Hannover Congress Centrum Theodor-Heuss-Platz 1-3 30175 Hannover, Germany 16 August 2004 Interim Report 2/2004 15 November 2004 Interim Report 3/2004
5 Boards and Officers 6 Executive Board 8 The Hannover Re share 16 Strategy and self-image 18 The Hannover Re Groups's global presence 20 Management report of the Hannover Re Group 20 Economic climate 21 Business development 22 Our business groups 23 Property and casualty reinsurance 36 Life and health reinsurance 44 Financial reinsurance 46 Program business 48 Investments 52 Risk report 59 Human resources 61 Outlook 65 Consolidated accounts 66 Consolidated balance sheet 68 Consolidated statement of income 70 Cash flow statement 72 Segmental report 77 Notes 117 Auditors' report 118 Report of the Supervisory Board 120 Corporate Governance report 122 Branch offices and subsidiaries 125 Glossary 131 Index of key terms
Investments (without funds held by ceding companies) 12 708.6 +4.8% 12 127.2 10 200.5 9 855.1 8 592.2
Earnings per share (diluted) in EUR* 2.75 0.11 4.13 2.29 1.94
yearFigures in EUR million * For previous years stock split of 15 July 2002 in a ratio of 3 to 1 taken into account ** Incl. bonus of EUR 0.08
We were also highly satisfied with the development of life and health reinsurance. Premium volume and results were both in line with our expectations. In life and health reinsurance it is important to consider not only the posted profit but also the growth in the value of in-force business – a factor that is not reflected in the statement of income or the balance sheet. This figure, too, recorded another significant increase. In special key markets such as Germany, France, the United Kingdom and Italy we now rank among the most prominent reinsurers; in Australia and southern Africa we are in fact the market leader. In the USA we are the leading specialty provider in the profitable niche segment known as "financial engineering" (reinsurance of complete life and annuity portfolios).
Financial reinsurance also developed entirely in accordance with our expectations. Although the gross premium volume declined, it should be borne in mind here that in the previous year – as an after-effect of the losses associated with 11 September 2001 – we booked considerable supplementary premium payments due to non-recurring experience-based additional premiums.
The development of our fourth and newest business group, program business, was most gratifying. We substantially enlarged our premium income and also
significantly increased our retention. A series of organisational and structural measures has enabled us to decisively improve the profitability of our program business.
Movements in exchange rates were an opposing factor in all business groups. The US dollar, for example, depreciated by 18.1% against our balance sheet currency in the course of the year. We generate more than half of our premiums and results in US dollars. Had exchange rates remained stable, both the premium volume and result would have been considerably higher still.
The mood on financial markets around the world was predominantly gloomy. For the third year in succession the leading stock indices closed with steep declines. Economic and political developments in the year under review did little to restore investor confidence. Interest rate cuts by central banks also failed to cheer the markets. Needless to say, our net investment income did not escape unscathed in this climate. Although ordinary income continued to grow thanks to a larger asset volume, total net investment income fell well short of our planned targets. Overall, we were compelled to take write-downs of more than EUR 200 million on our investment portfolio. It was only thanks to the reduction of our equity allocation to its current level of 5.7% by year-end 2002 – a move initiated back at the beginning of 2001 – that these write-downs were not considerably heavier.
In view of the marked difficulties of the previous year, and especially in comparison with our competitors, we can thus be greatly satisfied with the development of the 2002 financial year. What is more, we are confident that the financial year 2003 will also be highly successful. The treaty renewal negotiations as at 1 January in the cyclical segment of property and casualty reinsurance showed that this year, too, we will be able to profit from a seller's market across all lines and countries. Although early indications of softening conditions can be detected in isolated subsegments, we are prepared to scale back our premium volume in those areas that fail to meet our profitability requirements. This observation should not, however, take anything away from the fact that we are entirely satisfied with the treaty renewals as at 1 January 2003 and anticipate adequate terms and conditions in the coming renewals too.
In order to safeguard our success and the economic independence of our company for the long term, too, we strive for above-average and sustained profitability. Our exclusively profit-oriented business policy, our strategy of diversification and our efficient capital management form the basis for achieving this goal. Since equity capital is the most expensive option for financing business, we use – where appropriate – cost-effective substitutes to cover our capital requirements. Equity substitutes take various forms, including for example the securitisation of reinsurance risks and their transfer to the capital markets, long-term subordinated debt (so-called hybrid capital) as well as traditional reinsurance and retrocession arrangements. This type of capital management produces better-than-average returns on equity.
Our business policy geared exclusively to profitability safeguards our superb ratings: Standard & Poor's and A.M. Best have each rated us in their secondhighest category. In today’s market environment an excellent rating serves as a passport to the international reinsurance market and thereby helps us to diversify our portfolio. We deploy our capital in those business groups, lines and regions that promise the maximum profit.
Herbert K. Haas Member of the Executive Board Burgwedel of HDI Haftpflichtverband (from 24 May 2002) der Deutschen Industrie V.a.G.
Details of memberships of legally required supervisory boards and comparable control boards at other domestic and foreign business entreprises are contained in the individual report of Hannover Rückversicherungs-AG.
Controlling, Internal Auditing, Investor Relations, Public Relations, Corporate Development; Human Resources; Underwriting & Actuarial Services; Program Business
Coordination of entire NonLife Reinsurance; Property and Casualty Treaty Reinsurance North America and Englishspeaking Africa; Financial Reinsurance worldwide
The persistent weakness of leading national economies in the USA, Europe and Japan was a hallmark of 2002. All major stock indices closed in negative territory for the third year in a row. A similar scenario has not been seen since the depression more than 70 years ago (1929–1931), when world markets fell by almost 60%. Equity markets got off to a predominantly bright start in 2002, but accounting scandals shattered investor confidence and set in motion a downward spiral that continued on through the remainder of the year. Financial markets were also shaken by consistently poor economic growth, profit warnings, dividend reductions, fears of deflation as well as insecurity in the face of impending war in the Middle East. Striving to counter this trend and stimulate renewed capital spending, the cen2002: The third "bear-market year" in succession …
ter, many (re-)insurance companies found themselves compelled to take heavy write-downs on their equity portfolios in the second half of the year. As a result, numerous market players had to revise downwards their earnings forecasts that had been announced as late as the middle of the year.
Relative to the standard indices our share proved to be particularly stable. It significantly outperformed the market as a whole from the beginning of the year onwards and reached its high for the year of EUR 28.30 on 21 March. In September, however, capital markets came under massive selling pressure, and our share, too, did not escape unscathed the wave of bad news coming out of the stock markets. On 9 October it sank to its lowest point of the year at EUR 15.90, a fall of 30% on its value at the beginning of 2002. Yet by mid-October it had already recovered substantial ground, and it closed the year at EUR 24.30 – a price rise of some 8%. With a gain of 68 percentage points relative to the CDax for insurance stocks, 52 percentage points compared to the Dax and 37 percentage points even in relation to the MDax, our share thus demonstrated its extraordinarily strong level of resilience.
While in 2001 after the terrorist attacks in New York and Washington our share lost significantly, it developed positively compared to this index in the year under review: In the nine months from the beginning of 2002 until September our share consistently outperformed this index. In September it fell briefly below the benchmark, only to recover again by November. If we consider only the year under review, our share surpassed the average performance of our global competitors by almost 24 percentage points.
The considerable potential inherent in our share is borne out by its stability in this depressed stock market climate. Among European insurers no other stock has so staunchly held its ground against the negative trend on capital markets. Hannover Re was one of the few companies to meet its profit targets last year. This success is founded on the three maxims that guide our strategic actions: better-than-average profitability, optimal diversification and economic independence.
We consider the return on equity, which we use to demonstrate our ability to sensibly and profitably deploy the capital made available to us, to be a further key profitability ratio. In this respect, our strategic objective is to generate a minimum return on equity of 750 basis points in excess of the average 5-year yield on 10-year government bonds. In the year under review the admittedly highly favourable market conditions for the reinsurance sector contrasted with the adverse influences from the capital markets; we nevertheless succeeded in meeting this target, too. With a reported return on equity of 15.7%, we exceeded the average return on European government bonds of around 5% by 1,070 basis points.
The company's success was assisted not only by disciplined underwriting – with a strict orientation towards profitability rather than mar-
Hannover Re meets its profit target again 1) DVFA calculation method (without adjustment for amortisation of goodwill) 2) Earnings per share calculated in accordance with US GAAP (for previous years stock split of 15 July 2002 in a ratio of 3 for 1 taken into account)
The Hannover Re share of around 7 based on a consensus profit estimate for the year 2004. Given a continued favourable business development and a modest recovery on capital markets, there should be nothing to prevent a fair valuation of our share that reflects the company's true value. This view is reinforced by numerous positive reports from analysts.
ket shares – but also by the deliberate significant scaling-back of our equity allocation in early 2001 with an eye to the depressed state of the capital markets.
The growth potential inherent in our share is also apparent from a very low price/earnings ratio
Target: 750 basis points in excess of the average five-year yield on 10-year government bonds in %
The annual analyst seminar, at which reinsurance specialists from within our company provide background information on a variety of topics, has become part of our standard Investor Relations repertoire. Indeed, in the year under review we offered two seminars of particularly strong interest to our financial analysts and investors: in April 2002 we organised "Risk management in program business" in London and in August 2002 we held an "analysts' day" at our Hannover offices in connection with the publication of our semi-annual report.
We used the latter occasion to present the results of our strategy review, broken down into the specific business groups.
The Annual General Meeting of Hannover Re held on 24 May 2002 approved by a large majority a stock split in a ratio of 3 for 1 that was subsequently implemented on 15 July 2002. After the split a shareholder who previously owned ten shares of Hannover Re thus held 30 shares in his or her securities account, with the theoretical amount of the capital stock attributable to each no-parvalue share fixed at EUR 1.00. The purpose of this split was to significantly reduce the market price of a single share in order to render it optically more accessible and thus improve the liquidity of the share. Improved liquidity boosts demand and hence positively influences the price.
As early as 2004 we intend to fully implement the reporting periods recommended by the German Corporate-Governance Code. The consolidated annual financial statements are to be publicly accessible within 90 days of the end of the financial year and the interim reports within 45 days of the end of the reporting period in question. Due to the special features of international reinsurance business and the associated regulatory frameworks, we marginally exceed the recommended periods at present; yet, we by no means use the full scope of the deadlines permitted by law. We are already in conformity with all other recommendations of the Code.
