For six consecutive years now I have been able to report record results in this letter – and this is again the case today. We increased our net income in 2000 by 81% to EUR 365 million. The earnings per share, which rose from EUR 6.86 to EUR 12.38, showed a corresponding rise. The return on equity after tax stood at 26% and we intend to propose to our shareholders an increase of the dividend payment for the seventh time in a row.
In 1999, the German insurance industry had reasons to complain of the disadvantages associated with the tax legislation, the reduction in the rates of corporate tax in the financial year just-ended had a highly favourable, non-recurrent effect on some companies – including our own. Yet this should not disguise the fact that our pre-tax operating result declined. Overall, however, bearing in mind its previous tax disadvantages, Germany has become more competitive and hence also in the long term more attractive as a business location.
Although the burden of losses from natural catastrophes decreased very substantially in property and casualty reinsurance, profits were still adversely impacted by the terms and conditions of previous years, and we were therefore only able to generate a slight improvement in results. The combined ratio – an indicator of the quality of the business – improved from 111% to 108%. Program business, our fourth and newest business segment, performed disappointingly in the year under review. This segment continues to be largely dominated by the Clarendon Insurance Group based in New York. Despite systematic and highly successful growth, the inadequate terms and conditions prevailing on the US insurance markets at the beginning of 2000 were also reflected in our results. In addition, the performance of this segment was burdened by two non-recurring special circumstances, as a consequence of which the Group's program business only posted a balanced result. We have since taken all measures necessary to ensure that this segment, also, will once again generate the
expected profit contributions in the coming years. Our optimism in this regard is reinforced by the fact that in the USA, terms and conditions have now improved in numerous market segments.
With the sudden bursting of the bubble around technology stocks on the various "new markets", investors have started to "rediscover" our share as a fundamentally attractive stock. Climbing 24% in the year under review, the performance of our share finally charted a course which again ran parallel to our business results. Unfortunately, we were unable to divorce ourselves from the generally negative trend at the close of the past year and the beginning of the current one, with the result that the share's value has again declined. Based on the analysts' consensus estimate for the current year, the Hannover Re share is presently trading at a price earnings ratio of 9.8. This figure clearly reveals – also in comparison with similar listed companies – the considerable potential that is still inherent in our share.
Particularly gratifying was the feedback on our investor relations activities, which we received from financial analysts through the business journal "Capital" – namely in the form of the "Capital Investor Relations Award 2000". In a survey carried out in co-operation with the German Association for Financial Analysis and Asset Management (DVFA), financial analysts were asked to rate companies according to criteria of up-to-date nature, credibility and quality of company information. Based on this survey, the investor relations activities of Hannover Re were commended for being the best in their market segment (MDax). Not only that, in an overall rating of all the 237 companies considered we occupied third place, performing better than every Euro Stoxx 50 and Dax-listed company.
Dr.-Ing. Horst Dietz, Mannheim Chairman of the Executive Board of ABB AG
Dr. Erwin Möller, Hannover Member of the Executive Board of HDI Haftpflichtverband der Deutschen Industrie V.a.G.
Rudolf Schwan, Essen (until 20 July 2000) Former Member of the Executive Board of RWE AG
Dr. Klaus Sturany, Essen (from 20 July 2000) Member of the Executive Board of RWE AG
The 2000 stock market year was characterised by two very different phases with at times considerable turmoil. The beginning of the year was marked by an upbeat mood on the German and most international stock exchanges. A fundamentally positive tone carried over from the previous year, the absence of significant adverse effects associated with the new millennium and favourable economic trends in the most important industrialised nations spurred the stock markets to ever greater highs. Euphoria was particularly prevalent in the segments of the new markets for technology, media and telecommunications (TMT) stocks. Virtually all the world’s indices continued their high-flying run of the previous year. In the USA both the Dow Jones and the NASDAQ index for tech stocks boomed. In Germany, too, the Nemax new market index reached an all-time record high on 10 March at 9,603.46 points. The scene was similar on the Dax – primarily due to the vigorous growth of the technology and telecommunications stocks included in this index it reached its highest level of the year on almost exactly the same day. Yet,
Insurance stocks began 2000 on a pleasing note. The future tax exemption announced by the Federal Government for sales of equity participations led to particularly marked price increases among listed German market leaders in the insurance and reinsurance sector. The heavy weighting of these stocks within the CDax for insurance stocks caused this index to rise sharply during the early weeks of the year. However, the euphoria surrounding TMT stocks quickly deflected investors' focus away from insurance stocks, with the result that they generally lost ground into the month of March. Yet from the second quarter onwards, the collapse of the new markets created fresh potential for the "Old Economy" stocks, especially for insurance shares. The CDax for insurance stocks climbed by yearend to 751.35 points, a figure equivalent to a gain of roughly 30%.
We are certain that the Hannover Re share continues to offer considerable potential. Although the basic tendencies on the stock markets are beyond our control, we can create the necessary conditions for tapping into this potential by constantly enhancing our most important fundamental profit and return-on-equity parameters. Our overriding task, therefore, is to increase our profit by at least 10% annually and to continue to generate an above-average return on equity. In the financial year justended we again succeeded in achieving these targets. The earnings per share totalled EUR 12.38, a rise of 81% compared to the previous year. The return on equity was also above the market average at 17% before tax and 26% after tax. Furthermore, it clearly surpassed our strategic target of a minimum return on equity of 750 basis points in excess of the average yield on 10-year government bonds. In order to optimally structure the return on equity and hence ensure the highest possible return on the capital invested by our shareholders, we continued to implement highly purposeful asset management. The transfer of reinsurance risks to the capital markets, a long-term subordinated loan and traditional retrocessions all served as cost-effective equity substitutes.
In the year under review we again set great store by maintaining and further expanding our investor relations activities, which are frequently rated as above-average. Our goal was to familiarise an even larger group of investors and analysts with the Hannover Re share and intensify existing contacts. To this end, for example, we participated in investor fairs and share forums organised by various banks. In addition, we presented our share to institutional investors in numerous individual discussions – both at our offices in Hannover and during our visits to investors at all the world’s major financial centres.
Early analyses of our stock ledger produced gratifying results. This is particularly true of the already relatively good diversification of our free-floating stock, although it still offers scope for a broader spread. As at December 2000 the geographical diversification of our free float was as follows: If the shareholdings are broken down into corporate entities and natural persons, the lion's share is of course attributable to institutional investors. As of December 2000, around 72% of the free-floating capital stock was in the hands of institutional investors. Nevertheless, the resulting privately held proportion of 28% still constitutes a remarkable figure.
We attach great importance to the fulfilment of meaningful and internationally recognised corporate governance requirements. Several associations in Germany have now drawn up such principles, the purpose of which is to ensure responsible, value-orientated management and control of companies. We support the definition of such general principles and are guided by them. The introduction of variable remuneration based on value enhancement for our managerial staff worldwide (stock option plan), the provision of information on the share-
We were particularly pleased to win the "Capital Investor Relations Award 2000". This prize, which has been awarded by the business magazine "Capital" for the past four years, assesses the information provided by a company according to criteria of up-to-date nature, credibility and quality. The survey conducted in co-operation with the DVFA commended the investor relations activities of Hannover Re for being the best in their market segment (MDax). Not only that, in an overall rating of all the 237 companies considered we occupied third place, performing better than every Euro Stoxx 50 and Dax-listed company.
"Hannover Re's clear strategic focus, excellent diversification and disciplined underwriting policy are testimony to the quality of its management. "
"Hannover Re's foremost attraction seems to derive from its ability, as seen in its underwriting and retrocession policy, and a talent for innovation, as witnessed by the ways it has found to use securitisation to handle insurance risks."
"Unlike many other insurers, Hannover Re is not burdened with excess capital and the attractive leverage means that improved operating results will feed directly through to significant RoE enhancement."
"Hannover Re is a high-quality, aggressive reinsurance company, which has become the world's fifth-largest professional reinsurer. In the four-year period 1996 -1999, the group doubled its premiums."
Annual General Meeting: 20 July 2001 Hannover Congress Centrum Kuppelsaal Theodor-Heuss-Platz 1-3 30175 Hannover, Germany
Stock exchange ID: Share: Bloomberg: HNR1 GY Investdata: HNR Reuters: HNRGn.DE
Financial calendar 2001/2002 5 June 2001 Press conference on the annual results 2000 6 June 2001 Analysts' meeting Frankfurt 6 June 2001 Analysts' meeting London 20 July 2001 Annual General Meeting 2001 Beginning 10:30 a.m.
In order to generate above-average returns on the capital invested by our shareholders, we strive to achieve, as an absolute minimum for the Hannover Re Group, an operating result on a moving 5-year average which in relation to our capital, as per US GAAP, corresponds to at least the average 10-year government bond yield plus a risk premium of 750 basis points.
