Report of the Supervisory Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
The Hannover Re Group: Our global presence . . . . . . . . . . . . . . . . . . . . . . 192
Book value per share in EUR 27.77 + 15.6% 24.03 21.57 20.93 19.94 14
Share price at year-end in EUR 31.55 -10.1% 35.08 29.93 28.75 27.72 9
Dividend per share in EUR 1.80+0.50 3) + 43.8% 1.60 – 1.00 0.95 158
Market capitalisation at year-end 3,804.8 -10.1% 4,230.5 3,609.5 3,467.2 3,342.9 12
Catastrophe/major losses as percentage of net premium earned 5) 6.3% 2.3% 26.3% 8.3% 1.5% 23/115
Return on equity (after tax) 23.5% 18.7% 1.9% 11.5% 17.1% 14
Following closing of the transaction in May of this year, we are now able to concentrate entirely on our core business of reinsurance. In the context of the sale of Praetorian we also reorganised our four business groups in the year under review: since then our segmentation and reporting have been restricted to non-life and life/health reinsurance. In view of our strategic orientation as a "Multi-Specialist", your company is superbly diversified and well placed to tackle the challenges that lie ahead.
The state of the market in non-life reinsurance, our largest and most important business group, remained favourable: although the treaty renewals on 1 January 2007 clearly showed that the hard market has now passed its peak, the rate level – with just a few exceptions – was stable overall. This was also largely true of prices for natural catastrophe covers. In those areas that did see more marked rate reductions – for example in aviation business – prices were still coming back off what was a thoroughly adequate level.
It is thus evident that rate movements alone do not tell the full story when it comes to the quality of our business. What really matters is whether rates are still commensurate with the risks. And this is a question that we can broadly answer in the affirmative. We were therefore highly satisfied with the development of our non-life reinsurance business – an assessment that applies not least to our domestic market. In the year under review we were thus already able to profit from our move in the middle of the year to increase our stake in E+S Rück, which bears responsibility within the Group for German business.
Yet we are always looking ahead, and at this moment in time we are preparing for more difficult market conditions. In this respect your company can now benefit from the systematic cycle management that it has practiced for years in the typically cyclical lines of non-life reinsurance. In concrete terms, this means that during an upswing we increase our market share, while in a downward cycle – which we are now slowly entering – we scale back our participation and at the same time seek to identify market and product niches. Our basic principle of "profit before growth" will be more important than ever in the upcoming market phase.
What is more, we are in the process of staking out new territory as we strive to expand our market share. In Bermuda, for example, we established a new subsidiary that significantly strengthens our global network. In Asia, too, we are pursuing a clear expansion policy: we pressed ahead with the establishment of a life branch in the People's Republic of China and expect to commence operational business in the spring of 2008. In South Korea we received approval in principle from the local regulator for establishment of a branch office in Seoul. We also intend to cultivate the Indian market more intensively: the establishment of a service company in Mumbai is currently under preparation; before the end of the current year it should start to provide support services for our life and facultative non-life business.
I am not satisfied with the development of our share price: in common with many other stocks, the Hannover Re share did not escape unscathed the turmoil triggered by the US real estate crisis. Although we have only minimal investments in subprime bonds, investors displayed a general mistrust of financial stocks and hence also of your company. After faring well in the first half of the year, our share had shed considerable value by year-end. This movement is in stark contrast to our profit potential, and I am therefore confident that we will see prices begin to pick up again in the coming months.
It goes without saying that in the current financial year too have set ourselves ambitious goals. Given the softening market, however, can 2008 deliver figures as good as those in the year under review – less the effects of the tax reform, of course? In my assessment, absolutely. The treaty renewals as per 1 January 2008 passed off better than we had anticipated. We responded to modest softening tendencies and regrouped our portfolio accordingly. The outcome of the renewals in our domestic market was in fact highly successful. Our worldwide credit and surety business, which generated its best ever result in the year under review, is also expected to boost its premium income. For our total portfolio we anticipate a stable premium volume and very good profitability in original currencies.