Another major integral component of our Corporate-Governance declaration is the system of variable remuneration for our managerial staff based on the company's performance that was launched in 2000. One element here is the virtual stock option plan for our managerial staff worldwide. The number of stock options is determined by the level of achievement of the earnings per share target defined by the Supervisory Board as well as the development of our share price relative to the unweighted "Reactions" World Reinsurance Index.
At this moment in time Hannover Re can be described as a bright spot in the otherwise severely battered insurance sector. The focus on a currently attractive business group, good management and a low equity exposure have been reflected in a convincing share performance. The depressive factors dragging on the industry affect the reinsurer to a considerably milder extent and at the same time it is able to participate fully in the highly favourable market conditions in property and casualty reinsurance.
Dierk Schaffer WGZ-Bank, Düsseldorf February 2003 1st quarter 2nd quarter 3rd quarter 4th quarter
The improved performance of the Program Unit is largely attributable to actions taken at Clarendon, which is increasing both its business written and its retention. Clarendon has proved a significant challenge for the group since its acquisition and it would appear as though the turnaround is beginning to pay dividends.
[…], it is worth highlighting that Hannover Re benefits from a series of "soft factors" which ultimately strengthen its capital position: the consistency in earnings, the strengths of reserve levels, the diversification of the business and a substantial deferred tax on its equalisation reserve. Under these circumstances we regard Hannover Re's capital position as being quite comfortable especially relative to some other peers.
Hannover Re is well positioned to take advantage of improved profitability in reinsurance through 2003–2004 – especially after strong premium growth in 2002.
Shareholding structure: 75% HDI Haftpflichtverband der Deutschen Industrie V.a.G. (via HDI Verwaltungs-Service AG as well as Erste and Zweite HDI Beteiligungsgesellschaft mbh) 25% free float
Capital measure Increase in common stock out of company funds in the amount of of 6 June 2002: EUR 14,365,382.11 without issue of new shares
Stock split of 15 July 2002: Ratio of 3 for 1
Annual General Meeting: 27 May 2003, 10:30 a.m. Hannover Congress Centrum Kuppelsaal Theodor-Heuss-Platz 1-3 30175 Hannover, Germany
Optimal diversification: We take this to mean generation of maximum profits with our scarce equity and flexible allocation of capital to
Strategic principles 4. Investments • Priority attached to investments aimed at achieving an optimally diversified portfolio 5. Growth • Organic growth before acquisitions • Acquisitions only when they offer more than volume growth 6. Invested assets • Generation of an optimal profit contribution in the light of risk/return considerations
• Continuous dynamic financial analysis for the purpose of optimal asset/liability management
9. Risk management • Ongoing monitoring of all risks that could jeopardise the continued existence of the Group or individual parts thereof
Strategic fields of action 10. Performance Excellence • Constant improvements in leadership, business policy, quality of employees and in the management of resources and processes
• In order to achieve the highest possible levels of satisfaction among staff and clients and to generate optimal business results 7. Organisation and infrastructure • An effective and efficient organisation oriented towards our business processes • Investment priority for information management as an increasingly significant competitive factor
• Fostering of entrepreneurial thinking by delegating tasks, authorities and responsibility wherever possible
%-figures = participation You may find the addresses of our branch offices and subsidiaries on pages 122 to 124
The anticipated economic revival failed to materialise in 2002. Although the business climate gathered some impetus in the first halfyear, this initial momentum dissipated over the course of the year. The turmoil on the international financial markets and the Iraq conflict as well as the associated rise in crude oil prices placed an appreciable strain on economic growth in the industrialised nations.
While in the USA the feared double-dip recession did not come about and, thanks to the effects of an expansionary monetary and fiscal policy, the overall economic output actually grew in the third quarter, the US economy has still not regained a firm footing.
In the Eurozone the economic trend remained sluggish in 2002. Movements in exchange rates emerged as a further dampening factor in the course of the year. The sharp rise in the euro against the US dollar resulted in a reduced growth impetus. The stimuli deriving from the monetary policy of the European Central Bank were overshadowed by the retarding influences of the fall in equity prices and the Iraq conflict.
The situation on the insurance and reinsurance markets in 2002 was dominated in particular by the repercussions of the terrorist attacks on 11 September 2001 in the US. On the one hand, this immense loss event resulted in a market shake-up. Some insurers and reinsurers – including major players – had to cut back or entirely discontinue their business activities. On the other hand, rates surged sharply, thereby generating profitable growth for large reinsurers. Profitability was, however, significantly impaired by the generally depressed state of capital markets.
Growth in premiums and results slowed still further in the life insurance sector. The downward trend on equity markets hampered the business development, since demand for index-linked insurance products declined. The hopes placed in demand for retirement age provision products were only partially fulfilled. In Germany, for example, the so-called "Riester-Rente", a semi-privatised pension, lagged well behind expectations.
With the exception of financial reinsurance – which had been influenced by special factors in the previous year – we increased our premium volume in all business groups. Total gross premium income grew by 8.3% or EUR 1.0 billion to EUR 12.5 billion. Had it not been for the rise of the euro against most of the key foreign currencies for our company, most notably the US dollar, the increase in premium income would have been as much as 4.3 percentage points higher.
Shortly after the terrorist attacks on the World Trade Center reinsurance markets around the world began to see significant premium increases and improvements in terms and conditions. This market hardening was sustained in all the property and casualty reinsurance lines throughout the year under review. In accordance with our strategy of increasing our business and acquiring additional market shares only during phases of cyclical upswing – thereby enhancing our profitability – we substantially enlarged our premium volume in property and casualty reinsurance. Gross premium income rose by 21.9% or EUR 1.1 billion, while net premiums climbed by 17.2%.
Return on equity * Return on equity calculated in accordance with US GAAP ** After minority interests
Overall, the operating result (EBIT) increased by 331.2% to EUR 470.9 million (EUR 109.2 million ). The interest on our hybrid capital remained
The largest losses in the history of the insurance industry 30,000–77,000
The improvement in premiums and conditions on the reinsurance markets, which had begun to emerge even before the attacks of 11 September 2001, gathered considerable momentum in the months thereafter. This market hardening was borne out during each phase of renewals in 2002 for all our most important lines.
In the cyclical property and casualty reinsurance we pursue a strategy of strict profit orientation. Only during hard market phases do we seek to grow and enlarge our market shares. We were superbly successful in executing this strategy in the year under review. The fact that we write the bulk of our property and casualty reinsurance business centrally from our home office in Hannover helps us to respond flexibly to each market situation. This centralisation also facilitates better controlling of the quality of the treaties written as well as pooling of the necessary know-how and experience.
It raises hang-gliders up into the skies. It enables surfers to glide across the water. And it changes our weather. Not only that, wind is also making an increasing contribution to power generation.
Yet in the form of storms, hurricanes and tornadoes the wind strikes coastlines and land with unpredictable force and causes immense damage.
Unlike many of our competitors, we were not compelled to constitute significant additional reserves for losses from the terrorist attacks and from US liability business. We were protected by our cautious reserving policy – which we keep to even in market cycles of weak profitability – and the composition of our treaty portfolio.
In the German primary insurance market a considerable capacity shortage can be identified in industrial business. This shortage stems from the fact that numerous companies have discontinued or restructured this line of business. The remaining insurers in Germany are making intensive efforts to rehabilitate their industrial portfolios. Premium increases of between 50% and 100% – in some cases even more – were achieved in industrial fire insurance in the year under review. At the same time policyholders' deductibles were also raised substantially. Similarly, conditions improved considerably in industrial liability insurance. The rehabilitation of business with small and mid-sized companies is progressing somewhat more slowly, but also with appreciable results.
Since the events of 2001 terrorism losses have been excluded under property insurance policies in all cases where the sum insured per risk exceeds EUR 25 million. Where necessary, Extremus, the specialist terrorism insurer newly established in the year under review, provides coverage. To date, however, demand for this offer has been hesitant.
General third party liability business profited from the absence of sizeable catastrophe losses in the year under review and therefore generated a satisfactory result.
In credit and surety reinsurance the portfolio rehabilitation measures taken by insurers have been slow to make themselves felt. The claims situation remains tense and again placed a heavy strain on results, causing surplus cap-
Anticipating a recovery on the markets, we exploited the capacity shortage and cautiously enlarged our market share. In this regard, we sharply tightened our underwriting standards in order to ensure that the business is also profitable.
The insolvency of a large construction company impacted the entire industry. Nevertheless, our loss burden of EUR 5.6 million was significantly less than that of other reinsurers since we had been quick to adopt a cautious underwriting policy.
Against this backdrop an improvement in premiums and conditions was recorded across almost all lines in the reinsurance sector, too. Significant changes also occurred in the supply structure: one large German reinsurer discontinued its acceptances, a Lloyd's syndicate stopped writing liability covers and other competitors are finding it difficult to write long-tail business on account of the current development of their portfolios. These difficulties led to a capacity shortage in the liability sector and accelerated the search for quality reinsurers, especially with respect to long-tail treaties. Insurers seeking to reinsure such business prefer to turn to companies that have a Standard & Poor’s rating of at least "AA-" or better.
In marine and aviation business written on the London Market our underwriting policy targets non-proportional business involving middle and upper programme layers. We accept proportional business only where the premiums are markedly in excess of the expected losses. Due to sharply improved premiums and conditions, we were able to substantially expand our portfolio across all segments.
France has evolved into a significant credit/ surety reinsurance market for our company because two of our major clients are based there.
The partial withdrawal of some credit reinsurers cut into the available capacity in the year under review, leading to an – albeit as yet inadequate – hardening of market conditions.
In expectation of a better business climate we made the most of the capacity shortage and increased our market share in credit reinsurance business. At the same time we were able to enforce more stringent underwriting standards. Our European programmes still consist for the most part of proportional treaties, although we increased our share of non-proportional business.
Italy In the primary insurance sector the market players have extensively rehabilitated the largest line, namely motor third party liability. This became possible after the insurance supervisory authority stopped regulating the pricing of the motor third party liability tariff. Private customer business in the property and liability sectors has remained profitable overall. In industrial business, especially due to the pressure exerted by reinsurers, insurers were able to gain better control of natural catastrophe exposures. Liability for natural hazards was generally restricted, while the exclusion of coverage for terrorism – particularly in the case of more exposed risks – was made the rule.
