re share – suffered extremely heavily, even though our share was able to make good some ground by year-end.
Let us now look to the future. What can you expect from the current financial year? Our goals are ambitious, and we are seeking to generate a return on equity of more than 15% in 2009. The situation on international reinsurance markets is very favourable; the soft market has come to an end earlier than expected. This was clearly reflected in the treaty renewals as at 1 January 2009: in certain segments price increases sometimes ex-
tending into double-digit percentages were obtained, including for example in US catastrophe business but also more strikingly in credit and surety reinsurance. Our domestic market, especially in the area of non-proportional motor business, remains attractive. For our total portfolio we expect growth in premium income – and very healthy profitability – in the original currencies.
Dr. Immo Querner Member of the Executive Board Ehlershausen Talanx AG
It was not until the start of November that extensive government guarantees, rescue packages and support measures by the US government, the German government and other nations succeeded in preventing a collapse of the global financial system. Disappointing quarterly figures posted by many companies, news of a contraction in gross domestic product in the United States, Germany and other countries as well as reports of rapidly shrinking order books nevertheless fanned fresh recession concerns. Finally, in December, a fraud scandal that erupted around an asset manager on a scale of some USD 50 billion rocked the international world of finance.
An extremely volatile year for the Hannover Re share ber 2008 and hence suffered a loss of EUR 9.05 or 28.7% in the year under review. After allowance for reinvestment of the dividend paid in an amount of EUR 2.30 the overall performance was -23.5% – and hence not as poor as that recorded by the Dax and MDax.
In 2008 regular participation in investor conferences and roadshows – at which we have the opportunity to meet analysts and investors – as well as the holding of numerous telephone conferences once again formed the core areas of our Investor Relations work. Yet we are not the only ones to travel in our efforts to meet our investors and analysts; we also enjoy hosting them for personal discussions at Hannover Re's offices.
In the year under review, in view of the positive experience in past years, we again held our analysts' conferences marking the unveiling of the annual financial statements on the same day in Frankfurt and London. In this way we were able to brief the capital market on the outcome of the year just-ended as promptly as possible on a face-to-face basis.
USA American Depositary Receipts (Level 1 ADR program), OTC (over-the-counter market)
Number of shares as at 31 December 2008: 120,597,134 no-par-value registered shares
Annual General Meeting: 5 May 2009, 10.30 a.m. Hannover Congress Centrum Kuppelsaal Theodor-Heuss-Platz 1-3 30175 Hannover, Germany
Strategic Action Fields 1. Performance Excellence: Holistic management system including regular external assessment 2. Corporate Governance: Integrity in our dealings with all stakeholders – high ethical standards 3. Compliance: Observance of all external requirements in order to avoid business, liability and reputational risks
Non-Life Reinsurance: Not one of the largest, but one of the most profitable non-life reinsurers in the world – special attention paid to the correct assessment of risks – pricing and conditions guided by technical considerations, appropriate level of reserves
Life/Health Reinsurance: Within five years one of the three major, globally operating life and health reinsurers of above-average profitability – annual double-digit growth in volume and profit indicators – special attention devoted to the regional and biometric balance of the portfolio
Economic climate 2008 was dominated by a worldwide financial market crisis on an unimagined scale. It was triggered by upheavals on US real estate markets. Back in the second half of 2007 rising interest rates and falling property prices had already led to a mortgage crisis. For years mortgage lenders – especially in the United States – had handed out loans to borrowers with little or no equity, and as interest rates rose these loans could no longer be serviced. Many banks did not hold these poorly secured loans in their own books, but instead restructured them and passed them on to various groups of investors, including for example hedge funds. As part of a trend originating in the United States, hedge funds and banks began to get into liquidity problems. The capital market's proper functioning began to falter; banks lost confidence in one another and were scarcely willing to lend among themselves.
+++ Global crisis on financial markets dominates the year under review +++
The concerns about the stability of the banking system unleashed extraordinary turmoil on international capital markets. The leading stock indices shed up to 40% of their value in the year under review. Financials were especially hard hit by the stock market crash.
The economic climate around the world took a sharply darker turn as a consequence of the financial market crisis. The recession in the United States began to spill over to other countries; this was especially true of economic regions in which the financial sector and building industry contributed a large share of economic output. Yet the downturn was considerable even in countries whose economic expansion is crucially driven by exports. Only in threshold markets was it possible to boost output, although here too it flagged towards year-end.
The international financial market crisis also influenced the development of Hannover Re's business to a not inconsiderable extent in the year under review. After our investment portfolio had been affected only marginally by subprime losses, write-downs on insolvent financial institutions also remained within tight limits. Our investments were not, however, able to escape the turmoil on international equity markets entirely unscathed.
In the area of fixed-income securities the price rally – prompted by interest rate cuts on the part of central banks and the flight towards more secure assets – had positive implications for our shareholders' equity. Yet this was significantly tempered by the rise in risk premiums for corporate bonds. Ultimately, though, the positive effect prevailed. On equity markets the downward trend that had set in during the first six months of the year gained additional massive momentum in September/October. As a result, we were compelled to take considerable write-downs and realise sizeable losses on our equity portfolio, which were partially limited by the countereffect of hedge instruments.
With a clearly positive cash flow and no need for refinancing, the liquidity and solvency of the Hannover Re Group are in no way impaired.
Our credit and surety business was not affected by the real estate crisis since we do not write any mortgage guarantee contracts. An overall deterioration in the loss ratios cannot, however, be ruled out. In this case, too, appropriate allowance has been made in our IBNR reserves.
In Brazil, the largest insurance market on the South American continent, Hannover Re opened a representative office following the lifting of the reinsurance monopoly; since July of the year under review it has been licensed as an "admitted reinsurer". This gives us more direct access to clients and puts in place an optimal platform for participating in the up-and-coming Brazilian market.
Our second business group – life and health reinsurance – fell short of our expectations, principally due to the restraining effects of movements in exchange rates in the first six months. In the medium term, however, we are standing by our ambitious goal of generating double-digit growth in the original currencies. Both the demographic trend in industrialised nations and the growing urban middle class in threshold markets offer a solid basis for dynamic growth and justify such ambitious plans. We continue to participate in product development activities aimed at senior citizens, a customer group that is still neglected in Germany. What is more, we are optimally positioned in our largest market, the United Kingdom, thanks to our long-standing focus on enhanced annuities and the reinsurance of existing pension funds. In the United States, too, business with health insurance products for seniors shows great promise.
Detailed information on both business groups is provided in the following sections.
Investment performance The performance of our investments was overshadowed by the worldwide financial market crisis in the year under review. After international equity markets had already retreated in the first half of the year, the downward slide continued – especially in September and
Result of total business We are not satisfied with the results trend in the year under review. The operating profit (EBIT) fell by 84.0% to EUR 148.1 million (EUR 928.0 million) owing to the effects of the financial market crisis. Group net income contracted by 117.6% to -EUR 127.0 million (EUR 721.7 million), although the previous year had been assisted by a positive special effect associated with the reform of corporate taxation in an amount of EUR 191.5 million (before minority interests). The result in the year under review was additionally hampered by the fact that losses on equities are not tax-deductible in Germany and hence a tax load of EUR 205.6 million was incurred despite posting a pre-tax result of 70.6 million. Earnings per share stood at -EUR 1.05 (EUR 5.98).
We use retrocession, i.e. the passing on of portions of our covered risks to other reinsurers, as a means of risk reduction. In the course of the year the reinsurance recoverables on unpaid claims – i.e. receivables due to us from our retrocessionaires – decreased to EUR 2.1 billion (EUR 2.5 billion). We continue to attach considerable importance to the quality of our retrocessionaires: more than 95% of the companies with which we maintain such business relations have an investment grade rating of "BBB" or better from Standard & Poor's.
Wilhelm Zeller was honoured with the Lifetime Achievement Award. We were proud to accept further awards in Russia, where we were named as best foreign reinsurer on two occasions.
Our strategy when it comes to covers for agricultural risks is to acquire additional market shares. We are therefore expanding this business in both Latin America and Asia.
In the field of structured products we are one of the leading providers worldwide. The year under review was notable for the ongoing regional diversification of our portfolio, which in past years had been slanted heavily towards the United States. On the back of the repercussions of the financial market crisis we observed growing demand for such products in Europe and Asia. On the basis of tailored solutions and our long-standing actuarial expertise we are able to offer our clients the best possible service.
As part of our extended activities in the area of insurancelinked securities we completed our first transaction in the year under review. Unlike Hannover Re's previous securitisations, it was not designed for our own protection but rather to directly transfer our clients' business to the capital market. Property catastrophe risks of a number of US cedants were packaged and passed on to the capital
The most striking feature of the major loss situation in the year under review was a series of devastating natural disasters. These included, most notably, the snow and ice storms in several Chinese provinces, winter storm "Emma" in Europe, the severe earthquake in the Chinese province of Sichuan, hailstorms in Germany as well as the two hurricane events "Gustav" and "Ike". The latter produced a net strain of EUR 222.1 million for Hannover Re's account. A number of other small and mid-sized natural disasters were also recorded.
Geographical breakdown of non-life reinsurance (in % of gross premium income)
Key figures for non-life reinsurance 1) Figures for 2005 and 2004 before new segmentation 2) Incl. deposit interests special effect of EUR 137.8 million associated with the reduction of deferred taxes. Earnings per share amounted to -EUR 1.33 (EUR 4.56).
In view of the competitive climate prevailing on the German primary insurance market, we expanded our portfolio very selectively. Overall, though, the favourable claims situation enabled us to generate a satisfactory result.
Industrial property reinsurance lines suffered under premium reductions and increased losses in the year under review. Overall, though, a break-even result was achieved. Homeowners' comprehensive, which had incurred heavy strains in 2007 from winter storm "Kyrill", performed considerably better than in the previous year.
1) Relative to premium in non-life reinsurance (1999–2006 adjusted to new segmentation) 2) 1999–2004 = 5%, 2005 = 6%, from 2006–2007 = 8% from 2008 = 10% of net premium earned in non-life reinsurance
The directive adopted by the EU on finite reinsurance was implemented into national law in 2008 and incorporated into the Insurance Supervision Act. Structured products are explicitly recognised under these provisions and their treatment is governed by binding rules. Aided by intensive marketing efforts we further raised our profile in this sector, as a consequence of which ceding companies are increasingly including our products in their reinsurance planning. All in all, we were satisfied with the development of our business with structured products in Germany.
In the year under review we acquired new accounts and further diversified our portfolio in the United Kingdom. In accordance with our marketing strategy the focus was on expanding specialised niche business, such as travel personal accident covers, while scaling back our catastrophe -exposed business as planned.
In casualty business Hannover Re again profited from its very good rating. While the price level in the previous year had held stable, the year under review saw a slight reduction in rates. Although in a few instances our involvement is of a long-term nature, we generally pursue an opportunistic underwriting policy in the London Market.
The London Market is also a prominent centre for the underwriting of international marine and aviation risks; in both lines Hannover Re ranks among the market leaders.
After the original market had seen sharp rate declines in aviation insurance in 2007, leaving insurers with their first overall deficit, there was heavy pressure to stop this premium erosion. The crisis on financial markets and associated loss of capital among insurers also had a favourable effect on rate movements on both the insurance and reinsurance sides, with the result that initial tendencies towards stabilisation and rising rates could be discerned in the year under review. What is more, the opening up of the Brazilian insurance market presented new business opportunities in aviation reinsurance.
Notable major claims in the year under review included the deadly plane crash in Madrid as well as a satellite failure, producing a total net burden of losses in the order of EUR 13.9 million.
Following two years that were virtually spared major claims, rates in marine reinsurance softened slightly in 2008. There were, however, regional differences. The Asian market, for example – which is one of the most fiercely competitive in the world – saw reductions of around 20%. Overall, we largely preserved our existing portfolio, although exposures in the Gulf of Mexico were purposefully reduced. Our underwriting policy is slanted heavily towards non-proportional covers.
Along with higher basic losses on the primary side in offshore energy business, it was hurricane "Ike" that inflicted substantial losses on the (re)insurance industry: despite the relatively moderate intensity of its winds, the slow speed of the hurricane's advance led to considerable damage. The market loss for offshore business – i.e. the drilling rigs and oil platforms in the Gulf of Mexico – was put at around USD 3 billion. Prices for covers in the Gulf of Mexico are therefore likely to rise appreciably. As a further factor, the crisis on financial markets has prompted general market hardening as insurance and reinsurance capacities contract.
Our net burden of losses from hurricane "Ike" was in the order of EUR 222.1 million and encompassed not only offshore but also onshore business, i.e. the insured property damage on land. Another hurricane – by the name of "Gustav" – was recorded in the Caribbean in the year under review, although the resulting strain for Hannover Re's account was relatively modest at around EUR 18.1 million.
We selectively expanded our involvement in credit and surety business in the year under review – primarily by increasing shares under existing programmes, although also through new business relations in the surety line; the premium volume was consequently slightly boosted. We were able to cement our position as one of the three market leaders and further enhance the diversification of our portfolio by enlarging our surety business and stepping up our acceptances of political risks.
Primary insurance business in France fared satisfactorily. Rates bottomed out in 2008 after three years of declines. The motor line, in which the rate level on the reinsurance side was still insufficient, remained problematic.
In light of this situation we are not seeking to increase our market shares, but instead focus primarily on profitability.
With the exception of the fire in the Eurotunnel there were no significant loss events on the French market. The strain incurred by Hannover Re from this event was in the order of EUR 6.3 million for net account.
Amalgamations among smaller players were the hallmark of the primary insurance market in the Netherlands in the year under review. Further insurers will find themselves forced to merge in the face of the looming high costs associated with fulfilment of Solvency II standards. The financial market crisis also hit a number of insurers in the Netherlands, who felt compelled to take up government offers of assistance. The Dutch part of a major BelgianDutch group passed into state ownership. There were no negative repercussions for the reinsurance industry. Rather, it can be anticipated that the crisis on financial markets will prompt stronger demand for reinsurance covers. The intense price competition in industrial property business showed no signs of abating.
In the Netherlands we devoted special attention in the year under review to non-proportional niche segments, including for example reinsurance for greenhouses and public entities liability business. In view of the favourable rates in the casualty sector, we expanded our portfolio in this line.
The burden of losses incurred by Hannover Re in the year under review was moderate: while catastrophe business was spared losses – with the exception of a sizeable regional hailstorm –, the blaze at Delft University of Technology caused the largest fire claim hitherto recorded in Dutch property business. Based on the loss information currently available, the original claim is in the order of EUR 140 million. Our share of this loss will come in at a modest EUR 1 million.
We strive to play a leading role in the markets of Northern Europe, especially in the segment of mutual insurers. In general terms, we prefer client relationships that are geared to the long term. In cases where we do not consider loyalty considerations a relevant factor, we write our business opportunistically.
+++ Consequences of financial market crisis in Northern Europe have no adverse effects +++
The intense competition prevailing on Nordic markets continued unabated in the year under review. It can, however, be assumed that the downward slide in rates in original business bottomed out in 2008. Conditions on the reinsurance market were highly competitive, especially with regard to covers for catastrophe, property and personal accident business. Only in the casualty sector did prices hold stable, prompting us to make more capacity available in these lines.
The primary insurance markets of Central and Eastern Europe enjoyed above-average growth in the first six months of the year under review, although this slowed in the second half on account of the global financial market crisis. Rates in original business continued to decline in the face of undiminished intense competition.
For Hannover Re the countries of Central and Eastern Europe constitute a clear strategic focus as growth markets. We rank among the three market leaders in this region and offer reinsurance covers across all lines. As long as profitable business opportunities continue to be available going forward, we intend to pursue further growth.
In light of a positive loss experience and adequate prices, we were once again thoroughly satisfied with our result in Italy.
