Investments (incl. funds held by ceding companies) 22 031.1 +8.5% 20 305.8 19 278.0 14 196.2 12 810.7
Earnings per share (diluted) in EUR 3.24 +17.8% 2.75 0.11 4.13 2.29
Bookvalue per share in EUR 19.94 +11.4% 17.90 17.21 17.76 13.95
Our company recorded further improvements in rates and conditions for property and casualty reinsurance. In this highly positive environment, we achieved an excellent result and continued to optimise our market position. Most notably, we wrote more long-tail business since it was here that we observed the sharpest improvements in rates and conditions. In aviation reinsurance, on the other hand, we selectively scaled back our acceptances in response to declining prices in some areas. Independently of our normal cycle management, we used this "hard market" as an opportunity to screen our portfolio in light of long-term profitability considerations and reduce specific acceptances. We have christened this profitability initiative "More from less". As a further factor, effective 1 January 2003 we no longer accept the entire reinsurance volume of our HDI affiliates, but rather only the portion that we carry in our retention.
We were also highly satisfied with the development of life and health reinsurance in the year under review. Overall, following the expansionary phase of recent years, we consolidated our market position in this business group – in which we now rank among the three largest providers in the world. In major markets such as Germany we succeeded in establishing attractive new customer relationships. We showed a slight increase in our premium volume (adjusted for movements in exchange rates) and were able to increase the year-end result by more than half.
Program business, the fourth pillar of our Group, made again a decisive contribution to the result in the year under review. Our new underwriting-oriented approach with its intensive focus on the quality of the business written is now making itself felt here – namely by scrutinising the gross profitability of individual programs with an eye to sustainability and basing the level of retained premiums on the quality of the business. This led to a further marked increase in the retention. Profitability, however, fell slightly short of the previous year due to a non-recurring special effect. Following the successful restructuring measures of recent years we are now firmly on the right track in program business, and in the future we shall therefore be able to translate our market leadership into commensurate profitability.
After equity markets had descended to new record lows in March, the mood on financial markets brightened appreciably as the year progressed. As anticipated, we were of course once again not entirely spared write-downs on our investment portfolio in the year under review. These write-downs were, however, markedly lower than in the previous year. The sharply higher prices recorded on stock markets from April onwards generated further book profits on our equity investments as at year-end. Returns on fixed-income securities, which account for the bulk of our asset portfolio, fell appreciably year-on-year, thereby limiting ordinary income from the (re)investment of funds. Our total asset volume, on the other hand, grew very strongly due to the favourable market climate in reinsurance business, and overall we were therefore able to generate significantly improved net investment income compared to the previous year.
Herbert K. Haas 1) 2) Member of the Executive Board of Burgwedel Talanx AG
1) Member of the Standing Commitee 2) Member of the Balance Sheet Commitee 3) Staff representative are contained in the individual report of Hannover Rückversicherung AG.
within range, closing with a gain of 34.7%. The Euro-Stoxx 50, which put on 15.7%, was left trailing far behind. The performance of German second-tier stocks was also particularly noteworthy, outshining even the very strong Dax: MDax (+47.8%), TecDax (+50.9%) and SDax (+51.3%).
Performance of the Hannover Re share compared with standard benchmark indices since stock market listing 30 N ove mber 30 A pril 30 Sep te mber 29 Fe bru ary 30 Ju ly 1996 30 D ec em ber 30 M ay 1997 30 O cto ber 30 M arch 30 A ugust 30 Ja nuary 30 Ju ne 1 30 N ove mber 30 A pril 30 Sep te mber 28 Fe bru ary 30 D ec em ber 30 Ju ly 2001 30 M ay 2002 30 O cto ber 30 M arch 30 A ugust 30 Ja nuary 27 Fe bru ary
The Hannover Re share profited from the very favourable market climate …
We use the unweighted "Reactions" World Reinsurance Index to measure ourselves against reinsurers worldwide. Having outperformed the index at the outset of the three-year reference period, in 2001, our share fell behind the index as 2001 progressed – especially following the events of 11 September 2001. In the year under review, however, thanks to the outstanding development of our business, we were able once again to outperform the World Reinsurance Index. It is our stated aim to surpass our benchmark on a three-year moving average.