The reinsurance market is experiencing a conspicuously hard market phase, in which – with a few exceptions – technically acceptable prices can usually be enforced. As a general principle, all the reinsurers participating in the Italian market have renounced business policies driven by premium volume and are striving to generate underwriting profits.
Northern Europe Fierce competition, especially in the areas of commercial and industrial insurance, has been a hallmark of the insurance market in northern Europe in recent years. This competitive climate substantially restricted the level of attainable premiums. In the second half of 2002, however, an appreciable rate increase began to take hold.
Management report property and casualty reinsurance by the autumn of the year under review. At the same time the reinsurance sector experienced a surge in demand for additional coverage. The terms and conditions obtained by providers for these covers were substantially more favourable than in the past.
The states that used to belong to the former Soviet Union generate less premium income than the aforementioned countries of eastern Europe. Yet, they are recording strong growth rates, and we therefore see considerable potential in this region.
Fire and motor insurance continue to be our most important lines of insurance in eastern Europe. On balance, almost all the countries of central and eastern Europe were profitable for our country in the year under review. The exception was the Czech Republic, where we posted a not inconsiderable loss due to the flood damage.
There was no consistent pattern on the premium side, although overall we observed a significant recovery. Premium increases were unusually strong in commercial and private property insurance. In the liability lines, however, we believe there is still considerable room for further improvement.
In the wake of the events of 11 September 2001 terrorism risks were to be excluded, wherever possible, from standard property insurance policies. This prompted certain companies to offer separate coverage for terrorism risks. At the end of November 2002, however, a bill was passed into law under which terrorism risks must once again be included in property insurance policies. It should nevertheless be noted that this law has not as yet had any effect on policies in force in the year under review.
Hannover Re enjoyed a thoroughly successful 2002 financial year with its North American portfolio. Having written business cautiously during the soft market cycle, we had already begun to significantly step up our activities in 2001 in view of the emerging market hardening – a move we continued in the year under review. We thus expanded our premium volume in property insurance by more than 60% and in liability business by over 50%. The most important property line in our portfolio is industrial fire insurance. Of the liability lines, commercial business and professional indemnity are the most significant. The sharpest rates of growth were recorded in medical malpractice, workers' compensation and motor third party liability business. Through selective underwriting we also substantially expanded our business providing coverage for terrorism risks. This is an area in which we are one of the market leaders.
We concentrate heavily on excess of loss reinsurance covers. In terms of numbers, this type of business accounted for approximately 90.0% of all the treaties written in the year under review.
Africa The South African market, which generates the bulk of our African business, is dominated by two large insurance companies that together hold a market share of more than 52%. Premiums in the primary sector have risen appreciably, especially for commercial and industrial business.
pany made superb use of the favourable market situation, generating premium income of EUR 121.0 million in its first full year of business operations.
We also successfully transact credit and surety reinsurance in North America. The market players in this line remain unsettled following considerable losses in previous years and the uncertain outcome of the Enron proceedings. No new catastrophe losses were reported in the year under review. The claims frequency nevertheless remained largely unchanged as a consequence of a relatively high number of small and mid-sized losses. In this line of business we adhered to our strict policy of consolidation and sharply tightened our underwriting standards. We were able to profit from substantial rate improvements in excess of loss reinsurance while at the same time reducing our levels of exposure.
All in all, 2002 was a very difficult year for our company in South Africa. The burden of losses in the motor and liability lines increased. Writedowns at our participations as well as exchangerate effects associated with the strength of the rand during the year under review also placed a strain on our result. We initiated a fundamental review of our treaty relationships and have begun to streamline our organisation and improve its efficiency. We thus have reasons to feel confident that we will be able to overcome the aforementioned difficulties during the current year.
Reinsurers responded to this situation either by not renewing business or by significantly raising premiums and tightening the terms and conditions. Many treaties were also converted from pesos to US dollars.
In the other Latin American markets we observed market hardening comparable with that seen in other parts of the world. This enabled us to offset the premium decline in Argentina and Venezuela. In Latin America we are particularly active in the area of excess of loss reinsurance. Industrial fire insurance continued to be our most important line in the year under review. Overall, we were able to improve the result of our Latin American business.
Asia In Japan the process of concentration continued in the primary insurance sector. The five largest providers combined now book 86% of all premiums. On the reinsurance side appreciable hardening could be observed. Premiums for excess of loss reinsurance covers increased by between 15% and 20%. Commissions under proportional treaties were cut substantially. In this general climate, as a sought-after reinsurer, we were able to position ourselves advantageously in the Japanese market.
The reinsurance industry profited from these developments and enjoyed an exceptionally favourable year 2002, thanks to a market situation that was appreciably better than in the previous year. Large providers with good ratings reaped the greatest benefits. The aforementioned elimination from the market of one of the major Australian insurers prompted heightened quality awareness throughout the entire financial services sector. The insolvency triggered an increased sensitivity across the board to the ratings and financial stability of market players. The Australian insurance regulator also tightened the reporting obligations and capital requirements for insurance companies.
In this climate we were able to firmly assert our position as the number four in the market. We successfully implemented our strategy of growing with the cyclical upturn and writing profitable business. In the liability lines we made the most of the significant improvement in treaty terms and conditions and enlarged our portfolio; we consolidated our position as market leader for catastrophe excess of loss reinsurance programmes.
Yet time and again water is also an incalculable hazard for people and the livelihoods they have established.
Although the effects varied from company to company, these developments had generally unfavourable repercussions on the financial strength and solvency of life insurers. Against this backdrop, the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BAFin) took additional steps to obtain a real-time overview of the financial state of life insurers and at the same time exert a stabilising influence on the situation.
In this competitive environment small and mid-sized life insurers in Germany are finding it particularly difficult to hold their ground. Informed industry observers expect a consolidation in the life insurance market and anticipate that the number of companies squeezed out of this market in the coming years will run into double figures.
Against this backdrop the trend on the international life reinsurance market was satisfactory, albeit without spectacular developments such as those seen in the non-life sector as an aftereffect of the events of 11 September 2001 in the USA. Proportional reinsurance continues to be the dominant product line; non-proportional covers are used for the most part in group insurance and as catastrophe excess of loss coverage.
Consolidated gross premium income – excluding the premium deposits for unit-linked life and annuity products – grew by 4.2% to EUR 2.5 billion in the year under review, while net premiums earned increased by as much as 23.1% to EUR 2.1 billion due to our reduced recourse to the retrocession market. The level of retained premiums thus stood at 86.9% (previous year: Particularly notable growth impetus derived from a number of European markets, including the United Kingdom and Ireland, as well as Asia.
As far as financing transactions are concerned, the persistency of the in-force business is a crucial success factor since it safeguards the amortisation of the prefinancing provided. In this respect, the reality of the year under review was very largely in line with our expectations. Although insurers in many markets were downgraded by the rating agencies, we are not aware of a single case where financial difficulties at a ceding company have jeopardised repayment of the funding that we provided.
Overall, the year under review closed with a diminished operating result (EBIT) of EUR 48.5 million (EUR 50.5 million). Of the components that make up this result, the underwriting result deteriorated by EUR 39.7 million and net investment income improved by EUR 71.7 million. The net income after tax totalled EUR 30.0 million, a rise of 29.1% on the previous year. Earnings per share for the life and health reinsurance business group therefore amounted to EUR 0.31 (EUR 0.24).
Net premiums incl. premium deposits 2 257 1 869 1 723 1 485
Value of in-force business boosted by 15% to EUR 1.2 billion
Robustly structured portfolio due to short amortisation period of financing transactions
The following risk discount rates were used here; they are based on the return on long-dated government bonds in the respective currency plus 350 basis points: Figures in EUR million 2002 2001 2000 1999
in accordance with US GAAP, a positive balance remains. This so-called non-capitalised portfolio value, which amounted to EUR 471
From the standpoint of value creation, Hannover Life Re thus generated value of EUR 192.1 million in 2002, comprising a "visible" component of EUR 41.9 million from the US GAAP statement of income and an indirect value increase of EUR 150.2 million based on analysis of the value of in-force business. This produces a margin of 9.0% on the net premiums earned.
In the year under review we systematically expanded our position in Germany as a leading reinsurer for financing transactions in the area of unit-linked policies (life and annuity products). New business from the so-called "Riester" pension products, on the other hand, failed to live up to our expectations in the year under review.
Overall, gross premium income from the German market was roughly on a par with the previous year, amounting to EUR 347.7 million.
The claims experience remained favourable and net investment income was only marginally affected by the depressed state of UK financial markets. Hannover Life Re UK generated an operating result (EBIT) of GBP 3.3 million (EUR 5.3 million) – a gain of 15% year-on-year – and net income after tax of GBP 2.2 million (EUR 3.5 million).
In addition, since the mid-1990s several sizeable quota share acceptances of so-called enhanced annuities have been written on the UK market from Hannover. This business also recorded a positive performance within the anticipated parameters.
The overall claims experience was gratifying, enabling us to post an improved operating result (EBIT) of EUR 7.0 million.
France, Italy and Spain Our activities in these three important markets are concentrated on sizeable accounts in the bancassurance sector. We provide these clients with targeted support in the areas of product design, underwriting and workflow management.
Gross premium income from these markets totalled EUR 214.9 million. The major contributors were France (50%) and Italy (43%). Results, as in previous years, were highly satisfactory and the assumed portfolio was exceptionally well diversified.
We have largely withdrawn from traditional health reinsurance business, although we expanded our acceptances of health-related products for senior citizens and certain specialist products, such as supplementary insurance for dental services.
The total portfolio of life business in force grew by 46% to USD 41.7 billion (EUR 40.0 billion ), while gross premium income climbed by 11% to USD 939.1 million (EUR 993.4 million). The operating result (EBIT) of Hannover Life Re America was marginally in the black. In this context it is also important to bear in mind the considerable income from US business written in America that is reflected at other Hannover Life Re business centers due to internal retrocession arrangements within the Group.