Dr. Klaus Sturany 1) Former Member of the Executive Board Dortmund RWE Aktiengesellschaft Deputy Chairman (since 3 May 2007)
Dr. Erhard Schipporeit 2) Former Member of the Executive Board Hannover E.ON Aktiengesellschaft (since 3 May 2007)
Specialty Division (worldwide Facultative Business; worldwide Treaty and Facultative Business Marine, Aviation and Space); Non-Life Treaty Reinsurance Great Britain and Ireland; Retrocessions; Insurance-Linked Securities
Initially, however, it was uncertainties on the Chinese capital market that caused global stock exchanges to falter back in February of the year under review. The American bellwether index, the Dow Jones, fell by 5.8% within around two weeks and touched its lowest point of the year on 5 March 2007 at 12,050 points. The response of the German capital market was similarly nervous: having moved up very favourably in the first two months of the year, the German stock index (DAX) had also suffered price declines by the middle of March: it closed at its lowest level of the year (6,448 points) on 14 March 2007. Nor was the MDax – the index for mid-caps on which Hannover Re is also listed – spared from this turmoil, with prices retreating sharply at times.
In the middle of March, in the wake of these negative signals from the Far East, the capital markets were shaken – just as they had begun to recover – by the first warning signs coming out of the US real estate market: news of impending insolvencies in this market segment prompted short-term price declines even before the year had reached the halfway point. Yet both the Dax and the MDax initially rallied after these falls. On 16 July 2007, after a positive trend overall in the first half of the year, the Dax reached its peak for the year at 8,106 points – also its highest level in seven years. The MDax climbed to its annual high of 11,378 points on 9 July 2007.
Subsequently, however, investors' risk aversion gained the upper hand and prices gave ground – not only on the German stock market but on exchanges worldwide. Financials were particularly hard hit. This was attributable to the bad news coming out of the United States: at the beginning of July the market was dragged down by several profit warnings. Rating agencies such as Standard & Poor's and Moody's announced their intention to downgrade their ratings for subprime bonds – securities backed by subprime mortgages. From July onwards of the year under review the events surrounding the US mortgage market dominated developments on global capital markets – the subprime crisis was in full swing. Hedge funds and even banks around the world found themselves facing liquidity problems. Central banks around the globe were compelled to intervene in order to calm the financial markets, making additional liquidity available so as to preserve the markets' ability to function.
DaxHannover Re share 3 Ja nuary 3 M arch 3 Ju ne 2 3 A ugust 3 O cto ber 3 Ja nuary 3 M arch 3 Ju ne 2 3 A ugust 3 O cto ber 3 Ja nuary 3 M arch 3 Ju ne 2 3 A ugust 3 O cto ber 28 D ec em ber
Our internal benchmark, the weighted ABN Amro Global Reinsurance Index, put on 6.6% over the course of the year. Our strategic objective is to achieve an increase in the share price that surpasses the performance of the ABN Amro Global Reinsurance Index on a three-year moving average. We were unfortunately unable to achieve this goal in 2007.
market on the outcome of the year just-ended as promptly as possible on a face-to-face basis.
Another highlight of our Investor Relations programme was our 10th International Investors' Day in June 2007. Numerous financial analysts and investors came to Hannover so as to gain first-hand insights from presentations and discussions with the Executive Board and senior management. The focus of the event was on the business group offering the greatest growth potential, life and health reinsurance, and in particular the two largest life/ health reinsurance markets, namely the US and UK. Yet non-life reinsurance was by no means overlooked, with in-depth explorations of our securitisation transactions and the issue of risk management.
Analyst interest in our company was again very strong in the year under review. According to Bloomberg and
The powers of the Executive Board with respect to the issue and repurchase of shares are defined in § 6 "Contingent capital" and § 7 "Authorised capital" of Hanno-
Number of shares as at 31 December 2007: 120,597,134 no-par-value registered shares
Annual General Meeting: 6 May 2008, 10.30 a.m. Hannover Congress Centrum Kuppelsaal Theodor-Heuss-Platz 1–3 30175 Hannover, Germany
Above-average For us this means that we strive to be one of the three most profitable reinsurers profitability worldwide in terms of: • return on equity and
Economic independence For us this means: • financing growth with self-generated profits and
- earnings per share - book value per share (triple 10 target)
• Allocation of capital to areas promising the highest returns 3. Share price • Performance target: outperform Global Reinsurance Index
• geographical, line-of-business and product priorities 5. Growth • Primarily organic
• Minimum return: risk-free interest rate plus the cost of capital 7. Organisation and infrastructure • Organisation - geared to business processes - is effective and efficient - safeguards know-how and cost leadership
By means of Performance Excellence 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 an optimal outcome in terms of customer satisfaction and employee motivation as well as business results. Fulfilment of our responsibility to society also ranks among the criteria that are evaluated within the scope of assessments.