Management report non-life reinsurance interest in replacing their proportional cessions with nonproportional covers. In the year under review we observed growing demand for higher limits – as clients raised their retentions – and additional capacity for natural catastrophe risks. Against this backdrop we continued to enlarge our portfolio.
The economic downturn prompted a contraction in demand on the original market, especially in commercial business – including for example covers for craft enterprises, construction firms and haulage companies.
+++ No significant implications of the crisis on financial markets for North American business +++
For marketing purposes we further strengthened our partnerships with selected brokerage firms in the year under review, a helpful move which gives us extensive access to a cedant's entire portfolio. The positive effects of these initiatives will make themselves felt in the upcoming market hardening and will serve to further optimise our portfolio mix.
In most casualty segments – such as directors' and officers ' (D&O) covers – rates showed further single-digit declines in the first nine months of the year under review. In the shadow of the financial market crisis, however, they stabilised in the fourth quarter. We purposefully relinquished market shares and reduced our volume in casualty business, especially in the professional indemnity and special liability lines.
The combined ratio climbed markedly in the year under review, creeping close to the maximum level that we are prepared to tolerate. Only in routine casualty business did we maintain our volume, since conditions here were relatively favourable and we were again able to generate a breakeven result.
While rate reductions in double digits were still the norm in property business in the first half of the year under review, the onset of the hurricane season heralded a trend reversal. In particular, the repercussions of hurricane "Ike", which with a market loss of around USD 20 billion came in as the third most expensive hurricane of all time, halted the price decline.
We are one of the market leaders in credit and surety reinsurance in North America. The protracted crisis on financial markets led to a drop in the solvency level of businesses and hence to a rising number of bankruptcies in the year under review. The claims frequency in the credit line consequently increased. Losses in surety business, on the other hand, rose only marginally. Nor has the crisis on the real estate market had any significant implications for this line to date, whether in the primary sector or on the reinsurance side.
Rates in credit reinsurance climbed in the year under review in the face of a growing number of claims; the rate level in the surety line remained virtually unchanged.
+++ No negative repercussions of US mortgage market meltdown for credit and surety business +++
We were satisfied with our performance in North American credit and surety reinsurance, although it did not match up to the record result generated in the previous year.
Our strategy in the agricultural risks segment is to acquire additional market shares. State-run premium subsidy programmes in the primary sector and the promotion of plant-based energy sources continued to stimulate demand for agricultural insurance – and hence led to a greater need for reinsurance capacities.
Faced with regulations governing a revised risk-weighted capital calculation, which are expected to enter into force from 2011 onwards, insurers currently find themselves needing either to develop an internal model or to turn to external providers for assistance. In future, risk capital is to be geared to a reinsurer's size and the underlying risks; the guideline for measuring risk capital has hitherto been 25% of net premium. We expect these more exacting capital requirements and the repercussions of the financial market crisis to deliver fresh impetus for business – especially in the area of structured products.
Business relations with our Japanese clients traditionally emphasise continuity, and thanks to our very good rating we are a sought-after partner for reinsurance covers.
On the reinsurance side the picture in the various segments was a mixed one. In property business, for example, stable prices prompted us to modestly enlarge our portfolio in this market. Windstorm and earthquake covers, on the other hand, saw sharp rate cuts as expected owing to the absence of losses – although reinsurance commissions for earthquake risks remained unchanged or even increased slightly. Personal accident business – a line that has been spared major claims in recent years – inevitably witnessed substantial price declines. In Japanese casualty business, however, prices held stable; true to our strategy of further optimising the diversification of our business, we therefore not only maintained the casualty portfolio on a par with the previous year's volume, but actually stepped up our involvement in the year under review.
Our premium volume contracted in light of the devaluation of most local currencies. On the claims side, however, the year under review passed off relatively unremarkably; only in South Korea did we incur a major loss, which produced a moderate strain of around EUR 5 million for Hannover Re.
Since 2006 Hannover Re has maintained a Bahrain-based subsidiary, Hannover ReTakaful, which bears exclusive responsibility for transacting our retakaful business; we also have a local branch that writes traditional reinsurance in the region. Hannover ReTakaful serves a global customer base. Along with the Gulf States, Malaysia is one of our largest markets. In the year under review we established relationships with clients in Syria, Egypt and Libya, and we currently do business with 66 takaful insurers. It remains our goal to be the first and preferred partner for these companies over the long term.
We considerably enlarged our premium volume in this sector in the year under review.
China continues to rank as the most prominent growth market in Asia. While there was little movement yearon -year in the established primary insurance markets of Hong Kong and Taiwan, the Chinese market once again recorded disproportionately strong growth.
This expansion spanned all lines, although it was particularly noticeable in motor business and the casualty lines. China continues to be a target market for international insurers and reinsurers, and competition is correspondingly fierce. The number of insurers is consistently rising, while at the same time an oversupply of reinsurance capacity prevails on the market. Accounting for over 65% of total volume, motor business is the dominant line in China. Hong Kong and Taiwan are markets heavily slanted towards non-proportional covers – with property lines dominant for our company in Taiwan and casualty business generating the bulk of our premium volume in Hong Kong.
The business development in China was crucially shaped by a tense catastrophe loss situation in 2008, which led to highly unsatisfactory results on the reinsurance side:
Management report non-life reinsurance snow- and ice-storms between mid-January and mid-February left a trail of severe destruction and hence caused the most expensive insured losses in the history of China. The net burden of these events for Hannover Re was in the order of EUR 16.2 million. In May a severe earthquake in Sichuan Province resulted in a human tragedy, although the devastating economic losses bore no relation to the insured values. Hannover Re's loss expenditure was therefore rather modest at around EUR 8.3 million.
A competitive climate prevailed on the Australian primary insurance market in the year under review. Since listed companies are under special pressure to deliver profits, indications of market hardening could nevertheless be discerned. On the reinsurance side, however, rate reductions were for the most part the order of the day. Workers' compensation insurance came under heavy price pressure, and markdowns also had to be taken for catastrophe covers. Rates in non-proportional casualty business, on the other hand, remained stable.
On the Australian continent, too, the overriding principle guiding our business strategy is adherence to our profitability targets: leaving aside a very small number of proportional treaties, we therefore concentrate entirely on non-proportional business. We make exceptions only for customer relationships that have already existed for some years – provided they generate sustained profits. We are a leading provider for the upper layers of catastrophe programmes and for medical malpractice covers.
We were satisfied with the result generated on the Australian continent in the year under review.
Eight licensed life reinsurers (business centres) of Hannover Life Re serve as the nodes of our network; their shares of total gross premium income are set out below.
The life and health reinsurance business group combines under the worldwide Hannover Life Re brand the international activities of the Hannover Re Group in the life, health, annuity and personal accident lines (the latter only insofar as they are transacted by life insurers). The strategic emphasis is on building long-term, directly acquired customer relationships that can generate discernible value-added for our cedants in risk and financial management.
The repercussions of the worldwide financial market crisis, which became especially apparent on an enormous scale in the second half of the year under review, also affected the operating result of Hannover Life Re. On the underwriting side, we did not observe any changes in the claims experience for the biometric risks, and there were also no unusual developments affecting structural risks – such as the persistency of the business in force and the counterparty risk associated with ceding companies.
We appreciably strengthened our international market position in the year under review, with systematic expansion in the important threshold markets of Asia and Latin America playing a key role. Despite adverse effects of movements in the exchange rates of all major currencies relative to the euro, we enlarged our premium income and currently enjoy a global market share of 10% to 12%. Indeed, we rank first or second in a number of significant markets. In the worldwide arena Hannover Life Re is one of the four most important life and health reinsurers and is distinguished by its excellent rating and global presence.
Relationship Marketing (as an overarching conceptual business approach) and Customer Relationship Management (as a package of actions to be implemented) continue to play an essential role in our global acquisition and underwriting policy.
As an inherent feature of this approach, priority is accorded to existing, value-creating customer relationships, while the acquisition of new clients is a secondary concern.
In 2008 we once again devoted special attention to extending our presence in the Islamic life insurance market, which we support principally through our Bahrain-based subsidiary Hannover ReTakaful. With an eye to the group business that traditionally predominates in the
Islamic and Arab markets we substantially boosted our personnel resources at this location in the fields of actuarial marketing and product development.
Demand for financial reinsurance solutions rose steadily in the course of the year under review – the worldwide crisis on financial markets has damaged the solvency and risk-carrying capacity of life insurers in many countries. Against this backdrop the focus has moved back to the reinsurance market as a partner, especially as solutions designed for the capital market (securitisations) have proven to be extremely challenging. We made the most of this situation and completed several significant transactions of this type in the second half of 2008; these will make themselves felt to positive effect in the statement of income from 2009 onwards.
Key figures for life and health reinsurance 1) Figures for 2005 and 2004 before new segmentation 2) Operating profit (EBIT)/net premium earned
The United Kingdom reaffirmed its position as the largest market in our portfolio through significant expansion in the area of impaired/enhanced annuities – despite the fact that we scaled back our involvement in risk-oriented covers in the face of the competitive situation.
As in previous years, the main factors with a bearing on the performance of our life and health reinsurance business group remained unchanged as follows: • development of the three biometric risks of mortality, morbidity and longevity, the structural risk associated with the persistency of the business in force as well as the specific client-related counterparty risk in connection with financing transactions,
The trends on international capital markets – against the backdrop of the already familiar turmoil and upheavals – took on particular relevance in the year under review and had a considerable impact on our results.
accounted for almost 85% of the total premium income booked by Hannover Life Re in the year under review.
As far as the morbidity risk is concerned, our principal areas of involvement are US senior health medicare supplement products, long-term care covers in Europe and Asia and disability policies in Australia. Individual accident business again accounted for a modest, but stable share of our premium volume at 2.2%.
The amended Insurance Contract Act entered into force in the German market on 1 January 2008. Key aims of this reform are to enhance the transparency of life and annuity insurance products, provide increased cash surrender values in the event of premature contract termination and facilitate timely participation of customers in life insurers' hidden reserves.
Germany fourth and last step increase came into force at the beginning of 2008. Many of our existing clients used this incentive step as an opportunity to substantially raise premiums and benefits.
although a large international account based in the United States, under which we reinsure more than 40 individual life insurers, was heavily downgraded by the rating agencies in connection with financial difficulties affecting the holding company. This downgrade did not have any noticeable effect on the performance of the reinsurance treaties.
The impact of the risks associated with movements on capital markets and fluctuations in exchange rates was, however, severe in the year under review. With respect to the capital market risk, it should be borne in mind that the various operations of Hannover Life Re scarcely hold any equity securities or shares in their asset portfolios. We do, however, hold a high-quality portfolio of fixed-income securities – including corporate bonds – that optimally satisfies actuarial standards with respect to the mix of durations and currencies.
The total investment income generated for the life and health reinsurance business group amounted to EUR 245.5 million (EUR 293.9 million); this was equivalent to a decline of 16.4%.
The operating profit (EBIT) generated for the life and health reinsurance business group amounted to EUR 120.7 million (EUR 229.8 million); in this context, unlike in the previous year, allowance must be made for the negative special effect totalling EUR 72.1 million. Had it not been for this influencing factor, the operating profit would have reached EUR 192.8 million. The EBIT margin stood at 4.3%; it thus fell short of the previous year and our target range of 6.5% to 7.5% (excluding the negative special effect it would have reached 6.9%).
In the year under review we transferred a portfolio of life and annuity reinsurance to the capital market. Designated "L7", the transaction converts a future earnings stream into a current liquidity position and monetises an embedded value of EUR 100 million.
With a tax ratio of 29.4% and after allowance for minority interests, the consolidated net income of the life and health reinsurance business group came in at EUR 78.3 million (EUR 187.7 million). This was equivalent to earnings of EUR 0.65 (EUR 1.57) per share.
Ceding companies from this market are reinsured by various risk carriers within Hannover Life Re: the parent company Hannover Re, Hannover Life Re United Kingdom, Hannover Life Re Ireland and – since 2008 – by our new subsidiary Hannover Life Re Bermuda. For the first time we concluded a number of block assumption transactions for existing pension funds under which we assume the longevity risk for a defined group of pensioners.
The technical results from this market were once again most gratifying for the mortality and critical illness risk categories, while for the longevity risk they were within the actuarially expected bounds.
Insurance solutions for the so-called "60-plus generation" are a focus of our activities, particularly in the area of long-term care annuity insurance. We have amassed special expertise, which is attracting growing interest in what is still – in Germany – a relatively rare form of individual risk provision.
Since its establishment in 1999 our Dublin-based Irish subsidiary Hannover Life Re Ireland has designed and implemented tailored reinsurance solutions for an international clientele comprised primarily of large life insurers with first-class ratings in the United States, United Kingdom and Continental Europe.
For some years these regional markets – excluding Russia and the CIS states – have been handled by our life branch in Stockholm, with a concentration on Sweden, Norway and Israel. These three markets account for 80.8% of our business volume. Finland, the Baltic countries, Poland and Bulgaria also play a noteworthy role.
In this context we are currently seeing rapidly growing interest on the part of our cedants in efficient application systems that can be integrated into the overall application process at point of sale, thereby ensuring prompt processing for policyholders – a precondition that is especially essential in bancassurance business. To this end, working
Scandinavia, Eastern Europe, Russia, CIS states, Turkey and Israel in close cooperation with highly respected IT systems providers, we have developed a variety of state-of-the-art system solutions that we deploy at several ceding companies in Scandinavia and the Baltic markets.
The gross premium volume booked by the Stockholm branch in the year under review was significantly influenced by the expiry of earlier financing business and totalled EUR 81.3 million (EUR 86.9 million); profitability was again highly gratifying.
Looking ahead to the future cultivation of life markets in Russia and the CIS states, we set up a new underwriting unit in Hannover in the year under review with actuaries who are native speakers of Russian, Ukrainian and Georgian. In the coming years they will substantially reinforce our activities in this region. Particularly in the Russian market, where we have already acquired our first clients, we have identified a considerable long-term potential.
Life and health reinsurance business in these regions – also including French-speaking Canada – is lead-managed by our life branch in Paris. The premium volume in the year under review climbed by 17% to EUR 372.0 million, and profitability was again very pleasing.
Key growth drivers – as in the previous year – were bancassurance business, in which we successfully accompanied moves made by several life subsidiaries of major French banks into foreign markets, as well as the Near East. In
At our composite subsidiary Hannover ReTakaful based in Manama, Bahrain, which focuses on the reinsurance of Islamic insurance organisations, we put in place a complete infrastructure for the life sector (so-called family takaful) and acquired a number of new customers from Bahrain, Saudi Arabia and other countries in the region.
Responsibility for the US market is borne by our Orlandobased subsidiary Hannover Life Re America, which concentrates on the underwriting of financially oriented covers for US clients, supplementary private health insurance for seniors and a number of other US specialty segments.
The English-speaking Canadian market plays a minor role in our assumed business. Canada is, however, home to Hannover Life Re's most important retrocessionaires, with whom we work together on a long-term basis; they are of considerable significance to our worldwide risk management with respect to large and complex individual risks that surpass our retention.
In the United States we closed the largest block assumption transaction involving US individual life business in the history of Hannover Life Re; the transaction encompassed the monetisation of embedded values in several portfolios of endowment insurance.
The gross premium volume booked by Hannover Life Re America totalled EUR 613.6 million (EUR 508.6 million) in the year under review, an increase of 20.7%.
The Hamilton-based Hannover Life Re Bermuda, our subsidiary that was newly established in 2007, can report a gratifying business development in its first full financial year. It systematically consolidated its position as a specialist within the Hannover Life Re network and acquired its first clients in Bermuda, the Caribbean, the United Kingdom, South Africa and the United States. Gross premium totalled EUR 29.5 million, producing an operating profit (EBIT) of EUR 9.2 million. This operating profit is identical to the net income after tax.
