+++ Hannover Re generates best result in company history +++ Very good results in property/casualty and life/health reinsurance +++ Operating profit (EBIT) EUR 819.9 million +++ Group net income EUR 514.4 million +++ Earnings per share EUR 4.27 +++ Book value per share +11.4 % +++ Return on equity 18.7 % +++ Proposed dividend EUR 1.60 +++ Very good earnings prospects for 2007 +++ hannover re R
Earnings per share (diluted) in EUR 4.27 0.41 2.32 3.24 2.75
Catastrophe/major losses as percentage of net premium earned2) 2.7% 26.3% 8.3% 1.5% 5.2%
Underwriting capacity for catastrophe risks With "K5", its highest-volume securitisation (USD 414 million) to date, Hannover Re raises underwriting capacity on the capital market. It is thus able to protect its capital and profitability against contraction and price inflation on the retrocession market.
Best reinsurer in the USA In a survey conducted by the Flaspöhler Research Group leading US brokerage firms rank Hannover Re first among all reinsurers operating on the North American market for the second time in a row.
Profitable sale of Praetorian By selling its US subsidiary Hannover Re profits from the above-average valuation ratios for specialised insurers of this type. The company thereby completes the final logical step in its restructuring of specialty business and will now stay focused on its core business of reinsurance.
Your company thus left stormy seas behind it and sailed back into calmer waters last year. Having shouldered the adverse effects of an enormous catastrophe loss burden in 2005, we were able to profit – as is by no means uncommon after such loss events – from increased rates and improved conditions.
and indeed stepping up our transfers of insurance risks to the capital market: having concluded "K5", our highest-volume risk securitisation to date, prior to the start of the year under review, we issued our first-ever traditional catastrophe bond to protect against European windstorm events in July.
I am also thoroughly satisfied with the development of life and health reinsurance. The significance of this business group is unfortunately often underestimated in comparison to property and casualty reinsurance. Yet in our eyes life and health reinsurance is a rising star. Why is this? It is our second-most important business group, and we are generating organic growth with highly gratifying double-digit rates of increase. In the international arena the pace of growth in life and health insurance has been sustained, creating a promising business platform for a reinsurer such as ourselves. The increasing size of the upper segment of the age pyramid in the developed industrialised nations continues to drive growth in annuity and health insurance. November 2006 brought especially good news for the future of our life and health reinsurance business group: the China Insurance Regulatory Commission awarded us a licence to establish a branch office for life and health reinsurance in the People's Republic of China. This opens up outstanding opportunities for our company to fully share in the impressive growth of the Chinese life insurance market.
The performance of our investments also gave grounds for satisfaction. The sustained strong inflow of cash more than made up for price effects associated with rising yields
on international bond markets and the curbing influence of the US dollar, enabling us to further boost the asset portfolios under own management. We took advantage of the favourable trend on equity markets to realise gains and make tactical adjustments to our positioning.
I am pleased to report that Standard & Poor's and A.M. Best, the rating agencies most relevant to our industry, confirmed their very good ratings for your company in the year under review. This is welcome and important news for us, since our clients attach ever-greater weight to the financial strength of their reinsurers. A first-class rating is more valuable today than it has ever been, especially for the writing of long-tail liability lines. This was underscored once again by the treaty renewals as at 1 January 2007: thanks to its excellent ratings Hannover Re profited particularly strongly from this trend.
The movement in our share price in the final weeks of the year under review was a source of special satisfaction for me. Following a rather disappointing first half-year, our share gained considerable ground and also left our internal benchmark, the weighted ABN Amro Rothschild Global Reinsurance Index, trailing clearly in its wake. The substantial potential for further price growth inherent in our share is borne out not least by what is still a low price/earnings ratio. I am confident that your company’s potential will be reflected in the share price even more impressively going forward.
Similarly, following the sale of Praetorian, we shall no longer be showing the primary business written in specialty insurance as a separate segment. Particularly in view of the minimal remaining volume and our focus on our core business of reinsurance, we have decided to allocate this business to property and casualty reinsurance as well.
On behalf of the entire Executive Board I would like to thank you, our valued shareholders, for your trust. I can assure you that my colleagues and I have done everything in our power to equip your company as well as possible to handle the opportunities and risks that lie ahead. Our goal, as always, is to consistently improve the value of Hannover Re. With this in mind I look forward to the challenges of 2007.
Herbert K. Haas 1) 2) Chairman of the Executive Board Burgwedel Talanx AG
Specialty Division (worldwide Facultative Business; worldwide Treaty and Facultative Business Marine, Aviation and Space); Property and Casualty Treaty
Controlling, Internal Auditing; Risk Management; Investor Relations, Public Relations; Corporate Development; Human Resources Management; Specialty Insurance
Coordination of entire Non-Life Reinsurance; Property and Casualty Treaty Reinsurance North America and
Hannover Re share is listed – climbed 28.6% to reach 9,400 points for the first time.
2006 was another very upbeat year on international capital markets, and hence the fourth good year in a row for Germany. This success was driven by brisk corporate profits and encouraging economic data at home and abroad that surpassed many expectations among capital market players. The German stock index (Dax) closed at 6,597 points on 29 December 2006, a gain of 22.0% on the year and a mere 3% short of its six-year high. German mid-caps again performed even better: the MDax – on which the highly favourable. This development was reflected in the sector's Prime Insurance Performance Index (CXPI; formerly referred to as the "CDax for insurance stocks"), which had put on 21.4% by year-end and thus delivered a similar performance to the DAX.
The Hannover Re share outperformed our benchmark, the ABN Amro Rothschild Global Reinsurance Index, in a three-year comparison 2 Ja nuary 29 Fe bru ary 2004 30 A pril 30 Ju ne 2004 30 A ugust 30 O cto ber 2 30 D ece mber 2 28 Fe bru ary 2005 30 A pril 30 Ju ne 2005 30 A ugust 30 O cto ber 2 30 D ece mber 2 28 Fe bru ary 2006 30 A pril 30 Ju ne 2006 30 A ugust 30 O cto ber 2 29 D ece mber 2
Amro Rothschild Global Reinsurance Index. This put on 13.5% in the year under review. With our overriding strategic principle of generating "above-average profitability" every year and being one of the three best reinsurers in the world, we are committed to the goal of sustained growth in our share price. Our strategic objective is to achieve an increase in the share price that surpasses the performance of our benchmark on a three-year moving average.
Our share again performed well in the year under review. It started 2006 with a price of EUR 29.93 from the end of the previous year, and closed at EUR 35.08 on 29 December – a marked gain of 17.2 percent. Our share even charted a new six-year high on 27 December when it touched EUR 35.14.
In light of our record result in 2006 the Executive Board and Supervisory Board will propose to the Annual General Meeting on 3 May 2007 that a dividend of EUR 1.60 be paid. This corresponds to 37.5% of Group net income.
We regularly meet with international capital market experts. In the year under review we had more than 2,000 contacts – by phone, e-mail or face-to-face – purely with the roughly 100 analysts and investors who communicate with us particularly frequently. We profiled our company at around 60 roadshows and investor conferences throughout the world. What is more, we hold telephone conferences with analysts, investors and the business press after the completion of each round of renewals, upon publication of our quarterly financial statements as well on special occasions.
Each year, in connection with the publication of our annual financial statements, we hold an analysts' conference on the same day in both Frankfurt/Main and London so as to personally inform capital market experts as quickly as possible about the company's results. An international seminar for investors and analysts, held annually on a rotating basis at our offices in Hannover and London, has been part of our standard repertoire since 2000. On 23 June 2006 we welcomed around 60 international financial analysts and investors to our International Investors' Day in London. We used this opportunity to provide background information on a range of topics, including "Risk management at Hannover Re", "Outlook for the 1 July renewal season in property and casualty reinsurance" and "Life/health reinsurance: The dynamic evolution of our global strategy".
("buy") to one ("sell"), the consensus for the year was 3.8 on average – a clear "overweight". At the outset of the new 2007 stock market year most analysts put the fair value of our share at about EUR 38.
The following companies hold direct or indirect capital participations that exceed 10% of the voting rights: Talanx AG, Riethorst 2, 30659 Hannover, holds 10.4% of the company's voting rights. 20.14% of the company's voting rights are held by HDI Verwaltungs-Service GmbH, Riethorst 2, 30659 Hannover. The proportion of voting rights held by Zweite HDI Beteiligungsgesellschaft mbH, Riethorst 2, 30659 Hannover, is 19.7%.
In addition, the retrocession covers in life and non-life business known as the "K" and "L" transactions contain standard market changeof -control clauses which in each case grant the other contracting party a right of termination if a significant change occurs in the ownership structure and participation ratios of the affected contracting party.
Number of shares as at 31 December 2006: 120,597,134 no-par-value registered shares
OUR STRATEGY in a nutshell 1. Profit target • Minimum return on equity of 750 basis points above the risk-free interest rate • Annual double-digit growth in the - operating profit (EBIT) - earnings per share - book value per share (triple 10 target)
2. Capital management • Capital resources geared to - our own risk modelling (for risk-based capital)
• Rating: S&P AA- and A.M. Best A • Allocation of capital to areas promising the highest returns 3. Share price • Performance target: outperform Global
1) Allowing for the 1:3 stock split in July 2002 2) Modified DVFA/GDV calculation method (including amortisation of goodwill) 3) Earnings per share according to US GAAP, diluted
In order to manage the Group with an orientation towards value, we sought a tool that would enable us, on the one hand, to measure accomplishment of these goals and, on the other, to break them down to the level of individual profit centres.
In property and casualty reinsurance we have many years of positive experience using a ratio based on underwriting years, namely "DB 5": level 5 of our contribution margin accounting method constitutes the clear profit after earning the discounted claims expenditure plus all external and internal costs, including the cost of capital. In life and health reinsurance we use the European Embedded Value (EEV). The two concepts together provide the basis for our central management tool: Intrinsic Value Creation (IVC).
At the level of our business groups we have specified our long-term goals as shown in the following table. It should, however, be noted that for our business groups – with the exception of life and health reinsurance – we only set targets for profit growth, not premium growth, on account of their cyclical nature (see table: Profit growth targets).
This cascading of the Group strategy is further underpinned by the system of Management by Objectives. Financial and non-financial targets are agreed with managers that dovetail with the strategic objectives. With effect from the year under review IVC has been a mandatory integral component of the objectives agreed with all managers in the market sections.
The adjusted operating profit (EBIT) consists principally of the reported Group net income after tax and the change in the balancing items for differences between present values and amounts stated in the balance sheet (one adjustment for property/casualty and one for life/ health reinsurance). In addition, the interest on
IVC – our key ratio hybrid capital, minority interest in profit and loss and extraordinary profits and losses are eliminated.
We consider the allocated capital to be the average shareholders' equity plus minority interests, the balancing item for the difference between present value and carrying amount from property/casualty reinsurance as well as the average hybrid capital. Capital is allocated to the profit centres according to the risk content of the business in question.
Growth in book value per share >– 10% 11.4% 3.0% 6.3% 11.4% 4.0%
In calculating the cost of capital, our assumption for the cost of shareholders' equity – based on a Capital Asset Pricing Model (CAPM) – is that the investor's opportunity costs are 350 basis points above the risk-free interest rate. Value is created in excess of this return. The definition of our targeted minimum return on equity as 750 basis points above "risk-free" thus already contains a not insignificant target value creation. The rate of return on the balancing item for present value is calculated at the cost of shareholders ' equity and on debt capital at the actually paid interest for hybrid capital. Weighted according to the composition of the allocated capital defined above, the weighted cost of capital applicable uniformly to all profit centres is calculated from these interest rates.
The economical allocation of shareholder's equity and the efficient use of hybrid capital and other equity substitutes ensure that we have the lowest weighted cost of capital in the industry
1) In 2003 and 2004 the present value components are based on the value of in-force business, since 2005 they have been based on the European Embedded Value (EEV).
Hannover Rückversicherung AG Succursale française pour la Réassurance Vie Paris, France
The Eurozone emerged as a driver of growth for the global economy in the year under review. The rise in output and growing domestic demand were key factors in offsetting negative effects from the USA and Japan. The upward revaluation of the euro against the US dollar and the yen also suggest that economic consolidation will be sustained.
Management report business development transaction has been completed – most likely in the second quarter of 2007 – we shall concentrate exclusively on our core business of reinsurance.
In compliance with IFRS 5 we are reporting the result of our subsidiary Praetorian Financial Group, Inc. in both the consolidated and segmental statement of income (after tax) in a separate line ("net income from discontinued operations"). In order to ensure comparability of the reported figures, those referring to the previous year were – to the extent required by IFRS – adjusted accordingly. For further explanation and additional information please see Section 5.2 of the Notes "Disposals and discontinued operations."