The vigorous expansion enjoyed by the global economy in the previous year continued virtually unabated in the year under review. Although the economic picture clouded over somewhat towards the end of the year due to the real estate crisis in the United States, the pace of growth in the world economy remained brisk.
Developments in the major economic regions varied widely in the year under review: in emerging markets, such as India, as well as in Asia – and here most notably China – the already lively expansion actually accelerated. Manufacturing output in the Eurozone, Japan and the United States, on the other hand, recorded only moderate growth. Especially in the United States, economic activity had lost impetus appreciably in the previous year due to a fall-off in housing investment. This trend was exacerbated by the correction on the US real estate market in the second half of the year under review. The worsening of the property crisis triggered turmoil on financial markets – and hence considerably more marked volatility on the markets.
For the fifth time in succession Germany defended its title as world export champion in the year under review. Cyclical risks for the German economy nevertheless increased again: the American mortgage crisis and credit crunch also placed a strain on German financial institutions. The monetary environment deteriorated against the backdrop of unrest on financial markets. Although the business mood and consumer sentiment consequently dipped, cyclical expansion showed little sign of slowing.
For further explanation and additional information please see Section 5.2 of the Notes "Disposals and discontinued operations".
In order to derive maximum benefit from the opportunities offered by an attractive German market, we raised our stake in E+S Rück – which bears exclusive responsibility for German business within the Group – to 63.8% in the year under review.
The sustained favourable state of the market in non-life reinsurance had a positive effect on the development of our business. Although the "hard" market had already passed its peak in the year under review, rates were commensurate with the risk. By adhering to selective underwriting principles we were therefore able to generate profitable business in almost all segments. On the claims side, bearing in mind the – by European standards – severe winter storm "Kyrill" and the associated catastrophe loss expenditure for Hannover Re, the year under review failed to match up to the previous year's low burden of major losses. Nevertheless, the burden of catastrophe losses and major claims – at 6.3% – was still within the bounds of the expected level of 8% of net premium in non-life reinsurance. All in all, we were very satisfied with the course of non-life reinsurance in the year under review.
+++ Ordinary investment income improved by 8.4% in the year under review +++
In the first transaction of its type for the insurance industry, we transferred default risks associated with reinsurance recoverables to the capital market in the year under review and thereby immunised ourselves against a potential credit risk. Dubbed "Merlin", this securitisation is an innovation on the insurance market inasmuch as it marks the first time that a fully secured synthetic CDO has been launched for a portfolio of credit risks from insurance and reinsurance companies. The underlying portfolio has a nominal value of EUR 1 billion.
All in all, we were highly satisfied with the development of our non-life reinsurance portfolio; market conditions in the year under review were again favourable.
The renewal season as at 1 January 2007 demonstrated that the "hard" market would be sustained in the year under review. Nevertheless, it became clear – as was reinforced by the further rounds of renewals in the course of the year – that it had passed its peak in 2006 after eight consecutive years of rate increases. What was crucial, however, was that rates in most segments remained on a comfortably adequate level – i.e. one that was commensurate with the risks. As a result, we continued to be able to generate profitable business. Only in a few lines, such as US casualty business – and here especially directors' and officers' (D&O) covers –, did we assess prices and conditions as no longer appropriate to the assumed risk. In these areas we responded accordingly and scaled back our premium volume. In property business, on the other hand, the situation was still satisfactory despite modest decreases in rates. Although prices retreated slightly overall, they remained on a level that was commensurate with the risks. In US property catastrophe business rates remained buoyant, with reductions observed only in isolated subsegments.
In the field of structured products we are one of the leading reinsurers worldwide. The year under review was notable for the ongoing regional diversification of our portfolio: it remains the case that we generate around half our premium income in the United States, although the total number of contracts in other markets is now appreciably higher and their profit contribution significant.
Key figures for non-life reinsurance 1) Figures for 2003 to 2005 before new segmentation 2) On a US GAAP basis 3) Incl. deposit interests
Not only that, we protected our retention under the "K5" property catastrophe business with a further securitisation concluded in March of the year under review: in the first transaction of its type we placed an aggregate XL cover in an amount of USD 200 million on the capital market. This transfer rounds off our programme of protection cover with the result that our portfolio is now better protected than ever against exceptionally large losses. What is more, the transaction gives us even greater independence from the changeable traditional retrocession market.