The Hannover Re share in comparison with the unweighted "Reactions" World Reinsurance Index (performance in USD)
1 Ja nuary 1March 1May 2001 1 Ju ly 2001 1 Sep te mber 1 N ove mber 1Ja nuary 1March 1 M ay 2002 1Ju ly 2002 1Sep te mber 1 N ove mber 1 Ja nuary 1 M arch 1 M ay 2003 1 Ju ly 2003 1 Sep te mber 1 N ove mber 1 Ja nuary 27 Fe bru ary * The unweighted "Reactions" World Reinsurance Index combines all listed reinsurers worldwide. Our strategic objective is to achieve an increase in the share price, which on a three-year moving average surpasses the performance of this benchmark.
In the financial year just-ended we again conducted a diverse range of Investor Relations activities. In order to consistently enhance the level of awareness of our share, we took various opportunities to regularly inform capital market players on an up-to-date, comprehensive basis about Hannover Re's business development and activities. We enjoyed direct contacts with international investors, private shareholders and financial analysts at investor fairs and stock forums organised by various banks and shareholder associations as well as in numerous one-on-one meetings. Around 30 financial analysts and investors visited us in Hannover in the year under review, and we presented our company at more than 50 international roadshows and investor conferences worldwide. In this context we target not only the traditional marketplaces of Frankfurt, London and New York/Boston, but also include in our action plan the other European financial
Last but not least, our Investor Relations webpages offer you regular updates on all our IR activities, and interested readers can consult our new "IR Online Magazine" for the latest monthly insights into developments at Hannover Re, in the reinsurance industry and on the capital markets.
In June 2003 Hannover Re decided to implement a combined capital increase for cash and a contribution in kind in order to strengthen its capital resources. This measure increased our equity base by EUR 530 million and enlarged our underwriting capacity. Consequently, in the year under review we were able to fully participate in the hard, profitable reinsurance markets and raise our level of retained premiums in this profitable business.
Rating 4th Quarter3rd Quarter2nd Quarter1st QuarterAmount 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Flexible cycle management has enabled Hannover Re to exploit the hard market in nonlife reinsurance more aggressively than its competitors (...). Long-tail business was expanded disproportionately strongly, and the company practises a conservative reserving policy. It is thus likely that the fruits of the business written during the present market phase will be harvested progressively for some years to come.
Corporation-tax credit – – – 0.36 0.29 0.08 1) On each fully paid-up no-par-value registered share for the year 2000 2) Incl. bonus of EUR 0.08
Shareholding structure Talanx AG: 71.8% (since 18 February 2004: 51.2%) as at 31 December 2003: Free float: 28.2% (since 18 February 2004: 48.8%)
Annual General Meeting: 2 June 2004, 10.30 a.m. Hannover Congress Centrum, Kuppelsaal Theodor-Heuss-Platz 1–3, 30175 Hannover, Germany
We are guided by three maxims from which all others are derived: Above-average profitability: For us this means that we strive to be one of the three most profitable reinsurers worldwide in terms of return on equity and annual growth in earnings per share.
Economic independence: For us this means financing growth with self-generated profits and avoiding difficulties that would necessitate contributions by shareholders.
2. Capital management • The target is a Standard & Poor's rating of
3. Share price • Price development surpassing the performance of the unweighted "Reactions" World Reinsurance Index on a moving 3-year average. This facilitates - a sustained increase in the value of the shareholders' investment - the lowest possible costs of raising equity
Strategic principles 4. Investments • Priority attached to investments aimed at achieving an optimally diversified portfolio 5. Growth • Organic growth before acquisitions • Acquisitions only when they offer more than volume growth 6. Invested assets • Generation of an optimal profit contribution in the light of risk/return considerations • Ongoing dynamic financial analysis for the purposes of optimal asset/liability management
• Attainment of optimal performance levels as regards both satisfaction among staff and clients and the business results in %
Target: 750 basis points in excess of the average five-year yield on 10-year government bonds 3) Commercial treatment: on the need to apply the "as-if-pooling" method under US GAAP cf. p. 16 et seq.