The gross premium income booked by the Hannover Re Group came in on a par with the previous year at EUR 9.3 billion (EUR 9.3 billion). At constant exchange rates growth of 0.3% would have been generated. The Group's retention contracted by a modest 2.9 percentage points to 76.3% (79.2%). Net premium decreased by 5.4% to EUR 7.1 billion (EUR 7.5 billion ).
The operating profit (EBIT) in the year under review was most gratifying; it was boosted to EUR 819.9 million (EUR 91.6 million). It should, however, be borne in mind that the comparable result for 2005 was heavily affected by the exceptional hurricane losses. Group net income in the year under review stood at an excellent EUR 514.4 million after EUR 49.3 million in the previous year. This corresponds to record earnings per share of EUR 4.27 (EUR 0.41).
We use retrocession, i.e. the passing on of portions of our covered risks to other reinsurers, as a risk optimisation tool. As at year-end the resulting reinsurance recoverables on unpaid claims stood at EUR 3.0 billion (EUR 4.7 billion). This represents a decrease of 35.7% relative to the previous year, attributable inter alia to the reduction of commodity business at our US subsidiary Clarendon. We nevertheless continue to attach considerable importance to the quality
In the year under review the state of the market was once again favourable: the renewal season as at 1 January 2006 already demonstrated that the "hard" market was holding up.
Rate hikes in property reinsurance had been prompted first and foremost by the exceptionally intense 2005 hurricane season. Increases of 100% and more were obtained under reinsurance programmes that had been affected by the hurricanes. In addition to the shortage of reinsurance capacity, another factor here was the updating of pricing and rating models – in light of the experience of the previous year's hurricane events – to include components that had previously been inadequately modelled or indeed entirely neglected. In the year under review this was particularly apparent in the 1 July renewals, the second-most important renewal date in the USA, after external model providers had also recalibrated their simulation models. Prices for catastrophe covers consequently rose again.
In the following section we discuss the development of the financial year on the basis of our four strategic business groups: property and casualty reinsurance, life and health reinsurance, financial reinsurance and specialty insurance. In addition, the segmental report provided in the annual financial statement shows the key balance sheet items and profit components broken down into each business group.
of our retrocessionaires: more than 95.8% of the companies with which we maintain such business relations have an investment grade rating of "BBB" or better from Standard & Poor's.
Rates on the retrocession market, through which reinsurers obtain protection covers for peak exposures, surged exceptionally vigorously, as a consequence of which risk transfers to the capital market took on even greater importance for reinsurers: in 2006 alone catastrophe ("CAT") bonds with a volume of around EUR 4 billion were issued worldwide.
Hannover Re, which has been a pioneer in this field since 1994, also increasingly supplemented traditional retrocessions with risk transfers to the capital market in the year under review as part of its risk management approach. Our largest-volume transaction to date – a capital substitute worth USD 414 million – was placed predominantly with institutional investors in North America. We thus secured additional underwriting capacity so as to be able to enjoy an appropriate share of the available market opportunities. The portfolio underlying the "K5" securitisation consists of non-proportional reinsurance treaties in the property catastrophe, aviation and marine (including offshore) lines.
In July of the year under review we issued a traditional catastrophe bond, the first time our
Credit/Surety company had used such an instrument: with a volume of USD 150 million the "Eurus" CAT bond covers windstorm events in seven European countries (Belgium, Denmark, Germany, France, the United Kingdom, Ireland and the Netherlands). In this way we obtained protection on the capital market against one of our peak exposures in natural catastrophe business while at the same time further improving the diversification of our risk management.
Thanks to this advantageous positioning, Hannover Re was able to profit from the attractive market conditions that opened up. Another factor here was an aspect of our treaty negotiations with clients known as "showing" and "signing ". What this means is that as an established and financially strong reinsurer with excellent ratings we are offered and awarded virtually the entire spectrum of reinsurance business. This is a clear competitive edge inasmuch as we are able to select the business that best lives up our profitability standards.
In view of the modest burden of catastrophe losses, the underwriting result surged sharply after the hurricane-impacted 2005 financial year to reach EUR 63.9 million (-EUR 500.5 million). Thanks to a strong underwriting cash flow, net investment income improved on the previous year by 27.2% to EUR 693.1 million (EUR 544.8 million). The operating profit (EBIT) in property and casualty reinsurance amounted to EUR 670.0 million (-EUR 28.3 million) in the year under review, while Group net income totalled EUR 382.3 million (EUR 4.3 million). Earnings per share reached a gratifying EUR 3.17 (EUR 0.04).
Major loss burden * 1997–2004: 5%, 2005: 6% and 2006: 8% of net earned premium in property and casualty reinsurance
As one of the leading reinsurers in Germany we succeeded in further expanding our position in the year under review. This was due not least to new customer relationships, which we were able to acquire despite continuing market consolidation. What is more, we increased our treaty shares under long-standing accounts, thereby boosting our overall market share. Particularly among mutual insurers we were able to enlarge our portfolio – an especially gratifying achievement in view of our already high market share.
Our subsidiary E+S Rück, which operates as a specialist reinsurer for the German market, is highly valued by its clients thanks primarily to its excellent financial standing and the continuity of its business relationships. E+S Rück continues to rank second in Germany, the secondlargest non-life reinsurance market in the world.
In addition to professional reinsurance protection, we offer the clients of E+S Rück a wideranging array of services: among other things, we assist our clients with product development (especially in the field of insurance offerings for senior citizens), portfolio analysis and innovative projects such as the "Pay as you drive" system. A feature of this system is permanent monitoring via a recording/transmission device installed in the vehicle that logs mileage and individual driving habits, thereby making it possible to calculate the premium according to the driver's behaviour behind the wheel. In concrete terms, this means that as a policyholder adopts progressively less risky driving habits, so his or her premium is reduced.
In the casualty sector Hannover Re profited from its very good rating. Rates were largely stable, with only a few segments seeing modest reductions – although these declines were somewhat more marked in professional indemnity and directors' and officers' (D&O) covers.
Owing to the enormous losses associated with the 2005 hurricanes, the international property catastrophe business written on the London Market showed particularly significant rate increases. Prices up to 150% higher were obtained due to the shortage of capacity. This development went hand-in-hand with appreciably improved conditions for reinsurers. As part of our strategic risk management we nevertheless scaled back our peak exposures. On the claims side, we did not incur any sizeable loss events in the year under review.
The London Market is also a prominent centre for the underwriting of marine and aviation risks; Hannover Re ranks among the market leaders here.
Due to the massive surplus capacity in aviation insurance rates softened again appreciably in comparison to the previous year. On the reinsurance side, however, the excess capacities are limited because ceding companies continue to attach considerable importance to their reinsurer 's financial standing. Against this backdrop the price erosion was moderate. We wrote our business selectively, i.e. guided strictly by profitability considerations, and we retained our leading position in aviation reinsurance despite reducing our market shares. We continued to improve the diversification of our portfolio, thereby further scaling back the dominant role played by fleet business. All in all, the performance of our aviation reinsurance portfolio was satisfactory.
In offshore and energy business Hannover Re achieved appreciable rate rises, although price increases were also obtained for the rest of the
Management report property and casualty reinsurance marine portfolio. As part of our risk management activities we restricted the limit of liability for windstorm-exposed programmes; it is often the case, for example, that reinstatements of liability after such losses are now excluded. We write the bulk of our business on a non-proportional basis and only accept proportional arrangements in segments that promise high margins.
With insured market losses of roughly EUR 6 to 8 billion each for hurricanes "Katrina" and "Rita" 2005 went down as by far the most costly year in the history of marine reinsurance; the year under review, by contrast, passed off quietly without any major losses.
Hannover Re is the second-largest provider of reinsurance coverage in France and the market leader for personal accident and builder's risk insurance. Overall, we do not pursue any specific growth targets here, preferring to ensure that terms and conditions are commensurate with the risks. In segments offering attractive conditions we extend our involvement. In builder's risk insurance, too, we vigorously grew our portfolio in the year under review; this strategy of consistent expansion is pursued as a long-term objective. The very good cooperation between our facultative and treaty reinsurance sections generated a good performance and increased premium volume, while at the same time cementing our position in the market.
No significant loss events were recorded in the year under review; not least due to the situation in motor insurance, our result for the French market nevertheless failed to live up to expectations in 2006.
A hallmark of the insurance market in the Benelux countries in the year under review was increased competition from foreign companies, especially in the Netherlands. The insurance industry here enjoyed healthy profits in recent years, leading to fierce competition and declining rates – especially in industrial property business and the motor line. Some insurers have already begun to implement the European Motor Liability Directive, which provides for an increase in the previous standard minimum insured limit of EUR 2.5 million to EUR 5.0 million for bodily injury per claim and EUR 1 million per person. In Belgium our business progressed according to plan in both motor and, most notably, worker's compensation insurance.
In the Netherlands Hannover Re concentrates on clients among the ranks of mid-sized insurers and mutual insurance societies. Especially as far as this target group is concerned, our business is geared to long-term relationships. The year under review saw an increasing competitive struggle over property catastrophe covers due to the arrival of additional capacities from Bermuda. No major losses were incurred in this segment. Property business, on the other hand, incurred a sizeable number of claims, prompting a modest rise in the loss ratio. All in all, we were satisfied with the business development.
As in other markets, it has become increasingly important for a reinsurer in Italy to have an above-average rating, enabling Hannover Re to tap into additional business opportunities. We are the fourth-largest reinsurer in Italy.
Aside from a motor liability claim and a fire loss, with a resulting market loss in the lower double-digit million euros, Italy was spared major claims and natural disasters. Rates consequently came under appreciable pressure in some lines, including for example motor and industrial fire insurance. The premium volume contracted slightly in the year under review, although the result was once again thoroughly satisfactory.
Northern Europe Hannover Re is well positioned in the markets of Northern Europe; we are a leading partner for mutual insurers, an area where our business is geared to long-term relationships. The Danish and Norwegian markets experienced a construction boom in the year under review. In general terms, the insurance industry in this region generated good results. In Denmark, our largest market in Northern Europe, this triggered more intense competition in private business. On the reinsurance side rates came under modest pressure in all segments where programmes had been loss-free. Following the strain caused by winter storm "Erwin" in the previous year, natural catastrophe covers were spared any significant losses. The property lines recorded a higher claims frequency after two years of virtually no losses. We achieved good results in the motor segment, and
Management report property and casualty reinsurance personal accident business largely passed off without significant losses in the year under review.
The North American (re-)insurance market is the largest and most important single market for Hannover Re and indeed for all players worldwide. It accounts for 41.5% of our total premium volume.
Property catastrophe business developed particularly favourably for reinsurers. In the aftermath of the previous year's severe hurricane events this segment was notable for an imbalance between supply and demand. The marked capacity shortage and the updating of pricing and rating models to include hitherto neglected or inadequately reflected components led to substantial price hikes on the reinsurance side. Particularly in the July 2006 renewals – once the catastrophe modelling agencies had recalibrated their models –, Hannover Re obtained another appreciable increase in rates under programmes impacted by the hurricanes. Some of these rate rises even exceeded 100%. At the same time, as part of our strategic risk management, we scaled back our peak exposures – for example in coastal regions – and thereby significantly improved our risk profile: were another hurricane on the scale of "Katrina" to occur in 2007, the burden of losses for our company would be only half the size.
We maintain business relations with more than 500 companies in the United States. Our market penetration is already high; nevertheless, in view of the fact that the USA is currently home to around 1,100 insurance groups, there is still sufficient scope to selectively enlarge our market share. In cooperation with a number of brokerage firms we have therefore successfully undertaken marketing activities aimed at acquiring further new clients and extending our already very strong position.
Bearing in mind that the bulk of our worldwide marine and aviation portfolio is written on the London Market, the development of this business is discussed in the section on the United Kingdom (see pages 30 and 31).
Our US business is written almost exclusively through brokers. It was therefore all the more gratifying that for the second time in succession Hannover Re emerged as the best reinsurer overall in a survey conducted by the highly respected US Flaspöhler Research Group in the year under review. 366 experts from leading brokerage houses participated in the survey, evaluating 28 reinsurers active on the US market. This achievement takes on even greater significance in view of the fact that the bulk of North American reinsurance business is normally handled by brokers.
All in all, we can look back on a good financial year in North America that was notable for an exceptionally low loss burden. Market conditions were broadly attractive.