On balance, we were satisfied with the catastrophe loss experience in 2007: in January winter storm "Kyrill" caused widespread damage in Europe – especially Germany – and a market loss of around EUR 4 billion. For Hannover Re, this event produced a net loss burden of EUR 115.6 million before tax. In the course of the year a number of small and mid-sized natural disasters were recorded: windstorm events, accompanied by heavy rainfall, led to flooding in Australia and some Arab countries. The United Kingdom also suffered extensive flood damage. The predicted severe hurricane season in the United
+++ Ratio of catastrophe losses to net premium earned slightly below the expected level +++
The underwriting result improved to -EUR 26.7 million after a deficit of EUR 71.0 million in the previous year.
The law amending the Insurance Supervision Act (VAG) that was adopted by the German Federal Parliament in November 2007 – it entered into force on 1 January 2008 – is intended to strengthen the German insurance industry in the competitive European environment. Key points of this reform are new provisions relating to enterprise risk management. The rules place more exacting requirements, inter alia, on decision-making processes at companies. In another step, reform of the Insurance Contract Act was approved in the year under review that is intended to further strengthen the rights of policyholders. Finally, November 2007 saw the entry into force of a new Environmental Damage Act which introduced civil liability for environmental damage and harm caused to biodiversity. The German insurance industry responded by launching a new type of liability insurance for environmental damage on the market.
The German insurance market was again notable for fierce competition in the year under review: new providers from abroad sought to gain a foothold in motor insurance and in industrial insurance lines, and the price level consequently came under pressure. Particularly hard hit were industrial fire and fire loss of profits insurance as well as – to some extent – industrial liability insurance lines. Motor insurance, an important market for our company, was also the scene of a continuing intense struggle for market shares. This state of affairs – in combination with another slight decrease in the claims frequency in motor liability business – gave rise to corresponding premium reductions. Yet the price competition in motor insurance did not lead to the anticipated sharp declines, but merely a modest drop of around 3.5%.
Compared to the original market, the state of the reinsurance market in Germany continued to be favourable, i.e. with adequate rates and conditions. Although softening tendencies began to emerge, we secured improvements in conditions and acted on attractive business opportunities in the year under review. This was especially true of non-proportional motor liability insurance: prices here were broadly stable or moved in step with the risks, bearing in mind the further growth in claims costs for bodily injuries.
670.1 million) despite lower premium income. Group net income increased by 17.1% to EUR 560.5 million (EUR 478.5 million). This figure includes a special effect associated with the reduction of deferred taxes in an amount of EUR 137.8 million. Earnings per share reached a gratifying EUR 4.65 (EUR 3.97).
Thanks to larger treaty shares under existing accounts and new customer relationships we succeeded in further boosting our market share and extending our position as one of the leading reinsurers in the lucrative German market. Although the result on our domestic market was impacted by loss expenditure associated with the severe winter storm "Kyrill", we were highly satisfied overall with the business development.
Personal accident insurance was another target line to show a gratifying development. In accordance with the support that we have given this line for a number of years, we assist our clients not only by assuming risks in treaty and facultative reinsurance but also by offering them product innovations. We focus here on new products developed by our company, such as a combined personal accident annuity that also provides benefits in the event of severe illnesses. Extending the range of further services delivered by external providers (policies with assistance benefits) is another core area of our service offering. These product innovations enabled us to boost our premium income in this line by around 5%.
German business is transacted by our subsidiary E+S Rück. As a specialist reinsurer for the German market, the company is highly valued by its clients primarily due to its excellent financial standing, the quality of its services 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 the context of the new liability insurance for environmental damage E+S Rück has drawn up framework conditions for its clients that facilitate expert assessment of the risks. In view of the lack of statistics available to date, this represents a particularly significant value-added for our clients.
Percentage breakdown of gross written premium in Germany by line of business
The basic climate on the UK primary insurance market remained virtually unchanged from the previous year: further appreciable competition again led to corresponding pressure on rates. In most lines, therefore, erosion in the range of 5% – 15% was observed. Only in motor insurance was the situation more favourable.
Reinsurance markets, on the other hand, were notable for stable prices in the year under review. Although we are cultivating a few participations with a long-term orientation, our underwriting policy on the London Market is generally opportunistic.
The market climate in marine reinsurance in the year under review was still heavily overshadowed by the substantial losses from the 2005 hurricane events in the Gulf of Mexico, which had not only prompted rate hikes and increased retentions at ceding companies but also ushered in extensive restructuring of the reinsurance programmes. Programmes now distinguish between catastrophe-exposed regions and risks that have no correlation with natural disasters.