Africa Our subsidiary Hannover Life Re Africa, which is based in Johannesburg, serves South Africa and the English-speaking African markets. The company writes predominantly risk-oriented individual life business of mid-sized and larger South African life insurers. In the fourth quarter of 2008 the company – in cooperation with its affiliates Hannover Life Re Bermuda and Hannover Life Re Ireland – concluded a large block assumption transaction with one of South Africa's foremost life insurers.
Over the past two years we stepped up our expansion into neighbouring African markets and improved our access to Nigeria and Kenya by cooperating with a local professional reinsurer outside South Africa.
Central and South America Central American markets are served by our office in Mexico City, while South America is supported directly from Hannover Home Office.
Our premium income climbed by 23.1% in the year under review to EUR 103.9 million (EUR 84.4 million), with all major markets contributing to this growth. Results continued to develop favourably.
Owing to the planned reduction of a major individual account, the premium volume contracted by 17% in 2008 to EUR 290.5 million (EUR 348.6 million). The operating profit (EBIT) of EUR 11.3 million was again satisfactory, although it failed to match up to the previous year's result of EUR 34.5 million – which had been influenced by a nonrecurring effect.
While the US Federal Reserve Board slashed its key lending rates dramatically to 0% to 0.25%, the adjustments made by the European Central Bank were more moderate. It too cut the base rate, albeit initially only to 2.5%. In view of the recessionary tendencies in virtually all major currency areas, a cycle of interest rate reductions was set in motion worldwide.
Within the scope of our asset/liability management activities, the allocation of investments by currency is determined by the development of underwriting items on the liabilities side of the balance sheet. We are thus able to achieve extensive currency matching of assets and liabilities, thereby ensuring that our result is not significantly affected by fluctuations in exchange rates. As at year-end 43.8% of our asset portfolio was held in euros, 40.3% in US dollars and 6.1% in pounds sterling.
Thanks to a positive cash flow from the technical account and investments, and assisted by a slight recovery in the US dollar, our portfolio of assets under own management grew to EUR 20.1 billion (EUR 19.8 billion) despite the fall in fair value.
Ordinary investment income, on the other hand, was flat and came in below the previous year at EUR 829.8 million (EUR 859.0 million). This was due to a lower average yield than a year earlier, attributable principally to tactical regrouping into low-risk securities.
During the reporting period we also began to implement our real estate investment programme. An initial property has already been acquired, and further buildings are under review; the real estate allocation will therefore rise progressively as planned, although it is currently still
Results from participation in associated companies 4.2 -61.9% 11.0 6.3 3.9 2.2
Net investment income 1) Excluding expenses on funds withheld and contract deposits 2) Portfolio at fair value through profit or loss and trading
The cash flow from operating activities, which also includes inflows from interest and dividend receipts, increased by a substantial EUR 546.8 million year-on-year to EUR 1,458.9 million. The net inflow results from the positive experience of our reinsurance business and is notable, in particular, for appreciably lower claim payments than in the previous year.
Overall, the cash and cash equivalents increased by EUR 94.8 million year-on-year to EUR 430.2 million.
For further information on our liquidity management please see page 63 et seq. of the risk report as well as the explanatory remarks contained in Section 6 "Management of technical and financial risks" in the notes.
In non-life reinsurance we have many years of positive experience using a ratio based on underwriting years, namely "DB 5": level 5 of our contribution margin accounting method constitutes the clear profit after earning the discounted claims expenditure (level 1) plus all direct (level 2) and indirect costs (level 3), including the cost of capital (level 4). We apply DB 5 to the non-life reinsurance treaty departments as part of the fine tuning of portfolios down to the level of individual contracts.
* At the Global Management Forum (GMF) all senior managers of the worldwide Hannover Re Group come together once a year to define aspects of strategic orientation. The parameters elaborated here serve as the basis for the subsequent planning process.
With PE we have at our disposal a consistent method Group-wide that enables us to measure how the company is evolving and to what extent we have achieved our strategic objectives, while at the same time accommodating the specific conditions of the various treaty departments and service units. The local approach used by PE is of special importance in this context: it is incumbent upon every single organisational unit to continually reassess and enhance its value contribution to the Hannover Re Group. In so doing, however, we never lose sight of the big picture.
Non-life reinsurance Combined ratio < 100% 95.4% 99.7% 100.8% 112.8% 97.2 %
Life and health reinsurance Gross premium growth 12–15% 1.7% 10.4% 15.2% 11.4% (4.4%)
Growth in earnings per share ≥ 10% 8.3%3) 942.7% (82.4%) (28.4%)
The adjusted operating profit (EBIT) consists principally of the reported Group net income after tax and the change in the balancing items for differences between present values and amounts stated in the balance sheet (one adjustment for non-life and one for life/health reinsurance). In addition, the interest on hybrid capital, minority interest in profit and loss and extraordinary profits and losses are eliminated. We consider the allocated capital to be the shareholders' equity plus minority interests, the balancing items for differences between present values and carrying amounts as well as the hybrid capital. Capital is allocated to the profit centres according to the risk content of the business in question.
In calculating the cost of capital, our assumption for the cost of shareholders' equity – based on a Capital Asset Pricing Model (CAPM) – is that the investor's opportunity costs are 350 basis points above the risk-free interest rate. Value is created in excess of this return. The definition of our targeted minimum return on equity as 750 basis points above "risk-free" thus already contains a not insignificant target value creation. Interest is calculated on the balancing items for present value at the underlying interest rates, and on debt capital at the actually paid interest for our hybrid capital. Weighted according to the composition of the allocated capital defined above, the weighted cost of capital applicable to all profit centres is calculated from these interest rates. We allocate equity sparingly and make efficient use of hybrid capital as well as other equity substitutes; our weighted cost of capital is consequently the lowest in the industry (6.6% in 2007).
Since comparison of absolute amounts is not always meaningful, we have introduced the xRoCA (excess return on capital allocated) in addition to the IVC. This describes the IVC in relation to the allocated capital and shows us the relative excess return generated above and beyond the weighted cost of capital. Once they have been calculated we communicate the IVC and xRoCA for the reporting year in various media, including on our website.
Internal Management Reporting is drawn up twice a year, tiered according to areas of responsibility. In the first place, the achievement of objectives in the past year is reviewed here, and secondly the planning is assessed with an eye to the strategic objectives.
3. IVC from retrocession 4. IVC from investments 5. IVC from service center activities 6. IVC from excess capital
Country Total Male Female Total needed for the further professional development of our workforce. Three areas constituted the cornerstones of our personnel activities in the year under review: the fostering of an entrepreneurial mindset on all levels, the recruitment of highly qualified people and the promotion of a healthy work/life balance for our staff.
Fresh ideas and entrepreneurial thinking are especially important to Hannover Re if it is to enjoy a successful future. Fostering the latter, in particular – among younger employees and not just seasoned staff – was the goal of the "Future Workshop" held for the first time in July 2008. Conducted in an informal atmosphere, the workshop gave 30 individuals who had been with Hannover Re for between two and five years the opportunity to put aside the concerns of day-to-day business and discuss in general terms strategy, the future and Hannover Re as a company.
At the conclusion of the "Future Workshop" the specialists responsible for our strategic objectives – under whose leadership the event had also been held – received direct, knowledgeable feedback from the participants.
In view of the success of this concept we shall henceforth hold the "Future Workshop" once a year. Over the medium to long term the purpose of this event will be to establish a group of junior executives. We realise that our younger staff, in particular, can contribute interesting suggestions and a fresh perspective on Hannover Re – one which we would like to continue to benefit from going forward.
Demand for motivated, well educated university graduates – especially those with degrees in mathematics or business mathematics – continued to intensify in the year under review. Our company finds itself facing fierce competition from banks, management consultants and other financial services providers. Thanks to our longstanding involvement in university recruiting we have a presence at Germany's major job fairs. As a result, we are consistently able to fill new positions with highly qualified young candidates.
With a view to consolidating and further extending our position as an attractive employer in the market, we systematically seek to identify room for optimisation within the scope of our strategic human resources planning. In 2008 we therefore set up a "Task Force" for the recruitment of mathematicians. Comprised of the managers of departments which are especially reliant on mathematicians as well as representatives of Human Resources, it has set itself the task of further improving the way in which the company addresses this group of graduates
–14 ye ars 15–19 ye ars 20–24 ye ars >–2 5 y ea rs in particular. Stepping up and expanding our contacts with universities – in part also through the sponsoring of chairs in mathematics –, increasing the number of positions offered to apprentices and soon-to-be graduates as well as launching an employer branding project are just the first measures undertaken by this task force.
Flanking these marketing-oriented approaches, we have also created a trainee programme specially aimed at mathematicians: in the future, Hannover Re will offer particularly well-suited graduates the opportunity to undergo an 18-month trainee programme for junior executives and thereby familiarise themselves with the company from a broad variety of perspectives by spending periods of six to twelve weeks in various areas of the organisation. In this way, we shall be able to promptly fill vacancies in these departments as they arise with well-trained staff and further boost the appeal of Hannover Re among university graduates with a background in mathematics.
In addition to further steps aimed at simplifying the harmonisation of family life and career, Hannover Re is therefore funding the building of a new daycare centre on its premises at Hannover Home Office, which was
Work/life balance commissioned in December 2008. The nursery is supported by the parents' initiative "Hannover ReKids", a society founded by Hannover Re staff; more information on our daycare facility is provided in the Sustainability Report.
For a number of years Hannover Re has employed management feedback as a personnel development tool which can be used to give managerial staff systematic feedback on their leadership behaviour. In 2007 we revamped this tool – both in terms of content and process –, which has enjoyed high acceptance within the company since its adoption in 2001: it is now implemented online, and the assessment also encompasses the supervisor's perspective.
Centralised data recording interlinks the appraisals from various personnel development tools – while preserving the greatest possible objectivity – and thus enables us to obtain a comprehensive overview of the highly diverse skills set available among our workforce. As a supporting measure, we use already established applications for the updating and viewing of data by staff and managers.
New module for personnel development future, this will complement the feedback obtained from the other tools. All in all, then, the following personnel development tools are now available in addition to selfassessment and appraisal interviews: personnel development workshops, management feedback and project manager appraisals.
In the year under review we additionally included an assessment of specialist expertise as a further component of our appraisal interview; the relevant lists are being drawn up progressively and stored for all departments of our company in close consultation with the specialist areas. In the context of this project special reference should be made to the close and trusting cooperation with our Employee Council.
We are convinced that performance-based remuneration elements foster individual initiative. Consequently, we make every effort – where possible – to increase the performance -based salary component. The group of participants in our variable systems of remuneration was therefore further enlarged in the period under consideration.
The Executive Board would like to thank all employees for their dedication in the past year. At all times the workforce identified with the company's objectives and purposefully pursued them. We would also like to ex-
Social commitment is also something that Hannover Re takes very seriously, and the assumption of social responsibility constitutes a core element of our corporate culture. In the year under review, for example, we funded the building of a new daycare centre on our premises in Hannover. It is our hope that this facility will make it easier for working mothers and fathers to re-enter professional life and, what is more, to better combine the joys of parenting with their career. A maximum of 30 infants will be looked after at the nursery by trained childcare nurses. The staff at Hannover Re have taken up this offer of childcare very eagerly, as reflected in the fact that all 30 places for 2009 have already been filled. A society has been founded by Hannover Re employees – "Hannover ReKids e.V." – to support this institution. Going forward, Hannover Re will continue to cover the maintenance and operating costs for the daycare centre.
Yet our assistance is not limited to Germany alone, but is instead geographically wide-ranging. A variety of projects around the world are run under the auspices of individual subsidiaries and branch offices that collect donations for social causes through various staff activities. In Florida, for example, our subsidiary's workforce supports the "New Hope for Kids" campaign: children and their families who find themselves in difficult life situations are assisted with cash donations or other forms of aid.
These are just two examples of Hannover Re's social commitment on the international level. Back in Hannover we launched a Christmas tree campaign this year – inspired by the South African model: in this way, staff at Hannover Re helped to realise the dreams of children at a local children's home during the Christmas season.
The transfer of knowledge between business and research is an important element of our core commercial activities. Among other things, this exchange is indispensable for the underwriting and assessment of catastrophe risks. For some years now we have therefore supported the Geo Research Center in Potsdam, which engages in the systematic investigation and early detection of earthquakes.
Yet we also set great store by our dialogue with other universities. We assist a number of institutions of higher learning in Germany in a variety of ways – for example the University of Göttingen, where we sponsor a guest professorship in Anglo-American law to promote the internationalisation of legal training.
Hannover Re recognises that business flights undertaken by its employees cause CO2 pollution. As a compensatory measure we pay a carbon offset levy for each kilometre flown to atmosfair, an international organisation that puts the funds collected towards climate protection. atmosfair invests inter alia in solar, hydroelectric, biomass and energy-saving projects so as to reduce green-
Environment house gases to an extent comparable with the effect on the climate of the emissions produced by flying. Preferential support is given to projects in developing countries, although all projects must deliver a demonstrable contribution to climate protection.
In 2008, as in previous years, our subsidiary E+S Rück held a so-called "examination concert" in Hannover. Every year this event offers three to four "master students " at Hannover University of Music and Drama the opportunity to play with the accompaniment of a large orchestra. With this performance the students are able to complete their final examination and satisfy the requirements for becoming a professional soloist. In addition to advancing the career of the master students, the examination concert – which was held for the eleventh time in the year under review – served as the musical highlight of E+S Rück's annual "Hannover Forum" seminar event.
For many years our company has also dedicated itself to supporting the fine arts, especially in Hannover. Seventeen years ago, for example, we launched an art foundation that benefits the Sprengel Museum Hannover and we regularly make works of art available to this institution as permanent loans. The interest earned on the foundation's capital is used to acquire these pieces. Specially organised art tours make this collection accessible to interested sections of the broader public.
Our own art collection has enabled us to offer our staff, clients and other visitors an ambiance that presents multiple opportunities for contemplation and exploration. With the acquisition of Rolf Szymanski's six-metre high sculpture "Grosse Synagoge" we added another important work of contemporary art to our collection in the year under review.
In 2007 Hannover Re participated for the first time in the "Ecological Project for Integrated Environmental Technology" (Ecoprofit). In the year under review we continued to pursue the basic idea underlying this project – to combine economic profit with ecological benefit – through preventive environmental protection in order to bring about a further reduction in CO2 emissions.
As an internationally operating reinsurer we are confronted with a broad diversity of risks that are directly connected with our entrepreneurial activities and which manifest themselves differently in the individual strategic business groups and geographical regions. Our conception of risk is holistic. For our company, risk means the entire spectrum of positive and negative random realisations in relation to planned or expected values. Negative random realisations, by which we understand
A significant technical risk is the risk of underreserving and the associated strain on the underwriting result. We calculate our loss reserves on an actuarial basis. The point of departure here is always the information provided by our cedants, where necessary supplemented by additional reserves that may seem appropriate on the basis of our own actuarial loss estimations. Furthermore,
Chief Risk Officer • Responsibility for holistic risk monitoring across departments (systematic identification and assessment, control/monitoring and reporting of risks) of all material assets- and liabilities-side risks from the Group perspective
• Process-integrated risk monitoring function • Methodological competence, inter alia for
– development of processes/methods for risk assessment, management and analysis, – risk limitation and reporting, – risk monitoring and determination of the required risk capital across the Group
Management report risk report we constitute an IBNR (incurred but not reported) reserve for losses that have already occurred but have not yet been reported to us. Our own actuarial calculations regarding the adequacy of the reserves are subject to annual quality assurance reviews conducted by external actuaries and auditors. Catastrophe risks, especially those associated with natural hazards such as earthquakes or windstorm events, constitute another material risk for Hannover Re. Licensed scientific simulation models, supplemented by our own expertise, are used to assess the risks posed by natural hazards. Within the scope of accumulation control the Executive Board defines the appetite for assuming natural hazards risks once a year on the basis of our risk strategy. In order to manage the portfolio with this consideration in mind, maximum underwriting limits (capacities) are stipulated for various extreme loss scenarios and return periods /probabilities, utilisation of which is monitored and reported to the relevant bodies. The price/premium risk lies primarily in a failure to correctly calculate the necessary premiums in relation to the future loss experience. The risk arises out of the incomplete or inaccurate estimation of future claims, especially over time. Regular and independent reviews of the models used for treaty quotation as well as the implemented methods, e.g. our compulsory central and local underwriting guidelines, are therefore essential for the management of these risk potentials.