The South African insurance market was characterised by further appreciable softening tendencies in the year under review. With margins declining, profitability also deteriorated in motor insurance. Thanks to the sustained discipline of market players in 2006, the reinsurance market was not substantially affected by the downward cycle in the insurance sector and remained stable.
mentally, since on the African continent treaties are preferably placed together in bouquets.
Hannover Re Africa's loss ratio increased slightly owing to a number of sizeable claims. Our clear strategic positioning and disciplined underwriting policy nevertheless enabled us to generate a highly gratifying underwriting result in the year under review; overall, Hannover Re Africa enjoyed the best year in its history.
In personal accident insurance the market proved to be stable. We enlarged our premium volume in light of attractive business opportunities and wrote profitable business in virtually all programmes. What is more, due to changes in the regulatory framework we were able to begin writing private insurance business in the socalled Kyosai market (small mutual aid societies) in the year under review, thereby putting in place an additional pillar for the diversification of our business in Japan.
Our strategic objective throughout the entire region continues to be the expansion of our non-proportional portfolio. We are, however, also focused on writing profitable proportional business in lines with no correlation to natural catastrophe exposures. In this respect, the year under review offered us additional attractive opportunities. With the exception of the Surat flooding in India in August 2006, our account was spared any major losses. In India we grew our business against a backdrop of rising premiums. We achieved a very good result here despite the flood damage.
All in all, we were highly satisfied with our results in Asia.
Australia and New Zealand For fifteen years now Australia has been enjoying an economic boom. After years of a hard market, growth in the insurance sector was flat in the year under review against a backdrop of fierce local competition; in primary insurance this was especially true of the property lines and casualty business, most notably professional indemnity. On the reinsurance side, however, the price level largely held stable and premiums were still commensurate with the risks.
In this region too we concentrate first and foremost on non-proportional business and write only a very small number of proportional covers. Cyclone "Larry" was a catastrophe event that caused an estimated market loss of some AUD 500 million in the year under review. It nevertheless also had positive repercussions on the renewals as at 1 October 2006: price increases of up to 30% were obtained for the affected programmes – even though the cyclone only cost Hannover Re net loss expenditure in the singledigit million euro range. We were thus satisfied with our result on the Australian continent. The expansion of our activities in 2004 to include facultative business produced a sharp surge in premium for the year under review and ensured good market penetration, and Hannover Re has therefore further optimised its position in this market.
The 2006 financial year passed off very favourably for us. Life and health reinsurance (encompassing life, health, annuity and personal accident business) is driven by very similar demand factors in many markets around the world. Decisive here are, on the one hand, demographic influences – especially the significant rise in longevity – and, on the other, the growing imbalance between the actively employed and pensioners. In addition, the generally low level of interest rates is necessitating early efforts to accumulate savings for retirement.
This starting scenario tends to create a very advantageous climate for the products marketed by private life, health and annuity insurers – not least because in many markets tax incen-
With this withdrawal we have now terminated all four of the "L" series transactions placed in the years 1998 and 1999 ("L1" to "L4") and integrated the residual portfolios into our retention.
The "L6" transaction, which we placed on the capital market effective 31 December 2005 with a volume of EUR 100 million, developed according to plan in 2006. This securitisation consists of an in-force portfolio of unit-linked policies from Germany and Austria.
The life and health reinsurance business group within the Hannover Re Group is transacted by a network of seven reinsurance companies based in Hannover, Virginia Water/London, Dublin, Johannesburg, Orlando/Florida, and Sydney.
In this context the Hannover-based Hannover Life Re International performs a special steering function by handling the integrated risk management of the business group. It is supported
On the German life insurance market demand normalised in the year under review. In retrospect, German life insurers consider 2004 and 2005 to be exceptional years: following the tax-induced boom of 2004, 2005 proved – as anticipated – to be a difficult year for new business.
We generated enlarged premium volumes from a number of regions. In Europe, the United Kingdom (risk-oriented covers and enhanced annuities ) and France (bancassurance) emerged as particularly strong drivers of growth, whereas premium in Germany and Scandinavia was slightly lower owing to the expiry of sizeable life and disability portfolios that had been acquired in earlier years.
We enjoyed gratifying growth rates in South Africa, where we now rank among the market leaders for the reinsurance of individual life products.
Key figures for life and health reinsurance 1) On a US GAAP basis 2) Operating profit (EBIT)/net premium earned
The portfolio mix by individual lines continued to improve in accordance with our strategic planning; the proportion of the total assumed portfolio generated by our preferred lines of life and annuity stood at almost 87% (82%).
The performance of the life and health reinsurance business group is primarily determined by the following factors: • development of the biometric risks of mortality, morbidity and longevity,
In addition, on the level of individual cedant relationships – especially where financing transactions are involved –, it is important to monitor the development of the customer-specific credit risk.
The biometric risk of morbidity, which manifests itself in lines as different as health, longterm care annuity, critical illness and disability, is assumed primarily in the United States (in the form of Senior Health Medicare Supplement plans), Singapore (as long-term care annuities), the United Kingdom and South Africa (as critical illness covers), Germany (in the form of disability covers) and Australia (as critical illness covers and disability annuities). Results continued to be favourable overall, although margins were slimmer than in previous years due to more intense competition, especially in the USA and Australia.
The risk associated with the persistency of the in-force reinsured portfolios, which can be regarded as the dominant risk with respect to our financing transactions in Europe, the USA and South Africa, developed largely as expected in the year under review.
The cost and reporting structures in life and health reinsurance continue to be lean and efficient. With an expense ratio of 1.8% in relation to the gross written premium, we have the lowest figure among all comparable internationally operating reinsurers.
The credit risk associated with ceding companies did not materialise in the year under review; we are not aware of any instance in which the corporate rating of a client of Hannover Life Re significantly deteriorated or where the responsible supervisory authority was compelled to take
The consolidated operating profit (EBIT) in life and health reinsurance was again significantly boosted in 2006; at EUR 139.5 million it surpassed the previous year's figure by 49.8%. The
EBIT margin, calculated as a quotient of the operating profit (EBIT) and net premium earned, stood at 5.9%. It therefore exceeded the mediumterm target of 5.0% for the first time.
Group net income came in at EUR 102.6 million, an increase of 72.2% over the previous year (EUR 59.6 million). This was equivalent to earnings of 0.85 EUR (0.49 EUR) per share.
In 2006 the German life insurance industry returned to the modest long-term growth track seen in the early years of this decade, with the dual pillars of private and occupational annuity insurance with regular premium payments gaining considerable market shares – especially the so-called "Riester-Rente" pension product. Nevertheless, another pension product qualifying for tax assistance on inception of the policy – the "Rürup-Rente" – also showed appreciable growth. In comparison to earlier years, the appeal of single-premium business and traditional mixed life insurance products has diminished.
In the primary insurance sector our clients' resources are being taxed primarily by the new EU Mediation Directive as well as the changeover to the new actuarial interest rate of 2.25% per annum effective 1 January 2007.
E+S Rück, which bears responsibility for the German market within the Hannover Re Group, acquired inter alia a new account from the German bancassurance market in the year under review. The number of German cedants thus rose to 38 companies (26 life insurers, 5 personal accident insurers, 4 pension funds and 3 health insurers ).
Premium income from the German market climbed by a gratifying 4.3% to EUR 447.3 million. The underwriting result was notable for a very good experience with the biometric risks. Under a personal accident financing transaction we did, however, see a deterioration in the lapse rate, which we neutralised in the fourth quarter of 2006 via an appropriate adjustment recognised in income.
Hannover Life Re Ireland concentrates on a few key special accounts and continues to support its UK affiliate with quota share accept-
Total gross written premium in the United Kingdom climbed by 28.3% to EUR 686.9 million (EUR 535.4 million); of this amount, 27% was attributable to Hannover Life Re UK, 26% to Hannover Re and the remaining 47% to Hannover Life Re Ireland. For the first time, therefore, the United Kingdom is Hannover Life Re's largest worldwide market – ahead of the USA, Germany, Australia and France.
Staffed by a small expert team, it can respond flexibly to our clients' needs and offer solution models that either involve a full risk transfer or are booked as so-called deposit accounting contracts.
Results were influenced by two special effects, namely the commutation of an earlier large contract with a North American cedant and the establishment of an additional reserve for persistency risks from the United Kingdom associated with the amendment of tax arrangements for term life policies in occupational retirement provision (pension fund "A-Day" in May 2006). On balance this gave rise to extraordinary income of EUR 32.5 million in the year under review.
France, Italy, Spain and Arab countries Our life branch in Paris and the service offices in Milan and Madrid serve cedants in a sizeable European market zone encompassing France, Spain, Portugal, Italy, Malta, the countries of the former Yugoslavia, Albania and Greece. In addition, the Paris branch services accounts in the Near East, Maghreb and French-speaking Canada.
The premium volume fell by 10% compared to the previous year and totalled EUR 83.6 million. Profitability nevertheless continued to be satisfactory.
The US market, the largest life reinsurance market in the world, is served by our Orlando/Florida -based subsidiary Hannover Life Re America with the support of an underwriting office for group risks on Long Island/New York.
We continue to concentrate on non-traditional areas of the market, including block assumption transactions, Medicare Supplement business and facultative risks from Latin America.
Competition in the Medicare Supplement market has intensified sharply in the past year and a half as a consequence of the favourable results booked over the last four years. We noticed appreciable pressure on profitability in some parts of our portfolio.
In the spring of the year under review we supported the market launch of a new life insurer in South Africa which relies entirely on direct customer canvassing over the Internet or by telephone. The experience to date with this distribution model, which is backed by customised underwriting software that we developed inhouse, has comfortably exceeded expectations in both qualitative and quantitative terms.
Net income after tax fell by EUR 0.3 million to EUR 2.1 million.
Gross premium income surged by a vigorous 51.4% to EUR 103.6 million in the year under review. Growth is currently driven first and foremost by the markets of China and Korea.
Results in all markets can be described as good to very good.
In November 2006, as already mentioned, we received a licence from the China Insurance Regulatory Commission to establish a life office in China. This gives us excellent prospects of being able to tap into the impressive growth of the Chinese life insurance market to the fullest extent.
The gross premium volume enjoyed strong growth of 11.7% to reach EUR 302.7 million. Net premium earned climbed by 13.7% to EUR 188.8 million.
Profitability varied: results in the life and critical illness lines were very favourable, but higher inflation in Australia necessitated an adjustment of the reserves for current disability annuities with a corresponding strain on the result.
The difference between financial reinsurance and traditional property/casualty reinsurance principally rests in the nature of the individual client's reinsurance needs: whereas property and casualty reinsurance involves an unlimited risk transfer between insurer and reinsurer in the context of a single portfolio or various lines of business, financial reinsurance contains additional components alongside the risk transfer: the optimisation of the client's overall balance sheet situation with the aid of structured reinsurance products. Requirements such as these – which are usually of a highly specific nature – give rise to solutions that are specially tailored to the particular client.
When it comes to underwriting the risks, however, financial reinsurance uses the same actuarial models and contract constructions as those found in traditional property and casualty reinsurance. Following several years of uncertainty, the year under review brought positive news: a sharp fall-off in negative headlines ushered in increasing normalisation in demand for structured products in the United States. Yet there is still uncertainty among our clients and
The adoption of the EU's "Reinsurance Directive " must be assessed positively. European Union member states are now in the process of drawing up specific regulations and definitions governing financial reinsurance business. As a result, we are seeing a resurgence in acceptance of our products among our European clients.
The debate surrounding convergence of different accounting standards continues to move forward at a brisk pace and will likely affect some cedants' results in the future. We see here an opportunity for structured covers to become established across accounting borders.
Following the contraction in premium volume in recent years, signs of growing interest in structured covers could be discerned in the year under review. All three main products, namely surplus relief, aggregate excess of loss and spread loss contracts, were in demand.
We are one of the world's three largest providers of traditional structured reinsurance products. The brand name Hannover Re Advanced Solutions underscores our expertise in developing individually tailored customer solutions. Based on our considerable experience, technical expertise and not least our proven financial track record, we enjoy numerous long-term client relationships in the United States, by far our largest market. We work together with large and specialist brokerage houses, with whom we maintain similarly close relations. Most of our business contacts in the United Kingdom are with Lloyd's syndicates and London-based brokerage firms. The German market is served by our subsidiary E+S Rück.
Internal cooperation within our organisation across business groups enables us to calculate an adequate premium according to the risk content of the business. The Hannover Re Group's risk assessment tools are applied consistently by all underwriters in the financial reinsurance and property/casualty reinsurance business groups. This competitive edge opens up further market potential for our company.