Our underwriting policy is slanted heavily towards nonproportional covers; we only accept proportional treaties in segments that promise high margins. In other words, we operate even more opportunistically in proportional business than in our underwriting of non-proportional arrangements.
Marine business was not affected by any exceptionally large losses. Contrary to forecasts, the hurricane season in the Gulf of Mexico passed off relatively calmly in the year under review. The first half of the year saw an accumulation of sizeable ocean hull claims, although these impacted insurers first and foremost and reinsurers only to a lesser extent.
Ceding companies boosted their retentions in view of the long string of good results in recent years. This factor, combined with a surplus supply of reinsurance capacity, led to pressure on conditions in the reinsurance sector. Large insurance groups, in particular, were able to push through their demands owing to the capacity overhang. On the other hand, clients continued to focus on reinsurers noted for their financial soundness and high level of professionalism, a situation from which we benefited.
+++ Hannover Re records very good result in credit and surety reinsurance +++
Business in the credit and surety lines is traditionally geared to continuity, although the importance of this factor appears to be diminishing. Hannover Re ranks third in the worldwide credit and surety market. By increasing shares under existing accounts and entering into 20 new client relationships we were again able to generate significant premium growth with highly satisfactory margins in the year under review. The absence of losses will, however, result in further pressure on the premium level.
For reasons of diversification we stepped up our surety business and our acceptances of political risks.
In France Hannover Re is one of the largest providers of reinsurance coverage and the market leader in treaty and facultative reinsurance for personal accident and builder's risk insurance. Overall, though, we do not pursue any growth targets; we stepped up our involvement only in areas where terms and conditions were attractive. In the year under review, for example, we further optimised our portfolio in builder's risk insurance and were guided by a long-term strategy of consistent expansion. Cooperation between the facultative and treaty reinsurance departments in the personal accident and builder's risk reinsurance lines delivered a good performance, while at the same time cementing a solid position in the market.
Increased competition from foreign companies was the hallmark of the insurance market in the Benelux countries, especially in the Netherlands. Combined with the healthy profits generated by the insurance industry, this caused rates to decline – most notably in commercial and industrial property lines and motor business. All insurers in the Netherlands have now implemented the European Motor Liability Directive, which provides for an increase in the previous standard minimum insured limit to EUR 5 million for bodily injury and EUR 2.5 million for material damage per claim. Our portfolio in Belgium developed according to plan both in motor business and workers' compensation insurance.
The Italian non-life market again produced very marginal growth in the year under review. The volume of reinsured business contracted owing to the prolonged period of consolidation; supply comfortably outstripped demand, prompting a decline in rates and deterioration in terms and conditions. Thanks to our clear client and market segmentation, however, we were able to decouple ourselves from this trend. In Italy our focus is on small and mid-sized ceding companies. We classify our customer relationships with an eye to their value creation: in the case of cedants who purchase their reinsurance protection opportunistically we too operate on an opportunistic basis; special target clients can expect not only professional reinsurance but also additional services such as training and consulting support.
In Italy, as in other markets, an above-average rating is an important prerequisite for a reinsurer. This enables us to tap into a larger business potential.
We rank as the fourth-largest reinsurer in Italy and write our business predominantly in the form of non-proportional treaties. Unlike in the primary market, price erosion was only moderate on the reinsurance side – although some softening in conditions was observed. No major claims or natural disasters occurred in the year under review. While the premium volume contracted slightly, the result was once again most satisfactory.
We are well positioned in the markets of Northern Europe and especially among mutual insurers we play a leading role; in this client segment our business is geared to long-term relationships.
+++ Hannover Re satisfied with business development in Northern Europe despite difficult market conditions +++
The insurance markets of Central and Eastern Europe continued to grow disproportionately strongly relative to Western European markets, although increased competition caused rates in original business to fall. The most prominent growth markets were Russia – where private insurance lines, for example, have enjoyed considerable expansion –, Ukraine and Kazakhstan. Internationally operating insurance groups optimised their reinsurance cessions and raised their retentions.
Given the absence of natural disasters over the past two years, US insurers have been able to generate strong profits and hence further improve their equity position. Competition has therefore intensified appreciably in virtually all lines of insurance. In casualty business this has been the case for three years now, and very soon it will be reflected in the near-complete erosion of the price level built up during the "hard" market. On the reinsurance side competition emerged in the casualty sector back in 2006, and by mid-2007 it had become considerably more marked. Nevertheless, the pressure emanated principally from the insurance rather than the reinsurance market.