In order to keep our capital costs as low as possible, we prefer, to the extent of the rating agencies' tolerance limits, debt over equity. In addition, we also make intensive use of capital substitutes (transfer of risks to the capital market as well as conventional retrocession).
With a view to minimising the costs of raising equity capital, the performance of our share assumes key importance. The development of the earnings per share and our investor relations activities are intended to ensure a share price development exceeding, on a moving 3-year average, the performance of the unweighted world reinsurance share index.
For the Hannover Re Group, growth means first and foremost an increase in profit, not an expansion of the (gross or net) premium income. Acquisitions are considered inasmuch as they help us to achieve our strategic priorities faster and meet our profit targets and return-on-investment requirements. Equity stakes in primary insurers are, however, not considered a sensible growth vehicle.
The fundamental approach to the structure of our invested assets is that equity as per
Our risk management system regularly monitors all global, strategic and operating risks within the Hannover Re Group. In addition to control and early warning systems for traditional underwriting risks, systems are developed and maintained for the identification and containment of all other risks which may have a bearing on the Group's survival.
In this regard, the level of risk – primarily determined by the volatility of the technical result – is the yardstick for the capital requirement of each risk unit. The principle applied here is the greater the volatility of results, the higher the capital requirement. The capital requirement of each individual risk segment can then be specified accordingly.
The profit targets defined above give rise to the following target figure comparisons: 1) DVFA revised calculation method (without adjustment for amortisation of goodwill) 2) Earnings per share under US GAAP
Target figure: 750 basis points in excess of the average 10-year government bond yield
In Germany the economic upswing peaked in the summer. The German economy was driven primarily by export demand. After dropping off sharply over the summer, capital expenditure on plant and equipment continued to climb sharply in the second half-year. Private consumption, on the other hand, rose only slightly after the summer, and the drain on purchasing power was particularly evident here. The cost of living rose into the autumn months, driven first and foremost by higher oil prices. The labour market improved in 2000. This was due not only to the brighter state of the economy, but also to increased employment of part-time workers as a consequence of the amendment of laws governing jobs paying up to DM 630 per month.
Although the number of natural catastrophes increased in 2000, insured losses were lower than in the previous year. There was a particularly marked rise in climate-related catastrophe losses. Bearing in mind that global warming may be the most significant factor in this regard, increased losses must be anticipated in this sector in years to come.
We closed the 2000 financial year with substantial growth and a sharply higher aftertax profit. The strong profit increase was attributable to the extraordinary tax effect in the order of EUR 219 million. Nevertheless, the result shows that we were able to operate successfully and profitably despite the – in some respects – difficult business environment. Our earnings per share rose by approximately 81% from EUR 6.86 to EUR 12.38, and we generated a return on equity of 26% after tax and 17% before tax.
The business development reported for life and health reinsurance was very heavily impacted by two extraordinary effects. On the one hand, a special contract in the previous year had produced additional premium income of around EUR 200 million. On the other hand, financing transactions – which under German accounting requirements generate additional gross premiums of EUR 404 million – are reclassified under US GAAP (SFAS 97), with the result that this premium income was not reported. Once these two effects are factored out, the growth rate was 23%.
The business model of the Clarendon Insurance Group in US program business is based upon the ceding of substantial parts of its business to other reinsurers. In the year under review it again slightly reduced its retention. However, due to the higher retention of the other companies participating in program business, net premiums in this segment rose sharply. We also made further use of our innovative securitisation instruments and transferred part of our life and health reinsurance portfolio to the capital markets. Overall, the Group's retention increased from 62% to 64% and we recorded net premiums of EUR 5,304 million.
The other income and expenses shown in the statement of income comprises items such as exchange gains and losses as well as expenses for the company as a whole. The latter increased in line with the expansion of business. The amortisation of goodwill in the amount of EUR 12 million related primarily to the Clarendon Insurance Group and E+S Rück. Overall, the pre-tax result decreased slightly from EUR 330 million to EUR 304 million.
As a consequence of the larger profit contribution made by E+S Rück, minority interests in the Group profit were markedly higher than in the previous year.
The tax situation was of paramount importance in the year under review and had a decisive impact on the extraordinary increase in the profit after tax. Companies, which draw up their balance sheet in accordance with international accounting principles are obliged notionally to pay tax on all divergences from the relevant profit calculation for tax purposes and show them under deferred taxes. These tax items are determined by using an average overall rate of taxation, which is based on the tax rate applicable in Germany to retained earnings. In 2001, this rate of taxation was cut from 40% to 25%. Since the "deferred taxes" item is intended to reflect future tax effects, this reduction in the tax rate is to be applied immediately in 2000. Consequently, the tax rate for all items hitherto allocated to deferred taxes is reduced by 15 percentage points. In our case, the corresponding effect totalled EUR 219 million on balance, and it thus reduced the deferred taxes by the same amount. The actual tax burden in the 2000 financial year also fell due to the slight decrease in the pre-tax result and the lower rate applicable to deferred taxes, thereby producing overall tax proceeds of EUR 129 million. This caused consolidated net income to rise by 81% to EUR 365 million.
Competitive pressure thus remained intense and there was little improvement in the inadequate premium level. The negative trend in the claims experience was, however, reversed, with the result that the loss ratio of roughly 86% (87%) was slightly more favourable than
This general environment allowed us only limited expansion of our premium volume. In some lines of business, such as industrial fire reinsurance, we withdrew almost entirely from the market or changed over to non-proportional covers, thereby causing premium income to decline here.
Due to the decrease in natural catastrophe losses and the favourable run-off of the loss reserves from previous years, our technical result improved on the 1999 financial year. Motor and liability reinsurance also played a part in this improved result.
In our assessment, the rapidly changing structure of the insurance market poses special risks and challenges for the reinsurance industry. As things currently stand, the German insurance market still shows only a middling degree of concentration. The ten largest insurance groups in the property and casualty segment account for a market share of less than 50%. Yet it would appear to be merely a question of time before the stronger trends towards concentration in neighbouring countries also make themselves felt here. In France and the United Kingdom, for example, the three largest providers alone enjoy market shares in excess of 40%.
Lloyd's insurance market was similarly swept by a wave of mergers. Numerous Syndicates equipped with limited commercial liability capital changed hands because of poor results or were absorbed into other organisations. At the same time, however, new Syndicates were set up. Overall, approximately 80% of Lloyd's capital now derives from corporations, which are therefore continuing to squeeze out private individuals with unlimited liability.
tinues to be in ample supply, it was possible to secure improvements in treaty terms and conditions. Many reinsurers, especially in London, were and still are reliant on their own reinsurance (retrocession). However, with capacity of this type in scarce supply, closer attention is being devoted to the profitability of assumed reinsurance business. This also has a favourable impact on terms and conditions.
Increasing reinsurance costs and the reduction in reinsurance capacity have ultimately brought about improved conditions on the insurance market, most notably in industrial fire insurance.
The treaty negotiations between insurers and reinsurers had been largely completed when the winter storms occurred, and it was therefore too late to factor them into the year under review. For reinsurers, the conditions agreed at the beginning of 2000 thus marked the low point in a phase characterised by wholly inadequate terms and conditions. However, the strong surge in demand as the year progressed – French clients purchased additional windstorm coverage worth around EUR 600 million – subsequently made it possible to push through appropriate reinsurance conditions. Since the demand for covers even surpassed the actual scale of the recent storms, a capacity shortage ensued – thereby enabling reinsurers to secure very attractive prices in the windstorm segment at the end of 2000 and in the 2001 renewals.
Despite strong economic growth and a generally favourable business climate, the year justended was a disappointing one for Dutch property and casualty insurers. The technical deficit across all non-life lines was 2% of the premium volume. This was primarily attributable to unsatisfactory results in motor insurance and industrial fire business. In addition to the fiercely competitive climate, the year under review was marked by record figures for major fire claims –
Against the backdrop of a stable economic environment, the wave of insurance company mergers which had swept through the Nordic countries in recent years slackened in 2000. Scarcely any mergers or acquisitions were recorded. In all the countries of this region – with the exception of Denmark – the five major players now hold more than 80% of the non-life premium. Past international mergers have led to a relatively strict distinction between companies and groups that operate on an exclusively local basis and those which are active across national borders. The latter consider the entire Nordic and Baltic region as their primary sector of operations. Internationally active insurance groups still have a minimal presence. Due to the formation of ever-larger groups, the overall volume of ceded reinsurance is contracting and competition is constantly intensifying. Nevertheless, a continuing decline in the premium level is not to be expected since the poor results of past years have left no room for further concessions. Particularly in industrial fire business, the rate level was clearly too low and it has not shown any sign of improvement to date.