"As-if-pooling" is a US GAAP specialty (SFAS 141 App. D 11–18) applicable only to transactions between companies that are under common control. The most important implication is that Hannover Reinsurance (Dublin) Ltd. must be treated as if it had been part of the Hannover Re Group since the beginning of the financial year in which the transaction occurred. The disclosure for the previous year has to be adjusted according to this modified treatment – in other words, Hannover Reinsurance (Dublin) Ltd. must also be included here in order to ensure that the figures for the various accounting periods can be compared. Since the "as-if-pooling" method constitutes the formal implementation of the US GAAP standard, the certificate issued by our auditors is based upon these figures. In this context we would like to refer the reader to our comments in the notes to the financial statements contained in this annual report.
From the company's perspective, however, the "as-if-pooling" method does not realistically reflect the economic situation of the Hannover Re Group in the year under review or the previous period. It means that parts of the capital increase received by the parent company (Hannover Re) as at 1 July 2003 have to be shown not as stockholders' equity but as profit. In our opinion, this distorts the representation of our company's performance.
In the light of these considerations, we are publishing the "as-if-pooling" figures pro forma in the consolidated financial statements and notes. However, the previous year is discussed in the management report solely with reference to the historically published figures, while the year under review is described on the basis of the figures that include Hannover Reinsurance (Dublin) Ltd. in the Group at book values as at 1 July 2003. In our assessment, this is the best way to reflect the economic reality of the transaction. What is more, it is also in line with the quarterly financial statements released to date and the published earnings forecasts.
Consequences of the "as-if-pooling" accounting method for the Hannover Re Group's statement of income and stockholders' equity
Equity securities – available for sale 5.1 925 595 717 745 925 595 722 754
Reinsurance recoverables on other reserves 5.2 41 528 41 902 41 528 41 902
Other changes in cumulative comprehensive income 5.10 (22 685) (54 295) (22 685) (54 295)
Change in policy benefits for life and health contracts 5.2 297 797 574 123 297 797 574 123
Net unrealised appreciation/depreciation of investments 114 442 11 963 116 932 12 795
Consolidated net income (after tax) 354 779 267 172 418 321 243 113
Net realised gains and losses on investments (140 772) (93 354) (140 455) (93 592)
Changes in tax assets/provisions for taxes 206 461 55 681 213 954 50 155
Changes in other assets and liabilities (net) (30 865) (4 856) (27 388) (1 554)
Cash flow from investing activities (2 640 386) (1 803 618) (2 601 816) (1 673 387)
* On the need to apply the "as-if-pooling" method under US GAAP cf. p.16 et seq.
Inflow from capital increase through contribution in kind 11 402 – – –
IV. Exchange rate differences on cash 49 047 64 625 49 034 64 614
Cash and cash equivalents at the end of the period 386 134 671 866 386 134 672 844
Reinsurance recoverables on incurred claims and others 1 817 976 3 073 835 3 073 835 96 379 112 513 112 513
Commission and brokerage and other technical expenses 285 862 543 154 285 862 543 154 427 836 478 322 427 836 478 322 * On the need to apply the "as-if-pooling" method under US GAAP cf. p.16 et seq.
1. General accounting principles 32 2. Accounting principles including reporting and valuation methods 34 3. Consolidated companies and consolidation principles 35 4. Major acquisitions/new establishments 39 5. Notes on the individual items of the balance sheet and statement of income 40 5.1 Investments including income and expenses 40 5.2 Underwriting assets and liabilities 49 5.3 Contracts with no technical risk 51 5.4 Goodwill; present value of future profits on acquired life reinsurance portfolios 51 5.5 Taxes and deferred taxes 52 5.6 Staff and expenditures on personnel 54 5.7 Provisions for pensions and similar liabilities 54 5.8 Surplus debenture and loans 57 5.9 Stockholders' equity and minority interests 58 5.10 Other comprehensive income 59 5.11 Treasury stock 59 5.12 Earnings per share 60 5.13 Other assets and liabilities 60 5.14 Technical statement of income 61 5.15 Other income/expenses 62 6. Related party disclosures 62 6.1 Transactions with related parties 62 6.2 Compensation and stockholding of the management boards of the parent company and further information with respect to the German Corporate Governance Code 64 6.3 Stock options 65 6.4 Mortgages and loans 67 7. Other notes 67 7.2 Contingent liabilities 67 7.3 Long-term commitments 68 7.4 Derivative financial instruments 68 7.5 Events subsequent to conclusion of the financial year 69 7.6 Rents and leasing 70 7.7 Currency conversion 71
Hannover Rückversicherung AG (Hannover Re) belongs to Talanx AG, which in turn is wholly owned by HDI Haftpflichtverband der Deutschen Industrie V.a.G. (HDI). HDI is obliged to prepare consolidated annual accounts in accordance with §§ 341 i et seq. of the German Commercial Code (HGB). The annual financial statements of Hannover Re and its subsidiaries are included in these consolidated annual accounts. Under § 291 Para. 3 No. 1 of the German Commercial Code (HGB), amended version, the consolidated annual accounts of the parent company no longer release Hannover Re from its obligation to compile a consolidated financial statement.