Australia and New Zealand Hannover Life Re Australasia, Sydney, wrote premium income of AUD 271.6 million (EUR 156.1 million), broken down into risk-oriented business (70%), financing transactions (15%) and direct group life business (15%). In the year under review we concentrated primarily on enlarging the portfolio of group life business by working closely together with the trustees of company pension schemes.
The operating result (EBIT) increased by 23% to AUD 16.4 million (EUR 9.4 million), and net income after tax improved by 10% to AUD 11.2 million (EUR 6.4 million).
Africa In the assessment of a leading worldwide firm of actuaries, Hannover Life Re Africa, Johannesburg, advanced to become the largest life reinsurer on the African continent for the first time in 2001. Acceptances of risk-oriented treaty business – facultative risks are written as part of our service for important obligatory clients – generated gross premium income of ZAR 624.0 million (EUR 63.3 million) and net premiums of ZAR 405.8 million (EUR 41.2 million).
The underwriting result continued to improve. This was, however, virtually offset by exchange losses associated with the unexpected strength of the local currency against the US
Asia Our premium volume on the Asian markets increased to EUR 44.0 million (+ 10%), with growth concentrated in China and Japan.
In Japan we suffered a loss running into high single-digit millions of euros under a sizeable risk-oriented treaty due to an unusual accumulation of suicides and accidents resulting in death. In most Asian markets, however, the profit situation remains favourable.
Around 700,000 years ago, a lightning strike somewhere in Eastern Africa set the dry savannah ablaze – a frightening spectacle for the people of that era, believed to be Homo erectus. Yet some of these early inhabitants overcame their fear and dared to approach the fire. They carried the fire back to their home camps, tamed it and began to use its energy.
In the year under review the situation on the major primary markets for financial reinsurance was characterised by substantial rate increases around the world. Demand for simple financial reinsurance products aimed at protecting key balance sheet figures climbed sharply owing to the pressure that came to bear on accounting ratios, the risk of rating downgrades and the desire for cost-efficient growth financing. Rate rises were particularly pronounced in the USA as a consequence of the destructive competition that had prevailed for many years and the associated
Preparations underway in Asia to issue directives against the misuse of financial reinsurance arrangements
Management report financial reinsurance of Asian markets, in particular, the authorities have now issued directives or are about to do so. Hannover Re Advanced Solutions, the management company responsible for financial reinsurance transacted by the Hannover Re Group, has been consulted quite frequently in this regard.
Thanks to its direct contacts with our specialists in the property and casualty reinsurance business group, our German-based team of experts – Advanced Solutions Germany – is able to ensure that their know-how and the client base are fully integrated. Consequently, our clients have access to the entire range of reinsurance products and solutions that we offer.
If so desired by the client and depending upon the specific regulatory framework in the various countries from which our contracts originate, Advanced Solutions Germany is also able to write and support financial reinsurance transactions from Hannover Re’s home office in Germany.
Gratifying business development owing to less volatile contracts in the portfolio of Hannover Re
The Clarendon Insurance Group, our New York-based subsidiary that has been part of the Hannover Re Group since 1999, writes the bulk of our program business. Since mid-2001 Clarendon has been led by new management, which pursues a business policy focused more closely on the quality of the gross business than used to be the case. A number of measures were implemented in order to safeguard the quality and
Parallel to the aforementioned restructuring Clarendon also substantially increased its level of retained premiums. It now retains a substantial portion of the risk in its own books; the retention has increased steadily and stood at 32.5% by year-
Earnings per share in EUR* 0.45 0.18 0.03 0.18 * For previous years stock split of 15 July 2002 in a ratio of 3 for1 taken into account
Overall, Inter Hannover was able to enlarge its gross premium income by 28.8% to GBP 162.1 million (previous year: EUR 258.2 million). Net premiums grew by 71.0% to GBP 127.0 million (EUR 202.2 million). The year under review closed with net income of EUR 7.0 million.
Geopolitical crises, such as the looming war on Iraq and the repercussions of the general strike in Venezuela, were the final nail in the coffin for any hopes of a year-end rally. For the third year in succession the major stock indices closed in negative territory.
Given the slowdown in economic growth, the US Federal Reserve Board was particularly active as it repeatedly intervened in an attempt to stimulate the markets. The Fed cut the key interest rate several times, on the last occasion trimming it to an all-time low of 1.25% in No-
The national economies of Europe and Japan generated little impetus of their own, hoping to profit from a revival of the US economy. Although the European Central Bank took a lead from its US counterpart and slashed the prime rate by 50 basis points to 2.75% in December, fiscal policy failed to provide any greater impetus owing to the restrictions imposed by the Stability and Growth Pact.
Despite opposing effects associated with exchange rate movements, our total portfolio of self-managed assets (i.e. excluding funds held by ceding companies) grew in the reporting period by 4.8% to EUR 12.7 billion. The excellent performance of our reinsurance business generated significant cash inflows. The weakness of the equity markets was more than offset in our portfolio by the favourable development of our bond holdings, and on balance, we therefore booked unrealised price gains of EUR 143.3 million as at year-end.
The euro appreciated sharply in the course of the year against the majority of key foreign currencies for our company, most notably the US dollar. Had it not been for this factor, the volume of our investments would have grown to as much as EUR 12.8 billion.
Reduction in the proportion of dividendbearing securities protected us against excessive write-downs
In the year under review we consistently pursued our long-term strategy of investing in alternative investments. As a result of their low correlation with exchange-listed securities, these assets produced a moderately favourable overall performance. New investments were made through private equity partnerships and participation structures in the areas of venture capital (EUR 37.2 million) and structured real estate investments (EUR 60.0 million). Sales of real estate holdings and expiring investments generated profits on disposals of EUR 15.8 million. Provisions were made against losses anticipated on specific investments.
Fixed-income securities were once again our preferred asset category in the year under review. In the course of the year we invested free liquidity from maturities and cash inflows primarily in instruments with a short or medium time to maturity so as to minimise the interest rate risk. Our portfolio of fixed-income securities increased from EUR 8.8 billion to EUR 9.5 billion. It accounted for 74.7% of our total investments and cash.
As at year-end 2002 we held a total amount of EUR 1.5 billion in short-term assets, including overnight money and time deposits. Whereas in the previous year anticipated claims payments arising out of catastrophe losses had prompted us to keep relatively high liquidity holdings, in the year under review this action was prompted by the state of the capital markets. We wish to be able to respond flexibly to advantageous market situations, on the one hand, while also limiting the potential for losses from the portfolio.
Ordinary income increased by EUR 177.6 million to EUR 1.1 billion; while at the same time the total investment portfolio (including funds held by ceding companies) grew by 5.3% to EUR 20.3 billion. While current yields declined around the world in the year under review, the disproportionately strong rise can be attributed principally to higher deposit interest income.
The balance of realised price gains and losses increased considerably compared to the previous year. Profits on disposals of EUR 201.9 million were generated through the sale of securities. This contrasted with losses on disposals of EUR 108.6 million. The balance of EUR 93.3 million was thus EUR 37.4 million higher than in the previous year.
The downward slide on equity markets had a significant adverse impact on the investment performance. Write-downs on our investments, primarily on equities, increased by EUR 177.8 million to EUR 207.0 million.
Hannover Re's risk management is centrally coordinated, but based on local responsibility in the various areas of business. Overall responsibility for risk management is determined according to the specific strategic business groups, within which the responsible board members define the operating objectives. The task of local risk controllers is to identify increased risks in the various business groups as quickly as possible and to initiate counteraction without delay. To this end, we use a number of different quantifying methods that are tailored to individual risks and vary in their design and degree of reporting detail. Within the scope of our risk management system all risks conceivable with the current perspective, which could jeopardise the performance and survival of our company are recorded comprehensively and systematically. The up-to-date status of our risk portfolio, on the level of both individual risks and accumulation risks, is ensured by means of defined reporting procedures and an annual risk inventory. Our risk reporting consists primarily of standard and ad hoc reports that are
Global risks may arise, for example, as a result of changes in the legal framework (including changes in the general regulatory or tax situation ), which are beyond a reinsurer's direct sphere of influence. They may also derive from social or demographic trends or ensue as a consequence of developments in the insurance industry or changes in environmental and climate factors. Such potential risks can scarcely be reduced and there are limits to the extent to which they can be avoided. Risk management measures must therefore be geared to identifying dangerous developments as early as possible.
For that reason, amongst others, we constantly monitor claims trends. Currently notable in this context are liability risks in the USA due to mould, asbestos-related risks in Europe and the settlement of motor-third-party liability claims in foreign markets (Green-Card business).
created using a specially developed IT application and enable Hannover Re Executive Board to assess the overall situation with considerable accuracy. Risks are quantified with an eye to their probability of occurrence and the potential loss. The core risk management elements are set out in guidelines, which apply to the entire Hannover Re Group. Acting independently of these clearly defined procedures, Internal Auditing verifies compliance with the stipulated processes in all functional areas of our company.
Trends in the various national economic environments, on the other hand, are monitored first and foremost on a local basis within our business groups, whose market intimacy and experience ensure that even "weak signals" can be detected promptly. One of the central problems facing the reinsurance industry is the growing number of natural disasters around the world and the associated potential for considerable losses. Using detailed simulation models we therefore analyse the increase in the frequency of natural catastrophes caused by climate change and in the extent of the losses that they cause. On the basis of these analyses we are then in a position to determine the maximum exposure we are prepared to accept within the Group and to calculate our own reinsurance requirements.
Each business segment's contributions to the Group's overall performance are continuously measured and controlled.
In the year under review we further expanded our value-oriented controlling and management system. Through the progressive introduction of an intrinsic-value-creation (IVC) approach we are implementing a key ratio by means of which all company-wide management processes can be systematically geared to value creation. In this regard, IVC provides an objective ratio that motivates managerial staff to take value-oriented actions and prevents value-destroying management errors.
The technical risk lies primarily in the danger of accepting risks that surpass the available financial resources, but also in cases where the premiums calculated in advance turn out to be insufficient to finance the resulting loss burden. Possible reasons for situations like that to occur may be inaccurate pricing assumptions or pricing models, unexpected claims developments, inadequate reserves, a failure to appropriately tailor our own reinsurance or default on the part of retrocessionaires. The Group employs various mechanisms – both for the portfolio as a whole and geared to specific business groups – in order to control technical risks.