In the year under review Hannover Re's activities in the specialty insurance business group were conducted principally through four subsidiaries: by far the largest share of the total portfolio was written by the New York-based Praetorian Financial Group, Inc. and Clarendon Insurance Group, Inc. We are also represented in the European market by the UK-based International Insurance Company of Hannover Ltd.
Rates on the American primary insurance market were stable in our preferred lines. Competition nevertheless intensified markedly for sizeable accounts, especially in casualty business. On the other hand, substantial rate increases were obtained in catastrophe-exposed property business, especially for hurricane-exposed risks on the US Gulf Coast and in southern states as well as earthquake risks in California. Particularly with regard to the latter, however, it should also be noted that prices for reinsurance covers were appreciably higher than in the previous year.
Earnings per share in EUR 0.34 (0.02) (0.75) 0.39 0.45 1) On a US GAAP basis 2) Thereof from discontinued operations: EUR 88.2 million 3) Thereof from discontinued operations: EUR 24.8 million
International Insurance Company of Hannover 227.0 million (EUR 279.5 million) and net income of EUR 1.5 million (EUR 4.1 million).
Praetorian generated gross premium income of EUR 1.6 billion before consolidation in the year under review – an increase of 164% on the previous year (EUR 0.6 billion). In view of the agreement reached in December 2006 regarding the sale of Praetorian, this company's business is referred to as "discontinued operations" in the Notes to this annual report. For further explanation please see item 5.2 of the Notes "Disposals and discontinued operations". Net premium grew also impressively owing to a further rise in the level of retained premium, climbing by 104.9% to EUR 417.2 million (EUR 203.6 million). The operating result (EBIT) reached EUR 106.1 million (EUR 30.5 million) thanks to an outstanding combined ratio of 78.6%.
Our South African subsidiary Compass again benefited from new business relationships in the year under review and extended its premium volume accordingly. Gross premium income climbed to EUR 57.1 million (EUR 45.0 million ), while the after-tax profit stood at EUR 1.1 million (EUR 1.1 million).
Aside from a brief but pronounced corrective phase from the middle of May to June, international equity markets enjoyed a consistent upward trend. The Dax put on 22.0% for the year, reaching its highest level of 6,611 points on 28 December 2006. The German bellwether index thus outperformed the DJ EuroStoxx 50 (+15.1%), the S&P 500 (+15.8%) and the Nikkei (+7.9%).
agement approach, as against losses of EUR 87.7 million. The positive balance of EUR 217.4 million thus came in higher than in the previous year (EUR 162.2 million). Net investment income consequently improved by 5.9% year-on-year to EUR 1,181.2 million (EUR 1,115.8 million).
Our portfolio of fixed-income securities as at 31 December 2006 was virtually unchanged at EUR 15.7 billion, a rise of 0.4%. The increase in yields in Euroland led to the realisation of losses in the bond portfolio totalling EUR 24.1 million (EUR 44.2 million) on balance. In view of the low interest rate level and the minimal yield advantages of corporate bonds over government bonds we attached special importance to high quality in the year under review. Our holdings of corporate bonds were consequently not significantly expanded. Our preferred asset classes in Europe were debt securities issued by semi-governmental entities and jumbo mortgage bonds.
New investments were made primarily in short- or medium-duration instruments. Unrealised losses in our portfolio of fixed-income securities totalled EUR 133.1 million, compared to gains of EUR 56.2 million in the previous year.
In light of the favourable trend on stock markets we again realised increased gains on equities. The equity allocation increased slightly
Management report human resources to around 8% (6%), while in absolute terms the equity portfolio grew to EUR 1,596.3 million (EUR 1,213.3 million). New equity investments were made predominantly in index-tracking instruments from the Eurozone. By using targeted option strategies we exploited market volatilities in order to optimise our portfolio.
Within our real estate portfolio altogether eight buildings and undeveloped sites belonging to Hannover Re and E+S Rückversicherung AG worth EUR 110.5 million were sold effective 31 August 2006, thereby realising net gains of EUR
In addition, shares held by our subsidiary Hannover Re Real Estate Holding Ltd. in US real estate companies based in Washington, D.C. and Jacksonville were sold on 13 July and 22 December respectively for a total price of USD 115.3 million. Profits of USD 43.3 million were realised. These transactions were effected in order to profit from the attractive conditions currently prevailing on the real estate market. Hannover Re will continue to invest in real estate in the future; in the current year we shall begin to assemble an international portfolio.
More than half the workforce at our Home Office in Hannover can draw on a rich store of professional experience based on their age. The average length of service of nine years in combination with an average age of 39.4 indicates that new recruits regularly join our company shortly after completing their university studies.
Hannover Re energetically maintains a tightly knit network of contacts with German universities. Our focus is directed firstly towards local (technical) universities, such as the Leibniz University of Hannover, the University of Lüneberg and Hannover University of Applied Sciences, and secondly at prominent institutions of higher learning nationwide, such as Cologne University of Applied Sciences. A lively dialogue between scientific theory and business practice takes place within the scope of these contacts, first and foremost in the form of joint events held on campus or at our offices. In addition, Hannover Re contributes to a chair for insurance and financial mathematics at the Leibniz University of Hannover.
In the year under review we participated in nine recruitment fairs: in addition to "Campus Chances" in Cologne, Hamburg, Mannheim and
Münster, we again attended "Career Dates" in Hannover. Not only that, Hannover Re participated in an industry-specific workshop entitled "Financial Services & Risk Management", the Congress of Business Mathematicians in Ulm, the "Praxisbörse" in Göttingen and the Graduates Congress in Cologne.
< 20 ye ars 20–29 ye ars 30–39 ye ars 40–49 ye ars 50–59 ye ars >–
equity of 750 basis points above the risk-free interest rate (moving five-year average on 10year government bonds). This was applied for the first time in the year under review and generated additional performance-based compensation due to the favourable development of business.
For information concerning the compensation received by members of the Executive Board and Supervisory Board and their shareholdings please see the remuneration report provided as part of our Corporate Governance report.
Discussions with staff and the Employee Council ultimately led to the adoption of a new calculation base, namely the minimum return on
Word of thanks to our staff times. We would also like to express our appreciation to the representatives of staff and senior management for their critical yet always constructive cooperation.
Sustainability and social responsibility are in no way at odds with our strategic objective of being one of the best, i.e. most profitable, reinsurers in the world. On the contrary, successful business management establishes the basis for playing a positive role in society, consistently fos-
Sustainability report tering and advancing staff and supporting projects that are in the public interest.
The responsible underwriting of risks and diligent risk management are vital preconditions for safeguarding the quality of our business over the long term and for preserving and multiplying the value of our company. Based on the sustainability of its actions since its establishment in 1966, Hannover Re has never had to report a deficit, i.e. it has never lost capital. Our goal is to continue to act with this level of responsibility.
In addition, we support young musicians at Hannover University of Music and Drama. In cooperation with the university E+S Rück organises so-called "examination concerts". Three or four of the university's "master students" perform at
Social commitment these concerts each year accompanied by a large orchestra and are thereby able to satisfy the requirements for embarking on a career as a soloist. Were it not for the involvement of E+S Rück these advanced students would face a long wait until their final examination, since opportunities for them to play with a large orchestra are few and far between. At the same time E+S Rück is able to offer its clients a musical highlight as part of the "Hannover Forum" seminar event.
The reinsurance of catastrophe risks is part of our core business; a constant knowledge transfer between business and research that enables our company to apply the very latest insights is indispensable. With this in mind Hannover Re supports the highly respected Geo Research Center in Potsdam. The institute conducts systematic research into earthquakes and their early identification. We also seek to maintain an ongoing dialogue with universities. Our own experts are welcome speakers at conferences and institutions of higher learning.
Performance Excellence (PE) is a forwardlooking, holistic management system for the entire Hannover Re Group, with the aid of which we seek to sustainably increase the value of our company. It takes its lead from the "Excellence Model" of the European Foundation for Quality Management (EFQM) and is based on the evaluation and enhancement of methods, practices and procedures used, supported by external expert assessments. This comprehensive approach encompasses inter alia concepts such as the Balanced Scorecard, Customer Relationship Management, Leadership Feedback and Management by Objectives (MbO).
By way of this holistic management system, we strive to continuously improve our steering tools of leadership, policy and strategy, people as well as resources and process management. In so doing, our goal is to achieve optimal results in terms of customer and employee satisfaction as well as business performance.
Hannover Re's headquarters demonstrated its sophisticated quality management by delivering a superb result in the first external IBEC
By means of company-wide guidelines, including for example our business principles, we have defined standards that are valid for all employees worldwide. They are intended to help our staff successfully cope with the often complex ethical and legal challenges facing them in their
Management report risk report bility. A family-friendly approach is also reflected in the assistance offered for childcare and in jobsharing opportunities. Furthermore, active steps are taken to promote healthy living, ranging from company sports to the availability of a mobile massage service and flu shots.
• The up-to-date status of our risk portfolio is ensured by defined reporting procedures and an annual risk inventory.
• The systems are constantly reviewed in light of efficiency considerations and they are ad-
Risk Committee charged with bringing transparency to the entire risk situation
Management report risk report justed in line with the prevailing business environment.
Global Risks We take global risks to mean external risks that are beyond our direct sphere of influence. Global risks derive, inter alia, from changes in legislation and court practice, political developments and social changes, liability issues, natural disasters and environmental changes. Such sources of risk can scarcely be reduced and there are limits to the extent to which they can be avoided. Our risk management activities are therefore geared to early detection. We counter these potential risks, inter alia, by means of the following measures: • monitoring of claims trends as well as analyses of claims and catastrophe losses (e.g. analysis of the frequency and extent of losses associated with natural disasters due to climate changes),
– regulatory requirements (e.g. Minimum Requirements for Risk Management [MaRisk], Solvency II),
Risk Committee: The members are the Chairman of the Executive Board, the Chief Financial Officer, the member of the Board responsible for life reinsurance, the member of the Board responsible for coordinating non-life reinsurance, the Central Divisional Manager Controlling and the Chief Risk Officer. Group Risk Management: attends – under the leadership of the Chief Risk Officer – to aggregate control, natural catastrophe modelling, actuarial claims analysis and dynamic financial analysis (DFA) and deals with operational risks and reporting. Business groups: Up to and including the year under review Hannover Re's business groups were as follows: property and casualty reinsurance, life and health reinsurance, financial reinsurance, specialty insurance and – from the risk management perspective – investments.
se d en te rp ris e m an ag em en t
Technical operating risks The technical risk is primarily associated with the fact that cash flows which are essential for (re-)insurance business may diverge from their expected values. These risks can be subdivided into risks of random fluctuation, risks of error and risks of change.
The default risk on reinsurance recoverables is of relevance to our company because we do not always fully retain the business that we accept, but instead retrocede portions where necessary (e.g. peak exposures). The credit status of our retrocessionaires is therefore a criterion that assumes paramount importance in the selection process. As a further risk reduction measure, our receivables from reinsurance business are to some extent secured by deposits or letters of credit. What is more, in the case of most of our retrocessionaires we also have the possibility of offsetting against our own liabilities.
Property and casualty reinsurance In property and casualty reinsurance the main methods used to reduce risks are as follows: • Our loss reserves are determined on an actuarial basis. The point of departure for our calculations is the information provided by cedants, where necessary supplemented by additional reserves that may seem appropriate on the basis of our own loss estimations. Furthermore, we constitute an IBNR (incurred but not reported ) reserve for losses that have probably already occurred but have not yet been reported to us. This applies primarily to claims in the liability lines. The adequacy of our own actuarial calculations is subject to annual quality assurance reviews conducted by external actuaries and auditors.
• We pass on portions of our risks using traditional retrocession tools, on the one hand, and through transfers to the capital market, on the other. Both measures support diversification within the total portfolio and promote risk reduction with the goal of protecting our capital against peak exposures, such as those associated with natural disasters. In the year under review we not only completed our "K5" transaction but also placed a conventional catastrophe bond, the first time that we had used such a tool. The bond, which has a volume of USD 150 million, was placed with institutional investors from Europe and North America. It covers windstorm events in seven European countries for a period of roughly three years.
• In order to assess the risks posed by natural hazards the Hannover Re Group uses simulation models that were adjusted following the events of 2004 and 2005 in the USA. They now incorporate the latest expert insights of leading climatologists into possible changes in the frequency and intensity of such events due to climate changes. In addition, the natural hazards specialists within the Hannover Re Group continuously monitor the findings of all available scientific research with an eye to possible changes in the risk situation. In various segments we also determine additional safety loadings that are added to the output of the simulation models in order to adjust our calculation base to adequately reflect the risks.