Hannover Re has applied these standards since the above date. The requirement affected a small number of contracts in life and health reinsurance. The application of DIG B 36 had no significant impact on the consolidated financial statement in the 2003 financial year. For further details the reader is referred to section 7.4 "Derivative financial instruments".
In the same month the FASB published SFAS 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS 149 supplements the relevant accounting standards set out in SFAS 133, insofar as such derivative instruments and hedging activities were not already covered by the rules published by the Derivative Implementation Group. This standard is applicable to all contracts concluded or modified after 30 June 2003.
Hannover Re has applied the standards of FIN 46R to special purpose entities with effect from 31 December 2003. More detailed explanations are provided in section 5.1 on the securitisation of reinsurance risks. Hannover Re is currently reviewing the implications of FIN 46R for relations with companies that do not constitute special purpose entities.
The implementation of the standards did not have any impact on the consolidated financial statement in the 2003 financial year.
All Statements of Financial Accounting Standards (SFAS) issued by the FASB on or before 31 December 2003 with binding effect for the 2003 financial year have been observed in the consolidated financial statement.
In the consolidated financial statement and the individual companies' financial statements it is to some extent necessary to make estimates and assumptions which affect the assets and liabilities shown in the balance sheet and the disclosure of income and expenses during the reporting period. The actual amounts may diverge from the estimated amounts..
Oval Office Grundstücks GmbH, Hannover/Germany, was also consolidated for the first time in the financial year. The object of the company is to purchase, manage and sell real estate. HDI Privat Versicherung AG and Hannover Re each hold interests of 50% in this company. It was consolidated using the equity basis of accounting.
As part of a capital increase against a contribution in kind, Talanx AG transferred its shares in HDI Reinsurance (Ireland) Ltd. to Hannover Re effective 1 July 2003. Further information is provided in section 4 "Major acquisitions/new establishments".
Hannover Rück Beteiligung Verwaltungs-GmbH, 100.0 EUR 596 851 EUR 21 730 Hannover/Germany
HAPEP II Holding GMBH, 89.0 EUR 19 012 EUR (186) Hannover/Germany 8)
Hannover Euro Private Equity Partners III GmbH & Co. KG, 77.9 EUR 4 191 EUR (24) Hannover/Germany 8)
HEPEP III Holding GmbH, 77.9 EUR 2 009 EUR -(16) Hannover/Germany 10)
GbR Hannover Rückversicherungs-AG/ 70.1 EUR 59 108 EUR 1 207 E+S Rückversicherungs-AG Grundstücksgesellschaft, Hannover/Germany
Hannover Finance (UK) Limited, 100.0 GBP 109 352 GBP (10) Virginia Water/United Kingdom
Hannover Life Reassurance (Ireland) Ltd., 100.0 EUR 101 639 EUR 2 963 Dublin/Ireland
Hannover Re Sweden Insurance Company Ltd., 100.0 SEK – SEK 723 Stockholm/Sweden 3) 9)
Hannover Services (UK) Ltd., 100.0 GBP 635 GBP 169 Virginia Water/United Kingdom
Hannover Finance, Inc. compiles its own sub-group financial statement, including the following major companies in which it holds the following shares: Clarendon America Insurance Company, 100.0 USD 179 213 USD 10 815 Trenton/USA