In view of the inadequate level of rates in industrial fire business, we withdrew to a large extent from proportional treaties – especially surplus treaties. At the same time we substantially expanded the share of the total premium volume deriving from non-proportional business. We also made use of the market conditions in the natural catastrophe sector and slightly expanded our overall business volume in the year under review. The result in the Nordic countries was adversely affected by a high burden of losses in the fire line and, all in all, it was not satisfactory.
In this environment our business volume remained roughly on a par with the previous year.
In March 2000 the Italian government caused a stir at home and abroad when it accused market players of price collusion in the motor insurance sector, prohibited rate adjustments in the discounted categories for a period of one year and thus interfered in the companies ' freedom to set prices. It is unanimously believed that this 12-month tariff freeze violates EU law and will bring about a further deterioration in the already negative technical performance of this line. The deficit posted by Italian insurers in this line of business totalled approximately EUR 2.5 billion in 2000.
Since we had already largely withdrawn from the industrial insurance segment in the preceding years due to the inadequate terms and conditions prevailing in the market, the flooding in northern Italy placed only a minimal strain on our result. In motor third party liability insurance we have long pursued a restrictive underwriting policy. Due to the inadequate level of original premiums, we accept almost exclusively non-proportional business in order to divorce ourselves from the original terms and conditions.
Ten years after the opening up of the markets, the implementation of economic reforms and the accompanying deregulation of the insurance industry, it is still the case that the basic political and economic conditions differ widely in the various countries of eastern Europe. Particularly in the CIS states, numerous reforms continue to be necessary for the establishment of a functioning insurance market.
Nevertheless, the general state of the economy as a whole can be assessed increasingly favourably. The markets have experienced a broadly based acceleration in economic growth. The
appreciably to its rivals, but still enjoys comfortable market shares of between 30% and 50%. In those countries seeking to join the European Union, the reforms implemented by the insurance supervisory authorities are aimed at rapid alignment with EU standards, i.e. the introduction of solvency requirements, the abolition of price and product controls and the tightening of capital adequacy requirements.
Against this backdrop, we were successful – especially in the Czech Republic, Poland and Slovenia – in writing attractive new business. In Romania and Bulgaria, on the other hand, we were unable to expand our position as planned. Overall, however, we recorded gratifying growth. Results were burdened by proportional motor business, most notably in Bulgaria, as well as by two major losses, as a consequence of which our account closed with a slight technical deficit.
The US economy was clearly overshadowed by an impending downturn in the year under review, although its effects had not yet left a mark on the insurance and reinsurance industries. A greater impact derived from the collapse of the stock markets, thereby causing a drop in the investment income, which in previous years had partially offset the technical deficits. With the decline in the valuation reserves in investment portfolios, stockholders' equity in the insurance industry also fell by a sizeable 2.5%.
Furthermore, the scarcely adequate results gave additional impetus to the trend towards concentration among insurers and led to another substantial number of mergers and acquisitions. Most notably, many small and medium-sized companies disappeared from the market.
In 1998 and 1999 almost the entire US insurance industry suffered under wholly insufficient premiums and high loss burdens. In many instances positive annual results could only be shown by massively cutting reserving levels. In the year under review this trend could no longer be sustained. More due to the lack of profitability than any shortage of capacity, a significant turnaround began to occur. This manifested itself initially in workers' compensation insurance and commercial motor insurance as well as industrial property business and some casualty segments. US property and casualty insurance business consequently showed overall premium growth in excess of 5%. Yet it should not be overlooked in this context that the amount of the covered risks also increased sharply. The costs of medical care, for example, have climbed
by more than 50% in recent years, the concentration of values in catastrophe-exposed coastal regions has risen particularly sharply and the loss-of-profits risk in industrial property business has increased considerably. It was more by chance that the 2000 financial year was almost entirely spared any significant natural catastrophes.
The positive developments, which in some sub-sectors are by no means adequate, also made themselves felt in the reinsurance market. Most notably, the trend towards multi-year covers was stopped and increased deductibles from ground up were implemented almost across the board. The necessity of securing further improvements derives, inter alia, from the need to restore reserves to the former levels.
Declining premiums and increasing loss amounts were the hallmark of liability (re-)insurance in recent years. We had therefore heavily scaled back our participation in this segment. In the course of the year under review, however, the basic environment improved appreciably – a trend which was supported by the fact that clients are attaching greater importance to the financial strength of their reinsurers.
This trend was fostered not only by US interest rate movements but also by stable growth in Europe, although the differences between individual countries were sometimes pronounced.
most all the countries have introduced obligatory motor third party liability insurance. It should be noted, however, that the required insured limits are sometimes very low. With the exception of Argentina, Brazil and Mexico, the same is therefore true of the premium volumes. In some instances, motor own damage insurance included natural catastrophe claims without reflecting this in the tariffs, and premium levels were consequently inadequate. What is more, this line of insurance is generally transacted with very high expense ratios – both for acquisition and internal administration – and the business performance was therefore again highly unsatisfactory.
Due to the high natural catastrophe exposure in Latin America, the fire line of insurance together with its allied natural hazards risks is heavily reinsured – especially given the relatively low capital resources of insurers and hence their correspondingly limited capacity to run business in their retention. Accordingly, this segment is of paramount importance to reinsurers. Following a phase characterised by massive pressure on reinsurance terms and conditions with correspondingly poor results, a series of loss events has turned the market around. The considerable losses of the previous years associated with the storms "Mitch" and "Georges" as well as the flooding in Venezuela and the Colombian earthquake pushed original premiums higher and made possible improvements in reinsurance conditions. In Latin America, however, these positive developments only commenced in the course of the year and thus had little influence on results in the year under review. Particularly in the industrial fire segment, results were therefore unsatisfactory.
It was generally noticeable that the Brazilian reinsurance market failed to open up in the year under review, and indeed it remained firmly entrenched in its existing monopoly structure. We remain ready to utilise the opportunities which will present themselves after the expected deregulation. As things currently stand, however, it is scarcely possible to foresee just when this will happen on a comprehensive scale.
The portfolio of risks with natural hazards exposure produced generally favourable results, and the overall result of our Japanese business was therefore highly satisfactory. Nevertheless, it should be borne in mind that this was in large measure due to the fortuitous non-occurrence of major losses. Considering the potential losses and their statistical probability of occurrence, we regard the rate level as insufficient.
Due to continued positive growth, especially in its coastal regions, China has enjoyed an extraordinary economic upturn. The strong competitive pressure, which resulted from an excessive number of reinsurers with overly high expectations was clearly to the benefit of clients. We nevertheless posted a balanced result.
A number of competitors sharply scaled back their involvement in the Taiwanese reinsurance market. The ensuing decline in supply, which actually encountered a rise in demand for natural catastrophe cover following the severe earthquake in September 1999, thus enabled reinsurers to push through appreciable improvements in terms and conditions. We ensured compliance with minimum conditions for natural hazards under proportional treaties and secured appropriate reductions in commission on our participations. The premium volume in this line of business climbed sharply. We succeeded in assuming the role of leading reinsurer under a number of non-proportional programmes. This pleasing and likely highly profitable growth unfortunately contrasted with a number of losses in industrial fire insurance, as a consequence of which we showed a deficit for the year under review.
Motor insurance continues to be one of the most significant business segments in Taiwan. Premium income from this line accounts for almost half of our total premium volume. These participations posted satisfactory results. Overall, therefore, our Taiwanese portfolio closed with a slight technical deficit.
In motor business, too, results in all the ASEAN countries deteriorated. On the one hand, this was attributable to increases in benefits awarded by the courts in motor third party liability insurance. On the other hand, the faltering economic recovery in the second half of the year had an adverse impact on this segment.
Notwithstanding the aforementioned negative factors, the overall business performance in the ASEAN region was satisfactory – a result primarily made possible by our regional diversification and the favourable loss experience in fire material damage insurance.
This situation was exacerbated by the fact that the number of (re-)insurance brokers also diminished, leaving the remaining brokers to fight over a similarly reduced number of insurers. Thorough technical analysis of risks sometimes suffered under the competitive pressure thereby unleashed; in many instances it proved impossible to obtain remuneration which was more commensurate with the risk, and the premium development fell short of expectations.
By contrast, the liability line needs to be considered in a more differentiated light. While personal liability business continued its stable development and facilitated moderate premium increases, industrial liability business still suffered under inadequate tariffs. On the other hand, the reform of privatised workers' compensation business in western Australia – which was initiated in 1999 – showed its first appreciable positive effects in the year under review. The reform not only made it more difficult to take legal action, but also led to a marked rise in original premiums. We were thus able to improve the hitherto negative results of our proportional participations in this line of business. Owing to the fact that the run-off of the reserves for older occurrence years also proved better than originally anticipated, the result for the reporting period was very pleasing.
Overall, in the course of the year under review we cautiously and selectively stepped up proportional acceptances again after scaling them back substantially a few years ago. With the exception of storms and flooding on a minor to moderate scale, natural catastrophe business was spared any major loss events, and we therefore generated a very good result in this segment.