Breakdown of technical operating risks into risks of random fluctuation, risks of error and risks of change
• We review the risk feasibility of new business activities and of the assumed international portfolio on the basis of a series of regularly performed, holistic analyses.
• New business is written in all regions in compliance with internationally applicable Global Underwriting Guidelines, which set out detailed rules governing the type, quality, level and origin of risks. These global guidelines are revised every two years and approved by the full Executive Board of the Hannover Re Group. They are supplemented by country-specific "Special Underwriting Guidelines" that cater to the special features of individual markets. Regular audits verify compliance with these guidelines.
• Further quality assurance measures are carried out at the level of the subsidiaries in the context of the actuarial reports and documentation required by local regulators as part of Corporate Governance.
Financial reinsurance Hannover Re's financial reinsurance business involves the development of individually structured covers for our clients with a view to stabilising their results and affording balance sheet protection. The primary emphasis here is on financial optimisation rather than a traditional risk transfer. Financial reinsurance as a whole acquired a bad name because some companies were accused of using it to "dress up" their books. Demand for financial reinsurance products crumbled – especially in the USA – as a consequence of this uncertainty and the protracted discussions surrounding the business practices of certain companies. In the year under view, however,
Management report risk report we are pleased to report that business once again developed according to plan. We have transacted financial reinsurance for more than 25 years and over time we have continuously enhanced our underwriting guidelines and specified them more closely in light of our experience. A specially created Compliance Committee monitors compliance with legal, accounting and underwriting standards and responds to official inquiries, among other tasks. In our assessment, our underwriting guidelines ensure that any potential instances of abuse can be prevented. The closing of contracts after a loss occurrence, backdating of transactions, informal understandings not documented in the contract and the booking of business with no risk transfer as reinsurance are all practices that are prohibited under our underwriting guidelines.
Investment operating risks Since investment income is a major revenue source for a reinsurance enterprise, volatility on the capital markets can have serious repercussions for the statement of income. Risks in the investment sector primarily consist of market, credit and liquidity risks as well as currency exposures. The hallmarks of our risk strategy with respect to the investment portfolio are as follows: • Risk limitation in the investment sector takes precedence over return maximisation. The goal is to generate an optimal contribution margin while adhering to defined maximum risk limits.
• Clear distinction between trading, settlement and risk control based on the principle of separation of functions applied through to the level of management.
Hannover Re's internal control system is a vital management tool for minimising operational risks. The system consists of organisational measures and checks that have been integrated into all key processes and workflows.
Irrespective of these fixed procedures, the application and effectiveness of the internal control system is reviewed by our Internal Audit unit on a company-wide and line-independent basis in all functional areas of the Group.
Based on our currently available insights arrived at from a holistic analysis of the risk situation, we cannot discern any risks that could jeopardise the continued existence of our company in the short or medium term or have a significant, lasting effect on our assets, financial position or net income.
Further information on our risk management system, and in particular quantitative data on individual risks, is provided in Section 6 of the Notes, "Management of technical and financial risks."
The upturn in the industrialised nations, which had already lost impetus in the course of the year under review, is likely to slow still further in the current year. Monetary policy is expected to be neutral or modestly expansionary.
Japan should enjoy a more robust rise in output and stronger domestic demand in 2007.
We were broadly satisfied with the renewals as at 1 January – the date when around twothirds of our treaties are renegotiated. Although the hard market has now peaked and ceding companies are increasingly running higher retentions thanks to improved capital resources, the rate level remained largely stable with only a few exceptions. In areas that did see significant rate reductions (e.g. in aviation business), they generally retreated on what were still rather high price levels. In other areas, such as catastropheexposed US property business, further sharp increases were obtained as anticipated. It is gratifying to report that underwriting discipline also held firm among our competitors, and we were therefore again able to achieve prices and conditions that were commensurate with the risks.
The effects of the market softening that has begun to set in will not be reflected in our results before 2008/2009.
Non-life reinsurance write the business. Hannover Re, with its very good ratings of "AA-" from Standard & Poor's and "A" from A.M. Best, is one of the few reinsurers to satisfy this condition without reservation; these favourable assessments of our financial strength have consequently put us in a position to profit disproportionately strongly from the attractive market climate.
Significant price erosion is the hallmark of aviation (re-)insurance; after years of healthy profits, current market conditions are no longer attractive in some areas. We shall reduce our proportional acceptances and further diversify our non-proportional portfolio.
Credit and surety reinsurance is again faring well in the current financial year, although pressure on rates and conditions has intensified owing to the very good results posted so far. We were thoroughly satisfied with the outcome of the treaty renewals as at 1 January 2007, when around 85% of our portfolio was renewed. We were able to acquire new accounts and increase our shares under existing relationships, thereby offsetting some of the premium erosion. All in all, we expanded our position while maintaining a good level of profitability.
After a good year under review in facultative property and liability reinsurance, the renewal season – in which some 65% of the portfolio was renegotiated – also passed off very well. The decline in original rates has been felt more strongly here than in obligatory business. The broad geographical spread and large number of lines written will nevertheless enable us not only to make up for a large part of the contraction in premium volume but also to write profitable business.
In the Northern European markets we expect a continued positive trend, although the markets have softened overall. Rates for natural catastrophe covers also declined due to the absence of windstorm events in the year under review. In the Netherlands the total reinsurance volume contracted as ceding companies raised their retentions. In France we see further attractive business opportunities in builder's risk insurance, a line that we consequently intend to expand over the long term. Price increases were obtained in motor liability insurance.
Intense competition continues to prevail in the countries of Central and Eastern Europe, and rates therefore retreated in view of the capacity surplus. Nevertheless, it is our expectation that we will be able to modestly grow our premium volume in Russia and the countries of the former Soviet Union.
Following significant rate increases in property insurance last year in North America as a consequence of the severe hurricane losses, the market proved to be generally robust during the treaty renewals as at 1 January 2007. Despite the moderate hurricane losses incurred in the USA in 2006, the local market continued to develop favourably in view of the intense hurricane seasons of 2004 and especially 2005. Although rates in catastrophe-exposed property business fell somewhat short of the mid-year renewal date as at 1 July 2006, they were still highly gratifying and around 35% higher than the previous year's level. In light of the increase in natural disasters and the progressive concentration of values, these price increases are also likely to be sustained. Rates slipped back for programmes with no catastrophe exposure. We therefore stood by our strategy of requiring simultaneous cessions of other attractive business when writing catastrophe covers. We also keep an eye on special segments in which rate movements are less volatile. We pressed ahead with our policy of reorganising our portfolio in favour of more profitable non-proportional business at the expense of proportional arrangements. The capacity shortages that could still be observed
In North American casualty business rates held stable in some segments, while slight price erosion made itself felt in other lines. In longtail casualty business it was, however, possible to obtain price increases. A very good rating – something which few reinsurers can offer – is of considerable importance here. Hannover Re consequently enjoys a competitive edge. We have noted that insurers prefer to carry higher retentions than buy reinsurance protection from providers who do not have a first-class rating. All in all, we were satisfied with the treaty renewals in our largest and most important market.
Following the sale of Praetorian Financial Group, Inc., our company's US primary insurance subsidiary transacting specialty lines – the deal is expected to be completed in the second quarter of 2007 –, Hannover Re will concentrate exclusively on its core business of reinsurance. Sufficient scope for profitable growth is available to us here – including for example the continuing opportunities in US catastrophe business, in life reinsurance and in Germany as well as through the cultivation of new markets in Central and Eastern Europe and in Sharia-compliant reinsurance.
From 2007 onwards we shall limit our segmentation to two strategic business groups, namely "non-life reinsurance" and "life and health reinsurance". Non-life reinsurance will include not only property and casualty lines, but also financial reinsurance and specialty business. Against this backdrop the premium volume in this enlarged business group is expected to come in substantially higher.
The Group's premium income from primary insurance – what used to be its specialty insurance business – will be substantially reduced following the sale of Praetorian. The remaining volume is generated by the subsidiaries Clarendon Insurance Group, Inc. in the USA, Inter Hannover in the United Kingdom and Compass in South Africa. Clarendon will continue to scale back the existing commodity business in the current financial year. Owing to the increased costs of protection cover incurred in the period until June for residual natural catastrophe risks, we expect this part of the Group to post a result in negative territory.
With our five-pillar model, encompassing – along with traditional life and health business – new business financing, the development of new markets and products, the bancassurance sector and partnerships with large multinational clients – we are well placed to share in the development of major life and annuity markets.
One area of concentration for our activities in 2007/2008 will be the expansion of our infrastructure in Asia – with a focus on the Chinesespeaking economic region (inter alia through the establishment of our life branch in China). In Australia we are looking to consolidate our role as the market's leading life reinsurer.
Bearing in mind the favourable market conditions and further optimisation of our risk management, we are looking forward to another good financial year in 2007: as things currently stand, we expect to generate a return on equity of at least 15%. This is subject to the premise that the burden of catastrophe losses does not significantly exceed the expected level and that there are no unforeseen adverse movements on capital markets. As for the dividend distribution, the company remains committed in this scenario to a payout ratio in the range of 35 to 40%.
The expected positive underwriting cash flow should lead to further growth in our assets. Given a normal market environment, income from investments under own management is therefore likely to rise again. In the area of fixedincome securities we continue to stress the high quality of our portfolio. Combined with our other investments in equities and alternative asset categories, we should be able to generate a stable profit contribution.
On the Group level our return-on-equity target is at least 750 basis points above the riskfree interest rate.
Both the earnings per share and the book value per share also constitute central management ratios and performance indicators for our company: our strategic objective is to increase these key figures – together with the operating profit (EBIT) – by at least 10% every year (Triple
Equity securities – at fair value through profit or loss 10,207 –
Earnings per share in EUR 7.12 4.27 0.41 from continuing operations in EUR 3.56 0.24 from discontinued operation in EUR 0.71 0.17
Income and expense directly recognised in equity 144,522 16,826 (37) 5,787 10,682 177,780
Tax effects on income and expense directly recognised in equity (38,179) 18,176 52 – (1,604) (21,555)
Income and expense directly recognised in equity (149,322) (119,080) 74 (1) (25,829) (294,158)
At fair value through profit or loss 101,500 52,564 36,116 34,338
From insurance business with external third parties and from discontinued operation 4,573,486 4,528,531 2,793,626 2,406,764
The parent company Hannover Rückversicherung AG ("Hannover Re") and its subsidiaries (collectively referred to as the "Hannover Re Group") transact all lines of property/casualty, life/health and financial reinsurance as well as specialty insurance. The Group maintains business relations with more than 5,000 insurance companies in about 150 countries. With gross premium of approximately EUR 9 billion, Hannover Re is one of the largest reinsurance groups in the world. The company's global network consists of more than 100 subsidiaries, affiliates, branches and representative offices in 20 countries. The Group's German business is conducted exclusively by the subsidiary E+S Rück. We employ over 800 staff in Hannover and roughly 2,000 worldwide. The parent company is a joint-stock corporation, the registered office of which is located at Karl-Wiechert-Allee 50, 30625 Hannover, Germany.
Hannover Re is obliged to prepare a consolidated financial statement and group management report in accordance with § 290 German Commercial Code (HGB). Furthermore, HDI is required by §§ 341 i et seq. German Commercial Code (HGB) to prepare consolidated annual accounts that include the annual financial statements of Hannover Re and its subsidiaries. Under § 291 Para. 3 No. 1 German Commercial Code (HGB), the consolidated annual accounts of the parent company do not release Hannover Re from its obligation to compile a consolidated financial statement.
The consolidated financial statement reflects all IFRS in force as at 31 December 2006 as well as all interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), application of which was mandatory for the 2006 financial year.
The present consolidated financial statement was examined by the Supervisory Board, adopted at the meeting of the Supervisory Board held on 13 March 2007 and hence released for publication.
IFRIC 8 "Scope of IFRS 2" clarifies the scope of IFRS 2 "Share-based Payment", which is also applicable to transactions where an entity receives goods or services in consideration for share-based payment. IFRIC 8 explains that IFRS 2 applies even if the entity cannot specifically identify some or all of the goods or services received. IFRIC 8 is mandatory for financial years beginning on or after 1 May 2006. The Interpretation had no implications for the consolidated financial statement. For further details we would refer the reader to Section 8.3 "Share-based payment."
The IASB has issued the following standards, interpretations and amendments to existing standards with possible implications for the consolidated financial statement of Hannover Re, application
In August 2005 the IASB published IFRS 7 "Financial Instruments: Disclosures", which combines the disclosures on financial instruments previously contained in IAS 30 "Disclosures in the Financial Statements of Banks and Similar Financial Institutions" and IAS 32 "Financial Instruments: Disclosure and Presentation". In this connection certain disclosure requirements were modified or extended. IFRS 7 is mandatory for financial years beginning on or after 1 January 2007. Hannover Re is currently studying the implications of the standard for the consolidated financial statement.