Management report non-life reinsurance which we have successfully pursued in North America for 30 years, we continually identify business segments that no longer offer sufficient profitability. In such areas we reduce our shares and/or stop writing new business. At the present time this is especially true of the casualty sector, where we have significantly reduced our business – particularly in exposed lines.
On the claims side the year under review passed off largely quietly. The predicted severe hurricane season failed to materialise, and the damage caused by tornadoes, hailstorms and forest fires in California was within the expected bounds.
In the year under review our clients once again reaffirmed our very good market positioning: in a study conducted by the highly regarded US Flaspöhler Research Group we received top marks in the "Underwriting" and "Customer Service" categories. Our business partners particularly appreciate the fact that we offer a broader product range than many of our competitors and participate in all lines –
We are one of the market leaders in credit and surety reinsurance in North America. In the year under review we again maximised the attractive business opportunities.
+++ Our credit and surety business unaffected by the US mortgage crisis +++
We are exceptionally pleased with the performance of credit and surety reinsurance. Indeed, we were even able to improve appreciably on the already very good result of the previous year; no significant loss events were recorded in the year under review.
Seeing as the bulk of our worldwide marine and aviation portfolio is written on the London Market, the development of this business was discussed in the section on the United Kingdom.
All in all, we were satisfied with the development of our non-life reinsurance business in North America.
Both Mexico and Central America are regions with a marked natural catastrophe exposure. Hannover Re is highly involved in this segment, although reinsurers from Bermuda are now also forcing their way into the Mexican market. Prices fell sharply in catastrophe business, in some areas by as much as 20%; it should, however, be borne in mind that they were coming back off a very high level. The previous year had been notable for a capacity squeeze and corresponding price increases – triggered by hurricane "Wilma" in 2005 –, and in the year under review we made the most of every opportunity to recoup our losses from this event.
Rates slipped back in most lines, although they were still commensurate with the risks. In Colombian motor business loss ratios improved in the primary sector thanks to a drop in car thefts. In Mexico, where a softening in the rate level can be observed, the trend in casualty reinsurance is increasingly problematic.
+++ Hannover Re scarcely impacted by natural catastrophe losses in Latin America +++
Mexico and Central America were impacted by various natural disasters in the year under review: hurricane "Dean" left a trail of devastation in Mexico and the Caribbean, although the bulk of the damage was uninsured. The strain on our account from this event was consequently minimal. In addition, the flooding in Tabasco caused widespread damage and human suffering. Hannover Re incurred a loss from this event in the low single-digit millions of dollars. Hurricane "Felix" caused considerable destruction in Honduras and Nicaragua, although our portfolio was unaffected due to our minimal exposure.
In accordance with our strategic objectives we expanded our profitable, non-proportional business in Latin America and also modestly increased our total premium volume. The results obtained on our Latin American markets were thoroughly satisfactory. In these countries too we continue to offer our clients structured products. We are looking for growth impetus from the deregulation of the Brazilian market.
Africa Our most important market on the African continent is South Africa, where we are represented by our Johannesburg -based subsidiary, Hannover Re Africa. The operation is a sought-after partner for all lines, not least thanks to its quick and flexible response times.
The South African insurance and reinsurance markets were notable for growing competition in the year under review. The underwriting results posted by most insurers were overshadowed by a tense claims situation in motor business. On the reinsurance side, too, the market players adopted an aggressive stance. With ceding companies raising their retentions, demand for reinsurance protection declined.
The economic boom in South Africa and other African countries has driven organic growth in premium income. This is especially true of motor business as well as other private and industrial lines.
In accordance with our selective underwriting policy we did not renew treaties in the year under review that failed to show sufficient profitability. We boosted our share of the business written by our subsidiary Compass Insurance Company and were able to slightly increase our overall gross premium volume in the year under review.
The loss ratio at Hannover Re Africa increased somewhat due to a number of sizeable claims. Our clear strategic positioning and disciplined underwriting policy nevertheless generated another record result in the year under review for our non-life reinsurance operation in South Africa.