Despite depressed market prices and considerable flood damage in the north-eastern part of South Africa and in Mozambique as well as various fire losses, the technical deficit posted by Hannover Re Africa decreased appreciably. The portfolio of fire business was burdened by altogether 46 major claims with a loss amount in excess of ZAR 1 billion. Total premium income in this market was no more than ZAR 3 billion. Compared to 1990, the rate level in the year under review was thus down more than 60% over a ten-year period. This prompted us to drastically scale back this segment until prices recover to an acceptable level. Results in motor business were not satisfactory and placed a strain on the technical account.
The expansion of the global economy has generally had a positive impact on the marine insurance market. In Asia, for example, the turnover of goods picked up substantially as part of the general turnaround in the economic crisis. Ship owners worldwide saw an increase in the level of freight rates. Developments on the oil markets led to the increased building of production facilities and greater capacity utilisation of the worldwide tanker fleet.
The favourable trend was even more pronounced in the reinsurance market, for example in non-proportional business written on the London Market. It was possible here to increase ceding companies' retentions and achieve average rate increases of 25 - 30%. In other countries, however, premium increases were more moderate and the scope of coverage remained largely unchanged.
We accept the predominant share of our marine business from the London Market and the USA. Since premiums in these markets are for the most part booked in US dollars, our growth in this sector is also attributable to the appreciation of the dollar against the euro.
With slight overall growth the technical result showed a modest improvement.
In aviation and space business, as in marine insurance, the reinsurance market was able to some extent to divorce itself from these developments. Rate increases in the non-proportional sector averaged 30 - 40%, albeit with some major divergences depending on the individual claims experience of specific programmes.
In the USA, on the other hand, the dramatic claims experience brought about sometimes drastic rate increases and a marked tightening of the underwriting criteria applied to the surety market. The construction boom had led to inadequate rates at a number of leading surety companies and resulted in serious negligence in contract execution by their building customers. The consequence was an increased number of major claims.
Key figures for life and health reinsurance * including premium deposits
Particularly significant growth impetus derived from our preferred financing transactions for life, annuity and personal accident portfolios in German-speaking markets, the United Kingdom, South Africa and the Far East.
For refinancing purposes we again retroceded sizeable parts of our business. Consolidated net premiums (again including premium deposits) therefore increased to EUR 1,723 million – a rise of 16% compared to the previous year's figure of EUR 1,485 million. The retention rate thus stood at 69% in 2000 (as against 66% in the previous year).
On account of our positioning as a financing reinsurer, financial factors have a greater influence on our result than on that of other life and health reinsurers. The following aspects, for example, have a major impact on our portfolio and are documented by means of extensive actuarial analyses and sensitivity studies: • the persistency of the (pre-)financed business in force,
• the exchange-rate trend of the balance sheet currency (euro) against foreign currencies,
• to a lesser extent the interest-rate movements in foreign markets.
This applies particularly to our portfolio in Europe – especially in German-speaking markets – as well as to the USA, which accounted for approximately 43% of the total premium income.
The operating result before tax on income, minority interests and other general expenses totalled EUR 83 million in the year under review, an increase of 80% on the previous year's figure of EUR 46 million.
The organisation is structured in such a way that in future local competence centres within the network will be accessible to our clients. They will thus be able to draw on our expertise and experience at any time. We believe that this organisational form – that of the network reinsurer – marks the way ahead. It facilitates flexible adjustment to future, still-to-bedefined market requirements.
As at year-end 2000 our clients around the world could draw on the services of roughly 270 Hannover Life Re staff, around 220 of them stationed abroad.
In the year under review clients continued to use this method and the specialist expertise of Hannover Life Re in order to optimise their financial results and hence enhance their liquidity or solvency/tax position.
In 2000 we concluded eight new transactions of this type in the USA, France, Luxembourg and Japan, generating gross premiums of around EUR 310 million for 2001. Five transactions related to life and annuity portfolios, and in three instances health insurance portfolios were reinsured. On two occasions we retroceded the lion's share (75%) to the international capital markets using our securitisation instruments.
Volume in Year of Type of business Relief in 2000 Refinancing in 2000 EUR million placement (in EUR million) (in EUR million)
The performance of our conventional life reinsurance was also highly gratifying. In this context, we have focused on niche products offered by small US insurers; with new business of USD 5.4 billion, the total sum insured of the business in force reached USD 21.2 billion as at
The reported annual operating result after tax of minus USD 2.5 million fails to adequately reflect the true added value of the company due to the special features of our block assumption transactions. These transactions substantially increase the non-capitalised value of our portfolio.
Our operations in Australasia are conducted by our subsidiary Hannover Life Re of Australasia Ltd. In a fiercely competitive business climate, we maintained our market leadership among locally active life reinsurers in Australia with a market share of more than 35%.
Gross premiums amounted to AUD 266 million. The claims experience with life and disability annuity risks was appreciably better than in the previous years, and Hannover Life Re of Australasia consequently generated a very pleasing operating profit of AUD 11 million.
At the beginning of 2000 we concentrated our Group-wide southern African business in the hands of the Hannover Re Africa Group in Johannesburg; since that date our client relationships in southern Africa have been served exclusively by Hannover Life Re Africa. South African cedents account for 95% of its business, while the remainder derives from Mauritius, Kenya and Zambia.
With premium income of ZAR 604 million (equivalent to approximately EUR 93 million), an increase of 42% in gross business was achieved.
We are represented by two operational risk carriers in the United Kingdom and Ireland. Hannover Life Reassurance (UK) Ltd. in London handles the conventional, more risk-orientated reinsurance market in the UK and Ireland. Hannover Life Reassurance (Ireland) Ltd., on the other hand, which we established in Dublin in the second half of 1999, has been assigned a core strategic task within Hannover Life Re. Equipped with a small, highly skilled team, it is able to make use of the favourable supervisory and solvency framework in Ireland in order to implement bespoke reinsurance solutions for our international clientele.
The gross premium income of Hannover Life Reassurance (UK) grew to GBP 42.2 million in the year under review, an increase of 35% compared to the previous year.
The gross premium income of the home office in Germany showed a marked increase in 2000. A sizeable portion of this business (almost 50%) was attributable to retrocessions of foreign subsidiaries to Hannover Life Re International. This office is also responsible for performance controlling within Hannover Life Re in the light of both risk and financial considerations. As part of this brief, further financing arrangements were retroceded to the international capital markets in the year under review by way of securitisations.
In Germany we observed increased demand among our clients for liquidity relief as a consequence of the explosive growth in unit-linked life insurance (27% market share of new business in 2000). Against this backdrop, we succeeded in further expanding our leading position as a reinsurer of unit-linked life insurance policies.
Many of our activities in the German market are carried out with an eye to the future and are intended to establish the basis for a sustained improvement in our market position in the years to come. This was particularly true in the light of the strong demand anticipated for financing arrangements as a consequence of the introduction of additional old-age provision encouraged as part of the Pension Reform Act.
Activities conducted in other countries are grouped together under Hannover Life Re International and encompass a network of three branch offices in Stockholm, Kuala Lumpur and Hong Kong as well as service and marketing centres in Paris, Milan, London, Madrid, Mexico City, Shanghai, Taipei and Tokyo. We are thus in a position to provide our clients with technical support and expert advice on a local basis.
The office in Hannover not only serves Germany but also, most notably, Austria, Switzerland, Luxembourg, Liechtenstein and the Netherlands as well as South American markets and selected clients in the United Kingdom. An outstanding feature of 2000 was the conclusion of a large-volume reinsurance treaty with a major financial group in the United Kingdom, which we provided with extensive support for the establishment of a company specialising in the senior citizens' segment. Our assistance included product development, systems for risk selection and underwriting as well as the necessary financing arrangements.
Whereas in former years we had principally concentrated on financing transactions from our Milan-based Italian office, in the past two to three years we have established ourselves in the market through joint product development activities with various ceding companies. In addition to disability and long-term care policies, our clients were especially interested in coverage for the unemployment risk as part of credit life insurance. Owing to changes in tax legislation in the year under review, the demand for financing arrangements for traditional insurance products will tend to decline in the coming years. On the other hand, segments such as unit-linked life insurance and the reinsurance of capital market risks now offer promising opportunities.
Mediterranean region. In Scandinavia we observed increasing merger activity among our clients, and their total number therefore decreased. Nevertheless, the year also saw the formation of a number of new companies, with which we established reinsurance relations. Our business activities in the south-eastern Mediterranean region were concentrated on Israel and Cyprus.
Our office in Mexico City enjoyed great success in the year under review, acquiring twelve new clients in various parts of Central America. This achievement was founded in large measure on our local presence and the offer of training resources, especially in the areas of underwriting and reinsurance administration.