We reduce these potential risks with a broad range of risk management measures. For example, the reserves in life and health reinsurance are calculated in accordance with actuarial principles using secure biometric actuarial bases and with the aid of portfolio information provided by our clients. Through our own quality assurance we ensure that the reserves established by ceding companies in accordance with local accounting principles satisfy all requirements with respect to the calculation methods used and assumptions made (e.g. use of mortality and disability tables, assumptions regarding the lapse rate etc.). New business is written in all regions in compliance with internationally applicable Global Underwriting Guidelines, which set out detailed rules governing the type, quality, level and origin of risks. These global guidelines are revised every two years and approved by the Executive Board. They are supplemented by countryspecific special underwriting guidelines that cater to the special features of individual markets. In this context the quality standards set for the portfolio reduce the po-
We reduce these potential risks using a broad range of risk-controlling measures, the most significant of which are monitoring of the Value at Risk (VaR), various stress tests that estimate the loss potential under extreme market conditions as well as sensitivity and duration analyses and our asset/liability management (ALM). Despite our conservative investment strategy, restrictive limits and thresholds as well as the controlling tools described above, we cannot divorce ourselves entirely from general market developments. We took a number of riskminimising measures in the year under review in response to the financial market crisis: Capital market risks
• Limitation of the investment spectrum to government or supranational bonds in September 2008. Although this step reduced the average yield for 2008, it also limited any new risk-taking on the credit markets in view of the uncertain state of the market.
In reinsurance business the credit risk is material for our company because the business that we accept is not always fully retained, but instead portions are retroceded as necessary. These retrocessions conserve our capital, stabilise and optimise our results and enable us to derive maximum benefit from a "hard" market (e.g. following a catastrophe loss event). Alongside traditional retrocession we also transfer risks to the capital market. Over-
In our understanding, this category encompasses the risk of losses occurring because of the inadequacy or failure of internal processes or as a result of events triggered by employee-related, system-induced or external factors. Operational risks also encompass legal risks, although they do not extend to strategic or reputational risks.
Operational risks may derive, inter alia, from system failures or unlawful or unauthorised acts. Given the broad spectrum of operational risks, there is a wide range of
Hannover Re's reputation as a company is one of its most vital intangible assets. It often takes decades to build up a positive reputation, yet this reputation can be damaged or even destroyed within a very brief space of time. Like the strategic risk, the reputational risk usually manifests itself in combination with other risks, such as market or technical risks. Management of this risk is facilitated by our mandatory communication channels and processes that have been specified for defined crisis scenarios as well as by our business principles. The liquidity risk refers to the risk of being unable to convert investments and others assets into cash in order to meet our financial obligations when they become due. The liquidity risk consists of the refinancing risk, i.e. the necessary cash cannot be obtained or can only be raised at increased costs, and the market liquidity risk, meaning that financial market transactions can only be completed at a poorer price than expected due to a lack of market liquidity. Regular liquidity planning and a liquid asset structure are core elements of our ability to manage this risk. Our active liquidity management has helped to ensure that even in times of financial crisis we are able to meet our payment obligations at all times without reservation.
The above remarks describe the diverse spectrum of potential risks to which we, as an internationally operating reinsurance company, are exposed as well as the steps taken to manage them. These risks can potentially have a significant impact on our assets, financial position and net income. Yet it is inappropriate to consider only the risk aspect, since risks always go hand-in-hand with opportunities. Thus, we have already explained that our conception of risk is holistic. With the aid of our effective controlling tools as well as our organisational structure and process organisation, we ensure that we are able to identify risks in a timely manner and maximise our opportunities. Based on our currently available insights arrived at from a holistic analysis of the risk situation, we cannot discern any
In 2009 we expect to see a sharp downturn in the global economy and a continuing recession.
In the course of the renewal season it was again evident that ceding companies are attaching considerable importance to their reinsurers' ratings; this applies particularly to the underwriting of long-tail casualty business,
Non-life reinsurance where a very good rating is an indispensable prerequisite in order simply to be asked to submit a quotation. With its very good ratings ("AA-" from Standard & Poor's and "A" from A.M. Best), Hannover Re is one of the few reinsurers to meet this condition without reservation.
In motor liability business we obtained appreciable rate increases after several years of reduced basic premiums in the original market and claims inflation for bodily injuries. In view of the accumulation losses carried in 2008, significant improvement in conditions were also possible in own damage business.
Rates in property catastrophe business climbed sharply as expected following a year of heavy losses.
We were able to further extend our already large market share in Germany thanks to new customer relationships and increased treaty shares under existing accounts, thereby cementing and expanding our position as one of the leading reinsurers in the profitable German market.
Owing partly to the heavy losses from hurricane "Ike" in 2008, but also due to the worldwide financial market crisis, capacities in marine business contracted sharply in both the primary and reinsurance sectors; rates consequently rose. Increases were recorded in regions that had suffered heavy losses, such as the Gulf of Mexico, with prices here climbing by as much as 35%. In aviation business, too, where Hannover Re ranks among the global market leaders, the premium erosion was halted.
In the Netherlands the financial market crisis led to a "revaluation" of the technical account, prompting rates to rise again in industrial property insurance. In other Western European countries, too, business opportunities improved and we were therefore able to enlarge our premium volume.
For North America, too, we are looking to a significantly improved market environment in the current year; reductions in rates or conditions are a thing of the past. The diminished capital resources of primary insurers – in the aftermath of the financial market crisis – have fanned demand for reinsurance covers and hence pushed up prices. Especially in areas where reinsurance capacity is scarce, e.g. catastrophe business in exposed zones such as the Gulf of Mexico and California earthquake territory, we are seeing double-digit price rises. It should, however, be noted that prices here were not always commensurate with the risks.
As far as our business in South Africa is concerned, we expect 2009 to bring a rise in premium volume, which is driven by specialty business. In the area of structured products, too, we anticipate fresh business stimuli as a consequence of more exacting capital requirements and the repercussions of the financial market crisis.
The financial crisis and economic crunch have had farranging repercussions on worldwide credit and surety reinsurance. The number of insolvencies – and hence also the loss ratios – is set to rise. In the face of this business climate we are seeing appreciable hardening on the markets to the benefit of reinsurers and were thus extraordinarily satisfied with the outcome of the treaty renewals as at 1 January 2009. In proportional credit business we were able to push through significantly reduced commissions. Rate increases in the mid-doubledigit percentage range were obtained for non-proportional covers. Although we appreciably enlarged our premium volume, we also significantly scaled back our acceptances in some business segments. In these cases we did not consider even high prices to be commensurate with the risks.
The development of structured reinsurance products has been highly satisfactory. The loss of capital at primary insurers has sharply boosted demand, especially for surplus relief contracts. Our goal is to further diversify our business and to expand in regions outside the United
States. These efforts are proving successful. Especially in Asia, we have achieved sizeable growth. Yet in the US market, too, demand has risen.
In facultative reinsurance, which involves the writing of individual risks, around 40% of our treaty portfolio was renewed on 1 January. In this area we observed stable rates in virtually all markets. While a tendency towards a hardening market has made itself felt in the wake of the financial market crisis, the rate increases are still relatively insignificant. Only in US property business were we able to secure price increases running into the low double-digits. We anticipate further rate increases in the second half of the year.
For the non-life reinsurance business group we expect net premium growth of 10% in the original currencies as well as a healthy profit contribution.
The general environment for international life and health reinsurance remains favourable – not only in the short term but also from a medium-term perspective. Even against the backdrop of the current financial market crisis, the long-term demographic trends, heightened risk awareness among the urban middle classes, the opening up of the seniors' market and the creative design of innovative types of products should generate sustained growth stimuli, especially in key threshold countries.
In this context we believe that Hannover Life Re is very well positioned to share in these growth potentials to an above-average extent. We intend to further refine our tried and tested "Five Pillar model", with reinsurance solutions for occupational pension funds set to play an especially pivotal role in the new markets segment.
The application processes in life insurance, which were developed more than 100 years ago, are to be subjected to a thorough overhaul. The goal is to channel the purchase of life insurance policies into a process that – in common with many straightforward bank products – can
+++ Significantly higher cession ratio expected for mortality risks in the United States +++
This state of affairs is encapsulated especially succinctly in the US life market, where the insurance industry suffered marked erosion of its capital base in the course of the year under review. In this market, therefore, we expect 2009 and 2010 to bring an appreciable increase in the cession ratio for mortality risks.
Similar developments are taking place in markets such as the United Kingdom and Germany; the spotlight here is on financially oriented solutions such as realising the value of in-force business. Overall, most life reinsurers belong to the subsegment of the international financial services industry that is currently profiting from the worldwide financial market crisis and for which attractive new business opportunities are opening up on a scale that would have been considered unrealistic just a few years ago.
For the current financial year and beyond we are looking to an attractive EBIT margin in the range of 6.5% to 7.5% as well as a better-than-average return on the invested capital.
Bearing in mind the favourable market conditions described above in non-life and life/health reinsurance as well as our strategic orientation, we are looking forward to another good financial year in 2009. In view of our acquisition in life reinsurance we expect our gross premium in total business to grow by about 16%. This transaction will also improve the diversification of our earnings streams, since life reinsurance business – with its greater stability – will account for a significantly larger share of total business going forward.
The expected positive cash flow that we generate ourselves from the technical account and our investments should – subject to stable exchange rates – lead to further
Overall business outlook growth in our asset portfolio. In the area of fixed-income securities we continue to stress the high quality and diversification of our portfolio.
In the course of the current financial year and beyond we expect further hardening of the non-life reinsurance markets and continuing favourable conditions in life and health reinsurance.
We define our long-term goals as follows: In non-life reinsurance we are guided exclusively by profit rather than growth targets. Our goal here is to achieve an EBIT margin of at least 12.5% each year.
Both the earnings per share and the book value per share also constitute central management ratios and performance indicators for our company. Our strategic objective is to increase these key figures – together with the operating profit (EBIT) – by double-digit margins every year.
The common shares (share capital) of the company amount to EUR 120,597,134.00. They are divided into 120,597,134 registered no-par shares.
The following company holds direct or indirect capital participations that exceed 10% of the voting rights: Talanx AG, Riethorst 2, 30659 Hannover, holds 50.2% (rounded) of the company's voting rights. There are no shares with special rights granting their holders powers of control, nor is there any specially structured voting control for employees who have capital participations and do not directly exercise their rights of control.
The powers of the Executive Board with respect to the issue and repurchase of shares are defined in § 6 "Contingent capital" and § 7 "Authorised capital" of Hannover Re's Articles of Association as well as in §§ 71 et seq. Stock Corporation Act. In this connection the Annual General Meeting authorised the Executive Board on 6 May 2008 pursuant to § 71 Para. 1 No. 8 Stock Corporation Act to acquire treasury shares on certain conditions.
The two syndicated letter of credit lines extended to Hannover Re in the amount of USD 2 billion each as well as a syndicated line of credit in the amount of EUR 500 million contain standard market change-of-control clauses that entitle the participating banks to require early repayment if Talanx AG loses its majority interest or drops below the threshold of a 25 percent participation or if a third party acquires the majority interest in Hannover Rückversicherung AG.
Fixed-income securities – at fair value through profit or loss 7.1 254,528 158,740
Other financial assets – at fair value through profit or loss 7.1 44,654 20,385
Commission and brokerage, change in deferred acquisition costs 7.2, 7.13 1,635,941 1,759,010
Tax effects on income and expense directly recognised in equity (11,922) (50,246) 6,123
Cash and cash equivalents at the beginning of the period 335,422 351,776
Cash and cash equivalents at the end of the period 430,225 335,422
1. Company information 90 2. Accounting principles 90 3. Accounting policies 92 3.1 Change in accounting policies 92 3.2 Summary of major accounting policies 92 3.3 Major discretionary decisions and estimates 98 4. Consolidated companies and consolidation principles 99 5. Major acquisitions, new formations and other corporate changes 104 5.1 Acquisitions and new formations 104 5.2 Disposals and discontinued operations 104 5.3 Further corporate changes 106 6. Management of technical and financial risks 107 6.1 Quantitative risk management using the internal capital model 107 6.2 Technical risks in non-life reinsurance 108 6.3 Technical and financial risks in life and health reinsurance 111 6.4 Market risks 111 6.5 Credit risks 114 6.6 Liquidity risks 116 7. Notes on the individual items of the balance sheet and statement of income 117 7.1 Investments including income and expenses 117 7.2 Technical assets and liabilities 133 7.3 Funds held/contract deposits and contracts without sufficient technical risk 142 7.4 Goodwill; present value of future profits on acquired life reinsurance portfolios 143 7.5 Taxes and deferred taxes 144 7.6 Staff and expenditures on personnel 147 7.7 Provisions for pensions and other post-employment benefit obligations 148 7.8 Debt and subordinated capital 152 7.9 Shareholders' equity and minority interests 155 7.10 Treasury shares 157 7. 11 Earnings per share 157 7.12 Other assets and liabilities 158 7.13 Technical statement of income 164 7.14 Other income/expenses 166 8. Related party disclosures 167 8.1 Transactions with related parties 167 8.2 Remuneration and shareholdings of the management boards of the parent company 170 8.3 Share-based payment 170 8.4 Mortgages and loans 173 9. Other notes 173 9.2 Contingent liabilities and commitments 173 9.3 Long-term commitments 175 9.4 Rents and leasing 175 9.5 Currency translation 176 9.6 Fee paid to the auditor 177 9.7 Events after the balance sheet date 177
The consolidated financial statement reflects all IFRS in force as at 31 December 2008 as well as all interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), application of which was mandatory for the 2008 financial year.
The declaration of conformity required pursuant to § 161 German Stock Corporation Act (AktG) regarding compliance with the German Corporate Governance Code has been submitted and made available to the shareholders.
In November 2006 the IFRIC published IFRIC 11 "IFRS 2 – Group and Treasury Share Transactions". The interpretation provides guidance on the application of IFRS 2 "Share-based Payment" to share-based payments involving an entity's own equity instruments or rights to such equity instruments granted within the group. IFRIC 11 is mandatory for financial years beginning on or after 1 March 2007. Application of the interpretation had no implications for Hannover Re's consolidated financial statement.
On 13 October 2008, in response to the turmoil on international capital markets, the IASB adopted and published the amendments to "IAS 39 & IFRS 7 Reclassification of Financial Assets". By way of the Regulation (EC) No. 1004/2008 the European Commission adopted the amendments in European law on 15 October 2008. The amendments permit, in particular circumstances, reclassifications of (1.) non-derivative financial assets out of the fair value through profit or loss category and (2.) financial assets classified in the available-for-sale category to the loans and receivables category, and provide for additional disclosures in this regard. Hannover Re investigated the implications of the amendments and in view of the scarcely available scope for application did not avail itself of the facilities associated with the amendments as at the balance sheet date.