In niche segments such as private insurance business transacted by small mutual aid societies our involvement was still relatively limited on account of regulatory restrictions. We were nevertheless able to boost our share of this business. Bearing in mind the already substantial enlargement of our accident and liability portfolio in the previous year, the growth opportunities available to us in these segments were limited. The Japanese casualty market also proved to be relatively stable in the year under review, hence enabling us to further extend our position.
Business relations with our clients in Japan are traditionally geared to continuity. Thanks to our very good rating we are a sought-after partner for reinsurance covers. We were able to slightly increase our premium volume in the year under review, and our portfolio was spared any significant major losses. While a number of fire claims were recorded, the resulting strain on our account was relatively slight. All in all, we were thoroughly satisfied with the development of our business in Japan.
Southeast Asian markets suffered further rate reductions in both the primary and reinsurance sectors. The local markets tend to be dominated by proportional treaties – we are nevertheless making continuous efforts to focus more heavily on the writing of non-proportional business. In lines that have no correlation with natural catastrophe exposures we are also prepared to accept proportional arrangements provided they satisfy our profitability standards.
Our main markets in this region are Malaysia, India, the Philippines and Indonesia. Property lines account for about two-thirds of our total business. We successfully improved the diversification of the portfolio, extending our participation in lines such as personal accident, motor with limited liability, crop and livestock insurance as well as in the area of structured products. In motor business where policies have insured limits we offer selected clients a combination of traditional and structured products.
+++ Hannover Re very satisfied with the development of its retakaful business +++
The takaful and hence also retakaful markets – that is to say, insurance business transacted in accordance with Islamic law – have enjoyed dynamic growth in Southeast Asia and on the Arabian peninsula: in the year under review alone more than 20 new takaful companies were registered. Given the impressive pace of industrial expansion and what is still a relatively low insurance density at present, growth in the takaful market is currently estimated at over 20% per annum.
Our business with structured products has proven particularly successful in Asia: we were able to write new contracts in South Korea and China; in Thailand, the Philippines and Kazakhstan we concluded our first sizeable contracts and the prospects of adding more new business are bright.
Australia, New Zealand Hannover Re ranks third in the Australian non-life reinsurance market. For more than 20 years we have been represented by a branch office in Sydney. Our clients value us as a reliable and attractive partner not only on account of this local presence but also due to our very good rating. Since 2004 we have additionally written facultative business through this operation, which has subsequently developed profitably.
Rate reductions were again the hallmark of the Australian insurance market in the year under review in virtually all property and casualty lines. Commercial and industrial insurance lines were particularly hard hit. Conditions on the reinsurance side proved to be more stable, with only moderate price erosion observed. Personal accident insurance came under heavy price pressure in the year under review, while rates in non-proportional casualty business remained stable.
In the previous year cyclone "Larry" had already pushed up rates for catastrophe business, and in the aftermath of the severe flooding in New South Wales prices for programmes impacted by the resulting losses climbed higher; rate increases of up to 30% were obtained for lower layers. Rates for programmes that were spared losses remained stable. Upper layers of the programmes saw some slight reductions, but stable prices were also attainable.
The flooding in Australia in the months of June/July of the year under review produced an estimated market loss in the order of AUD 1 billion; it can, however, be anticipated that between 40% and 50% of this amount will be retained by the insurers. For Hannover Re this loss event meant a net burden of around EUR 20.7 million. In December Sydney and the coastal region were hit by a hailstorm for which we have set aside reserves of EUR
The life and health reinsurance business group combines under the worldwide Hannover Life Re brand the international activities of the Hannover Re Group in the life, health, annuity and personal accident lines, insofar as they are transacted by life insurers.
Hannover Life Re writes its business on all five continents and in recent years has advanced to become a leading provider of reinsurance concepts and solutions. With gross premium income in excess of EUR 3 billion and a market share of around 8% worldwide in 2007 it consistently ranks among the four most important internationally operating life reinsurers.
The gross premium income booked by Hannover Life Re surpassed the EUR 3 billion mark for the first time in the year under review, climbing by 10.4% to EUR 3.1 billion. Due to lower retrocessions the level of retained premium rose to 90.8% (85.4%), as a consequence of which net premium earned grew by as much as 17.8% to EUR 2.8 billion.
It should be borne in mind in this context that the weakness of the US dollar and currencies pegged to it – such as the Hong Kong dollar – against our balance sheet currency (euro) was one of a number of factors to exert a restraining effect on premium growth in the year under review; at unchanged exchange rates the premium volume would have been EUR 100 million – i.e. 3% – higher.