Redland Insurance Company, 100.0 USD 26 500 USD 2 393 Council Bluffs/USA
Hannover Reinsurance Group Africa (Pty) Ltd., 100.0 ZAR 343 191 ZAR (39 118) Johannesburg/South Africa
Hannover Life Reassurance Africa Ltd., 100.0 ZAR 32 977 ZAR (2 195) Johannesburg/South Africa
Hannover Reinsurance Africa Ltd., 100.0 ZAR 289 992 ZAR 259 Johannesburg/South Africa
Hannover Reinsurance Mauritius Ltd., 100.0 MUR 39 897 MUR (101 045) Port Louis/Mauritius
Aviation Insurance Company Ltd., 31.3 ZAR 21 326 ZAR 3 970 Cape Town/South Africa 5)
Hannover Re Real Estate Holdings, Inc. holds a sub-group including the following major companies in which it holds the following shares: Hannover USA Real Estate Corporation, 94.0 USD 51 042 USD 1 966 Orlando/USA
Summit at Southpoint Corporation, 94.0 USD 7 422 USD 338 Jacksonville/USA
Hannover Re Advanced Solutions Ltd., 85.3 EUR 797 EUR 218 Dublin/Ireland 1)
Hannover Life Re of Australasia Ltd., 77.9 AUD 177 160 AUD 13 940 Sydney/Australia
E+S Reinsurance (Ireland) Ltd., 55.8 EUR 157 643 EUR 12 994 Dublin/Ireland
Oval Office Grundstücks GmbH, 50.0 EUR 29 903 EUR (24) Hannover/Germany
HANNOVER Finanz GmbH Beteiligungen und Kapitalanlagen, 25.0 EUR 106 971 EUR 37 543 Hannover/Germany 3)
JM Management Consulting GmbH, 74.0 EUR 47 EUR (3) Hannover/Germany 3)
Willy Vogel Beteiligungs GmbH, 15.0 EUR 70 061 EUR 14 612 Hannover/Germany 3)
Special Risk Insurance and Reinsurance Luxemburg S.A., 18.2 EUR 291 230 EUR (8 770) Luxembourg/Luxembourg 3)
HI Holdings, Inc., 16.3 USD 17 348 USD 2 235 Honolulu, Hawaii 4) 7)
Bulstrad Life Insurance, 9.1 BGN 5 707 BGN 286 Sofia, Bulgaria
As part of a capital increase for a contribution in kind, Talanx AG transferred its shares in HDI Reinsurance (Ireland) Ltd. to Hannover Re effective 1 July 2003 against issuance of 13,716,814 new shares. Since this transfer constitutes a transaction between entities under common control, US GAAP required that the company be consolidated at the book values of Talanx AG as if it had already belonged to the Group at the commencement of the financial year. The previous year's figures presented for comparative purposes were also adjusted according to this treatment (on the "as-if pooling" method cf. section "Capital consolidation"). The consolidated financial data of the Group reported on this basis for the periods prior to the transfer do not necessarily reflect the assets, financial position and net income that would have been reported had it not been for the inclusion of HDI Reinsurance required by US GAAP. For this reason, we expanded the consolidated financial statement for the 2003 financial year and the previous year to include figures based on first-time consolidation of the company as at 1 July 2003 (commercial treatment). With effect from 8 December 2003 Hannover Re transferred its shares in HDI Reinsurance (Ireland) Ltd. to Hannover Reinsurance (Ireland) Ltd. as part of a capital increase for a contribution in kind.
Notes notes on the individual items 5. Notes on the individual items of the balance sheet and statement of income 5.1 Investments including income and expenses
The other investments primarily consist of shares in private-equity limited partnerships.