In September 2007 the IASB issued a revised IAS 1 "Presentation of Financial Statements". The revision is aimed at improving users' ability to analyse and compare the information given in financial statements. IAS 1 defines the basic principles for the presentation and structure of the annual financial statement. It also contains minimum requirements for the content of an annual financial statement. The revised standard is applicable to financial years beginning on or after 1 January 2009; early adoption is permitted.
In February 2008 the amendments to IAS 32 and IAS 1 "Puttable Financial Instruments and Obligations arising on Liquidation" were published. The revised version of IAS 32 permits the balance sheet classification of puttable financial instruments as equity in the future under certain conditions. The amendment cannot be applied to the consolidated financial statement, and in particular minority interests in partnerships shall continue to be recognised as a financial liability. The amendment of IAS 1 refers to revised disclosure requirements applicable to puttable financial instruments and obligations arising on liquidation. The application of both standards is mandatory from 1 January 2009 onwards. Hannover Re does not expect the amendments to have any effect on the consolidated financial statement.
In July 2008 the IFRIC published IFRIC 16 "Hedges of a Net Investment in a Foreign Operation". This interpretation provides guidance on possible hedges of a net investment in a foreign operation and on the accounting thereof in an entity's consolidated financial statements. Application of the clarifications is mandatory for financial years beginning on or after 1 October 2008. Hannover Re does not expect application of the interpretation to have any effect on the consolidated financial statement.
Reinsurance contracts: in March 2004 the IASB published IFRS 4 "Insurance Contracts". The first standard governing the accounting of insurance contracts, it divides the "Insurance Contracts" project into two phases. IFRS 4 represents the outcome of Phase I and serves as a transitional arrangement until the IASB defines the measurement of insurance contracts after completion of Phase II. Underwriting business is to be subdivided into insurance or so-called "investment contracts". Contracts with a significant insurance risk are considered to be insurance contracts, while contracts without significant insurance risk are to be classified as investment contracts. The standard is also applicable to reinsurance contracts. 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).
Financial assets: as a basic principle we recognise the purchase and sale of directly held financial assets including derivative financial instruments as at the settlement date.
Financial assets at fair value through profit or loss consist of securities held for trading and those classified as measured at fair value through profit or loss since acquisition. This refers principally to unsecured debt instruments issued by corporate issuers and derivative financial instruments. Within the scope of the fair value option provided under IAS 39, according to which financial assets may be carried at fair value on first-time recognition subject to certain conditions, all structured securities that would have needed to have been broken down had they been recognised as available for sale or under loans and receivables are also recognised here. Hannover Re makes use of the fair value option solely for selected subportfolios of its assets. In addition, derivative financial instruments that Hannover Re does not recognise as a valuation unit with underlying risks are recognised here. Securities held for trading and securities classified as measured at fair value through profit or loss since acquisition are carried at their fair value on the balance sheet date. If stock market prices are not available for use as fair values, the carrying values are determined using generally acknowledged measurement methods. All unrealised gains or losses from this valuation are recognised in net investment income. The classification of financial assets at fair value through profit or loss is compatible with Hannover Re's risk management strategy and investment strategy, which is oriented extensively towards economic fair value variables.
Establishment of the fair value of financial instruments carried as assets or liabilities: the fair value of a financial instrument corresponds to the amount that Hannover Re would receive or pay if it were to sell or settle the said financial instrument on the balance sheet date. Insofar as market prices are listed on markets for financial instruments, these prices are used. In other cases the fair values are established on the basis of the market conditions prevailing on the balance sheet date. These fair values are calculated using recognised models of mathematical finance. Hannover Re uses a number of different valuation models, the details of which are set out in the following table.
Insurance derivatives Theoretical price Market values of the cat. bonds Interest-rate curve
Netting of financial instruments: financial assets and liabilities were only netted and recognised in the appropriate net amount where expressly permitted in law (reciprocity; similarity and maturity), in other words if the intention is to offset such items on a net basis and this offsetting can be effected simultaneously.
Investments in associated companies are valued at equity on the basis of the proportionate shareholders' equity attributable to the Group. Under IAS 28.23, which requires the application of the equity method based on the investor's share of the results of operations of the investee, the goodwill apportionable to the associated companies must be recognised together with the investments in associated companies. The year-end result of an associated company relating to the Group's share is included in the net investment income and shown separately. As a general rule, the shareholders' equity and year-end result are taken from the associated company's latest available annual financial statement.
Reinsurance recoverables on technical reserves: shares of our retrocessionaires in the technical reserves are calculated according to the contractual conditions on the basis of the gross technical reserves. Appropriate allowance is made for credit risks.
Deferred tax liabilities: in accordance with IAS 12 deferred tax liabilities must be accounted for if assets are to be recognised in a higher amount or liabilities in a lower amount in the consolidated balance sheet than in the tax balance
Notes 3.2 Summary of major accounting policies sheet and if these differences will be cancelled out again in the future for tax purposes (so-called temporary differences).
Minority interests are shares in the equity of affiliated companies not held by companies belonging to the Group. IAS 1 "Presentation of Financial Statements" requires that minority interests be recognised separately within Group shareholders ' equity. The minority interest in profit or loss is shown separately as profit appropriation following the net income ("thereof" note). This item refers mainly to minority interests in E+S Rück and its subsidiaries.
Notes 3.3 Major discretionary decisions and estimates 3.3 Major discretionary decisions and estimates
Notes 4. Consolidated companies and consolidation principles 4. Consolidated companies and consolidation principles
With regard to the major acquisitions and disposals in the year under review please see our remarks in Section 5 "Major acquisitions, new formations and other corporate changes".
HAPEP II Holding GmbH, Hannover/Germany 4) 95.3 EUR 47,756 EUR 685
Hannover Re Euro RE Holdings GmbH, Cologne/Germany 4) 82.1 EUR 4,025 EUR (37)
Hannover Euro Private Equity Partners III GmbH & Co. KG, Hannover/Germany 4) 67.3 EUR 49,991 EUR 7,002
Hannover Euro Private Equity Partners IV GmbH & Co. KG, Hannover/Germany 4) 60.4 EUR 60,499 EUR (1,839)
Hannover Euro Private Equity Partners II GmbH & Co. KG, Hannover/Germany 4) 57.8 EUR 9,597 EUR 5,177
Hannover Finance (Luxembourg) S.A., Luxembourg/Luxembourg 1) 100.0 EUR 36,486 EUR (13,181)
Hannover Finance (UK) Limited, Virginia Water/United Kingdom 1) 100.0 GBP 131,119 GBP (10)
Hannover Life Reassurance Bermuda Ltd., Hamilton/Bermuda 1) 100.0 EUR 131,355 EUR 9,214
Hannover Life Re of Australasia Ltd., Sydney/Australia 1) 100.0 AUD 191,844 AUD 39,337
Hannover Re Advanced Solutions Ltd., Dublin/Ireland 6) 100.0 EUR – EUR –
Hannover Re (Bermuda) Ltd., Hamilton/Bermuda 1) 100.0 EUR 930,790 EUR 86,339
Hannover Reinsurance (Dublin) Ltd., Dublin/Ireland 6) 100.0 EUR 31 EUR –
International Insurance Company of Hannover Ltd., Bracknell/United Kingdom 1) 100.0 GBP 104,621 GBP 1,916
Secquaero ILS Fund Ltd., George Town, Grand Cayman/Cayman Islands 1) 7) 100.0 USD 50,214 USD 214
Hannover Finance, Inc. compiles its own subgroup financial statement in which the following major company is included: Clarendon Insurance Group, Inc.,
Hannover Reinsurance Group Africa (Pty) Ltd., Johannesburg/South Africa 1) 100.0 ZAR 156,133 ZAR 33,712
Hannover Reinsurance Africa Ltd., Johannesburg/South Africa 1) 100.0 ZAR 686,963 ZAR 76,008
Notes 4. Consolidated companies and consolidation principles 1) Provisional (unaudited) figures 2) Year-end result after profit transfer 3) Formerly Zweite Hannover Rück Beteiligung Verwaltungs-GmbH 4) Financial year as at 30 September 2008 5) Abbreviated financial year from 10 April - 30 September 2008 6) Company is inactive and does not compile an annual report 7) IFRS figures 8) Financial year as at 31 December 2007 9) Formerly WeHaCo Unternehmensbeteiligungs-AG 10) Company is in liquidation 11) Figures as at 31 August 2006 12) Unaudited US GAAP figures, abbreviated financial year from 30 May - 30 September 2008
Hannover Re Real Estate Holdings, Inc., Orlando/USA 1) 95.2 USD 138,741 USD (11,498)
The capital consolidation complies with the requirements of IAS 27 "Consolidated and Separate Financial Statements". Subsidiaries are consolidated as soon as Hannover Re acquires a majority voting interest or de facto controlling influence. The same is true of special purpose entities, the consolidation of which is discussed separately below.
Securitisation of reinsurance risks The securitisation of reinsurance risks is largely structured through the use of special purpose entities. The existence of a consolidation requirement in respect of such entities is to be examined in accordance with SIC-12 "Consolidation – Special Purpose Entities". In cases where IFRS do not currently contain any specific standards, Hannover Re's analysis – in application of IAS 8.12 – also falls back on the relevant standards of US GAAP.
Since November 2000 Hannover Re had held voting equity interests in an amount of 33.3% in the special purpose entity Mediterranean Re PLC for the securitisation of reinsurance risks in France and Monaco. The securitisation ended as per the contractual agreement on 18 November 2005. The bonds issued as security were repaid in full to investors. The additional paid-in capital was repaid to the partners. The special purpose entity was liquidated effective 5 February
In the previous year Hannover Re placed on the capital market a protection cover on its worldwide natural catastrophe business in an amount of USD 200.0 million with a term of two years. It provides Hannover Re with aggregate excess of loss coverage. The special purpose entity Kepler Re, a separate cell within Kaith Re Ltd., is used for the transaction. The volume as at the balance sheet date was EUR 143.1 million (EUR 135.9 million). The underlying portfolio consists of the natural catastrophe business retained under the existing "K5" securitisation. The cover attaches upon occurrence of an aggregated 83-year-event for "K5" and is fully utilised upon occurrence of a 250-year accumulation. Within this spread the outside investors in this and the "K5" transaction combined assume 90% of the "K5" losses, while the remaining 10% remain with Hannover Re. Hannover Re does not bear the majority of the economic benefits or risks arising out of this company's activities through any of its business relations with the special purpose entity.
In the previous year the Hannover Re Group also transferred risks from reinsurance recoverables to the capital market. By way of this securitisation in a nominal amount of EUR 95.0 million, which has a term of five years, Hannover Re reduces the default risk associated with reinsurance recoverables. The portfolio of recoverables underlying the transaction has a nominal value of EUR 1.0 billion and is comprised of exposures to retrocessionaires. The securities serving as collateral are issued through the special purpose entity Merlin CDO I B.V. A payment to Hannover Re is triggered by the insolvency of one or more retrocessionaires as soon as Hannover Re's contractually defined cumulative deductible of EUR 60.0 million over the term of the contract is exceeded. In the months of May and November 2008 Hannover Re purchased securitisations issued by Merlin with a nominal value of altogether EUR 10.5 million on the secondary market, which it holds in its asset portfolio. Hannover Re does not derive the majority of the economic benefits or risks arising out of the special purpose entity's activities through any of its business relations.
In the context of the sale of the interest held by Hannover Re in ITAS Assicurazioni S.p.A., a portion of the purchase price was paid by the purchaser in the form of shares in E+S Rück. The stake of 1.41% in the common shares of E+S Rück received in this way was transferred to Hannover Rück Beteiligung Verwaltungs-GmbH (HRBV) on 30 December 2008 by way of a capital increase for a non-cash contribution. Upon closing of the transaction HRBV held 64.19% of the shares in E+S Rück. Please see our explanatory remarks in Section 5.2 "Disposals and discontinued operations".
After Hannover Re had already paid out the paid-in capital of WRH Offshore High Yield Partners L.P. in the 2007 financial year and during the third quarter of 2008 by way of two distribution resolutions, the company's application for cancellation was filed on 17 December 2008. Deconsolidation of the company gave rise to a loss of altogether EUR 13.6 million, of which EUR 12.1 million was attributable to Hannover Re.
Effective 1 January 2008 Hannover Re and E+S Rück, which were equal partners in GbR Hannover Rückversicherung AG/E+S Rückversicherung AG-Grundstücksgesellschaft (GbR), liquidated the company. The partnership assets of GbR were divided equally between the former partners by way of de facto splitting. The transaction had no implications for the consolidated financial statement as at 31 December 2008.
In the previous year Hannover Re acquired the 50% stake held by E+S Rück in Hannover Life Re of Australasia Ltd., Sydney, and thus held all shares in the company; full allowance was made for transaction costs. All intercompany profits arising out of this transaction were eliminated. Effective 31 March 2008 Hannover Re transferred its shares in the company at book value by way of a capital increase for a non-cash contribution to the former Zweite Hannover Rück Beteiligung Verwaltungs-GmbH, all shares of which were held by Hannover Re. Effective 1 July 2008 Zweite Hannover Rück Beteiligung Verwaltungs-GmbH was converted to Hannover Life Re AG, the registered office of which is in Hannover. The change in corporate form came into effect upon entry in the commercial register on 7 August 2008.
Notes 6.1 Quantitative risk management using the internal capital model 6. Management of technical and financial risks 6.1 Quantitative risk management using the internal capital model
Hannover Re's risk management makes use of appropriate quantitative simulation models. The purpose of risk quantification – using the internal capital model – is inter alia to calculate the risk capital and determine the diversification effect. We also use the model to perform scenario analyses.
As part of our holistic approach to risk management across all business groups, we take into account numerous relevant scenarios. In addition, we analyse extreme scenarios, determine their effect on key balance sheet variables and performance indicators, evaluate them in relation to the planned figures and identify alternative courses of action.
The underreserving of claims constitutes a significant technical risk. Loss reserves are determined using actuarial methods, primarily based on information provided by our cedants, and supplemented as necessary by additional reserves established on the basis of our own loss assessments. Especially in liability business, reserves are also set aside for claims that have been incurred but not yet reported (IBNR) owing to the long run-off periods for such claims. The additional IBNR reserve established by the Hannover Re Group amounted to EUR 3,236.2 million in the year under review. The IBNR reserve is calculated on a differentiated basis according to risk categories and regions. All in all, the anticipated ultimate loss ratios are calculated in 76 subsegments. The correct measurement of loss reserves for asbestos- and pollution-related claims is a highly complex matter since decades may elapse between causation of the loss and reporting of the claim. Hannover Re's exposure to asbestos-related claims and pollution damage is comparatively slight. The adequacy of these reserves is normally measured using the so-called "survival ratio". This ratio expresses how many years the reserves would cover if the average level of paid claims over the past three years were to continue. At the end of the year under review our survival ratio stood at 25.0 years.
Run-off triangles are another tool used to verify our assumptions. Such triangles show the changes over time in the reserves as a consequence of paid claims and in the recalculation of the reserves that are to be established as at each balance sheet date. Adequacy is monitored using actuarial methods (cf. here our explanatory remarks on technical reserves in Section 7.2 "Technical assets and liabilities").
The combined ratio is tracked over time in non-life reinsurance in order to monitor the risk of losses exceeding premiums: Combined ratio (non-life reinsurance) 95.4 99.7 100.8 112.8 97.2 96.0 96.3 116.5 107.8 111.1
Figures in EUR million Catastrophe losses and major claims in 2008
Hail in southern Germany ("Hilal"), 28 May – 3 June 55.7 55.2
Flooding in the US, 28 May – 20 June 10.0 7.2
For the purpose of risk limitation, maximum underwriting limits (capacities) are stipulated for various extreme loss scenarios and return periods in light of profitability criteria. Adherence to these limits is constantly monitored by Group Risk Management. The Risk Committee, Executive Board and the body responsible for managing non-life reinsurance are regularly updated on the extent to which these capacities are utilised. The limits for the 100- and 250-year aggregate annual loss as well as the utilisation thereof were as follows: Furthermore, we establish the portfolio risk for various scenarios (e.g. hurricanes in the US, windstorms in Europe, earthquakes in the US) in the form of probability distributions. The range of tools used for accumulation control is supplemented by the progressive inclusion of realistic extreme loss scenarios.