Directly held minority shares in partnerships whose members have a right to redeem their interests are classified as debt (financial liabilities) by IAS 32. Such shares must be measured at the fair value of the redemption amount as at the balance sheet date.
Permanent impairments on all fixed-income and variable-yield securities are recognised directly in the statement of income. In addition, IAS 39.61 (rev. 2003) states that in the case of securities with the character of equity a significant or prolonged decrease in fair value below acquisition cost constitutes objective evidence of impairment. Hannover Re considers securities to be impaired under IAS 39 if their fair value falls significantly, i.e. by at least 20%, or for a prolonged period, i.e. at least nine months,
Benefit reserves are comprised of the underwriting reserves for guaranteed claims of ceding companies in life and health reinsurance. Benefit reserves are determined using actuarial methods on the basis of the present value of future payments to cedants less the present value of premium still payable by cedants. The calculation includes assumptions relating to mortality, disability, lapse rates and the future interest rate development. The actuarial bases used in this context allow an adequate
In the consolidated financial statement it is to some extent necessary to make estimates and assumptions which affect the assets and liabilities shown in the balance sheet, the information on contingent claims and liabilities as at the balance sheet date and the disclosure of income and expenses during the reporting period. Key facts and circumstances subject to such assumptions and estimates
Notes accounting policies include, for example, the recoverability of contingent reinsurance liabilities, the recoverability of investments in associated companies, the valuation of derivative financial instruments as well as assets and liabilities relating to employee benefits. The actual amounts may diverge from the estimated amounts.
The projections, which cover various model scenarios ("conservative assumptions" versus "best estimate"), constitute the starting point for numerous areas of application encompassing quotation, the determination of carrying values and embedded values as well as contract-specific analyses, e.g. regarding the appropriateness of the recognised reinsurance liabilities ("liability adequacy test"). In this context we would refer the reader to our comments on technical assets and reserves in Section 3.2 "Summary of major accounting policies" and on the "liability adequacy test" in Section 7.2 "Technical assets and liabilities."
In determining the carrying values for certain financial assets it is sometimes necessary to make assumptions in order to calculate fair values. In this regard we would refer the reader to our remarks in Section 3.2 "Summary of major accounting policies" concerning financial assets at fair value through profit or loss and securities held as available for sale. Assumptions concerning the appropriate applicability criteria are necessary when determining the need for impairments on non-monetary financial assets held as available for sale. In this regard we would again refer the reader to our explanatory remarks in Section 3.2 "Summary of major accounting policies."
In conformity with Item 7.1.4 of the recommendations of the German Corporate Governance Code as amended on 12 June 2006, the following table also lists major participations in unconsolidated third companies.
Hannover Euro Private Equity Partners IV GmbH & Co. KG, Hannover/Germany1) 57.3 EUR 8,942 (64)
Hannover Life Reassurance (UK) Ltd., Virginia Water/United Kingdom 100.0 GBP 37,939 5,888
Hannover Re Advanced Solutions Ltd., Dublin/Ireland 3) 100.0 EUR 31 –
International Insurance Company of Hannover Ltd., Bracknell/United Kingdom 100.0 GBP 79,009 (425)
Hannover Finance, Inc. compiles its own subgroup financial statement, including the following major companies in which it holds the following shares: Praetorian Financial Group, Inc.,
Hannover Re Real Estate Holdings, Inc. holds a subgroup including the following major companies in which it holds the following shares: Summit at Southpoint Corporation, Jacksonville/USA 5) 94.0 USD 12,999 5,707
Name and registered office of the company (Figures in currency units of 1,000)
Result for the last financial year 5115 Sedge Corporation, Chicago/USA 5) 94.0 USD 1,889 179
WRH Offshore High Yield Partners, L.P., Wilmington/USA 5) 86.7 USD 53,087 4,027
Notes consolidated companies interest or de facto controlling influence. The capital consolidation is based on the revaluation method. In the context of the "purchase accounting" method the acquisition costs of the parent company are netted with the proportionate shareholders' equity of the subsidiary at the time when it is 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 IFRS 3 "Business Combinations" are to be accounted for separately from goodwill, the difference between the revalued shareholders' equity of the subsidiary and the purchase price is recognised as goodwill. Under IFRS 3 scheduled amortisation is not taken on goodwill. Instead, unscheduled amortisation is taken where necessary on the basis of annual impairment tests. Immaterial and negative goodwill are recognised in the statement of income in the year of their occurrence.
Companies over which Hannover Re is able to exercise a significant influence ("associated companies ") are normally consolidated "at equity" with the proportion of the shareholders' equity attributable to the Group. A significant influence is presumed to exist if a company belonging to the Hannover Re Group directly or indirectly holds at least 20% – but no more than 50% – of the voting rights. Income from investments in associated companies is recognised separately in the consolidated statement of income.
Within the scope of the portfolio-linked securitisation of certain reinsurance risks under transactions concluded in the years 1993 to 1999, Hannover Re retroceded business on a proportional basis to an insurance enterprise in the form of a special purpose entity that finances the business via the international capital markets. The company has been undergoing winding up since February 2003, a process that was completed in the year under review.
Hannover Euro Private Equity Partners IV GmbH & Co. KG was consolidated for the first time in the first quarter of 2006. Hannover Re and E+S Rück each hold shares of 36.8% in the company's capital. The company commenced business operations on 1 January 2006. Its purpose is to build, hold and manage an investment portfolio.
Effective 13 July 2006 Hannover USA Real Estate Corporation, a company belonging to the subgroup Hannover Re Real Estate Holdings, Inc., Orlando, sold its 65% interest in the special purpose vehicle 1201 F Street LLC, Wilmington, the object of which is to hold and manage real estate in Washington, D.C. held as a financial investment. Following transfer of the remaining assets of Hannover USA Real Estate Corporation to Hannover Re Real Estate Holdings the company was wound up in December 2006. In addition, the real estate held by the special purpose entity Summit at Southpoint Corporation, Jacksonville, was sold effective 22 December 2006. The gain on disposal from the two transactions amounting to altogether EUR 34.4 million before tax was recognised under realised gains on investments within our property and casualty reinsurance business group.
On 13 December 2006 Hannover Re reached agreement on the sale of its American subgroup Praetorian Financial Group, Inc., New York (PFG), to an Australian insurance group. Hannover Re holds all shares of PFG indirectly via the intermediate holding company Hannover Finance, Inc., Wilmington (HFI), which is also included in full in the consolidated financial statement and constitutes a subgroup in which other companies still owned by Hannover Re are consolidated together with PFG. The buyer is to acquire all shares of PFG at a purchase price of USD 800.0 million before final price determination. As at the balance sheet date the transaction still required the approval of the competent authorities. Completion of the transaction and hence the associated deconsolidation from Hannover Re is expected in the second quarter of 2007.
In compliance with IFRS 5 we recognise the profit or loss of PFG in both the Group and segmental statement of income for all presented periods after tax in a separate line and disclose the assets and liabilities of the discontinued operation in the 2006 financial year in corresponding balance sheet items that are distinct from continuing operations. In order to avoid distorting effects on the profit and losses of separately disclosed operations, transactions of a long-term nature between the two groups of operations that are continued beyond the disposal date are recognised on an unconsolidated basis.
In addition, the figures referring to the discontinued operation are recognised separately in the further explanations provided in these Notes regarding the items of the consolidated financial statement in order to reconcile the amounts reported in the consolidated financial statement that represent continuing operations.
Hannover Re uses an integrated, internal risk model that is subject to constant refinement. The internal risk model enables us to assess the implications of risks (e.g. capital market risks such as interest rate changes or underwriting risks such as natural catastrophe exposures) for our business segments and lines and hence calculate their profit/loss probability distributions. In addition, with the aid of this integrated approach we are able to gear our general risk/return management to probability distributions for our Group's key balance sheet variables and performance indicators (e.g. shareholders' equity and underwriting result).
Relative to the net premium earned our capital requirement is reduced by 47%.
Figures in EUR million Effect on forecast net income 100-year loss California earthquake (240) (270)
Bad debt risks are of relevance to our company because the business that we accept is not always fully retained, but instead portions are retroceded as necessary. Our retrocession partners are therefore carefully selected in light of credit considerations. Our large proportion of broker business gives rise to potential default risks (e.g. loss of the premium paid by the cedant to the broker or double payment of claims). This risk potential is therefore actively tracked and minimised with the aid of a number of measures. All broker relationships are reviewed once a year with an eye to criteria such as the existence of professional indemnity insurance, payment performance and proper contract implementation. The bad debt risk can be summarised as follows: • 95.8% of our retrocessionaires have an investment grade rating (AAA to BBB), and 91.0% thereof are rated "A" or better.
• In terms of the Hannover Re Group's major companies, less than 8.3% of our accounts receivable from reinsurance business were older than 90 days as at the balance sheet date.
The most significant technical risks are managed as follows: The Hannover Re Group uses simulation models to assess the risks associated with natural hazards. These models were adjusted in the wake of the events of 2004 and 2005 and now include the latest expert insights of leading climatologists into possible changes in the frequency and intensity of natural disasters caused by climate changes. In addition, the natural hazards experts of the Hannover Re Group continuously analyse the findings of scientific research into possible changes in the risk situation. The simulation models and know-how of our natural hazards experts provide the basis for determining the maximum exposures that the Group can accept for such risks as well as for calculating our own reinsurance needs. What is more, within various business segments we establish extra safety loadings that are added to the output of our simulation models in order to adjust the basis of our calculations to adequately reflect the risks. Contrary to the increase in the frequency and intensity of natural disasters forecast by experts, this year's loss experience was comparatively favourable. The most significant events for Hannover Re in the year under review were a tornado in March in the Midwest of the United States, cyclone "Larry" in Australia and the catastrophic floods in India. Our burden of losses from these events amounted to EUR 22.3 million for gross account and EUR 19.1 million net.
Run-off triangles are another risk management tool. Such triangles show how the reserve has changed over time as a consequence of paid claims and the recalculation of the reserves that are to be established as at each balance sheet date. Adequacy is monitored using actuarial methods (cf. here our explanatory remarks on technical reserves in Section 7.2 "Technical assets and liabilities").
Combined and catastrophe loss ratio over the past ten years 1) Based on figures reported in accordance with US GAAP 2) Based on figures reported in accordance with the German Commercial Code (HGB) 3) Natural catastrophes and other major losses > EUR 5 million gross for the share of the Hannover Re Group as a percentage of net premium earned
The reserves in life business are calculated in accordance with actuarial principles using secure biometric actuarial bases and with the aid of portfolio information provided by our clients. Local supervisory authorities ensure that the reserves established by ceding companies satisfy all requirements
Our asset/liability management is subject to constant enhancement with a view to minimising the interest rate risk.
A key tool of our value-oriented controlling and risk management in the area of life and health reinsurance is systematic tracking of the European Embedded Value (EEV). Together with the results for the first quarter of 2006 Hannover Re for the first time reported the EEV for the 2005 financial year. The EEV replaces the calculation of the value in force of the net portfolio and constitutes an actuarial evaluation of the life and health (re)insurance portfolio. The EEV amounted to EUR 1.3 billion in 2005, an increase of 8.2% compared to 2004. The operating embedded value earnings totalled EUR 112.5 million, while the value of new business stood at EUR 84.7 million. The EEV for 2006 will be presented together with the report on the first quarter of 2007.
Risks in the investment sector consist primarily of market, credit and liquidity risks. The most significant market price risks are share price, interest rate and currency risks. The "value at risk" (VaR) is a vital tool used for managing market price risks. The VaR is determined on the basis of historical data, e.g. for the volatility. As part of these calculations the probability of losing a certain portion of our portfolio is calculated. The calculation of this maximum loss potential is performed with a confidence level of 95% and a holding period of ten days. Our range of management tools is complemented by stress tests and sensitivity analyses.