Due after five through ten years 295 000 298 825 130 000 138 330
Due after one through five years 6 212 600 6 280 794 4 383 705 4 518 495
Due after five through ten years 2 150 603 2 196 050 2 092 802 2 176 097
Debt securities issued by semi-governmental entities 145 689 11 042 – 156 731
Government debt securities of EU member states 1 490 422 15 622 3 247 1 502 797
Government debt securities of EU member states 1 473 858 44 389 – 1 518 247
Other foreign government debt securities 260 441 7 142 1 698 265 885
Equity securities – available-for-sale 21 438 1 886 419 771 35 936 9 537 211 503 22 000 683 722 754
Fixed-income securities – held-to-maturity – – 488 672 – – 1 573 8 450 – 498 695
Securitisation of reinsurance risks In December 2003 the FASB published the revised version of FIN 46 "Consolidation of Variable
FIN 46 is to be applied for the first time with effect from 31 March 2004 to all relevant entities. As at 31 December 2003 we applied FIN 46R to all variable interests in special purpose entities. In addition, FIN 46R contains disclosure requirements with respect to existing relationships with variable interest entities that are to be satisfied even if such entities are not consolidated.
This entity reported liable equity capital of EUR 182.4 million as at 31 December 2003. It is fully secured and thus does not constitute any risk of loss for Hannover Re.
Since 2 November 2001 Hannover Re has held the equity of a special purpose entity for the purchase and handling of so-called "life settlements". The company's total financing volume amounts to EUR 269.6 million. The entire underwriting risk of the special purpose entity is borne by an insurance company. This cedant retrocedes part of the risk to Hannover Re. The contract has been terminated with effect from 31 December 2003. The special purpose entity is closed for the acceptance of new business and is currently in the process of winding up. The maximum risk of loss for Hannover Re from this transaction is EUR 20.6 million. Hannover Re is not the primary beneficiary in this relationship.
Since May 1994, Hannover Re has participated in a number of special purpose entities for the securitisation of catastrophe risks by taking up certain capital market securities known as "disaster bonds" (or "CAT bonds"). Hannover Re's relations with these entities constitute variable interests. Hannover Re is not the primary beneficiary in any of these transactions, and there is therefore no consolidation requirement. The maximum risk of loss for Hannover Re resulting from these participations is EUR 48.5 million.
Technical provisions The loss and loss adjustment expense reserves are in principle calculated on the basis of the information supplied by ceding companies. IBNR reserves are also included. The total amount of the reserves corresponds to the "principle of best estimate" under US GAAP. This estimate is based on past experience and estimations of future development. In one subsegment of financial reinsurance technical provisions were discounted at interest rates of between 3.0% and 8.6%. The interest rates are determined by the contractual agreements. These treaties are discounted over a period of at least four years, which represents the period from inception to expiry of the respective contracts. The discounted amount totals EUR 697.9 million (EUR 1,127.2 million). As at year-end 2003 the discounted provisions amounted to EUR 2,857.3 million (EUR 4,314.9 million).
Reserve as at 31 December of previous year (net) 13 738 185 13 136 501
Change in additions to/departures from the consolidated group – 4 963
Effects of currency conversion at exchange rates on 31 December of year under review (net) (79 706) (76 837)
The impairments reported in the financial year were primarily attributable to a company consolidated at equity and a subsidiary of Hannover Reinsurance Group Africa.
The disposals resulted from the sale of the shares held by Hannover Rück Beteiligung VerwaltungsGmbH in E+S Rück to the Barmenia Group (see also section 6.1 "Transactions with related parties").
The period of amortisation on acquired portfolios varies between 5.5 and 15 years.
Policy benefits for life and health contracts 37 689 115 497
Policy benefits for life and health contracts 107 205 66 919
Expenditures on personnel The expenditures on insurance business, claims expenses (claims settlement) and expenditures on the administration of investments include the following personnel expenditures: 5.6 Staff and expenditures on personnel
Staff The average number of staff at the companies included in the consolidated financial statement of the Hannover Re Group was 1,970 (1,900). Of this number, 789 were employed in Germany in the year under review. The majority of staff were employed at the consolidated Group companies abroad.
Effective 1 December 2002 Group employees have an opportunity to accumulate additional oldage provision by way of deferred compensation through membership of HDI Pensionskasse AG. The benefits provided by HDI Pensionskasse AG are guaranteed for its members and their surviving dependants and comprise traditional pension plans with bonus increases as well as unit-linked hybrid annuities.
Additional similar obligations based upon length of service exist at some Group companies. Expenditures for these commitments in the financial year totalled EUR 2,903 thousand.