All natural catastrophe risks, net exposure 100-year aggregate annual loss 864 93%
As part of a holistic analysis of technical risks, the risk deriving from the accepted new business is considered in addition to the reserving risk. The risk capital for the premium and reserving risk per line of business is set out in the chart below. Risk spreading across lines of business is referred to as diversification. In this way we are able to enhance the efficiency of the allocated capital while at the same time reducing the required equity resources. Depending upon the capital required by our business segments and lines and their contribution to diversification, we define the cost of capital to be generated for each business unit.
Risk capital* required per Multi-Specialist line without diversification effect * Calibrated to the 99.97% quantile as per internal risk model; equivalent to "AA" S&P rating
1) More extensive information is provided in the EEV reports for 2006 and 2007 published on our website. The presentation is based on the principles for publication of the EEV which were published for the first time in May 2004 and subsequently further expanded in September 2005 by the CFO Forum, an international organisation of Chief Financial Officers from major insurance and reinsurance enterprises 2) Before consolidation, without minority interests 3) For contracts in foreign currencies
The moderate change in the EEV under the scenarios set out above is in line with our expectation and reflects our portfolio 's high degree of diversification. The consolidated EEV before minority interests amounted to EUR 1,715.1 million (EUR 1,527.6 million) as at 31 December 2007, an increase of 12.3% (16.3%) compared to the corresponding figure for the previous year. Regarding the change relative to the previous year, please see our publication "European Embedded Value Report 2007". The operating embedded value earnings totalled EUR 280.0 million (EUR 185.6 million), while the value of new business stood at EUR 106.4 million (EUR 64.2 million). Leaving aside non-recurring special effects, the development relative to the previous year's figures was in line with our expectations.
A key tool of our risk management in the area of life and health reinsurance is the European Embedded Value (EEV). The EEV is a ratio used to evaluate life insurance and reinsurance business. It is comprised of the value of in-force business and the corresponding capital. The value of in-force business is determined as the present value of the future shareholders' earnings from worldwide life and health reinsurance business after appropriate allowance for all risks underlying this business. Since the 2006 financial year the EEV has been calculated on a basis that is consistent with the market. Going forward, the Market Consistent Embedded Value (MCEV) will be determined on the basis of the principles published by the CFO Forum in June 2008. The MCEV will be published on our website at the same time as the quarterly financial report on the first quarter of 2009.
The overriding principle guiding our investment strategy is capital preservation while giving adequate consideration to the security, liquidity, mix and spread of the assets. Risks in the investment sector consist primarily of market, credit, spread and liquidity risks. The most significant market price risks are share price, interest rate and currency risks.
Time series of selected representative market parameters (equity prices, yield curves, spread curves, exchange rates, commodity prices and macro-economic variables) serve as the database for the APT model. All correlations between these time series are reduced to up to 25 main components, which for their part are by definition linearly independent. All asset positions can be mapped in this multidimensional space. Inexplicable volatilities of individual securities make up the residual, from which the specific risk of the security is derived.
Value at Risk1) in the Hannover Re Group 1) VaR upper limit according to Hannover Re's investment guidelines: 2.5%
Jan. 08 Feb. 08 Mar. 08 Apr. 08 May 08 Jun. 08 Jul. 08 Aug. 08 Sep. 08 Oct. 08 Dec. 08Nov. 08
Further information on the risk concentrations of our investments can be obtained from the tables on the rating structure of fixed-income securities as well as on the currencies in which investments are held. Please see our comments in Section 7.1 "Investments including income and expenses".
As a consequence of the crisis on international financial markets we took a number of further risk-minimising measures in the second half of the year under review. In this regard please see our explanatory remarks on market risks in the risk report on page 66 et seq.
• 30.3% of our recoverables from reinsurance business are 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 recoverables can potentially be set off against our own liabilities.
• The average default rate over the past three years was 0.3%.
The chart shows the high quality of security backing our reinsurance recoverables. It also provides insight into the ratings of our retrocessionaires.
For further remarks on technical and other assets which are unadjusted but considered overdue as at the balance sheet date as well as on significant unscheduled depreciation taken in the year under review please see Section 7.2 "Technical assets and liabilities" and Section 7.12 "Other assets and liabilities".
The latter items, which also encompass lower-quality mortgage loans, had a fair value of altogether EUR 31.0 million as at the balance sheet date; the underlyings for these securities were in part subprime assets. The write-downs taken on this portfolio amounted to EUR 15.7 million. Similarly, the value adjustments prompted by insolvencies at financial institutions remained within comparatively modest bounds. The failures of Lehman Brothers, Washington Mutual and Bradford & Bingley caused write-downs of EUR 28.1 million. Of this amount, EUR 25.6 million was apportionable to fixed-income securities and EUR 2.5 million to equity and equity-related securities.
In addition, we would refer the reader to our comments in the risk report on risk-minimising measures taken as a consequence of the crisis on international financial markets on page 66 et seq.
Government bonds Securities issued by semi-governmental entities Corporate bonds Asset-backed securities in % in EUR million in % in EUR million in % in EUR million in % in EUR million 1) Securities held through investment funds are recognised pro rata with their corresponding individual ratings
Credit risks from investments may arise out of a failure to pay (interest and/or capital repayment) or change in the credit status (rating downgrade) of issuers of securities. We attach vital importance to credit assessment conducted on the basis of the quality criteria set out in the investment guidelines.
Investments are classified and measured in accordance with IAS 39 "Financial Instruments: Recognition and Measurement ".
The investments also encompass investments in associated companies, own-use real estate, investment property, other invested assets, short-term investments, cash and funds held/contract deposits.
In the case of financial assets that are not traded on an active market, the fair value is determined using a measurement method (e.g. effective interest rate method). The value determined in this way at time of acquisition can, however, diverge from the actual cost of acquisition. The resulting measurement difference constitutes a theoretical "day-one profit/loss". As at the balance sheet date this produced only an insignificant loss.
Variable-rate bonds (so-called "floaters") are shown under the maturities due in one year and constitute our interestrelated, within-the-year reinvestment risk.
Amortised cost, unrealised gains and losses and accrued interest on the portfolio of investments classified as held to maturity as well as their fair value
Government debt securities of EU member states 2,565,205 74,577 2,000 46,936 2,684,718
The carrying amounts of the fixed-income securities and equity securities classified as available for sale as well as the short-term investments allocated to this category correspond to their fair values including accrued interest.
The carrying amounts of the financial assets allocated to this category correspond to their fair values including accrued interest.
For further information please see the explanatory remarks on derivative financial instruments in this section.
The unscheduled impairments of EUR 479.9 million (EUR 71.4 million) were predominantly attributable to assets classified as available for sale. Of the impairments taken on fixed-income securities of EUR 96.9 million (EUR 26.6 million), an amount of EUR 15.7 million (EUR 9.6 million) related to structured products connected with the crisis on the US housing market in respect of which Hannover Re identified a risk of default. The impairments on fixed-income securities were taken largely on structured assets and determined on the basis of a case-by-case analysis. In this context consideration was given not only to pure changes in the fair value of the securities, but also to qualitative criteria. The fair value of the underlying instruments totalled EUR 77.7 million (EUR 66.8 million) as at 31 December 2008. They accounted for accrued interest of EUR 0.5 million (EUR 0.1 million) as at the balance sheet date. In addition, an impairment loss of EUR 356.1 million (EUR 34.2 million) was recognised on equities whose fair value had fallen significantly or for a prolonged period below acquisition cost. The portfolio did not contain any overdue, unadjusted assets as at the balance sheet date since overdue securities are written down immediately.
The net gains and losses on investments held to maturity, loans and receivables and the available-for-sale portfolio shown in the following table are composed of interest income, realised gains and losses and impairments. In the case of the fixed-income securities at fair value through profit or loss designated in this category and the other financial assets, which include the technical derivatives, changes in unrealised gains and losses are also recognised.
Net gains and losses on investments 1) Including income from associated companies, for reconciliation with the consolidated statement of income 2) Excluding other investment expenses
Allocation to gains/losses from the fair-value measurement of the available-for-sale portfolio 347,041 103,639
Fixed-income securities – at fair value through profit or loss 4,863 11,828 68,541 40,072 101,670 23,325 4,229 – 254,528
Total fixed-income securities incl. derivatives 10,476,743 3,050,654 3,093,846 886,061 140,718 126,330 59,527 26,904 17,860,783
Fixed-income securities – at fair value through profit or loss 1,445 26,143 32,559 37,821 26,649 30,715 – 3,408 158,740
Total fixed-income securities incl. derivatives 7,780,216 3,868,515 2,869,956 654,331 52,692 275,191 7,416 158,676 15,666,993
Investments were held in the following currencies: The maximum credit risk of the items shown here corresponds to their carrying amounts.
Fixed-income securities – available-for-sale 679,117 325,065 5,746,278 1,119,426 92,903 6,009,523 163,126 347,394 14,482,832
Fixed-income securities – at fair value through profit or loss – – 66,518 – – 164,860 23,150 – 254,528
Other financial assets – at fair value through profit or loss – – 40,740 – – 3,914 – – 44,654
Fixed-income securities – available-for-sale 706,327 386,111 4,404,086 1,184,578 61,008 5,257,713 168,690 308,542 12,477,055
Hannover Re calculates the fair value of the embedded derivatives in Modco treaties using the market information available on the valuation date on the basis of a "credit spread" method. Under this method the derivative is valued at zero on the date when the contract commences and its value then fluctuates over time according to changes in the credit spreads of the securities. The derivative had a negative value of EUR 89.1 million (EUR 13.0 million) as at the balance sheet date and was recognised under other liabilities. The charge to investment income from the derivative amounted to altogether EUR 72.1 million (EUR 20.0 million) before tax as at the balance sheet date. This development can be attributed principally to the sustained widening of the credit spreads in the year under review – especially in the fourth quarter.
The derivative components of another group of contracts in the area of life and health reinsurance were measured on the basis of stochastic considerations. The measurement produced a positive derivative value of EUR 11.1 million (EUR 12.7 million) on the balance sheet date. The derivative was recognised under other financial assets at fair value through profit or loss. The valuation resulted in a charge against investment income of EUR 1.5 million (EUR 0.7 million) as at 31 December 2008.
Pursuant to IAS 39.9 the "Eurus" transaction gives rise to a derivative, the fair value of which as at 31 December 2008 was EUR 3.9 million (-EUR 2.9 million) and which we recognised under other financial assets at fair value through profit or loss as at the balance sheet date. Measurement resulted in an improvement of EUR 6.9 million in investment income (previous year: charge to investment income of EUR 3.0 million) in the year under review. We would refer the reader to the explanatory remarks in Section 4 "Consolidated companies and consolidation principles" regarding the securitisation of reinsurance risks.
The recognised disposals of EUR 28.5 million include the sale of ITAS Assicurazioni S.p.A., Trento, Italy. In this regard and for further information on our major participating interests please see Section 5 "Major acquisitions, new formations and other corporate changes".
Balance at 1 January of the year under review 170,083 166,375
Real estate is divided into real estate for own use and third-party use (investment property). The real estate in the portfolio which is used to generate income is shown under the investments. Real estate is valued at cost of acquisition less scheduled depreciation with useful lives of at most 50 years. Own-use real estate is recognised under other assets.
In addition, we held indirect real estate investments for the first time in the year under review in an amount of EUR
The other invested assets consisted largely of participating interests in partnerships measured at fair value in an amount of EUR 622.6 million (EUR 528.2 million). The amortised cost of these participations amounted to EUR 504.6 million (EUR 385.2 million); in addition, unrealised gains of EUR 135.8 million (EUR 155.1 million) and unrealised losses of EUR 17.8 million (EUR 12.1 million) were recognised from these participations.
Gross book value at 31 December of the previous year 41,370 42,215
Cumulative depreciation at 31 December of the year under review 23,640 24,408
Technical assets The retrocessionaires' portions of the technical provisions are based on the contractual agreements of the underlying reinsurance treaties. For further details please refer to our comments on the technical provisions in this section as well as to the explanatory remarks in Section 6 "Management of technical and financial risks".
In the case of reinsurance treaties for unit-linked life insurance policies classified as "universal life-type 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.
Net book value at 31 December of the previous year 1,807,143 1,980,102
With regard to the credit risks resulting from technical assets we would also refer the reader to our comments in Section 6 "Management of technical and financial risks".
For further explanatory remarks please see Section 3.2 "Summary of major accounting policies".
Net book value at 31 December of the previous year 16,553,888 2,471,585 14,082,303 17,596,325 3,048,496 14,547,829
The table below shows the net loss reserve (loss and loss adjustment expense reserve) for non-life reinsurance in the years 1998 to 2008 as well as the run-off of the reserve (so-called run-off triangle).
The development of the euro relative to the most relevant foreign currencies is also a significant influencing factor in this context. In particular, despite the opposing effects of other major foreign currencies, the appreciation of +5.0% in the US dollar against the euro compared to the previous year led to a slight increase in the loss and loss adjustment expense reserve on a euro basis.
The run-off triangles show the run-off of the reserve established as at each balance sheet date, this reserve comprising the provisions constituted in each case for the current and preceding occurrence years. The run-off of the reserve for individual occurrence years is not shown in this regard, but rather the run-off of the reserve constituted annually in the balance sheet as at the balance sheet date.
Loss and loss adjustment expense reserve (from balance sheet) 5,913.1 7,012.5 8,482.0 12,182.7 12,863.4 13,462.2 13,120.7 14,295.9 13,279.8 12,718.2 13,354.1
Net run-off result of the loss reserve (41.1) (55.6) (71.4) (55.0) (19.9) 184.9 290.4 388.9 497.9 546.7
As percentage of original loss reserve (0.9) (1.0) (1.0) (0.2) 0.1 1.5 2.2 3.3 4.3 4.5
Liabilities in liability and motor reinsurance traditionally have long durations, sometimes in excess of 20 years, while liabilities in property business are settled within the first ten years.
The benefit reserve is established for life, annuity, personal accident and health reinsurance contracts. Based on the duration of these contracts, long-term reserves are constituted for life and annuity policies and predominantly shortterm reserves are set aside for health and personal accident business.
The benefit reserve is established in accordance with the principles set out in SFAS 60. The provisions are based on the Group companies' information regarding mortality, interest and lapse rates.
The adequacy of the technical liabilities arising out of our reinsurance treaties is reviewed as at each balance sheet date. As part of the adequacy test for technical liabilities the anticipated future contractual payment obligations are compared with the anticipated future income. Hannover Re adopts the "loss recognition" method set out under US GAAP. Should the result of the test indicate that the anticipated future income will not be sufficient to fund future payments, the entire shortfall is recognised in income by first writing off capitalised acquisition costs corresponding to the shortfall. Any remaining difference is constituted as an additional provision.
Net book value at 31 December of the previous year 6,143,460 255,076 5,888,384 6,109,154 447,537 5,661,617
Net book value at 31 December of the previous year 1,186,382 92,322 1,094,060 1,581,034 339,096 1,241,938
Funds held under insurance contracts that satisfy the requirements of both IFRS 4 and SFAS 113 in relation to the risk transfer from the ceding company to the reinsurer are recognised under this item.
The funds held under reinsurance treaties totalling EUR 566.0 million (EUR 956.9 million) represent the cash and securities deposits furnished to our company by our retrocessionaires that do not trigger any cash flows and cannot be used without the consent of our retrocessionaires. The durations of these deposits are matched to the corresponding shares of the reinsurers in the technical provisions. If such a share no longer exists the corresponding funds held are reduced to the same extent.