We have long had a presence in Kuala Lumpur, and with effect from 1 January 2000 we were the first foreign reinsurer to acquire the status of a branch office for life as well as non-life business. In Hong Kong too we were granted a licence with effect from 1 January 2000 to operate a branch office, having previously maintained a representative office for marketing purposes. The geographical scope of responsibility assigned to this branch office extends from Korea through China (including Hong
We have begun to export the business idea underlying program business and have brought together on a centralised basis program business already existing outside the USA. Two different models are in use. The Clarendon model is based upon passing on the largest possible portions of the accepted business to reinsurers, who assume the role of risk carriers (reinsurance model). The principal source of income here is the fees which reinsurers pay Clarendon for its assumption of the primary insurer's function. However, such programs can also be accepted on a so-called retention basis; in other words, the niche business
Clarendon's business success continues to be founded on its ability to respond flexibly to market opportunities while at the same time applying strict standards to risk acceptance and the management of business. New programs were developed in the year under review, and the company considerably expanded the scope of audit activities used to constantly monitor MGAs. In some cases, however, it was also necessary to cancel programs in order to limit losses. In accordance with the business model, the bulk of the premiums were ceded to reinsurers. The net premiums written amounted to EUR 168 million, and the retention thus decreased further to 9.4%.
Overall, fee income – Clarendon's principal source of revenue – rose by around 6% from USD 82 million to USD 87 million. On the other hand, the substantial strengthening of the reserves, the default on a reinsurance receivable and the inadequate premium level placed a considerable strain on the technical account, as a consequence of which only a break-even result was achieved. In this context, the terminated business relationships had a significant negative impact on the result.
In March 2001, ICH acquired the renewal rights to the program business of Acceptance Insurance Companies, Inc. with a gross premium volume in the order of USD 60 million. The experienced underwriting team of Acceptance was also taken over as part of this transaction. Bearing in mind also that terms and conditions on the American insurance markets have improved considerably, we expect gross premiums of more than USD 125 million and appreciably higher results in the current year.
The total volume of Inter Hannover's program business, which for the most part derives from the United Kingdom, Ireland and Germany, amounted to EUR 115 million in the year under review. The portfolio generated a gratifying operating profit of EUR 6 million.
Inter Hannover's stated aim is to evolve into a recognised writer of program business in Europe. Its target segment comprises managing general agents who have focused on a special
The overall result in the program business segment reflects not only the performance of the individual companies but also at the Group level amortisation of the goodwill of Clarendon, pro-rata interest on debt financing, expenses for the Group as a whole and the effects of deferred taxes. Before deduction of these general expenses the operating result declined – most notably due to Clarendon – from EUR 52 million to EUR 17 million, but it remained in positive territory despite the special strains.
This was particularly true of the already welldeveloped financial reinsurance markets such as North America and the United Kingdom. The developing markets in Asia and Latin America followed the trend, and it is now the case that nontraditional financial reinsurance solutions are used almost everywhere in order to stabilise balance sheet result and optimise the cost of capital.
We have concentrated our financial reinsurance activities at the International Financial Services Centre (IFSC) in Dublin, where we operate through two reinsurance companies – Hannover Reinsurance (Ireland) Ltd. and E+S Reinsurance (Ireland) Ltd. The financial position and development of our financial reinsurance segment are determined by the consolidated business figures of these two operational riskcarriers.
The business year just-ended was marked by strong growth. Compared to the previous year, gross premium income grew by 71% to EUR 870 million. Roughly 18 percentage points of this growth were attributable to exchange-rate effects, particularly the appreciation of the US dollar against the euro. Decisive growth impetus again derived from the North American and UK markets, where we concluded significant new business. Retrocessions were used principally to reduce risk components under our original transactions. The retention thus remained virtually unchanged at 92%, and net premiums written increased proportionately to EUR 801 million. Under US GAAP some financial reinsurance transactions are reported in the non-technical rather than the technical account. Although they form part of our financial reinsurance activities, their volume is therefore not reflected in the premium. We anticipate that the scale of such transactions will steadily grow in significance in the future.
Bearing in mind the special nature of financial reinsurance business, it is to be assumed that the premiums collected and the investment income generated on these premiums will in large measure flow back to our clients in subsequent years. Given the fact that under the applicable accounting requirements we are obliged to show these amounts as loss reserves, loss expenditure climbed sharply to EUR 963 million.
Generally speaking, in financial reinsurance little insight is to be gained by considering the technical account in isolation, since non-technical items normally form an integral part of the transaction.
German insurance companies have consistently found themselves confronted by new challenges in recent years. The lowering of barriers within the European Union, national deregulation and their own striving for growth all led to increased competitive pressure.
The system of equalisation reserves enables many German insurers to balance results over time to some degree. However, the heavily formula -based method used to calculate the equalisation reserves imposes limits on the balance sheet stabilisation which can be achieved, and these restrictions are not always in tune with current and future needs.
These considerations have prompted companies to take a greater interest in modern reinsurance solutions. Their primary objective is to optimise the management of capital costs and to put balance sheet protection on a broader footing, where appropriate by also including non-technical aspects.
Growth in the year under review derived principally from the expansion of existing client relationships. The poor conditions prevailing in the insurance markets in the previous year and at the beginning of 2000 resulted in increased calls on treaties dating from earlier years. These produced additional premiums and corresponding investment income. For our part, due to the mechanisms underlying our financial reinsurance arrangements, the fundamentally negative development of risks and losses from previous years scarcely caused any additional strain and left our results largely unscathed.
Geographical breakdown of financial reinsurance in % of gross premium income nover Re Group are also reflected in their ratings. In addition to the existing A+ (Superior) rating from the agency A.M. Best, which is particularly significant in the North American market, both companies were for the first time awarded Standard & Poor's second-highest rating of AA+ (Very Strong) during the reporting period.
The following sections describe the development of financial reinsurance in our most important markets.
Several large transactions have secured our position as one of the dominant reinsurers in the financially orientated sector of the Australian market. Through constant enhancement of our products and close co-operation with our existing and potential new clients, we shall consolidate and expand our market position.
The interest rate policy in the USA not only had a decisive impact on share prices, it also dominated the interest rate markets. Particularly in the area of short maturities, increases in key lending rates by the US Federal Reserve and the European Central Bank during the first half of the year led to interest rate rises. In the second half of the year, faced with a slowing US economy, the central banks adopted a more cautious approach. Longer maturities, such as 10-year government bonds, showed an impressively stable trend throughout the year. It was notable in this connection that in January 2000 the interest rate curve was inverted for the first time in this cycle: the yield on 30-year interest-bearing securities dropped below those with a 10-year maturity. Further interest rate cuts ensued with correspondingly favourable effects on bond market prices. Interest rates for 10-year US Treasury Bonds fell from more than 6.8% in January to less then 5% in December. The same trend saw the benchmark yield in Europe reduced from 5.7% to 4.8%.
The situation on the financial markets was thus all but reversed over the course of the year: initially booming stocks and unstable bond markets contrasted with dramatic falls in the value of company shares and more robust bonds and debentures by year-end.
There were no major changes in the structure of our investment portfolio in the year under review. In accordance with our strategy of investing the Group's capital in equities, we increased our total equity holdings to around EUR 1.6 billion. In relation to our total self-managed assets, the proportion attributable to equities thus rose from 14.0% in the previous year to 15.6%. In the light of the emerging negative market trend, however, we carried out considerable regrouping within our equity portfolio. The previous overweighting of technology and growth stocks was almost entirely eliminated from April 2000 onwards. As in the previous year, these substantial sales of portfolio holdings produced high profits on disposals. The growth in our equity portfolio was largely financed by the scaling back of short-term investments, which were reduced from EUR 709 million in the previous year to EUR 476 million.
Our growth capital and private equity investments are reported in the balance sheet under the item "Other invested assets". Both in absolute and relative terms, the change in the share of total investments attributable to these items was insignificant in the 2000 financial year.
Unrealised price gains in our portfolio of fixed-income and equity securities decreased overall by EUR 16 million to EUR 102 million. The declining interest rate level produced an increase in value in the portfolio of fixed-income securities totalling EUR 149.6 million compared to the previous year. On the other hand, unrealised price gains in the equity portfolio fell markedly from EUR 169.2 million to EUR 15.5 million due to profits on disposals and the general development of the market.
The regroupings in our equity portfolio combined with the continuing good earnings performance of our private equity investments again generated gratifyingly high profits on the disposal of investments. In the previous year realised profits on disposals had been favourably influenced by a special effect amounting to EUR 50 million in connection with a life reinsurance treaty. Nevertheless, the total income of EUR 251 million even surpassed the extraordinarily high level of the previous year. The losses from the disposal of investments in the amount of EUR 70.5 million were on a par with the previous year; they too derived principally from our equity portfolio. Other investment expenses were, however, significantly higher. The increase of EUR 57 million to EUR 107 million was attributable to a change in the valuation method applied to our participations in two domestic venture capital companies. This change led to a depreciation charge of EUR 55 million. Adjusted for this special effect, the increase in the other investment expenses was EUR 2 million.