The point of departure is the information provided by ceding companies. The IBNR (incurred but not reported) reserve of EUR 1,014.1 million additionally constituted for this segment has been built up to a confidence level which is clearly above average on a US GAAP basis. For the property, liability and motor lines of business this reserve is calculated according to risk classes and with a regional breakdown; for the credit, aviation and marine lines it is calculated on an aggregate proportional basis.
The anticipated ultimate loss ratios are calculated in altogether 50 subsegments on the basis of statistical run-off triangles and actuarial methods.
Specific mechanisms have been put in place to control technical risks
Developments on the US market in 2002 showed an appreciable increase in asbestos and pollution risks. This is attributable in part to the fact that a potential exposure to claims deriving from so-called "non-product risks" exists in addition to the well-known product liability considerations. We have not as yet received any specific loss advices with respect to such claims.
Nevertheless, in view of the increased risks from asbestos- and pollution-related claims we strengthened our reserves. For 2002 our own additional reserves were boosted by 39%. The relative level of such reserves is normally measured on the basis of the "survival ratio". This indicates the number of years which the reserves will be sufficient to cover if the annual loss expenditure remains unchanged. At the end of the year under review our survival ratio stood at 16.9 – clear proof of the quality of reserves both in absolute terms and relative to our competitors. For the first time these reserves also take account of the potential for asbestos-related claims under our treaty relationships in France and the United Kingdom. An amount of EUR 10.5 million is included in the additional reserves for this business.
Furthermore, the run-off of the loss reserve is constantly monitored as well.
For Hannover Re the US dollar and pound sterling (cf. section 7.7 in the Notes on the Consolidated Accounts) are particularly important foreign currencies. The depreciation of these currencies against the euro compared to the previous year (USD -18.1% and GBP -6.8%) led to a decrease in the loss and loss adjustment expense reserves.
Loss and loss adjustment expense reserve (net) 3 486.5 3 735.6 3 957.6 4 304.7 4 849.4 5 002.1 5 696.3 6 162.3 6 867.8 5 846.1
Net run-off result of the loss reserve 656 .2 676.1 540.1 815.5 899.9 371.8 570.6 144.8 48.5
Net run-off result excluding currency exchange rate differences 781.4 1 007.5 1 075.5 1 157.4 965.3 671.5 421.6 (199.3) (495.4)
Our investment strategy is shaped by the duration of our commitments and our interest in generating an adequate return. Risks in the investment sector consist most notably of market -, credit-, and liquidity risks. The risks run by an internationally operating reinsurer also include, however, the exchange risk – which we limit by matching commitments in foreign cur-
The reserves in life and health reinsurance are always based upon the information provided by our clients. The regulations of the local supervisory authorities ensure that the reserves calculated by ceding companies satisfy all local requirements with respect to the actuarial methods and assumptions (e.g. use of mortality and disability tables, assumptions regarding the lapse probability etc.).
rencies as far as possible with assets in the corresponding currencies. This strategy largely offsets exchange gains and losses.
Portfolio Scenario portfolio change based on fair value in EUR million
We also classify risks associated with human resources management under operational risks. Fierce competition for qualified specialists and
As an internationally active reinsurance group we are confronted with numerous potential risks that could have a not inconsiderable impact on our net income and assets. Nevertheless, on the basis of the information currently avail-
In addition to capital resources, the skills and motivation of its employees are the guarantors of success for a financial services company operating worldwide. The continual enhancement of these factors was once again the overriding goal of our human resources development and management activities in the year under review.
In order to ensure a close dovetailing of corporate and personnel strategy we initiated a strategic approach in the field of human resources management known as "Performance Excellence ". By applying this method we are seeking in future to ensure the continual enhancement of key management tools, namely business policy, leadership, employee quality as well as resources and process management.
able to us, we do not perceive any risks that could jeopardise the continued existence of our company in the short or medium term or could impair the assets, financial position or net income in a significant or sustained manner.
Management report outlook workshops. Computer-aided learning techniques are currently undergoing a trial phase. They are intended to facilitate personal feedback on the acquired level of knowledge and to enable staff to develop their own study rhythm independently of other learners.
Our staff are now able to view online portions of their personal data record. This fosters trust and helps to quickly resolve possible discrepancies. In addition, we shall shortly make a broad range of management information available online to executives via the "Manager Desktop".
We devote special energy toward cultivating our existing contacts with institutions of higher education and attending the relevant university career fairs. The sharp increase in the number of highly qualified applicants bears out the positive response to these efforts. Trainees at our company pass through an 18-month programme for junior executives and get to know many sides of the organisation by spending periods of 6 to 12 weeks in various departments. We also offer students the chance to gain insights into different areas of the company through internships and we support diploma students writing on reinsurance -related topics with appropriate stipends.
In dual courses of study conducted in cooperation with the internationally oriented "Berufsakademie Berlin" and the "Leibniz-Akademie Hannover" we train students of business administration by providing on-the-job instruction.
Management report outlook sharply. Here, too, there is little sign of a shortterm recovery.
Last but not least, we shall again systematically scrutinise each of our 22 business centers on an ongoing basis in the current year so as to ensure that our profitability requirements are met.
Despite the difficult economic climate, property and casualty reinsurance is currently enjoying a segment-specific boom period. The effects of the cyclical upswing – with profitable rates and advantageous terms and conditions – will probably be fully felt in 2003, for the first time unencumbered by the aftermath of the cyclical downturn experienced in the second half of the nineties.
We were highly satisfied with the treaty renewals as at 1 January 2003, when roughly two-thirds of our treaties came up for renewal. We achieved broad-based improvements in rates and conditions and further enlarged our share of profitable, predominantly non-proportional business. Particularly in the North American market, we observed a sustained positive trend. Improvements in rates and conditions in this market are more striking in liability reinsurance than in property business; it is here that we also see the greatest potential for further improvements in the years to come. Developments on the London Market similarly gave grounds for satisfaction. However, in certain segments, such as aviation fleet business, we observed early signs here of a softening in rates and conditions. In accordance with our strict cycle management we have therefore already slightly reduced our involvement in such segments during the current year.
In view of the well-known demographic trend in most insurance markets, it is our expectation that demand will tend to rise worldwide for products in the area of private provision for retirement and dependants.
As a reinsurer operating worldwide, we expect to participate disproportionately strongly in this development. The total premium volume will likely remain unchanged. The value of the inforce business and the net income generated by life and health reinsurance should rise appreciably.
In the current year our clients will again originate primarily from the highly developed financial markets, most notably the USA. Yet, we shall also systematically cultivate the emerging markets in Asia and Latin America and enlarge our portfolio here, too.
Overall, we expect 2003 to be a good year in property and casualty reinsurance. Provided no extraordinary expenditures are incurred for catastrophe losses, this business group is expected to make another very favourable profit contribution.
Impetus for life and health reinsurance anticipated primarily through increased private old age provision
We shall purposefully press ahead with the reorientation of the Clarendon Insurance Group and optimise the profitability of the portfolio. The integration of the Insurance Corporation of Hannover into Clarendon is also expected to bear fruit. These measures should help to consolidate and further extend the Clarendon Group's leading position on the US market.
Further marked increase in net income expected for the current year
Fixed-income securities – available for sale 5.1 9 140 755 8 422 878
Loss and loss adjustment expense reserve 5.2 18 836 651 18 859 679
Policy benefits for life and health contracts 5.2 4 136 701 3 908 584
Funds held under reinsurance treaties 1 630 200 1 744 536
Other changes in cumulative comprehensive income 5.10 (54 295) (15 893)
Unrealised gains and losses on investments 5.1 (7 090) 21 332
Earnings per share in EUR* 2.75 0.11 * For previous year stock split of 15 July in a ratio of 3 for 1 taken into account
Net realised gains and losses on investments (93 354) (55 953)
Changes in claims reserves (net) 2 002 234 2 695 687
Changes in other assets and liabilities (net) (4 856) 110 915
Cash flows from operating activities 1 615 293 1 166 246
Cash and cash equivalents at the beginning of the period 830 659 482 262
In the following table we have allocated the underwriting assets and liabilities as at 31 December 2002 and 2001 to our business segments after eliminating intergroup transactions across segments.
SEGMENTAL REPORT as at 31 December 2002 in TEUR Property/casualty reinsurance
Reinsurance recoverables on benefit reserves – – 489 784 493 650
Funds held under reinsurance treaties 986 831 735 653 343 819 331 418
1. General accounting principles 78 2. Accounting principles including reporting and valuation methods 80 3. Consolidated companies and consolidation principles 80 4. Acquisitions /new establishments 84 5. Notes on the individual items of the balance sheet and statement of income 85 5.1 Investments including income and expenses 85 5.2 Underwriting assets and liabilities 94 5.3 Contracts with no technical risk 96 5.4 Goodwill; present value of future profits on acquired life reinsurance portfolios 96 5.5 Taxes and deferred taxes 97 5.6 Staff and expenditures on personnel 99 5.7 Provisions for pensions and similar liabilities 100 5.8 Surplus debenture and loans 103 5.9 Stockholders' equity and minority interests 104 5.10 Other comprehensive income 105 5.11 Treasury stock 105 5.12 Earnings per share 106 5.13 Other assets and liabilities 106 5.14 Technical statement of income 107 5.15 Other income/expenses 108 6. Related party disclosures 108 6.1 Transactions with related parties 108 6.2 Compensation and stockholding of the management boards of the parent company and further information with respect to the German Corporate Governance Code 110 6.3 Stock options 111 6.4 Mortgages and loans 112 7. Other notes 112 7.2 Contingent liabilities 112 7.3 Long-term commitments 113 7.4 Derivative financial instruments 113 7.5 Events subsequent to conclusion of the financial year 114 7.6 Rents and leasing 115 7.7 Currency conversion 116
At the end of June 2001 the Financial Accounting Standards Board (FASB) issued SFAS 141 "Business Combinations". This Statement requires that all business combinations initiated after 30 June 2001 be accounted for using a single method, namely the purchase method. A distinction is made between acquired intangible assets that are to be recognised separately from goodwill and those that are to be reported in goodwill.
At the same time the FASB issued SFAS 142 "Goodwill and Other Intangible Assets", which states that goodwill will no longer be amortised but will be tested (at least) annually for impairment in a twostep fair value process. SFAS 142 further contains accounting provisions applicable to finite-lived intangible assets (wasting assets) and indefinite-lived intangible assets recognised in financial statements.