Hannover Re reports contract deposits under insurance contracts that satisfy the test of a significant risk transfer to the reinsurer as required by IFRS 4 but fail to meet the risk transfer required by US GAAP under the items "Contract deposits". Since the risk transfer under these transactions is of subordinate importance, these contracts were recognised using the "deposit accounting" method and hence eliminated from the technical account. The compensation elements for risk assumption booked to income under these contracts were netted under other income/expenses. The payment flows resulting from these contracts were reported in the cash flow statement under operating activities. The balances were shown as contract deposits on the assets and liabilities sides of the balance sheet, the fair values of which corresponded approximately to their book values.
The contract deposits on the assets side fell by EUR 327.3 million in the year under review from EUR 616.1 million to EUR 288.8 million. The decrease was attributable principally to the expiry of certain contracts in the area of non-traditional life reinsurance.
Notes 7.3 Funds held/contract deposits and contracts without sufficient technical risk
Goodwill As at the balance sheet date this item principally included the goodwill from the acquisition of E+S Rückversicherung AG. For further information on the method used to test impairment the reader is referred to our explanatory remarks in Section 3.2 "Summary of major accounting policies".
Notes 7.4 Goodwill; present value of future profits on acquired life reinsurance portfolios
Net book value at 31 December of the previous year 45,438 152,639
Net book value at 1 January of the year under review 43,412 140,199
Deferred tax assets and liabilities are booked in accordance with IAS 12 for tax reductions and additional tax charges expected in subsequent financial years, insofar as they result from different valuations of individual balance sheet items. In principle, such valuation differences may arise between the national tax balance sheet and the national commercial balance sheet, the uniform consolidated balance sheet and the national commercial balance sheet as well as from tax loss carry-forwards and tax credits. Deferred tax assets and liabilities were not constituted on temporary differences in conjunction with interests in subsidiaries and associated companies.
In July 2007 the German Federal Council approved the Business Tax Reform Act 2008. Among other things, this led to a reduction in tax rates for corporations domiciled in Germany effective 1 January 2008. Consequently, the tax expenditure for the previous year recognised non-recurring income from this revaluation in an amount of EUR 191.5 million for the parent company Hannover Re and E+S Rückversicherung AG.
Deferred taxes at the Group level were booked using the Group tax rate of 32%.
Net book value at 1 January of the year under review 2,228 4,778
Availability of capitalised loss carry-forwards Unused tax loss carry-forwards of EUR 292.0 million (EUR 230.3 million) existed as at the balance sheet date. Making allowance for local tax rates, EUR 249.6 million (EUR 210.2 million) thereof was not capitalised since realisation is not sufficiently certain.
The actual and deferred taxes recognised directly in shareholders' equity at the end of the financial year amounted to -EUR 53.5 million (EUR 2.5 million). They resulted from items that were charged or credited directly to equity.
The following table presents a reconciliation of the expected expense for income taxes with the actual provision for income taxes reported in the statement of income. The pre-tax result is multiplied by the Group tax rate in order to calculate the Group's expected expense for income taxes. The Group tax rate used is rounded to take account of the corporate income tax rate including the German reunification charge levied on corporate income tax as well as trade earnings tax.
Value adjustments on deferred tax assets were recognised separately for the first time in the year under review. The figures for the previous year were adjusted accordingly.
Figures in EUR thousand One to five years Six to ten years More than ten years Unlimited Total
Staff The average number of staff at the companies included in the consolidated financial statement of the Hannover Re Group was 1,790 (1,922). The decrease in the workforce was attributable to the disposal of North American Risk Services, Inc., Wilmington/USA, a subsidiary of Hannover Finance, Inc., Wilmington/USA, in the first quarter of 2008.
As at the balance sheet date altogether 1,812 (1,825) staff were employed by the Hannover Re Group, with 963 (907) employed in Germany and 849 (918) working for the consolidated Group companies abroad.
Figures in EUR thousand 2008 2007 a) Wages and salaries aa) Expenditures on insurance business 101,065 98,396 ab) Expenditures on the administration of investments 10,115 8,015 b) Social security contributions and expenditure on provisions and assistance ba) Social security contributions 15,261 13,397 bb) Expenditures for pension provision 12,644 11,686 bc) Expenditures for assistance 2,059 1,727
Provisions for pensions are established in accordance with IAS 19 "Employee Benefits" (rev. 2004) 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 commitments to employees in Germany predominantly comprise benefit obligations financed by the Group companies. The pension plans are unfunded. Amounts carried as liabilities are recognised under other liabilities. The provisions for pensions in Germany and abroad were calculated on the basis of uniform standards defined by Talanx AG and subject to local economic conditions.
The change in the projected benefit obligation of the pension commitments as well as their breakdown into plans that are unfunded or are wholly or partially funded was as follows: The calculation of the provisions for pensions is based upon the following assumptions: Notes 7.7 Provisions for pensions and other post-employment benefit obligations
Projected benefit obligation from wholly or partially funded plans (before deduction of fair value of plan assets) 1,149 8,425
Funded status (present value of earned benefit entitlements less fund assets) 72,857 69,763
The structure of the asset portfolio underlying the plan assets was as follows: The fair value of plan assets as at the balance sheet date included amounts totalling EUR 1.4 million (EUR 1.5 million) for own financial instruments.
The following table presents a reconciliation of the funded status – calculated from the difference between the defined benefit obligations and the plan assets – with the provision for pensions recognised as at the balance sheet date: Reconciliation of the net provision for pensions
The fair value of the plan assets developed as follows: Figures in EUR thousand 2008 2007
Fair value at the beginning of the year under review 9,372 7,302
Defined benefit obligations at the end of the year under review 79,908 79,135
Net provisions for pensions at 31 December of the year under review 72,207 67,101
The components of the net periodic pension cost for benefit plans were as follows: Net periodic pension cost
The net periodic pension cost was recognised in the consolidated statement of income in amounts of EUR 5.8 million (EUR 3.8 million) under administrative expenses, EUR 0.6 million (EUR 1.4 million) under other expenses and EUR 1.0 million (EUR 0.7 million) under other investment expenses.
The following amounts were recognised for the current and previous reporting periods under the accounting of defined benefit plans: The recognised provision for pensions developed as follows in the year under review: Change in the provisions for pensions
On 31 March 1999 Hannover Finance, Inc., Wilmington/USA, issued subordinated debt in the form of a floating-rate loan in the amount of USD 400.0 million with a term of 30 years. The due date of the loan is 31 March 2029. It may be redeemed by the issuer no earlier than 31 March 2009. In order to hedge against the risk of interest rate changes associated with this loan, the company purchased interest rate swaps in 1999 in the same amount which expire on 31 March 2009. In this way, the interest rate is converted from a floating rate to a fixed rate for a period ending commensurate with the first opportunity to redeem the loan. In February 2004 and May 2005 Hannover Re bought back portions of the debt amounting to USD 380.0 million, equivalent to altogether 95% of the total volume. The interest rate swaps were closed out in the second quarter of 2006. Under a contract dated 1 June 2007 Hannover Finance, Inc. repurchased the subordinated debt in an amount of USD 380.0 million from Hannover Re. Effective 17 July 2007 the interests in the loan amounting to USD 380.0 million were cancelled and have not been traded on the capital market since that date. The remaining portions of the debt totalling USD 20.0 million are held by investors outside the Group and carry a coupon of LIBOR +80 basis points until 31 March 2009. Hannover Re intends to exercise the call option granted in the loan terms which provides for early repurchase of the debt at nominal value effective 31 March 2009.
In the current financial year Hannover Re expects payments of EUR 6.5 million (EUR 6.2 million) under the pension plans set out above.
Defined contribution plans In addition to the defined benefit plans, some Group companies have defined contribution plans that are based on length of service and the employee's income or level of contributions. The expense recognised for these obligations in the year under review in accordance with IAS 19.46 was EUR 2.6 million (EUR 2.9 million), of which only a minimal amount was due to obligations to members of staff in key positions.
Debt and subordinated capital exchange was nominally EUR 211.9 million, corresponding to EUR 240.5 million of the new bond issue. The cash component of the new bond in the amount of nominally EUR 259.5 million was placed predominantly with institutional investors in Europe. The remaining volume of the bond issued in 2001 after the exchange was unchanged at EUR 138.1 million.
Other financial facilities In order to protect against possible future major losses Hannover Re took out a new credit line of EUR 500.0 million in 2004 in the form of a syndicated loan. The facility has a term of five years and ends in August 2009. It has not been used to date.
The ordinary expenses include interest expenses of EUR 77.4 million (EUR 77.6 million) resulting predominantly from the subordinated debt with coupons of between 5.0% and 6.25% placed through Hannover Finance (Luxembourg) S.A. in the years from 2001 to 2005. In addition, interest expenditures from the remaining portions of the floating-rate loan issued by Hannover Finance, Inc., Wilmington/USA are recognised here.
The policyholders' surplus totalled EUR 4,708.4 million (EUR 5,295.1 million) as at the balance sheet date.
Weighted average of issued shares – 120,594,783 – – 120,597,134 –
On the occasion of the Annual General Meeting to be held on 5 May 2009 it will be proposed that a dividend should not be distributed for the 2008 financial year. The dividend proposal does not form part of this consolidated financial statement.
Gross book value at 31 December of the year under review 89,110 95,352
Cumulative depreciation at 31 December of the previous year 69,571 59,612
Net book value at 31 December of the previous year 25,781 23,732
The additions can be broken down into EUR 4.9 million (EUR 13.4 million) for purchased software and EUR 9.1 million (EUR 2.8 million) for advance payments on self-provided software.
Gross book value at 31 December of the year under review 165,959 155,429
Net book value at 31 December of the previous year 56,390 45,030
Net book value at 31 December of the year under review 61,310 56,390
The overdue other receivables of Hannover Finance, Inc., recognised here in the previous year were settled in the year under review.
Credit risks may result from other financial assets that were not overdue or adjusted as at the balance sheet date. In this regard, the reader is referred in general to our comments in Section 6 "Management of technical and financial risks".
The liabilities from derivatives of EUR 91.7 million (EUR 15.9 million) consist principally of the embedded derivatives recognised separately from the underlying insurance contract at fair value pursuant to IAS 39. Please see our remarks on derivative financial instruments in Section 7.1 "Investments including income and expenses".
The age structure of the other receivables which were unadjusted but considered overdue as at the balance sheet date is presented below: Figures in EUR thousand 2008 2007
Audits and costs of publishing the annual financial statements 3,033 (186) 2,847
With regard to the claims and claims expenses as well as the change in the benefit reserve the reader is also referred to Section 7.2 "Technical assets and liabilities". The change in the benefit reserve relates exclusively to the life and health reinsurance segment.
The administrative expenses amounted to altogether 3.1% (2.8%) of net premium earned.
Commissions and brokerage, change in deferred acquisition costs (net) 1,635,941 1,759,010
Of the separate value adjustments, an amount of EUR 47.8 million (EUR 52.5 million) was attributable to accounts receivable, EUR 27.0 million (EUR 2.0 million) to reinsurance recoverables on unpaid claims and EUR 3.8 million (EUR 0.2 million) to other receivables.
Income from contracts recognised in accordance with the deposit accounting method 25,654 75,383
The Hannover Re Group provides reinsurance protection for the HDI Group. To this extent, numerous underwriting business relations exist with related parties in Germany and abroad which are not included in Hannover Re's consolidation. This includes business both assumed and ceded at usual market conditions.
Protection Reinsurance Intermediaries AG grants Hannover Re and E+S Rück a preferential position as reinsurers when it comes to placing reinsurance cessions of the Talanx Group's primary insurers (Group cedants). Under these arrangements, Hannover Re and E+S Rück are given the opportunity to write any desired share of placed reinsurance cessions provided this does not jeopardise overall placement in the interest of the Talanx Group. In addition, Hannover Re and E+S Rück are able to participate in the protection covers on the retention of Group cedants and share in the protection afforded by them. Under certain conditions Hannover Re and E+S Rück are required to assume from Protection Re portions of the Group cedants' reinsurance cessions not placed on the global market. This agreement entered into force on 1 January 2003 and may be terminated at four months' notice effective 30 June of any year.
Major reinsurance relationships with related parties in the year under review are listed in the following table.
With effect from the 1997 financial year onwards all new business and renewals written on the German market have been the responsibility of E+S Rück, while Hannover Re has handled foreign markets. Internal retrocession arrangements ensure that the percentage breakdown of the business applicable to the previously existing underwriting partnership is largely preserved between these companies. Every reinsurance treaty subject to internal retrocession is allocated to a pool. The assuming company participates in this pool with a fixed percentage share. Some individual retrocessions exist alongside the pools.
Since the 2005 financial year Hannover Re had held participation certificates of HDI Haftpflichtverband der Deutschen Industrie V.a.G. in an amount of EUR 18.5 million with a coupon of 7.25%; they became due on 1 October 2008. The participation certificates were recognised under the portfolio of fixed-income securities held to maturity. The term of the participation certificates was limited to the end of the 2007 financial year. Repayment was made on the due date.
As at 31 December 2008 Hannover Reinsurance (Ireland) Ltd. recognised loan receivables due from Aspecta Lebensversicherung AG and Aspecta Assurance International Luxembourg S.A. in an amount of altogether EUR 255.9 million (EUR 249.8 million). The loans result from a group of reinsurance contracts for which Talanx AG had furnished guarantees, which in 2007 were transferred to Hannover Reinsurance (Ireland) Ltd. In accordance with IAS 39 the contracts in question were classified as financial instruments with the character of loans and receivables measured at amortised cost, and the corresponding changes in income are recognised in ordinary investment income.
As part of long-term lease arrangements companies belonging to the Hannover Re Group rented out business premises in 2008 to HDI Direkt Versicherung AG and Protection Reinsurance Intermediaries AG, both based in Hannover. IT and management services were also performed for the latter under service contracts.
Talanx AG took out directors' and officers' (D&O) insurance for Praetorian Financial Group, Inc., New York, on behalf of the Hannover Re Group. The insurance premiums were billed to Hannover Re, which the latter on-debited to Hannover Finance, Inc.
With regard to this information please see in general the remuneration report included as part of our Corporate Governance report, in particular page 187 et seq.
The remuneration report is based on the recommendation of the German Corporate Governance Code and contains information which also forms part of the notes to the 2008 consolidated financial statement as required by IAS 24 "Related Party Disclosures". In addition, we took into account the more specific provisions of DRS 17 "Reporting on the Remuneration of Members of Governing Bodies". Under German commercial law, too, this information includes data specified as mandatory for the notes (§ 314 HGB) and the management report (§ 315 HGB). These details are discussed as a whole in the remuneration report. Consequently, we have not provided any further explanation in the notes or management report.
The allocations for the years 2000, 2002 to 2004 as well as 2006 and 2007 gave rise to the following commitments in the 2008 financial year. No allocations were made for 2001 or 2005: Stock appreciation rights of Hannover Re * Although the maximum amount was reached some participants did not exercise all stock appreciation rights
Participants in year of issue 110 106 109 110 113 95
In the 2008 financial year the waiting period expired for 100% of the stock appreciation rights awarded in 2000 and 2002, 80% of those awarded in 2003 and 60% of those awarded in 2004. 93,747 stock appreciation rights from the 2002 allocation year, 121,117 stock appreciation rights from the 2003 allocation year and 1,699 stock appreciation rights from the 2004 allocation year were exercised. The total amount paid out stood at EUR 1.89 million.
The stock appreciation rights of Hannover Re have developed as follows: The existing stock appreciation rights are valued on the basis of the Black/Scholes option pricing model.