The long-standing concern with the issue of risk management has in recent years also acquired considerable prominence in communication with the financial markets. Particularly conspicuous examples of glaring control weaknesses and the resulting corporate crises contributed to the adoption in Germany of the Law on Controlling and Transparency in Business (KonTraG) with effect from 1 May 1998. The legislation stipulates that risks which could jeopardise a company 's continued existence must be rendered transparent by means of an efficient control and monitoring system; we consider this requirement to be an indispensable prerequisite for the management of the Group.
The acceptance and professional management of risks constitute the core business of an internationally operating reinsurer; to this extent, the professional management of risks is also a major competitive factor for our company. This has a bearing on the concerns and interests of both our business partners and our shareholders. Our business partners expect us to have sufficient risk capital resources and a correspondingly high security rating from renowned rating agencies. Our shareholders, on the other hand, call for returns that are commensurate with their invested capital and the accepted risk. We try to satisfy these opposing expectations with optimised capital resources, which are nevertheless adequate to meet the risks involved. Consequently, risk management has always played a central role in the management of Hannover Re's business.
Within the framework of our comprehensive risk management system, we assess systematically and at regular intervals the risks which could threaten our company's future existence with an eye to determining the possible loss amount, probability of occurrence and time horizon. At the operational level, the system is locally integrated into the organisation of Hannover Re's various business segments. This allocation of responsibility is intended to ensure that risks can be identified and controlled as quickly as possible. To this end, we use a number of quite different measuring methods tailored to the individual risk, and they provide information at an early stage about any potentially undesirable developments. A central risk co-ordinator ensures that all the risk management activities carried out are monitored, harmonised and documented; the co-ordinator also bears responsibility for the comprehensive description of the risk situation of the company as a whole. Independently of these permanently installed procedures, the internal auditing department verifies compliance with defined processes in all functional areas of our company.
tion of dangerous trends. Monitoring of developments in the individual national frameworks around the world is therefore carried out locally by our market specialists, whose market intimacy ensures that they detect significant changes without delay. Global changes in possible losses, however, are monitored centrally by the appropriate specialist departments. For example, our legal experts in the central claims department assess developments in court decisions worldwide, especially with respect to the liability lines
The technical risk comprises first and foremost the danger of accepting risks that exceed the available financial resources as well as those cases where the previously calculated premiums are insufficient to offset the resulting losses. Possible reasons here may be inaccurate calculation assumptions or models, unexpected claim developments or inadequate reserves as well as insufficient own reinsurance (retrocession) or the default of a retrocessionaire. The technical risk for our Group is principally determined by mandatory underwriting guidelines. These define in detail which risks may be accepted and up to what amount. The contents of the guidelines are reviewed annually, adjustments are made where necessary and compliance is subject to regular control.
In order to ensure that adequate premiums are agreed, various instruments are available for controlling the profitability of individual reinsurance treaties. Detailed minimum returns defined for the various business segments form the basis of the premium calculation. Shortly after conclusion of a new transaction or the renewal of existing business, the so-called first forecast analysis determines the extent to which it was possible to achieve the quoted premiums on the market, while a contribution margin analysis identifies whether the terms and conditions agreed for individual treaties will produce the expected results. In this connection, the calculation of the loss reserves – which in reinsurance business frequently have a significant impact on results – is scrutinised by independent
external experts and not least audited and certified by our auditors. Particularly in property and casualty reinsurance, this multi-layered system ensures that risks are written with an eye to profits, not volume.
Investment decisions are made within the framework of detailed investment guidelines, which are constantly reviewed and where necessary revised, as determined by the entire Executive Board. Compliance with these guidelines and the associated observance of defined limits are ensured, inter alia, by the strict separation of trading and settlement functions as well as by regular reviews. These encompass, for example, the weighting of the investments (e.g.
Derivative financial instruments are used by Hannover Re solely to hedge existing investment portfolios against price, interest rate, currency and default risks and as a substitute for securities purchases; they are controlled using mark-to-market valuations and with the aid of appropriate sensitivity analyses.
By other operating risks we particularly have in mind risks associated with information technology and human resources management. The failure of technical equipment, especially in the case of the data processing infrastructure and the availability of the applications which it provides, poses a major risk to our company. We ensure the availability of our IT systems by means of state-of-the-art defence technologies and efficient methods of anti-virus protection, prevent-
ive structural measures and active fire protection safeguards as well as a secure uninterrupted power supply. Contingency plans and safety guidelines have also been drawn up to define the measures to be taken and appropriate behaviour in such emergencies. The relevant safety measures are documented centrally and subject to regular review. Thus, for example, all systems managed the change of date at the turn of the millennium virtually flawlessly thanks to intensive preparatory measures. Virus attacks at those points where we are connected with worldwide public data networks have also been effectively prevented. The so-called "I LOVE YOU" virus, for example, did not cause any damage whatsoever within our company.
As an internationally operating reinsurer we are confronted with numerous opportunities and risks which are directly connected with our entrepreneurial activities and can therefore impact our net income or financial situation. Given the information currently available to us, however, we do not perceive any risks which could jeopardise the continued existence of our company in the short or medium term or which could impair the assets, financial position or net income in a significant or sustained manner.
As at the end of 2000 the Hannover Re Group employed 1,528 staff worldwide. Growth in the number of employees was recorded primarily in the USA and the United Kingdom. This reflects the internationalisation of our business, which is increasingly transforming us into a global reinsurance group. In Germany asset management activities within the HDI Group were centralised. Around 50 members of staff transferred to HDI Asset Management GmbH and are thus no longer on the payroll of the Hannover Re Group. The regional distribution of our employees around the world is shown in the following table.
Individual control of working hours creates organisational flexibility and a high level of adaptability to the time needs of our staff and our company – something which ultimately is to everyone's benefit. The various models of part-
The job evaluations have also created the basis for company-wide performance-orientated management remuneration, most notably including the launch of a stock option plan. The design of this stock option plan is "virtual", i.e. members of staff receive stock value participation rights which entitle the holder not to the award of shares but to payment of a corresponding cash amount. In this way, we link the interests of decision-makers in a sustained increase in the company's value with those of shareholders. At the same time, the Hannover Re Group offers its managerial staff internationally competitive remuneration components. These payment opportunities are of a long-term nature, closely tied to the company's overall performance and easily comprehensible in the context of a transparent system.
We also assist employees by contributing to their own expenses for old-age provision. In foreign countries we participate in a similar way in local retirement pension models.
We would like to take this opportunity to thank our members of staff for their considerable commitment and personal dedication. This is particularly true of the hospitality extended to our many guests from home and abroad who visited us during EXPO 2000. We would also like to express our appreciation to the labour council and the senior management committee for their constructive and trusting co-operation.
High oil prices and interest rate increases by the US Federal Reserve and the European Central Bank have left their mark on anticipated developments in the global economy in 2001. On the financial markets the fear of recession is growing.
The development of the global economy is in turn crucially dependent on the economic trend in the USA. Just as in the past the US had fuelled growth in the light of progressive globalisation, its economic weakness is currently depressing the global economic cycle. The reduced sales and earnings prospects of American companies will probably have an adverse effect on company investments, and economic growth in the USA is therefore likely to be considerably smaller than in the previous year.
In property and casualty reinsurance the modestly favourable general climate will be further impaired by the fact that – due to ongoing concentration in the insurance market – the number of clients is steadily diminishing and ceding companies are growing in size and capital resources. This is leading to higher retentions and the increasing prevalence of non-proportional types of reinsurance, with a corresponding decline in premium volumes. On the other hand, the worldwide reinsurance capacity available for the coverage of natural catastrophes is by no means sufficient and thus continues to offer good opportunities. During the current year the extensive improvement in terms and conditions in important property and casualty reinsurance markets had almost exclusively positive repercussions, and given a normal major loss experience – i.e. slightly worse than the previous year – premiums and technical results are therefore likely to rise. What is more, there is every indication that the favourable trend will continue beyond 2001 and the next renewal season, and this may restore some appeal to markets which are currently still producing losses – such as the liability sector in the USA and motor business in Germany. As at the date of compilation of this report, the incidence of major claims and natural catastrophe losses was within "normal bounds". Nevertheless, our account has been burdened by the explosion and subsequent total loss of an oil-rig off the coast of Brazil as well as an earthquake in Central America and a railway accident in the United Kingdom.