Asset-backed securities in % in EUR million in % in EUR million in % in EUR million in % in EUR million
For further explanation please see Section 3.2 "Summary of major accounting policies."
due after four through five years 203,263 204,026 10,538 10,986 due after five through ten years 1,271,484 1,281,502 316,565 342,977 due after ten years 11,178 11,357 1,902 1,902
Loans and receivables due in one year 27,992 28,147 37,417 37,579 due after one through two years 24,774 25,347 19,015 19,709 due after two through three years 62,218 60,628 24,609 26,934 due after three through four years 123,217 119,212 63,631 62,955 due after four through five years 91,335 87,326 127,626 126,003 due after five through ten years 554,829 534,798 436,778 435,410 due after ten years 31,228 31,213 36,906 36,766
Available for sale due in one year 1,381,230 1,380,347 1,543,185 1,529,823 due after one through two years 1,700,790 1,692,481 1,419,412 1,397,314 due after two through three years 1,678,241 1,637,918 2,037,995 2,028,214 due after three through four years 1,566,342 1,562,701 1,638,228 1,617,552 due after four through five years 1,187,735 1,176,674 1,557,596 1,568,347 due after five through ten years 4,543,454 4,472,663 5,175,331 5,208,951 due after ten years 1,123,275 1,139,366 983,662 1,032,975
Allocation to gains/losses from the fair-value measurement of the available-for-sale portfolio (84,444) 92,326
Fixed-income securities – loans and receivables 301,546 311,219 253,887 43,617 161 5,163 – – 915,593
Total fixed-income securities incl. derivatives 8,099,918 3,414,529 3,185,267 606,189 56,916 325,968 10,825 40,804 15,740,416
Fixed-income securities – held-to-maturity 23,386 140,887 199,423 94,976 45 – – – 458,717
Fixed-income securities – loans and receivables 224,208 270,657 185,906 38,604 168 26,439 – – 745,982
Equity securities – at fair value through profit or loss – – 10,207 – – – – – 10,207
Fixed-income securities – loans and receivables – – 634,588 7,447 – 76,368 – 27,579 745,982
Fixed-income securities – at fair value through profit or loss – – 13,141 – – 74,970 – – 88,111
Equity securities – available-for-sale – 2,768 1,068,347 7,080 – 121,102 13,994 – 1,213,291
Equity securities – trading – – 16,075 – – 6,759 – – 22,834
The fair values of the derivative financial instruments were determined on the basis of the market information available at the balance sheet date and using the effective interest rate method. If the underlying transaction and the derivative are not carried as one unit, the derivative is recognised in the trading portfolio item on the balance sheet or under the other liabilities.
Within the scope of the accounting of "modified coinsurance" and "coinsurance funds withheld" reinsurance treaties, under which securities deposits are held by the ceding companies and payments rendered on the basis of the income from certain securities of the ceding company, the interest-rate risk elements are clearly and closely related to the underlying reinsurance arrangements. Embedded derivatives consequently result solely from the credit risk of the underlying securities portfolio.
Hannover Re calculates the fair value of the embedded derivatives using the market information available on the valuation date on the basis of a "credit spread" method. Under this method the derivative is valued at zero on the date when the contract is concluded and its value then fluctuates over time according to changes in the credit spread of the securities. The pre-tax improvement in the investment income amounted to altogether EUR 0.2 million (-EUR 2.3 million) as at the balance sheet date.
The investments in associated companies include goodwill in the amount of EUR 21.6 million (EUR 21.6 million).
For further details of our major participating interests please see Section 4 "Consolidated companies and consolidation principles."
Real estate is divided into real estate for own use and third-party use (investment property). Only the real estate in the portfolio which is used to generate income is shown under the investments. Real estate is valued at cost of acquisition less scheduled depreciation with useful lives of at most 50 years. Own-use real estate is recognised under other assets.
Gross book value at 31 December of the year under review 42,215 290,507
The fair value of investment property amounted to EUR 22.4 million (EUR 240.0 million) as at the balance sheet date. The market value of the real estate was determined using the discounted cash flow method.
In life business, the deferred acquisition costs under life and annuity policies with regular premium payments are determined in light of the period of the contracts, the expected surrenders, the lapse expectancies and the anticipated interest income.
Net book value at 31 December of the previous year 2,228,501 1,994,273
Reserve at 1 January of the year under review 18,850,199 4,383,573 14,466,626 20,006,726 4,613,284 15,393,442 thereof from discontinued operation 544,894 152,950 391,944 – – –
Loss and loss adjustment expense reserve (from balance sheet) 4,304.7 4,849.4 5,002.1 5,696.3 6,162.3 6,867.8 5,846.1 6,584.9 7,337.5 9,908.1 10,402.6
Net run-off result of the loss reserve 1,317.0 1,472.7 995.1 1,226.3 867.0 1,024.4 475.1 228.2 88.3 771.4 of which currency exchange rate differences 65.5 (227.1) (33.1) (513.0) (745.9) (1,011.0) (567.0) 51.2 342.6 (417.8)
Net run-off result excluding currency exchange rate differences 1,382.4 1,245.7 962.0 713.3 121.1 13.4 (91.9) 279.5 430.9 353.6
Due after ten through twenty years 2,250,775 430,554 1,820,221 400,427 17,692 382,735
Liabilities in liability and motor reinsurance traditionally have long durations, sometimes in excess of 20 years, while liabilities in property business are settled within the first 10 years.
Net book value at 31 December of the year under review 6,109,154 447,537 5,661,617 5,779,169 94,089 5,685,080
Reserve at 1 January of the year under review 1,828,475 426,958 1,401,517 2,030,726 549,456 1,481,270 thereof from discontinued operation 120,691 (39,084) 159,775 – – –
Net book value at 31 December of the year under review 1,581,034 339,096 1,241,938 1,977,570 463,528 1,514,042
The adequacy of the technical liabilities arising out of our reinsurance treaties is reviewed as at each balance sheet date. As part of the adequacy test for technical liabilities the anticipated future contractual payment obligations are compared with the anticipated future income. Hannover Re adopts the "loss recognition" method set out under US GAAP. Should the result of the test indicate that the
Net book value at 31 December of the year under review 152,639 193,098
Goodwill This item principally includes the goodwill from the acquisition of the Clarendon Insurance
The additions of EUR 3.2 million were for the most part attributable to the acquisition of Alea North America Specialty Insurance Company that took place within the subgroup Praetorian Financial Group. The transaction is to be allocated to discontinued operations. In this regard please see our remarks in Section 5.1 "Acquisitions and new formations."
Net book value at 1 January of the year under review 7,491 9,925
Unused tax loss carry-forwards of EUR 522.4 million (EUR 435.7 million) existed as at the balance sheet date. Corresponding loss carry-forwards were established on the assets side in accordance with local tax rates to the extent that their realisation is adequately secure.
Tax losses that can be carried forward without limitation in the amount of EUR 207.2 million were not capitalised since their realisation is not sufficiently certain.
Effective 1 December 2002 Group employees have an opportunity to accumulate additional oldage provision at unchanged conditions by way of deferred compensation through membership of HDI Gerling Pensionskasse AG. The benefits provided by HDI Pensionskasse AG are guaranteed for its members and their surviving dependants and comprise traditional pension plans with bonus increases as well as unit-linked hybrid annuities.
Fair value at the end of the year under review 7,302 10,500
The actual return on the plan assets amounted to EUR 0.8 million (EUR 0.9 million) in the year under review.
Defined benefit obligations at the end of the year under review 77,400 85,233
Fair value of plan assets at the end of the year under review (7,302) (10,500)
Net provisions for pensions at 31 December of the previous year 64,559 57,626
The net periodic pension cost was recognised in the consolidated statement of income in amounts of EUR 5.3 million (EUR 3.7 million) under administrative expenses, EUR 2.6 million (EUR 0.7 million) under other expenses and EUR 1.0 million (EUR 0.8 million) under other investment expenses.
Notes notes on the individual items 7.8 Debt and subordinated capital
In May 2005 Hannover Re issued further subordinated debt in the amount of EUR 500.0 million through its subsidiary Hannover Finance (Luxembourg) S.A. As part of the transaction, holders of Hannover Re's EUR 350.0 million subordinated debt placed in 2001 were offered an opportunity to exchange their existing issue for holdings in the new bond, which has a term of 30 years and may be called in prior to maturity by the issuer after 10 years. Participation in the exchange was nominally EUR 211.9 million in the previous year, corresponding to EUR 240.5 million of the new bond issue. The cash component of the new bond in the amount of nominally EUR 259.5 million was placed predominantly with institutional investors in Europe. The remaining volume of the bond issued in 2001 after the exchange amounted to EUR 138.1 million.
Other financial facilities In order to protect against possible future major losses, Hannover Re took out a new credit line of EUR 500 million in 2004 in the form of a syndicated loan. The facility has a term of five years and is due in August 2009.
Notes notes on the individual items 7.9 Shareholders' equity and minority interests
Shareholders’ equity is shown as a separate component of the financial statement in accordance with IAS 1 "Presentation of Financial Statements" and subject to IAS 32 "Financial Instruments: Disclosure and Presentation" in conjunction with IAS 39 "Financial Instruments: Recognition and Measurement ". The change in shareholders’ equity comprises not only the net income deriving from the statement of income but also the changes in the value of asset and liability items not recognised in the statement of income.
The shareholders' equity (share capital of the parent company) amounts to EUR 120,597,134.00. It is divided into 120,597,134 voting and dividend-bearing registered no-par shares. The shares are paid in in full. Each share carries an equal voting right and an equal dividend entitlement.
Cumulative other comprehensive income remained nearly unchanged from the previous year at -EUR 1.5 million (-EUR 1.6 million). It resulted principally from the recognition as income of hedge-ineffective changes in the fair value of derivative financial instruments.
IAS 1 requires separate disclosure of treasury shares in shareholders’ equity. By a resolution of the Annual General Meeting of Hannover Rückversicherung AG adopted on 12 May 2006, the company was authorised until 31 October 2007 to acquire treasury shares of up to 10% of the share capital existing on the date of the resolution. The company did not hold treasury shares at any time during the reporting period.
The portfolio of own-use real estate was measured at cost of purchase less scheduled straightline depreciation over useful lives of 10 to 50 years. The fair values were calculated using the discounted cash flow method. Effective 1 January 2006 Hannover Re and E+S Rück AG each acquired 5% of the shares of GbR Hannover Rückversicherung AG/E+S Rückversicherung AG Grundstücksgesellschaft, Hannover, from the minority shareholder. The company's shares have since been wholly owned by Hannover Re. The object of the company is the acquisition, development and use of the land and building at Karl-Wiechert-Allee 50, Hannover.
Gross book value at 31 December of the previous year 85,606 71,374
Cumulative depreciation at 31 December of the previous year 55,389 44,777
Gross book value at 31 December of the year under review 141,242 129,566
Cumulative depreciation at 31 December of the previous year 93,730 90,558
Cumulative depreciation at 31 December of the year under review 96,212 93,730
Net book value at 31 December of the previous year 35,836 24,676
Net book value at 31 December of the year under review 45,030 35,836
As at the balance sheet date the item included EUR 0.1 million (EUR 0.2 million) for self-provided software and EUR 13.8 million (EUR 15.0 million) for purchased software. Scheduled depreciation is taken over useful lives of 3 to 10 years.
The other liabilities in a carrying amount of EUR 19.4 million attributable to discontinued operations in the year under review were recognised under liabilities connected with assets held for sale.
Audits and costs of publishing the annual financial statements 2,879 (172) 2,707 – 176
The other liabilities include sundry non-technical provisions of EUR 71.5 million (EUR 57.5 million ), which developed as shown in the following table.
Notes notes on the individual items 7.14 Technical statement of income
With regard to the claims and claims expenses and the change in benefit reserves the reader is referred to Section 7.2 "Technical assets and liabilities."
Sundry expenses 40,930 56,865 7.15 Other income/expenses 8. Related party disclosures 8.1 Transactions with related parties
IAS 24 defines related parties inter alia as parent companies and subsidiaries, subsidiaries of a common parent company, associated companies, legal entities under the influence of management and the management of the company itself. In the year under review the following significant business relations existed with related parties.
HDI HANNOVER International España, Cia de Seguros y Reaseguros S.A. 21,751 3,457
The major reinsurance relationships with related parties in the year under review are listed in the following table.
In accordance with the partners' meeting of Oval Office Grundstücks GmbH held on 5 May 2006, repayment of capital in the amount of EUR 3.8 million was agreed. The capital was repaid to the partners in equal portions on 31 May 2006. Hannover Re's share in the company was consequently reduced by EUR 1.9 million.
The remuneration report is based on the recommendation of the German Corporate Governance Code and contains information which also forms part of the notes to the 2006 consolidated financial statement as required by IAS 24 "Related Party Disclosures". Under German commercial law, too, this information includes data specified as mandatory for the notes (§ 314 HGB) and the management report (§ 315 HGB). These details are discussed as a whole in the remuneration report. Consequently, we have not provided any further explanation in the notes or management report.