Number of options at 31.12.2001 – – – – – 1,138,005
Number of options at 31.12.2002 – – – – – 1,097,235
In the context of the acquisition of Lion Insurance Company, Trenton/USA, by Hannover Finance, Inc., Wilmington/USA – a subsidiary of Hannover Re –, a legal dispute exists with the former owners of Lion Insurance Company regarding the release of a trust account in amount of around USD 13 million that serves as security for liabilities of the former owners in connection with a particular business segment.
The average fair value of each stock appreciation right was EUR 1.73 for the 2000 allocation year, EUR 3.43 for the 2002 allocation year, EUR 3.62 for the 2003 allocation year, EUR 4.48 for the 2004 allocation year, EUR 2.86 for the 2006 allocation year and EUR 2.45 for the 2007 allocation year.
As security for technical liabilities to our US clients, we have established a master trust in the United States. As at the balance sheet date this master trust amounted to EUR 2,352.8 million (EUR 2,088.3 million). The securities held in the master trust are shown as available-for-sale investments. In addition, we extended further collateral to our cedants in an amount of EUR 269.3 million (31 December 2007: EUR 328.7 million) through so-called "single trust funds".
As security for our technical liabilities, various financial institutions have furnished sureties for our company in the form of letters of credit. The total amount of the letters of credit as at the balance sheet date was EUR 2,470.9 million (EUR 2,150.0 million).
For liabilities in connection with participating interests in real estate companies and real estate transactions Hannover Re Real Estate Holdings has furnished the usual collateral under such transactions to various banks, the amount of which totalled EUR 85.5 million as at the balance sheet date.
The rental income resulted principally from the renting out of a property by Hannover Real Estate Holdings. This non-cancellable transaction has a remaining term of two years with an option to renew for a further five years.
Transactions in foreign currencies reported in Group companies' individual financial statements are converted into the reporting currency at the transaction rate. In accordance with IAS 21 the recognition of exchange differences on translation is guided by the nature of the underlying balance sheet item.
Winter storm “Klaus”, which moved across southern France and northern Spain at the end of January, caused insured damage of around EUR 1.0 billion. In this connection Hannover Re anticipates a net burden of losses in the order of EUR 70 million.
Key exchange rates 1 EUR corresponds to: Mean rate of exchange on the balance sheet date Average rate of exchange
As part of its discussion of important individual projects the Supervisory Board considered, inter alia, the sale of a 1% interest and the granting of a purchase option on a further 2% interest in E+S Rückversicherung AG by Hannover Rück Beteiligung Verwaltungs-GmbH to Mecklenburgische Versicherungsgruppe. It also examined the authorisation process for real estate acquisitions and approved the revised strategic principles and objectives as well as updated Rules of Procedure for the Executive Board, in which the canon of measures and transactions subject to approval was extended in favour of the Supervisory Board. Last but not least, the Supervisory Board approved a capital increase at Hannover Life Reassurance Company of America in Orlando/USA.
In view of the impending retirement of the Chief Executive Officer, the Standing Committee deliberated throughout the year over the medium- and long-term planning for the overall composition of the Executive Board. As a result, it issued recommendations to the full Supervisory Board regarding the reappointment / non-reappointment of members of the Executive Board. In particular, the committee attended to the identification of internal and external candidates for appointment as the new Chief Executive Officer, undertook an in-depth evaluation of the short-listed candidates including consultations with an outside psychologist and on this basis submitted an appropriate proposal to the full Supervisory Board. In addition, the Standing Committee determined the performance bonuses of the members of the Executive Board for the 2007 financial year and the overall number of stock participation rights to be awarded to the Executive Board for the 2008 financial year. For the 2009 financial year recommendations were drawn up for the full Supervisory Board regarding the specification of the target performance (target EPS) and the total volume of remuneration to be granted.
Since no elections to the Supervisory Board were upcoming, the Nomination Committee set up in 2007 did not meet.
The report on the company's relations with affiliated companies drawn up by the Executive Board has likewise been examined by KPMG AG and given the following unqualified audit certificate: "Having audited the report in accordance with our professional duties, we confirm that 1. its factual details are correct; 2. in the case of the transactions detailed in the report, the expenditure of the company was not unreasonably high.“
– in each case drawn up as at 31 December 2008 – and have no objections. Nor do we have any objections to the statement reproduced in the dependent company report. The Supervisory Board thus concurred with the opinions of the auditors and approved the annual financial statements and the consolidated financial statements; the annual financial statements are thereby adopted.
At the same meeting the decision was taken to terminate the mandate of Dr. Elke König as a member of the company's Executive Board on the most amicable terms effective 31 March 2009. The Supervisory Board expressed its thanks and appreciation to Dr. König for her considerable personal dedication and her successful work on behalf of the Hannover Re Group. Mr. Roland Vogel was appointed to succeed Dr. König as a deputy member of the Executive Board with effect from 1 April 2009 for a period of three years.
In past years Hannover Re was in compliance with all recommendations of the German Corporate Governance Code (DCGK). This continued to be the case in the present year, insofar as implementation of the German Corporate Governance Code as amended 14 June 2007 is concerned. We diverged with respect to one item of the Code as amended 6 June 2008. The item in question involves a recommendation adopted with the most recent amendment of the Code to the effect that a severance cap should be included when new management contracts are drawn up or existing ones renewed. The reasons for our decision are explained in the Declaration of Conformity contained in this report.
With an eye to the theme of compliance, we informed you last year that explicit responsibility for this issue is now enshrined within the schedule of responsibility of the Executive Board and the Balance Sheet Committee of the Supervisory Board. Since then, the Executive Board has regularly briefed the Balance Sheet Committee in detailed reports on the latest developments and activities in this area. The goal of these efforts is to prevent any infractions of the law and to ensure that every single employee and officer at Hannover Re conducts themselves with integrity, irrespective of whether the matter at hand is one of antitrust law, compliance with national and international embargo regulations or equal treatment and non-discrimination.
In the year just-ended we again devoted considerable attention to our communication with the financial market and developed an impressive range of Investor Relations activities. For further details please see the section entitled "The Hannover Re share" in this Annual Report.
Information regarding this topic is provided under Item 8.3 of the notes and in the remuneration report with respect to the members of the Executive Board.
The remuneration report summarises the principles used to determine the remuneration of the Executive Board of Hannover Re and explains the amount of the income received by the Executive Board in the 2008 financial year on the basis of the Board members' work for Hannover Re and its affiliated companies. In addition, the amount of the remuneration paid to the Supervisory Board on the basis of its work for Hannover Re and its affiliated companies and the principles according to which this remuneration is determined are explained.
The remuneration report is based on the recommendations of the German Corporate Governance Code and contains information which forms part of the notes to the 2008 consolidated financial statement as required by IAS 24 "Related Party Disclosures". In addition, we took into account the more specific provisions of DRS 17 "Reporting on the Remuneration of Members of Governing Bodies". Under German commercial law, too, this information includes data specified as mandatory for the notes (§ 314 HGB) and the management report (§ 315 HGB). These details are discussed as a whole in the remuneration report. Consequently, we have not provided any further explanation of the information discussed in the remuneration report in the Group management report or the notes to the consolidated financial statement.
In the 2008 financial year 215,280 stock appreciation rights totalling EUR 0.5 million (EUR 1.2 million) were granted for the 2007 allocation year; stock appreciation rights granted in previous years were exercised in an amount of EUR 0.4 million (EUR 0.4 million).
Retirement provision The pension agreements of the members of the Executive Board with Hannover Re contain commitments to an annual retirement pension calculated as a percentage of the fixed annual emoluments. There were seven individual commitments to the active Board members in the year under review. An amount of EUR 1.5 million (EUR 2.0 million) was allocated to the provision for pensions in the year under review. This includes the allocation to the employee-funded provision constituted from deferred compensation – an allocation that was made from the variable bonus for the previous year. The provision for pensions stood at EUR 9.9 million (EUR 8.4 million) as at 31 December 2008.
The remuneration paid to former members of the Executive Board and their surviving dependants, for whom eleven pension commitments existed, totalled EUR 1.3 million (EUR 0.9 million) in the year under review. Altogether, an amount of EUR 10.7 million (EUR 9.8 million) has been set aside for these commitments.
Amount of remuneration received by the Executive Board The total remuneration received by the Executive Board of Hannover Re on the basis of its work for Hannover Re and its affiliated companies is calculated from the sum of all compensation accruing in cash as well as in pecuniary advantages from non-cash compensation. It can be broken down as follows in the year under review: Figures in EUR thousand 2008 2007
In accordance with § 12 of the Articles of Association as amended on 3 August 2007, the members of the Supervisory Board receive fixed annual remuneration of EUR 10,000 per member in addition to reimbursement of their expenses. Furthermore, each member of the Supervisory Board receives variable remuneration of 0.03%o of the operating profit (EBIT) reported by the company in the consolidated financial statement drawn up in accordance with International Financial Reporting Standards (IFRS). Variable remuneration is not paid if the EBIT is negative.
The Chairman of the Supervisory Board or of a Committee receives three times the aforementioned amounts, while a Deputy Chairman receives one-and-a-half times the said amounts.
The remuneration for a financial year is due upon completion of the Annual General Meeting that ratifies the acts of the Supervisory Board for the financial year in question. Value-added tax payable upon the remuneration is reimbursed by the company.
Dr. Paul Wieandt Deputy Chairman of the Supervisory Board (until 20 March 2007) 17.7 74.1
Renate Schaper-Stewart* Member of the Supervisory Board (until 2 May 2007) 15.2 42.4
Dipl.-Ing. Hans-Günter Siegerist* Member of the Supervisory Board (until 2 May 2007) 12.8 35.6
Members of the Supervisory Board and Executive Board of Hannover Re as well as their spouses or registered partners and first-degree relatives hold less than 1.0% of the issued shares. As at 31 December 2008 the total holding amounted to 0.058% (0.031%) of the issued shares, i.e. 69,991 (37,096) shares.
The company is in compliance with the recommendations of the Code as amended 14 June 2007 in all respects. It diverges from the recommendations of the Code as amended 6 June 2008 in one respect (cf. specifically the Declaration of Conformity below).
Securities transactions 1) The bonds have a nominal value of EUR 1,000.00 each 2) Rounded, the average price was EUR 20.89504
Supplementary note on Code Item 4.2.4; disclosure of remuneration received by members of the Executive Board With respect to the non-mandatory provision of the Code requiring individualised specification of the remuneration received by members of the Executive Board, we are following the resolution of the Annual General Meeting of 12 May 2006, according to which the disclosures required in § 285 Clause 1 No. 9 Letter a Sentences 5 to 9 and § 314 Para.1 No. 6 Letter a Sentences 5 to 9 German Commercial Code as amended by the Act on Disclosure of Executive Board Compensation (Vorstandsvergütungs-Offenlegungsgesetz) shall be omitted.
Brazil Hannover Re Escritório de Representação no Brasil Ltda. Praça Floriano 19/1701
Canada Hannover Rückversicherung AG Canadian Branch – Chief Agency 3650 Victoria Park Avenue, Suite 201 Toronto, Ontario M2H 3P7
China Hannover Rückversicherung AG Shanghai Branch Suite 1708, United Plaza 1468 Nan Jing Xi Lu 200040 Shanghai
Hannover Rückversicherung AG Hong Kong Branch 2008 Sun Hung Kai Centre 30 Harbour Road Wanchai, Hong Kong Tel. +852 25193208 Fax +852 25881136 General Manager: Gerd Obertopp
Hannover Rückversicherung AG Australian Branch – Chief Agency The Re Centre Level 21 Australia Square 264 George Street Sydney NSW 2000 G. P. O. Box 3973 Sydney NSW 2001
Hannover Rückversicherung AG Bahrain Branch Al Zamil Tower 17th Floor Government Avenue Manama Center 305 Manama
France Hannover Rückversicherung AG Succursale Française 109 rue de la Boetie (Entrance: 52 avenue des Champs Elysées) 75008 Paris
Mexico Hannover Services (México) S.A. de C.V. German Centre Oficina 4-4-28 Av. Santa Fé No. 170 Col. Lomas de Santa Fé C.P. 01210 México, D.F.
South Africa Compass Insurance Company Ltd. P. O. Box 37226 Birnam Park 2015 Johannesburg www.compass.co.za Managing Director: Angela Mhlanga
International Insurance Company of Hannover Ltd. 1st Floor L’ Avenir Opladen Way Bracknell Berkshire RG12 0PE
Hannover Life Reassurance Company of America 800 N. Magnolia Avenue Suite 1400 Orlando, Florida 32803-3268
Acquisition cost, deferred (DAC): cost of an insurance company that arises from the acquisition or the renewal of an insurance contract (e.g. commission for the closing, costs of proposal assessment and underwriting etc.). Capitalisation results in a distribution of the cost over the duration of the contract.
Cash flow statement: statement on the origin and utilisation of cash and cash equivalents during the accounting period. It shows the changes in liquid funds separated into cash flows from operating, investing and financing activities.
Catastrophe loss: loss which has special significance for the direct insurer or reinsurer due to the amount involved; it is defined as a catastrophe loss in accordance with a fixed loss amount or other criteria.
Expense ratio: administrative expenses in relation to the (gross or net) premiums written.
Funds held by ceding companies/funds held under reinsurance treaties: cf. ➞ Deposits with ceding companies/deposits received from retrocessionaires
Gross/Retro/Net: gross items constitute the relevant sum total deriving from the acceptance of direct insurance policies or reinsurance treaties; retro items constitute the relevant sum total deriving from own reinsurance cessions. The difference is the corresponding net item (gross – retro = net, also: for own account).
International Securities Identification Number (ISIN): ten-character universal code used to identify securities internationally. It is prefixed by a country code that specifies the country where the issuer entity is legally registered or in which it has legal domicile, e.g. DE = Germany.
Special Purpose Entity (SPE): legal structure with specific characteristics not bound to a certain form of organisation used to conduct defined activities or to hold assets.
Surplus reinsurance: form of proportional reinsurance under which the risk is not spread between the insurer and reinsurer on the basis of a previously agreed, set quota share. Instead, the insurer determines a maximum sum insured per risk up to which it is prepared to be liable. Risks that exceed the ceding company's retention (surpluses ) are borne by the reinsurer. The reinsurer's lines thus vary according to the level of the retention and the sum insured of the reinsured contract. The reinsurer's liability is generally limited to a multiple of the ceding company's retention.
Asbestos, asbestos and pollution risks, asbestos- and pollution-related claims 99, 113f
Book value per share 14, 20, 54, 77 Builder's risk insurance 30, 73 Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) 14, 181
Cash flow, underwriting 77 Catastrophe/major loss(es) 2, 4, 19, 22f, 28ff, 48, 54, 67f, 72ff,
Haftpflichtverband der Deutschen Industrie V.a.G. (HDI) 5, 92, 166f Hannover Life Re 38f, 43ff, 76 Hannover Re share 3, 8ff, 172
Performance Excellence 16, 53f, 57, 68 Property and casualty reinsurance, property/casualty 1f, 6f, 10,
Talanx (AG, Group) 5, 8, 10ff, 92, 94, 108, 149, 166ff, 176
Hannover Life Re UK, Virginia Water/London hannover re R hannover life re R
A printed version of the Hannover Re Group's Annual Report is also available in German. The report can be downloaded online in PDF format in English and German: www.hannover-re.com.
Photographs: Zippo, Hamburg: Pages 1, 6/7 Quintin Lake: Pages 14/15, 26/27, 36/37, 54/55
11 March 2009 Annual Results Press Conference Hannover Re Karl-Wiechert-Allee 50 30625 Hannover, Germany 12 March 2009 DVFA Analysts' meeting, Frankfurt 12 March 2009 Analysts' meeting, London 05 May 2009 Annual General Meeting Beginning 10:30 a.m.