In August 2001 the FASB published SFAS 144 "Accounting for the Impairment or Disposal of LongLived Assets". This standard requires that a long-lived asset classified as held for sale be accounted for at the lower of its carrying amount or fair value (less cost to sell). Depreciation (amortisation) is to cease. This means that future losses from discontinued operations and from long-lived assets to be disposed of by sale are no longer recognised before they occur.
The application of SFAS 144 had no significant implications for the consolidated financial statement in the financial year.
In June 2002 SFAS 146 "Accounting for Costs Associated with Exit or Disposal Activities" was published. This Statement requires that costs associated with exit or disposal activities be recognised as liabilities when the costs are incurred, provided the fair value can be reasonably measured. It had previously been the case that such liabilities could be recognised at the date of an entity's commitment to a restructuring plan.
SFAS 146 is to be applied prospectively to exit and disposal activities initiated after 31 Decem-
In November 2002 the FASB issued Interpretation No. 45 (FIN 45) "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness and Others – an Interpretation of FASB Statements 5, 57 and 107 and recission of FASB Interpretation 34". The interpretation elaborates on the information that a guarantor is required to disclose in its financial statements with respect to the obligations assumed under guarantees that it issues. FIN 45 further clarifies that at the time a company issues a guarantee, the company must recognise an initial liability for the fair value of the obligations it assumes under the guarantee. The disclosure requirements are effective for financial statements of interim or annual periods ending after 15 December 2002. The initial recognition and initial measurement provisions apply to guarantees and contingent liabilities entered into after 31 December 2002.
In December 2002 the FASB published SFAS 148 "Accounting for Stock-Based Compensation – Transition and Disclosure – an Amendment of FASB Statement No. 123". Supplementary to the existing provisions, this Statement provides alternative methods of transition for voluntary change to the fair value based method of accounting for stock-based employee compensation. It also requires additional disclosures about the method of accounting for stock-based employee compensation and the effect of initial application of the standard on reported results.
All Statements of Financial Accounting Standards (SFAS) issued by the FASB on or before 31 December 2002 with binding effect for the 2002 financial year have been observed in the consolidated financial statement.
The declaration of conformity required pursuant to § 161 German Stock Corporation Act (AktG) regarding compliance with the German Corporate Governance Code has been submitted and made available to the stockholders.
HDI Immobilienfonds Nr. 4 Nürnberg Bucher KG, Munich/Germany, was wound up. The company's assets were transferred to Hannover Re (further information is provided in section 6.1 "Transactions with related parties").
Following complete disposal of its shares Protection Reinsurance Intermediaries Ltd., London/UK, left the consolidated group companies in the third quarter.
In conformity with Item 7.1.4 of the recommendations of the German Corporate Governance Code the following table also lists major participations in unconsolidated third companies.
Hannover Re (Bermuda) Ltd., 100.0 EUR 575 146 EUR 62 918 Hamilton/Bermuda
Hannover Reinsurance (Ireland) Ltd., 100.0 EUR 219 521 EUR 35 222 Dublin/Ireland
Hannover Re Sweden Insurance Company Ltd., 100.0 – SEK 723 Stockholm/Sweden
International Insurance Company 100.0 GBP 64 563 GBP 529 of Hannover Ltd., Virginia Water/United Kingdom
Clarendon Select Insurance Company, 100.0 USD 42 282 USD (35) Tallahassee/USA
Hannover Reinsurance Group Africa (Pty) Ltd., 96.9 ZAR 382 309 ZAR (2 685) Johannesburg/South Africa
Hannover Reinsurance Group Africa (Pty) Ltd. compiles its own sub-group financial statement, including the following major companies in which it holds the following shares: Compass Insurance Holdings (Pty) Ltd., 100.0 ZAR 32 355 ZAR 4 026 Johannesburg/South Africa3)
Hannover Reinsurance Mauritius Ltd., 100.0 MUR 164 207 MUR 6 064 Port Louis/Mauritius
Lireas Holdings (Pty) Ltd., 100.0 ZAR 13 292 ZAR (38 810) Johannesburg/South Africa
Hannover Re Real Estate Holdings, Inc. holds a sub-group including the following major companies in which it holds the following shares: Hannover USA Real Estate Corporation, 94.2 USD 50 075 USD 1 233 Orlando/USA
Orange Avenue Corporation, 94.2 USD 1 122 USD 4 955 Orlando/USA
Internationale Schule Hannover Region, 8.5 EUR 448 EUR 185 Hannover/Germany 5)
Acte Vie S.A. Compagnie d‘ Assurances sur la Vie et de Capitalisation, 9.4 EUR 6 906 EUR 253 Strasbourg/France1)
Bulstrad Life Insurance, 9.1 BGN 5 358 BGN 235 Sofia, Bulgaria1)
Name and registered office of the company (Figures in currency units of 1 000)
The capital consolidation is based upon the "purchase accounting" method (comparable to the German revaluation method). The purchase costs of the parent company have been netted with the proportionate stockholders' equity of the subsidiary at the time when it was first included in the consolidated financial statement after the revaluation of all assets and liabilities. After recognition of all acquired intangible assets that in accordance with SFAS 141 are to be accounted for separately from goodwill, the difference between the revalued stockholders' equity of the subsidiary and the purchase price is recognised as goodwill. Immaterial and negative goodwill were booked to earnings in the year of their occurrence. Where minority interests in the stockholders' equity exist, such interests are reported separately. The minority interest in the result is deducted from the net income in the statement of income and totalled EUR 15,005 thousand (previous year: EUR 24,553 thousand) in the 2002 financial year.
HEPEP III was established on 25 November 2002. The company has capital resources of EUR 1.0 million, in which Hannover Re and E+S Rück each hold participations of 50.0%. The object of the company is to build, hold and manage a portfolio of assets comprising equity capital and quasi-equity participations primarily in Europe.
Fixed-income securities classified as held to maturity are valued at purchase costs plus/minus amortised costs. The amortised costs derive from the difference between the nominal value and purchase cost and they are spread over the time to maturity of the fixed-income securities.
Contractual maturities of the fixed-income securities in the held-to-maturity portfolio, available-forsale portfolio and trading portfolio as at the balance sheet dates of 31 December 2002 and 2001
Due after one through five years 4 380 831 4 515 430 4 571 102 4 631 074
Due after one through five years – – 7 832 7 878
Amortised costs and unrealised gains and losses on the portfolios of investments classified as available for sale and trading
Fixed-income securities – available-for-sale 5 443 188 1 650 983 1 232 447 464 252 54 465 175 158 4 969 115 293 9 140 755
Fixed-income securities – held-to-maturity 169 031 84 033 19 596 8 538 606 2 266 – – 284 070
Fixed-income securities – trading – – – – – 46 895 – – 46 895
Fixed-income securities – available-for-sale 420 128 179 164 2 908 165 1 087 029 31 947 4 282 076 20 227 212 019 9 140 755
Equity securities – available-for-sale 21 438 1 886 414 762 35 936 9 537 211 503 22 000 683 717 745
FIN 46 is to be applied for the first time with effect from 1 July 2003. In addition, FIN 46 contains immediately applicable disclosure requirements with respect to existing relationships with variable interest entities that are to be satisfied even if such entities are not consolidated.
This transaction falls within the scope of FIN 46. Hannover Re is currently examining whether the transaction establishes variable interests as defined by FIN 46 and whether a Group company is the primary beneficiary, therefore giving rise to a consolidation requirement.
The extent of the interests in special purpose entities other than those described above is currently being analysed in the light of the scope of FIN 46. There are grounds to presume that further information on these transactions will have to be disclosed when FIN 46 is initially applied. A consolidation requirement does not exist based on our current assessment. As things presently stand, the total scope of these transactions and the resulting maximum risk of loss for the Group are insignificant.
Technical provisions The loss and loss adjustment expense reserves are in principle calculated on the basis of the information supplied by ceding companies. IBNR reserves are also included. The total amount of the reserves corresponds to the "principle of best estimate" under US GAAP. This estimate is based on past experience and estimations of future development. In one subsegment of financial reinsurance technical provisions were discounted at interest rates of between 3.0% and 8.6%. The interest rates are determined by the
Currency exchange rate differences between valuation at the average rate and the year-end rate (2 519) 206
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 1,127.2 million (EUR 1,370.4 million). As at year-end 2002 the discounted provisions amounted to EUR 4,314.9 million (EUR 4,758.3 million).
Effects of currency conversion as at 1 January of year under review (1 418 010) 264 825
Net reserve as at 1 January of year under review 10 682 906 9 514 845
Change in additions to/departures from the consolidated group 4 963 –
Effects of currency conversion at exchange rates on 31 December of year under review (net) (76 837) (27 442)
The impairments reported in the financial year were primarily attributable to Compass Insurance Holdings held by Lireas Holdings within Hannover Reinsurance Group Africa.
At the end of June 2001 the FASB issued the accounting standards SFAS 141 "Business Combinations " and SFAS 142 "Goodwill and Other Intangible Assets". Hannover Re has applied these provisions since 1 January 2002. Goodwill was therefore no longer amortised, but was tested for impairment in a two-step fair value process.
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 based on the current tax rates. In the event of a change in the tax rates on which the calculation of the deferred taxes is based, appropriate allowance is made in the year in which the change in the tax rate is stipulated in law with sufficient certainty. Deferred taxes at the Group level are booked using the Group tax rate of 40%.
Policy benefits for life and health contracts 115 497 128 476
The following table presents a reconciliation of the expected expense for income taxes with the actual provision for income taxes reported in the statement of income. The pre-tax result is multiplied by the Group tax rate in order to calculate the Group's expected expense for income taxes. The Group tax rate used is composed of the corporate-income-tax rate of 25%, the German reunification charge of 5.5% levied on corporate income tax and trade earnings tax of 13.625% calculated on the basis of this effective corporate-income-tax rate.
Number of employees (excluding board members) 1 676 1 833 1 869 1 882 2 016 1 900
Nationality of employees US German Other South African UK Irish Total
Notes notes on the individual items 5.6 Staff and expenditures on personnel
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 closed as at 31 March 1999.