The internal performance criterion is satisfied upon achievement of the target performance defined by the Supervisory Board, which is expressed in terms of the diluted earnings per share (EPS) calculated in accordance with IAS 33 "Earnings Per Share". If the target EPS is surpassed or undershot, the provisional basic number of stock appreciation rights initially granted is increased or reduced accordingly to produce the EPS basic number. The external performance criterion is the development of the share price in the allocation year. The benchmark used in this regard is the weighted ABN Amro Rothschild Global Reinsurance Index. This index encompasses the performance of listed reinsurers worldwide. Depending upon the outperformance or underperformance of this index, the EPS basic number is increased – albeit by at most 400% of the EPS basic number – or reduced – although by no more than 50% of the EPS basic number.
Amounts paid out in the 2006 financial year (in EUR million) – 1.85 1.00 0.64
On this basis the aggregate provisions for the year under review amounted to EUR 6.1 million. The expense totalled EUR 2.3 million.
As security for technical liabilities to our US clients, we have established a master trust in the USA. As at the balance sheet date this master trust amounted to EUR 2,238.8 million (EUR 2,668.5 million). The securities held in the master trust are shown as available-for-sale investments. The substantial decline was largely attributable to movements in exchange rates.
Operating leasing contracts produced expenditures of EUR 4.4 million (EUR 6.3 million) in the year under review.
In 2006 Clarendon concluded a new lease agreement for business premises effective June 2006 for a term until June 2011.
Rented property Hannover Re Real Estate Holdings rents out real estate in Florida; the period of the rental contracts ranges from three to ten years. Non-cancellable contracts will produce the income shown below in subsequent years.
Rental income totalled EUR 9.8 million (EUR 14.3 million) in the year under review.
Foreign currency items in the individual companies' statements of income are converted into the respective functional currency at the average rates of exchange. The individual companies' statements of income prepared in the national currencies are converted into euro at the average rates of exchange and transferred to the consolidated financial statement. The conversion of foreign currency items in the balance sheets of the individual companies and the transfer of these items to the consolidated financial statement are effected at the mean rates of exchange on the balance sheet date. In accordance with IAS 21 "The Effects of Changes in Foreign Exchanges Rates" differences from the currency translation of financial statements of foreign Group companies must be recognised in the consolidated financial statement as a separate item in shareholders' equity.
The decline in future rental income from non-cancellable contracts in the years 2007 to 2009 will result from disposals of rented property in 2006 by Hannover Real Estate Holding. For further explanation please see Section 5.2 "Disposals and discontinued operations."
Mean rate of exchange on the balance sheet date Average rate of exchange
Of this total amount, EUR 1.3 million (EUR 1.4 million) was attributable to the fee paid to the appointed auditor of the consolidated financial statement as defined by § 318 German Commercial Code (HGB). The amount includes a fee of EUR 1.0 million (EUR 1.0 million) for the auditing of the financial statement, EUR 0.2 million (EUR 0.2 million) for tax consultancy services and EUR 0.1 million (EUR 0.2 million) for consultancy and other services performed for the parent or subsidiary companies.
In a press release dated 16 January 2007 we reported that Hannover Re had again drawn on the capital market to obtain underwriting capacity for catastrophe risks by increasing the volume of last year's "K5" securitisation to USD 394.5 million. The transaction was placed with investors in North America, Europe and Japan. The additional capital in the amount of EUR 80.4 million was provided by both new and existing investors. The latter primarily used this as an opportunity to reinvest their profits from the previous year. The envisaged term of the transaction runs until 31 December 2008.
Effective 8 January 2007 Hannover Re sold its 49% interest in DSP Deutsche Senior Partner AG, Bonn.
In our function as the Supervisory Board we considered at length during the 2006 financial year – as in previous years – the position and development of the Group. We advised the Executive Board on the direction of the company and monitored the management of business on the basis of written and verbal reports from the Executive Board. The Supervisory Board held four meetings in order to adopt the necessary resolutions after appropriate discussion. Resolutions were adopted by a written procedure with respect to five matters requiring attention at short notice. The Standing Committee and the Balance Sheet Committee, both committees formed by the Supervisory Board within the meaning of § 107 Para. 3 German Stock Corporation Act, each met on two occasions. The Chairman of the Supervisory Board updated the full Supervisory Board on the Committees' major deliberations at the next meeting. Furthermore, we received quarterly written reports from the Executive Board on the course of business and the position of the Group pursuant to § 90 German Stock Corporation Act. These reports contain, inter alia, up-to-date details of the current planned and expected figures for the individual business groups. The reporting also covers strains from major losses as well as the investment portfolio, investment income, the ratings of the various Group companies and the development of the Group's global workforce. The quarterly reports with the quarterly financial statements and key figures for the Hannover Re Group constitute a further important source of information for the Supervisory Board. In addition, the Chairman of the Supervisory Board was constantly advised of major developments and impending decisions by the Chairman of the Executive Board. All in all, we were involved in decisions taken by the Executive Board as required by our statutory responsibilities and those placed upon us by the company's Articles of Association.
The Executive Board explained to us the profit expected for the 2006 financial year as well as the operational planning for the 2007 financial year.
The Supervisory Board also paid close attention to the development of the Group's other major subsidiaries and participations. The Supervisory Board approved capital increases of USD 200 million and EUR 100 million at Hannover Finance, Inc. (HFI) Wilmington, Delaware, and Hannover Finance (Luxembourg ) S.A., Luxembourg, respectively. Both these capital measures were necessary in order to enable the companies to continue to exercise their financing functions within the Hannover Re Group and thereby safeguard the Group's further growth.
In view of the extremely dynamic growth of life and health reinsurance the Supervisory Board similarly examined this strategic business group at length. Based on the European Embedded Value
concept the Supervisory Board obtained an overview of the value created by Hannover Life Re to date, its medium-term objectives and further prospects. Following an analysis of the company's real estate holdings, the Supervisory Board approved the sale of a real estate portfolio consisting of seven properties.
The Supervisory Board again devoted close attention to the issue of Corporate Governance. A further review of the efficiency of the work performed by the Supervisory Board was set in motion, the results of which are to be discussed by the Supervisory Board in early 2007. The considerable importance attached to the standards of good and responsible enterprise management set out in the Corporate Governance Code is also evident from the Declaration of Conformity given by the Executive Board and Supervisory Board pursuant to § 161 Stock Corporation Act regarding compliance with the German Corporate Governance Code. The company is in compliance with all recommendations of the Code. The reader is further referred to the Corporate Governance report printed in this annual report and the company's publications in the Internet.
The new information included as a consequence of the Takeover Directive Implementation Act in the management reports of the parent company Hannover Re and the Hannover Re Group in accordance with § 289 Para. 4 and § 315 Para. 4 German Commercial Code is to be explained by the Supervisory Board pursuant to § 171 Para. 2 Sentence 2 German Stock Corporation Act. With respect to all these additional reporting items, including for example the composition of the common shares and of the direct or indirect participating interests which are relevant to this legal context, there have been no changes compared to the previous year. There is no restriction or control of voting rights. The appointment and withdrawal of members of the Executive Board and the amendment of the Articles of Association are guided by the provisions of stock corporation law and specified in detail in the Articles of Association. The conditions under which the Executive Board is empowered to issue or buy back shares of the company are also set out in the Articles of Association. The major agreements entered into by the company that are subject to reservation in the event of a change of control are described in the management report.
The report on the company's relations with affiliated companies drawn up by the Executive Board has likewise been examined by KPMG DTG and given the following unqualified audit certificate: "Having audited the report in accordance with our professional duties, we confirm that 1. its factual details are correct; 2. in the case of the transactions detailed in the report, the expenditure of the company was not unreasonably high and any possible disadvantages were offset."
"Good enterprise management and supervision in the spirit of state-of-the-art Corporate Governance is enshrined in Hannover Re's business practices as a matter of course". The accuracy of this assertion – with which we began our Corporate Governance report last year – is borne out by the fact that in the year under review the company for the first time fulfilled all the recommendations of the Code without exception. As a study conducted by the Berlin Center of Corporate Governance confirmed, Hannover Re was again – as in previous years – one of the leaders among MDax-listed companies when it came to compliance with the provisions of the German Corporate Governance Code (DCGK).
In the year just-ended we again devoted considerable attention to our communication with the financial markets and developed an impressive range of Investor Relations activities. For further details please see the section entitled "The Hannover Re share" in this Annual Report.
As in the previous years, the company again had to adjust to numerous new statutory regulations in the area of Corporate Governance in the year just-ended. Implementation of the EU Takeover Directive alone gave rise to a host of new reporting obligations – any violation of which, even if only through negligence, can trigger significant legal consequences. The entry into force of the Transparency Directive Implementation Act at the beginning of 2007 also served to extend already existing reporting obligations. The new arrangements impose a broad range of supplementary obligations on companies, which are reflected in new organisational requirements, create a need for additional reporting and generate significant extra financial expenditure.
The content of the stock option plan is based solely on the Conditions for the Granting of Stock Appreciation Rights. Under these conditions, stock appreciation rights are awarded separately for each financial year provided the internal and external performance criteria defined in advance by the Supervisory Board are met.
The internal performance criterion is satisfied upon achievement of the target diluted earnings per share (EPS) calculated in accordance with IAS 33 "Earnings Per Share." The external performance criterion is the increase in the value of the Hannover Re share. The benchmark used to measure this increase in value is the weighted ABN Amro Rothschild Global Reinsurance Index. The benchmarks cannot be retrospectively altered.
For further details of the virtual stock option plan please see the explanations provided in the notes to this Group Annual Report, Section 8.3 "Share-Based Payment."
In the 2006 financial year no stock appreciation rights were granted for the 2005 allocation year since the internal performance criterion was not met (previous year: EUR 0.3 million); stock appreciation rights granted in previous years were exercised in an amount of EUR 1.0 million (EUR 0.8 million).
Retirement provision The pension agreements of the members of the Executive Board with Hannover Re contain commitments to an annual retirement pension calculated as a percentage of the fixed annual emoluments. There were seven individual commitments to the active Board members in the year under review. An amount of EUR 1.0 million was allocated to the provision for pensions in the year under review, which stood at EUR 6.4 million as at 31 December 2006.
The remuneration paid to former members of the Executive Board and their surviving dependants, for whom eleven pension commitments existed, totalled EUR 0.9 million in the year under review. Altogether, an amount of EUR 9.8 million has been set aside for these commitments.
From the 2005 financial year onwards, in accordance with § 12 of the Articles of Association, the members of the Supervisory Board receive fixed annual remuneration of EUR 10,000 per member in addition to reimbursement of their expenses. Furthermore, each member of the Supervisory Board receives variable remuneration of 0.03%o of the operating profit (EBIT) reported by the company in the consolidated financial statement drawn up in accordance with International Financial Reporting Standards (IFRS). Variable remuneration is not paid if the EBIT is negative.
Herbert K. Haas Member of the – Supervisory Board – Standing Committee – Balance Sheet Committee 34.9
Bodo Uebber Member of the Supervisory Board (until 12 May 2006) 14.2
Individual remuneration received by the members of the Supervisory Board in the year under review for the 2005 financial year
In 2006 no loan relationships existed with members of Hannover Re's Executive Board or Supervisory Board, nor did the company enter into any contingent liabilities for members of the management boards.
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Bancassurance: partnership between a bank and an insurance company for the purpose of selling insurance products through the banking partner's branches. The link between the insurer and the bank is often characterised by an equity participation or a long-term strategic cooperation between the two parties.
Benefit reserves: value arrived at using mathematical methods for future liabilities (present value of future liabilities minus present value of future incoming premiums ), primarily in life and health insurance.
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 casualty insurance.
Provision for unearned premiums (also: unearned premium reserve): 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.
Stochastic partnerships: targeted provision of financial support for primary insurers through reinsurance arrangements under which the reinsurer participates in the original costs of an insurance portfolio and receives as a consideration a share of the future profits of the said portfolio. This approach is used primarily for long-term products in personal lines, such as life, annuity and personal accident insurance.
Surplus reinsurance: form of proportional reinsurance under which the risk is not spread between the insurer and reinsurer on the basis of a previously agreed, set quota share. Instead, the insurer determines a maximum sum insured per risk up to which it is prepared to be liable. Risks that exceed the ceding company's retention (surpluses ) are borne by the reinsurer. The reinsurer's lines thus vary according to the level of the retention and the sum insured of the reinsured contract. The reinsurer's liability is generally limited to a multiple of the ceding company 's retention.
US GAAP (United States Generally Accepted Accounting Principles): internationally recognised US accounting principles. Not all the provisions which together constitute US GAAP have been codified. US GAAP comprises not only defined written statements but also, for example, standard accounting practices in specific industries.