In life and health reinsurance, the non-traditional business model of the "stochastic banker " – in other words, a concentration on our clients ' overall financial situation – will continue to offer favourable opportunities in the coming years. This expectation is based, on the one hand, on the assumption that most primary markets for life and health insurance will generate strong growth and, on the other hand, on the forecast that the demand for reinsurance solutions will rise as companies strive to optimally deploy their capital resources. In addition, we are seeing a trend towards the transformation of large mutual societies into joint-stock corporations, giving rise to a much greater interest in individually tailored life and health reinsurance products.
A number of European markets, including Germany, Austria, Italy and Spain, have shifted the focus of their life insurance activities to the area of unit-linked life and annuity policies. We believe that we are superbly positioned in this segment. In the United Kingdom and France we also plan to enlarge our market position in the conventional and bankassurance segment. In the USA we intend to expand our status as a leading specialist reinsurer and here, too, we see particularly promising opportunities to generate profitable growth in the bancassurance sector. In the growth markets of Asia our focus is on China, Taiwan and Japan, and in this context we primarily seek to support insurance companies with local shareholders. Overall, we anticipate premium growth of 20-25% in life and health reinsurance for 2001, accompanied by a similar increase in results. In order to further enhance our client relations, we are in the process of developing our website (www.hannoverlifere. com) to create a dynamic and interactive medium of communication. The new platform is to be implemented gradually in the second half of 2001 and the first half of 2002.
Our subsidiary Insurance Corporation of Hannover (ICH), based in Los Angeles and Chicago, is similarly planning to further expand its program business. In Europe – and also in selected regions around the world – the International Insurance Company of Hannover Ltd. (Inter Hannover) is expected to press ahead with the expansion of its program business model from its base in London. A state-of-the-art infrastructure has been established there and a professional team is in place to carry out this task from the second half of 2001 onwards.
On the basis of these expectations in our four strategic business segments, we anticipate further substantial double-digit growth in total gross premium income coupled with an appreciable improvement in technical results. Our investment income is by its very nature difficult to forecast. On the stock markets the initial sharp downslide in technology stocks is likely to be halted and a certain stability achieved. We do not anticipate any significant interest rate movements, and bond markets should thus continue to develop favourably. We therefore expect a marked decline in profits on disposals but a further rise in ordinary investment income, and overall it appears realistic to anticipate a slight decrease in net investment income.
In order to back the growth in our reinsurance portfolio with sufficient capital strength, we required additional risk capital. To this end, in the year under review we began to prepare the issue of a further subordinated loan (so-called hybrid capital) with a total volume of EUR 350 million. This loan was very successfully placed in March of the current year with a coupon of 6.25%, a figure which reflects the high credit rating of our company and further reduces our average capital costs.
We intend to propose to the Annual General Meeting that the net income should be distributed as follows: Payment of a dividend of EUR 2.30 on each registered no-par value share fully paid-up for the entire year 2000 38 479 494.50
Payment of a bonus of EUR 0.21 on each registered no-par value share fully paid-up in 2000 which was partially paid in the amount of 58.33% until 31 May 2000 1 008 000.00
Fixed-income securities – available for sale 5.1 6 518 580 6 307 706
Loss and loss adjustment expense reserve 5.2 12 782 710 10 776 704
Policy benefits for life and health contracts 5.2 3 043 573 2 279 870
Unrealised appreciation/depreciation of investments, 5.10 net of deferred taxes 71 413 48 733
Changes in other assets and liabilities (net) (567 173) (587 379)
Change in cash and cash equivalents (I.+II.+III.+IV.) 44 996 186 193
Change in cash and cash equivalents according to cash flow statement 44 996 186 193
In the following table we have allocated the underwriting assets and liabilities as at 31 December 2000 and 1999 to our business segments after eliminating intergroup transactions across segments: Segmentation of underwriting assets and liabilities
Reinsurance recoverables on incurred claims and others 1 329 943 1 213 704 195 144 287 826
Funds held by ceding companies 301 436 407 607 1 887 236 1 593 611
Loss and loss adjustment expense reserve 7 497 745 7 029 864 952 999 1 035 114
Change in policy benefits for life and health contracts – – (37 494) (496 124)
Net technical and investment income 265 578 297 250 82 618 46 425
1. General accounting principles 88 2. Accounting principles including reporting and valuation methods 88 3. Consolidated companies and consolidation principles 88 5. Notes on the individual items of the balance sheet and statement of income 91 5.1 Investments including income and expenses 91 5.2 Underwriting assets and liabilities 97 5.3 Contracts with no technical risk 99 5.4 Goodwill; present value of future profits on acquired life reinsurance portfolios 100 5.5 Taxes and deferred taxes 100 5.6 Staff and expenditures on personnel 102 5.7 Provisions for pensions and similar liabilities 103 5.8 Loans and surplus debenture 106 5.9 Stockholders' equity and minority interests 106 5.10 Comprehensive income 108 5.11 Treasury stock 108 5.12 Earnings per share 108 5.13 Other assets and liabilities 109 5.14 Technical statement of income 110 5.15 Other income and expenses 111 6. Relations with affiliated companies 111 6.1 Relations with affiliated non-consolidated companies 111 6.2 Emoluments received by the management boards of the parent company and loans granted to them 112 6.3 Stock options 113 6.4 Mortgages and loans 113 7. Other notes 114 7.2 Contingent liabilities 114 7.3 Long-term commitments 114 7.5 Events subsequent to conclusion of the financial year 115 7.6 Rents and leasing 115 7.7 Currency conversion 116
The consolidated financial statement of Hannover Re has been drawn up fully in accordance with United States Generally Accepted Accounting Principles (US GAAP).
The following companies are included in the consolidated financial statement: NOTES
Hannover Reinsurance Group Africa compiles its own sub-group financial statement, including the following major companies in which it holds the following shares: Hannover Reinsurance Africa Ltd., Johannesburg/South Africa 100.0
Effective 1 July 2000, Clarendon National Insurance, Trenton, a company belonging to the sub-group of Hannover Finance Inc., New York, acquired all the shares of Redland Insurance Company, Iowa, USA (433,344 shares) for a purchase price of USD 10.9 million. In common with the other companies belonging to the Hannover Finance sub-group, this company transacts program business. The acquisition of the company complements our range of products and services for this segment. The premium volume is in the order of USD 100.0 million.
Effective 17 April and 29 June 2000, Hannover Re increased its 70% participation to 96.9%. The remaining shares are held by the company's executive staff. In total, 2,745,600 ordinary shares were acquired for a purchase price of ZAR 171.1 million from Rand Merchant Bank, Johannesburg/South Africa and Veritas Rückversicherung, Zug/Switzerland. Following the transfer last year of Hannover Re's portfolio of African business to the former Hollandia Reinsurance Group in the context of a capital increase, business activities in southern Africa have been concentrated on this organisational unit. With effect from 1 January 2000 it has traded under the name Hannover Reinsurance Group Africa (Pty) Ltd. The provision of local service for clients optimises the quality of our consulting and enables us to tap into synergistic potentials.
Trading securities are valued at fair value. The difference between the fair value and amortised cost is recognised within the statement of income.
The amortised cost and the unrealised gains and losses on the portfolio of investments classified as held to maturity were as follows: Investments held to maturity
Other foreign government debt securities 261 994 1 588 10 142 253 440
Fixed-income securities – available-for-sale 3 369 539 877 367 713 019 154 992 44 377 52 948 136 1 306 202 6 518 580
Valuation adjustments gave rise to increased write-downs in the year under review which are allocated to the other investment expenses.
Fixed-income securities – held-to-maturity – – – – 213 008 – 45 406 – 258 414
Fixed-income securities – available-for-sale 340 609 499 613 16 758 137 012 2 677 363 30 239 2 462 145 143 967 6 307 706
Equity securities – available-for-sale 10 711 69 528 – 1 206 646 087 60 404 545 265 48 950 1 382 151
Fixed-income securities – available-for-sale 352 835 610 788 68 172 163 005 2 491 153 7 732 2 724 523 100 372 6 518 580
Fixed-income securities – trading – – – – – – 40 869 – 40 869
Equity securities – available-for-sale 38 526 48 700 2 020 2 743 782 562 71 251 607 607 40 560 1 593 969
Fixed-income securities – available-for-sale 3 442 803 792 603 760 459 149 848 34 068 75 312 2 134 1 050 479 6 307 706
Real estate is valued at cost of acquisition less scheduled depreciation.
Income and expenses from rental agreements are included in the investment income: 19992000Figures in EUR thousand
The retrocessionaires' portions of the technical provisions are recorded in accordance with the contractual agreements of the underlying reinsurance treaties.
Contrary to German accounting requirements, SFAS 60 "accounting and reporting by insurance enterprises" requires that acquisition costs be capitalised as assets and amortised via the statement of income in proportion to the earned premiums.