Provisions for pensions are established in accordance with SFAS 87 "Employers' Accounting for Pensions" using the Projected-Unit-Credit Method. The basis of the valuation is the estimated future increase in the rate of compensation of the pension beneficiaries. The benefit entitlements are discounted by applying the capital market rate for highest-rated securities.
Projected benefit obligation at the end of the reporting year 54 024 48 289
In order to safeguard the sustained financial strength of the Hannover Re Group, Hannover Re issued subordinated debt. A subordinated loan was placed via Hannover Finance (Luxembourg) S.A. – a wholly owned subsidiary of Hannover Re – on the European capital market. The debt, which is secured by Hannover Re, was issued in the amount of EUR 350 million with a term of 30 years. It may be redeemed by the issuer after 10 years at the earliest. Hannover Re received from Hannover Finance a loan in the amount of EUR 100 million.
Surplus debenture (Genussrechtskapital) On 2 November 1993 Hannover Re and E+S Rück issued surplus debentures in the amounts of
EUR 76.7 million at an interest rate of 7.55% and EUR 40.9 million at an interest rate of 7.75% respectively. Repayment is due in full on 2 November 2004.
Other financial facilities In order to protect against possible future catastrophe losses, Hannover Re took out a new credit line of EUR 250 million in 2000 in the form of a syndicated loan. The facility has a term of five years and is due in November 2005.
Additional bilateral, secured credit lines in the amount of EUR 200.0 million – available variably for both cash and guarantee credit financing – as well as similar unsecured credit lines with a volume of EUR 70.0 million were arranged with Landesbank Hessen-Thüringen Girozentrale for the purpose of short-term borrowing.
On 15 July 2002 Hannover Re implemented a 3 for 1 stock split. The stockholders' equity was increased to EUR 97,164 thousand through a withdrawal of EUR 14,365 thousand from the additional paid-in capital. One no-par-value share worth a theoretical amount of EUR 3.00 of the capital stock was replaced by three no-par-value shares each worth EUR 1.00. The capital stock is divided into 97,163,928 no-par-value registered shares, which are fully paid up. The new shares carry a full dividend entitlement for the 2002 financial year.
The changes of -EUR 38.4 million in the cumulative comprehensive income in the year under review resulted principally from the application of SFAS 133 "Accounting for Derivative Instruments and Hedging Activities". This development was due to changes in the fair value of interest rate swaps included in a cash flow hedge transaction used to hedge floating-rate loans.
Total number of fully-paid shares 97 163 928 97 163 928
Liabilities due to banks 5 775 50 287 5.14 Technical statement of income
In accordance with SFAS 60 insurance contracts are to be classified as "short-duration contracts" or "long-duration contracts". The determinative criteria in this regard are, inter alia, the termination opportunities available to the insurer, the period of risk protection and the scope of the services provided by the insurer in connection with the contract. Premiums from short-duration contracts are brought to account over the period of the underlying contract, and where appropriate unearned premiums are deferred to subsequent years. By contrast, premiums deriving from long-duration contracts are brought to account at the date payable.
Expenses for the company as a whole 16 698 15 965
Figures in EUR thousand 2002 2001 6. Related party disclosures 6.1 Transactions with related parties
SFAS 57 defines related parties as parent companies and subsidiaries, subsidiaries of a common parent company, entities and trusts under the influence of the management, major owners and the management of the company itself, close family of the owners and management as well as associated companies.
In the year under review Hannover Re transferred its shares in the Insurance Corporation of Hannover to Hannover Finance Inc. at book value. By simultaneously purchasing the interest held by E+S Rück in Hannover Finance Inc., Hannover Re is now the sole stockholder of Hannover Finance Inc. and hence of the Clarendon Insurance Group. This transaction was prompted by the desire not only to streamline the structure of the subgroup but also to restructure program business in the USA.
In November 2002 Hannover Re (Bermuda) Ltd. increased its capital resources by EUR 250.0 million through allocation of this amount to its additional paid-in capital.
Hannover Re (Bermuda) Ltd. granted Hannover Re a fixed-rate loan of EUR 200.0 million due in
The HDI Group grants us insurance protection, inter alia, in the areas of public liability, fire, group accident and business travel collision insurance. We received legal protection insurance coverage from HDI Rechtschutz Versicherung AG.
All transactions were effected at normal market conditions. We gave an account of these transactions with regard to Hannover Re and E+S Rück in the corresponding dependent company reports.
Notes related party disclosures 6.2 Compensation and stockholdings of the management boards of the parent company and further information with respect to the German CorporateGovernance Code
The total compensation received by the members of the Executive Board included variable components of EUR 707 thousand. The variable remuneration of the Executive Board is determined on the basis of the year-end result and the value creation. The value creation is measured using an appropriate benchmark (the performance of the Hannover Re share relative to the unweighted "Reactions" World Reinsurance Index). The benchmarks cannot be retroactively changed.
Transactions implemented by Executive Board and Supervisory Board members of Hannover Re and by their spouses or registered partners and first-degree relatives involving shares, options or derivative financial instruments of Hannover Re as well as of the parent companies (so-called "Directors ' Dealings"), which with effect from 1 July 2002 are to be reported in accordance with § 15a of the German Securities Act (WpHG), are set out in the table below: Members of the Supervisory Board and Executive Board of Hannover Re as well as of the parent companies and their spouses or registered partners and first-degree relatives hold less than 1% of the issued shares. As at 31 December 2002 the total holding amounted to 0.034% of the issued shares, i.e. 33,008 shares. The total volume of stock options held by members of the Executive Board on the basis of the virtual stock option plan amounted to 0.92% of the capital stock as at the balance sheet date. The value of these stock options was EUR 895 thousand. Further information is provided in section 6.3 "Stock options".
The compensation received by the Supervisory Board comprises fixed and variable components determined by the paid dividend. Appropriate allowance is made for the functions performed by the Chairman, Deputy Chairman and the members of the committees when determining the level of compensation paid to the members of the Supervisory Board. In the year under review the company did not pay any compensation to members of the Supervisory Board for personally rendered services, e.g. consulting or mediation services.
The company did not enter into any contingent liabilities for members of the management boards. The names of the members of the management boards of the parent company are listed on pages 5 to 7.
A present value of EUR 20.00 is assumed in order to determine the basic number of stock options. The basic number increases or decreases according to the over- or underperformance of the earnings per share. For each full amount of EUR 0.10 by which the earnings per share exceeds the target performance the basic number of stock options is increased by 10%, while for each amount of EUR 0.20 by which the earnings per share falls short of the target performance it is reduced by 10%.
The calculations were based on the year-end closing price of the Hannover Re share as at 30 December 2002 of EUR 24.30, volatility of 48.5%, a dividend yield of 2.88% and a risk-free rate of interest
On this basis a provision of EUR 3,371 thousand was established for the stock options existing as at 31 December 2002.
Apart from the aforementioned litigation, no significant court cases were pending during the year under review or as at the balance sheet date – with the exception of isolated out-of-court proceedings within the scope of ordinary insurance and reinsurance business activities.
As security for our technical liabilities to our US clients, we have established a master trust in the USA. As at the balance sheet date this master trust amounted to EUR 1,491.9 million (previous year: EUR 1,403.6 million). The securities held in the master trust are shown as available-for-sale investments.
Within the scope of a novation agreement regarding a life insurance contract we assumed contingent reinsurance commitments with respect to due date and amount estimated at EUR 17.0 million as at the balance sheet date.
Several Group companies are members of the German aviation pool, the association for the reinsurance of pharmaceutical risks and the association for the insurance of German nuclear reactors. In the event of one of the other pool members failing to meets its liabilities, an obligation exists to take over such other member's share within the framework of the quota participation.
Fair value hedges In the case of a fair value hedge, the results of the fair valuation of the derivatives and the corresponding underlying transactions are recognised in the statement of income.
Cash flow hedges In the case of a cash flow hedge, the hedge-effective part of the changes in fair value is initially recognised under the stockholders' equity (cumulative comprehensive income). It is only reported in the statement of income when the underlying hedged transaction has been recognised in the statement of income. The hedge-ineffective part of the changes in fair value is recognised in the statement of income immediately. Furthermore, derivatives embedded in host contracts are to be reported separately.
The fair value of derivatives used in fair value hedges was -EUR 3.7 million. The fair value of derivatives used in cash flow hedges totalled -EUR 69.6 million. Derivatives recognised in the trading portfolio had a fair value of -EUR 8.7 million.
As at year-end the portfolio did not contain any forward purchase options or forward exchange transactions.
Figures in EUR thousand 1 to 5 years 5 to 10 years more than 10 years Total
Operating leasing contracts produced expenditures of EUR 4,892 thousand in the 2002 financial year.
The Insurance Corporation of Hannover and the Clarendon Group have multi-year contracts for the lease of business premises. In the latter case, the ten-year lease ends on 31 August 2005. The rent instalments are fixed for the rental period, although adjustments in line with changed market conditions are possible at contractually agreed times.
Rental income totalled EUR 23,027 thousand in the 2002 financial year.
1 EUR corresponds to: Mean rate of exchange on the Average rate of exchange balance sheet date
We conducted our audit of the consolidated financial statements in accordance with German auditing principles and the generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW). Those standards require that we plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free of material misstatements. The evidence supporting the amounts and disclosures in the consolidated financial statements are examined on a test basis as part of the audit. The audit includes assessing the annual financial statements of the companies included in consolidation, the determination of the companies to be included in consolidation, the accounting and consolidation principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
We supervised the management of Hannover Rückversicherungs-AG (Hannover Re), the parent company of the Hannover Re Group, regularly during 2002 on the basis of detailed written and verbal reports from the Executive Board. The Supervisory Board held a total of four meetings – each lasting several hours – in order to adopt the necessary resolutions. In addition, particularly urgent decisions were taken on five occasions using a written procedure. The Standing Committee, a committee within the meaning of § 107 Para. 3 German Stock Corporation Act, met on three occasions. Furthermore, we received quarterly written reports from the Executive Board on the course of business and the position of the company pursuant to § 90 German Stock Corporation Act. These reports contain, inter alia, up-todate details of the current planned figures for the Group with regard to the growth in premiums, the burden of catastrophe losses, the development of administrative expenses as well as the investment portfolio, investment income and the increase in the global workforce. The quarterly reports with the quarterly financial statements and key figures for the Hannover Re Group constitute a further important source of information for the Supervisory Board. In addition, the Chairman of the Supervisory Board was constantly advised of major developments and impending decisions by the Chairman of the Executive Board. All in all, we were involved in decisions taken by the Executive Board as required by our statutory responsibilities and those placed upon us by the company's Articles of Association. The development of our major subsidiaries and participations was also included at all times in our consultations.