Provisions for pensions are established in accordance with SFAS 87 "Employers' Accounting for Pensions" using the Projected Unit Credit Method. The basis of the valuation is the estimated future increase in the rate of compensation of the pension beneficiaries. The benefit entitlements are discounted by applying the capital market rate for highest-rated securities. The provisions for pensions in Germany were calculated according to uniform standards defined by Talanx AG.
Projected benefit obligation at the beginning of the reporting year 54 024 48 289
Projected benefit obligation at the end of the reporting year 54 581 54 024
Notes notes on the individual items 5.8 Surplus debenture and loans
Other financial facilities In order to protect against possible future major losses, Hannover Re took out a new credit line of EUR 250 million in 2000 in the form of a syndicated loan. The facility has a term of five years and is due in November 2005.
E+S Rück has a credit line of EUR 40 million, which is extended on a half-yearly basis and can be drawn on as required.
The common stock was strengthened in the 2003 financial year through a capital increase for cash. On the basis of the capital increase for cash 9,716,392 new shares were issued, thereby raising the common stock to EUR 120,597,134.00. The capital stock is divided into 120,597,134 no-par-value registered shares.
Weighted average of issued shares 116 224 758 110 880 742
Dilution through payment of outstanding capital – – – – – –
In accordance with the "as-if pooling" method, our calculation of the earnings per share is based on the assumption that HDI Reinsurance (Ireland) Ltd. already belonged to Hannover Re at the beginning of the previous year. The weighted average number of shares was therefore increased by 13,716,814 with effect from the beginning of 2002.
Notes related party disclosures 6. Related party disclosures 6.1 Transactions with related parties
SFAS 57 defines related parties inter alia as parent companies and subsidiaries, subsidiaries of a common parent company, associated companies, legal entities under the influence of management and the management of the company itself.
Expenses for the company as a whole 25 433 16 698
Hannover Re and E+S Rück each hold limited partnership interests of EUR 25.0 million in Hannover Euro Private Equity Partners II GmbH & Co. KG (HEPEP II KG). The object of the company is to build, hold and manage a portfolio of passive investments, especially by entering into participations in companies with a similar business objective. The investments consist of equity and quasi-equity participations primarily in Europe in the form of private equity pools, parallel investments and secondaries. Capital calls in the financial year were paid in proportion to the interests.
Hannover Re and E+S Rück each hold limited partnership interests of EUR 25.0 million in Hannover Euro Private Equity Partners III GmbH & Co. KG. The object of the company is the same as that of HEPEP II KG. Capital calls in the financial year were paid in proportion to the interests.
Hannover Re holds a limited partnership interest of USD 75.0 million in Hannover America Private Equity Partners II GmbH & Co. KG. E+S Rück holds an interest of USD 25.0 million in this company. The object of the company corresponds to that of HEPEP II KG, with the difference that it is intended investments should be made largely in the USA. Capital calls in the financial year were paid in proportion to the interests.
In accordance with a resolution of 19 May 2003 Hannover Re’s interest in Hannover Reinsurance Group Africa (Pty) Ltd. was increased from 96.85% to 100% through acquisition of the remaining shares.
In the financial year Hannover Re repaid ahead of schedule the loans taken out from Hannover Re (Bermuda) Ltd. (EUR 200.0 million) and E+S Rück (EUR 250.0 million).
Hannover Re acquired the property & casualty portfolio of the Insurance Corporation of Hannover. E+S Rück is involved in the transfer of the portfolio through internal retrocession arrangements.
As part of a portfolio withdrawal Hannover Re transferred treaties in the area of life and health reinsurance to Hannover Life Reassurance Company of America for regional handling.
6.2 Compensation and stockholdings of the management boards of the parent company and further information with respect to the German Corporate Governance Code
André Arrago Purchase Share DE 000 840 221 5 27.3.2003 3 000 18.22
134,165 option rights lapsed in the financial year at an average exercise price of EUR 25.19.
The calculations were based on the year-end closing price of the Hannover Re share as at 30 December 2003 of EUR 27.72, volatility of 43.0%, a dividend yield of 2.88% and risk-free interest rates of 4.26% for the 2000 allocation year and 4.42% for the 2002 allocation year.