In the case of property and casualty reinsurance, acquisition costs directly connected with the acquisition or renewal of treaties are deferred and amortised in line with the unearned portion of the premiums. In life and health reinsurance, the capitalised acquisition costs under life and annuity policies with regular premium payments are determined in the light of the period of the contracts, the expected surrenders, the lapse expectancies and the anticipated interest income. In the case of annuity policies with a single premium payment, these values are determined in relation to the expected policy period or period of annuity payment.
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 6.5% 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 675.9 million. As at year-end 2000 the discounted provisions amounted to EUR
We have identified insurance contracts which do not satisfy the requirements of SFAS 113 (accounting and reporting for reinsurance of short-duration and long-duration contracts). These involve reinsurance treaties under which the risk transfer between the ceding company and the reinsurer is of merely subordinate importance. Contracts allocated to the life and health reinsurance segment were merely brought to account in the amount of the fees accruing to the reinsurer from the ceding company. Contracts allocated to the other segments were eliminated in full from the technical account. The profit components were netted under other income and expenses. Technical amounts were shown as contract deposits on the assets and liabilities sides.
Reserve as at 31 December of year under review (gross) 12 782 710 10 776 704 2000 1999Figures in EUR thousand
The present value of future profits (PVFP) on acquired life reinsurance portfolios developed as follows in the year under review: The period of amortisation on acquired portfolios varies between 5.5 and 15 years.
Deferred tax assets and liabilities are booked in accordance with SFAS 109 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 taxes are assessed using the current tax rates. In the event of a change in the 2000 1999Figures in EUR thousand
Valuation differences arising out of the portfolio of life and health reinsurance – 85 369
Valuation differences relating to investments and other valuation differences 233 185 416 156 2000 1999Figures in EUR thousand
The following table illustrates the reconciliation of the expected expense for income taxes with the actual provision for income taxes: Profit before income taxes, extraordinary profit components and minority interests 304 276 329 934
Pension commitments were given in accordance with the pension plan. The pension plan provides for retirement, disability, widows' and orphans' benefits. The pension entitlement is dependent on length of service; entitlements under the statutory pension insurance scheme are taken into account. The pension plan was closed to new participants with effect from 31 January 1981.
On 1 April 1993 (1 June 1993 in the case of managerial staff) the 1993 pension plan came into effect. This pension plan provides for retirement, disability and surviving dependants' benefits. The scheme is based upon annual determination of the pension contributions, which at 1% up to the assessment limit in the statutory pension insurance scheme and 2.5% above the assessment limit of the pensionable employment income are calculated in a range of 0.7% to 1% and 1.75% to 2.5% respectively depending upon the company's performance. The pension plan was closed as at 31
Additional similar obligations based upon length of service exist in Asian countries.
Provisions for pensions in accordance with SFAS 132 developed as follows: Change in benefit obligation
Amortisation of net obligation 457 457 2000 1999Figures in EUR thousand
The capitalised issuance costs for this loan total USD 1.8 million and will be amortised over the loan term.
The interest rate arising after allowance is made for the interest rate swap amounts to an annual average rate of 6.69% until 31 March 2009.
In addition, authorised but unissued capital of EUR 20.0 million is available until 1 July 2004.
On 20 July 2000 the Annual General Meeting of Hannover Rückversicherungs-AG resolved that the bearer shares still existing at that date should be replaced with registered shares. The changeover was completed in the year under review.
Total number of fully-paid shares 27 446 882 24 530 215
The other changes relate primarily to currency exchange rate differences deriving from the conversion of the stockholders' equity using historic exchange rates and the rates on the reporting dates.
The other comprehensive income increased by EUR 18.7 million in the year under review due to the reduction in the deferred tax rates for German operations. Overall, comprehensive income fell by 10% after deduction of deferred taxes. This decrease was primarily attributable to the lower comprehensive income resulting from currency conversion.
The other income and expenses can be broken down as follows: 6. Relations with affiliated companies 6.1 Relations with affiliated non-consolidated companies
HDI Haftpflichtverband der Deutschen Industrie V.a.G. (HDI) indirectly holds approximately 75% of the shares of Hannover Re through Talanx AG.
The details of these underwriting business relations are as follows: Written premiums assumed
All other business relations, such as the performance of services on a limited scale or the renting of office premises, are of subordinate importance.
As security for our technical liabilities to our US clients, we have established a master trust in the USA. As at the balance sheet date this master trust amounted to EUR 661.4 million (EUR 499.1 million). The securities held in the master trust are shown as available-for-sale investments.
Operating leasing contracts produced expenditures of EUR 3,322 thousand in the 2000 financial year.
The Clarendon Group concluded a ten-year contract for the lease of business premises. The contract period ends on 31 August 2005. The Insurance Corporation of Hannover also concluded a multi-year contract for the lease of business premises. The rent instalments are fixed for the rental period, although adjustments in line with changed market conditions are possible at contractually agreed times.
At the beginning of 2001 the Insurance Corporation of Hannover (ICH), Los Angeles, acquired substantial parts of the program business of Acceptance Insurance Companies, Inc. The new acquisition increased the premium income of ICH by USD 70 million.
Effective 30 March 2001, Hannover Re established a new subsidiary on Bermuda, Hannover Re (Bermuda ) Ltd. The company is equipped with capital of EUR 250 million.
No other events with significant implications for the Group's assets, liabilities, financial position and net income occurred after the balance sheet date.
Both operating and capital leasing contracts existed within the Hannover Re Group as at the balance sheet date. In subsequent years an annual amount of EUR 110,004 will be payable as leasing instalments under capital leasing contracts.
Mean rate of exchange on the balance sheet date 1 Euro corresponds to: Rental income totalled EUR 11,454 thousand in the 2000 financial year.
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 nonfunctional currencies are recognised in the statement of income. Functional currencies are defined as those currencies in which investments are effected.
Hannover Re Real Estate Holdings rents out real estate in Florida; the period of the contracts ranges from five to seven years. Non-cancellable contracts will produce the income shown below in subsequent years:
Our audit, which also extends to the group management report prepared by the Executive Board for the year from January 1 to December 31, 2000, has not led to any reservations. In our opinion the group management report provides a suitable understanding of the Group's position and suitably presents the risks of future development.
Bermuda Hannover Re (Bermuda) Ltd. 50 Parliament Street, 2nd Floor Hamilton HM 12
Sweden Hannover Re Sweden Insurance Company Ltd. Hantverkargatan 25 P. O. Box 22085
Hannover Rückversicherungs-AG, Tyskland filial Stockholm Branch Hantverkargatan 25 P. O. Box 22085
South Africa Hannover Life Reassurance Africa Ltd. P. O. Box 10842 Johannesburg 2000
Hannover Life Reassurance Company of America 800 N. Magnolia Avenue Suite 1400 Orlando, Florida 32803-3251
Hannover Rückversicherungs-AG Representative Office USA 1901 North Roselle Road, Suite 1040 Schaumburg, Illinois 60195
Accumulation loss: sum of several individual losses incurred by various policyholders as a result of the same loss event. This may lead to a higher loss for the direct insurer or reinsurer if several affected policyholders are insured by the said company.
Block assumption transactions (BAT): quota share reinsurance treaties on our clients' life or health insurance business, by means of which it is possible, inter alia, for our clients to realise in advance the future profits inherent in the portfolio so as to be able to efficiently ensure the attainment of corporate objectives, e.g. in the areas of financial or solvency policy.
Cedent: direct insurer or reinsurer, which passes on (cedes) shares of its insured or reinsured risks to a reinsurer in exchange for premium.
Discounting of loss reserves: determination of the present value of future profits through multiplication by the corresponding discount rate. In the case of the loss reserves this is necessary because of the new profit calculation methods for tax purposes applicable to German joint-stock corporations.
Dread disease coverages: riders on the basis of which parts of the sum insured – which would otherwise only become payable on occurrence of death – are paid out in the event of previously defined severe illnesses.
Equalisation reserve: provision for the equalisation of substantial fluctuations in the claims experience of individual lines of business over several years.
Facultative reinsurance: specially negotiated participation on the part of the reinsurer in a particular individual risk assumed by the direct insurer. This is in contrast to ➞ obligatory (also: treaty) reinsurance.
Financial reinsurance: reinsurance with limited potential for profits and losses; the primary objective is to strive for risk equalisation over time and to stabilise the ➞ cedant's balance sheet.
Policy benefits for life and health contracts: value arrived at using mathematical methods for future liabilities (present value of future liabilities minus present value of future incoming premiums), primarily in life and health insurance.
Portfolio: all risks assumed by a direct insurer or reinsurer on an overall basis or in a defined subsegment (e.g. line of business, country).
Provision: liability item as at the balance sheet date to discharge obligations which exist but whose extent and / or due date is / are not known. Technical provisions, for example, are for claims which have already occurred but which have not yet been settled, or have only been partially settled (= provision for outstanding claims, abbreviated to: claims provision).