In addition, the Supervisory Board considered capital increases at various subsidiaries. Due to in some cases marked premium growth the Supervisory Board approved capital increases at E+S Rückversicherungs-AG, Hannover Re (Bermuda ) Ltd. and Hannover Life Reassurance (UK) Ltd. as well as an increase in the capital reserves at Hannover Finance (Luxembourg) S.A. In order to bundle the activities in US program business the American subsidiaries of Hannover Re operating in this segment were organisationally combined with the consent of the Supervisory Board. To this end, the Insurance Corporation of Hannover was integrated into Clarendon National Insurance Company, New Jersey/USA. The Supervisory Board further discussed and approved the acquisition by Hannover Rückversicherungs-AG of the 20 percent share of Hannover Finance Inc. (HFI), Wilmington/USA held by E+S Rückversicherungs -AG. The Supervisory Board additionally approved a substantial participation by Hannover Re in the newly established Special Risk Insurance and Reinsurance Company in Luxembourg. The Supervisory Board further stayed informed of the current status of significant pending legal actions involving the Group companies.
With an eye to the repercussions of the terrorist attacks of 11 September 2001 in the USA the Supervisory Board also closely monitored the progress of the renewals in property and casualty reinsurance and supported the Executive Board in its review of the strategic objectives and principles.
We examined both the Executive Board's report and the auditors' report on the company's relations with affiliated companies, and we found everything to be in order. In the light of our examination, we had no objections to the statement by the Executive Board at the end of its report on relations with affiliated companies.
On 24 May 2002, the date of the Annual General Meeting, Dr. Horst Dietz and Dr. Erwin Möller – as representatives of the shareholders – and Ms. Karola Böhme – representing the employees – stepped down from this body. The Supervisory Board thanked them for their many years of constructive work and expressed its appreciation of their contribution to the development of the company and the Group. The Annual General Meeting elected Mr. Bengt Pihl and Mr. Herbert Haas as new members of the Supervisory Board. In the period until 31 January 2002, Mr. Haas had served for eight years on the company's Executive Board, moving to the Board of Management of HDI V.a.G. with effect from 1 February 2002. Mr. Hans-Günter Siegerist was elected to succeed Ms. Böhme as an employees' representative on the Supervisory Board.
Effective 1 January 2002, Dr. Elke König was appointed as a deputy member of the Executive Board.
Good and transparent Corporate Governance ensures that an enterprise is responsibly managed and supervised with an orientation towards value creation. Corporate governance thereby serves the goal to strengthen and consolidate the trust in the enterprise held by present and future shareholders, business partners, clients, employees and the general public. In recent months this has become of even greater relevance to the assessment and valuation of listed companies. In February 2002, the "Government Commission on the German Corporate Governance Code" appointed by the Federal Government published the "German Corporate Governance Code". This Code states in practical terms standards of conduct for Supervisory and Management Boards and defines duties of disclosure with respect to shareholders as well as the role of auditors. Last but not least, it is aimed at standardising the methods and procedures used in existing practice so far and creating transparency concerning the Code stipulations that are already law in Germany.
Hannover Re supports the principles of value-oriented and transparent enterprise management and supervision and recognises their importance in guiding its activities. The goal of generating sustained value enhancement for all shareholders of Hannover Re is firmly enshrined in our corporate philosophy. Major elements of its principles, the requirements of which have now been defined in writing, have long been "lived" as part of the standard practice at our company. This is true, for example, of the following principles: • All investors have equal rights to information ("fair disclosure")
• Up-to-date information is provided via the Internet, press releases and newsletters
• The agenda and voting results of the Annual General Meeting can be accessed via the Internet
• Value-oriented management of the company that takes into account the interests of all shareholders constitutes an integral component of our corporate philosophy
• Financial statements are drawn up on the basis of internationally recognised accounting principles (US GAAP)
• Quarterly reports are compiled, including segmental reports and earnings per share
Our Corporate Governance principles are reviewed at regular intervals and modified whenever necessary. These reviews are conducted against the backdrop of our self-image which is guided by internationally valid "best practice" standards and legal requirements. The disclosure mandated by law according to the recommendation of the German Corporate Governance Code still to be implemented is provided in the following declaration of conformity: The "German Corporate Governance Code" (DCGK) was published on 26 February 2002. It sets out the major legal stipulations governing the management and supervision of German listed companies and contains both internationally and nationally recognised standards of good and responsible enterprise management. Under § 161 Stock Corporation Act (AktG) it is incumbent on the Management Board and Supervisory Board of a listed company to confirm conformity with the recommendations of the Code or explain which recommendations of the Code are not applied. From the very outset Hannover Re has supported the deliberations of the Government Commission on the "German Corporate Governance Code" in the interests of our shareholders and the company. The implementation of the recommendations at Hannover Rückversicherungs-AG diverges in only one aspect from the German Corporate Governance Code. The consolidated financial statements are supposed to be publicly accessible within 90 days of the end of the financial year, and interim reports within 45 days of the end of the reporting period in question (Code Item 7.1.2, Sentence 2). Due to some special features of international reinsurance business and the associated regulatory frameworks, we marginally exceed the recommended periods at present. Yet, by no means do we use the full scope of the deadlines permitted by law. By further optimising our reporting processes we expect to achieve conformity with the recommended periods from 2004 onwards.
We are in conformity with all other recommendations of the Code.
Hannover Rückversicherungs-AG Australian Branch – Chief Agency The Re Centre Level 21 Australia Square 264 George Street G. P. O. Box 3973 Sydney NSW 2000
Hannover Rückversicherungs-AG Canadian Branch – Facultative Office 150 York Street, Suite 1008 Toronto, Ontario M5H 3S5
Hannover Rückversicherungs-AG Hong Kong Branch 2008 Sun Hung Kai Centre 30 Harbour Road Wanchai, Hong Kong
Great Britain Hannover Life Reassurance (UK) Limited Hannover House Virginia Water Surrey GU25 4AA
Korea Hannover Rückversicherungs-AG Seoul Representative Office German Office Shintown Plaza Building 28-2 Hannam-dong Yongsan-ku Seoul 140-210
Malaysia Hannover Rückversicherungs-AG Malaysian Branch Suite 31-1, 31st Floor Wisma UOA II No. 21 Jalan Pinang 50450 Kuala Lumpur
USA Clarendon Insurance Group, Inc. 1177 Avenue of the Americas, 45th Floor New York, New York 10036
Insurance Corporation of Hannover Los Angeles Office 333 South Hope St. Suite 2400 Los Angeles, California 90071
Confidence level (also: probability level): the confidence level defines the probability with which the defined amount of risk will not be exceeded.
Dread disease coverages (also: critical illness coverages): personal 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.
Earnings per share, diluted: ratio, which is calculated by dividing the group's net income by the weighted average number of shares outstanding. The diluted earnings per share are calculated based on a number of shares that includes subscription rights already exercised or that still can be exercised.
Earnings retention: non-distribution of a company's profits leading to different treatment for tax purposes than if profits were distributed.
Economic loss: total loss incurred by the affected economy as a whole following the occurrence of a loss. The economic loss must be distinguished from the ➞ insured loss.
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 ➞ cedent's balance sheet.
Hybrid capital: debt structure which because of its subordination bears the character of both debt and equity.
Impairment: Extraordinary amortisation taken when the present value of the estimated future cash flow of an asset is less than its book value.
Investment grade: investment-grade ratings are awarded to companies and assigned to securities that have a low risk profile. They contrast with non-investment-grade ratings, which by definition include speculative elements and therefore entail a significantly higher risk.
Present value of future profits (PVFP): Intangible asset primarily arising from the purchase of life and health insurance companies or portfolios. The present value of expected future profits from the portfolio assumed is capitalised and amortised according to plan.
Program business: A well-established business model in the US primary insurance market. It is transacted by primary insurers ("program insurers") in very close cooperation with highly specialised managing general agents (MGAs). The business group is focused on strictly defined, homogeneous primary insurance portfolios (programs), typically comprising niche and non-standard coverages, i. e. risks that are impossible or difficult to place with conventional insurers. Functions normally performed by the insurer, such as sales, closing contracts, issuing policies, collection, policy administration and claims settlement, are assumed by the MGAs or by other external service-providers.
Property and casualty (re-)insurance: collective term for all lines of business which in the event of a claim reimburse only the incurred loss, not a fixed sum insured (as is the case in life and personal accident insurance, for example). This principle applies in all lines of property and liability insurance.
Rating: ratings are systematic evaluations of companies with respect to their ➞ credit status or the credit status of issuers regarding a specific obligation. They are awarded by a rating agency or bank.
Retention: the part of the accepted risks which an insurer/reinsurer does not reinsure, i.e. shows as ➞ net (retention ratio: percentage share of the retention relative to the gross written premiums).
Survival ratio: this reflects the ratio of loss reserves to paid losses under a specific contract or several contracts in a balance sheet year.
Technical result: the balance of income and expenditure allocated to the insurance business and shown in the technical statement of income (after additional allowance is made for the allocation to / withdrawal from the equalisation reserve: net technical result).
Unearned premiums: premiums written in a financial year which are to be allocated to the following period on an accrual basis. This item is used to defer written premiums.
Federal Financial Supervisory Authority (BAFin) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36, 58
Hannover Life Re United Kingdom (UK) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39f.
Property and casualty reinsurance . . . . . . . . . . . . . . . . . . . 1ff., 13 21, 23, 26, 45, 53f., 57, 62ff., 94, 118
United States Generally Accepted Accounting Principals, US GAAP . . . . . 10f., 13, 21, 39, 48, 53f., 57, 78, 80, 94, 111, 117, 119f., 130
Photographs: Zippo, Hamburg: pages 1, 6/7 | dpa, Hamburg: page 35 Getty Images, Munich: pages 24/25, 34, 42/43, 50/51 |