On this basis provisions of EUR 1,116 thousand for the 2002 allocation year and EUR 3,486 thousand for the 2000 allocation year were established for the stock options existing as at 31 December
Total options remaining at 31 December 1 673 499 24.78 1 097 235 25.50
Hannover Re has also provided security for subordinated debt in the amount of EUR 350 million issued by Hannover Finance (Luxembourg) S.A.
Outstanding capital commitments with respect to special investments exist in the amount of EUR 62.8 million for E+S Rückversicherungs-AG and EUR 115.4 million for Hannover Re. These involve primarily private equity funds and venture capital firms in the form of private limited companies.
Within the scope of a novation agreement regarding a life insurance contract we assumed contingent reinsurance commitments with respect to due date and amount estimated at EUR 25.7 million as at the balance sheet date.
Several Group companies are members of the German aviation pool, the association for the reinsurance of pharmaceutical risks and the association for the insurance of German nuclear reactors. In the event of one of the other pool members failing to meets its liabilities, an obligation exists to take over such other member’s share within the framework of the quota participation.
The accounting of the "Modco" and "CFW" reinsurance treaties, under which security deposits are held by the ceding companies and payments rendered on the basis of the income from certain securities of the ceding company, must comply with the standards of SFAS 133 DIG B 36. The derivatives embedded in such host contracts are to be reported separately from the underlying reinsurance arrangements at fair value (cf. section 1 "General accounting principles").
The application of DIG B 36 had no significant impact on the consolidated financial statement in the financial year. The fair values of the embedded derivatives were recognised in the investments as at the balance sheet date and to this extent increased the investment income. The pre-tax effect on the investment income amounted to altogether EUR 3.3 million as at the balance sheet date. Of this amount, EUR 2.8 million before tax was attributable to the cumulative adjustment based on first-time application of the standard as at 1 October 2003 with tax expenditure of EUR 0.5 million, and the investment income after tax was therefore increased by EUR 2.3 million under the first-time application. In the course of the fourth quarter the fair value of the embedded derivatives further increased by a total of EUR 0.5 million before tax.
The fair values of the financial instruments were determined on the basis of the market information available as at the balance sheet date and by using the valuation methods set out below. If the underlying transaction and the derivative cannot be reported as a single unit, the derivative is recognised under the "trading portfolio" item in the balance sheet.
In a press release dated 18 February 2004 we announced that we had successfully placed subordinated debt in the amount of EUR 750 million on the European capital markets through our subsidiary Hannover Finance (Luxembourg) S.A. The bond was placed predominantly with institutional investors in Europe.
The bond was priced at a spread of 163 basis points over the 10-year mid-swap rate and has a final maturity of 20 years. It may be redeemed by Hannover Re after 10 years at the earliest and at each coupon date thereafter. If the bond is not called at the end of the tenth year, the coupon will step up to a floating-rate yield of quarterly EURIBOR + 263 basis points.
The Insurance Corporation of Hannover and the Clarendon Group have multi-year contracts for the lease of business premises. In the latter case, a lease agreement for business premises was concluded in the financial year with a term of 20 years. The lease ends on 29 August 2023. The rent instalments are fixed for the lease term, although adjustments in line with changed market conditions are possible at contractually agreed times.
Foreign currency items in the individual companies' statements of income are converted into the respective national currency at the average rates of exchange. The individual companies' statements of income prepared in the national currencies are converted into Euro at the average rates of exchange and transferred to the consolidated financial statement. The conversion of foreign currency items in the balance sheets of the individual companies and the transfer of these items to the consolidated financial statement are effected at the mean rates of exchange on the balance sheet date. In the case of functional currencies, differences arising between the average exchange rate and the exchange rate on the balance sheet date lead to the establishment of a separate item in the stockholders' equity, which is excluded from the statement of income. Differences arising with regard to non-functional currencies are recognised in the statement of income. Functional currencies are defined as those currencies in which investments are effected.
We conducted our audit of the consolidated financial statements in accordance with German auditing principles and the generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW). Those standards require that we plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free of material misstatements. The evidence supporting the amounts and disclosures in the consolidated financial statements are examined on a test basis as part of the audit. The audit includes assessing the accounting and consolidation principles used and significant estimates made by the legal representatives as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.