Measured in terms of the regional origin of our premium volume, the United Kingdom substantially extended its leading position and remained – with 30.1% (24.4%) of
Our preferred lines of life and annuity accounted for 87.8% of the total premium in 2007, with enhanced annuities in the United Kingdom serving as a particularly vital driver of our growth.
We consider ourselves a customer-oriented life and health reinsurer that structures and manages its relations with the aid of systematic Customer Relationship Management. We work together with our clients on a long-term, partnership-based footing in order to open up profit potentials for both parties.
Earnings per share in EUR 1.57 +83.9% 0.85 0.49 0.32 0.43
As in previous years, the following factors had a bearing on the performance of our life and health reinsurance business group: • development of the biometric risks of mortality, morbidity and longevity,
• development of the client-related credit risk in connection with financing transactions,
• movements on international capital markets, especially in the currencies of EUR, USD, GBP, AUD and ZAR,
The mortality factor remains the most significant biometric risk for our worldwide portfolio. In this respect our most notable exposures are in the United Kingdom, South Africa, Australia and various Asian markets. The US market, on the other hand, is of relatively minor importance in this context – in contrast to most of our competitors. The mortality experience for the year under review was favourable overall, although in Australia and South Africa we were impacted by a number of sizeable individual claims.
States), long-term care annuities (in Singapore and Germany ) and disability covers (in Germany and France). We can also include here the risk of involuntary unemployment, which we assume as a supplementary risk under reinsurance treaties in bancassurance business – first and foremost in Germany as well as in Romance-speaking markets such as France, Spain and Italy. The morbidity experience was better than average in the year under review.
The longevity factor is of growing relevance due to our heavy involvement in the field of UK single-premium enhanced annuities. In accordance with our position as market leader in this segment of the UK market we continuously analyse the claims experience at all major cedants; for the year under review our actuarial analyses indicate that this business is progressing in line with our projections.
We did not have any adverse experiences with the credit risk attached to our ceding companies in the year under review; in no instances were the ratings of our key insurance clients downgraded by internationally reputed rating agencies such as Standard & Poor's or A.M. Best.
Geographical breakdown of life and health reinsurance (as % of gross premium)
The investment income generated by Hannover Life Re also came in within the expected bounds despite the weakness of some foreign currencies: it amounted to EUR 293.9 million (EUR 313.2 million). This result includes investment income from the benefit reserves and claims reserves deposited with insurers as well as income from the portfolio of assets under own management. The income from self-managed assets totalled EUR 116.4 million, a fall of 5% compared to the previous year.
+++ Hannover Life Re cost leader with an expense ratio of 2% relative to gross written premium +++
These complex changes in the general environment left their mark on new business in the German market: regular premiums were down. Annuity policies in the form of
E+S Rück, which bears responsibility within the Hannover Re Group for handling the German market, generated premium income of EUR 428.6 million from its German cedants in the year under review; this was equivalent to a modest decline of around 4%. Even the above-average growth of our portfolio for Riester pensions failed to entirely offset the planned run-off of a large block assumption transaction from 2004. The underwriting result developed as expected, improving significantly on the previous year.
The UK reinsurance market is the second-largest in the world after the United States. Indeed, for our company it is the most important single market, accounting for 30.1% of our total premium volume written worldwide in the year under review.
Despite the introduction of solvency relief by the FSA, the UK regulator, there was scarcely any change in the demand pattern among UK insurers in the year under review. Large-volume quota share reinsurance treaties, which enable insurers to optimise their capital and risk management, continue to dominate the market. On the reinsurance side, some observers consider the increasingly fierce competition raging among predominantly Continental European providers to be verging on excessive.
Hannover Life Re operates through three different risk carriers in this market: Hannover Life Re UK based outside London provides a broad range of services in support of conventional reinsurance business, with an emphasis on risk transfer for mortality covers and critical illness
The biometric risk experience for mortality and critical illness was highly favourable in the year under review; we profited here from the expiry of large portfolios comprised of new business written in the years 2001 – 2005.
Our Irish subsidiary Hannover Life Re Ireland focuses on tailored reinsurance solutions for mid-sized and larger insurers in the United States, United Kingdom, Continental Europe and Asia. In recent years the company has advanced to become Hannover Life Re's most important foreign subsidiary – measured by written premium. It recorded a slight decline in gross written premium in the year under review to EUR 586.8 million (EUR 597.6 million ), while net premium earned stood at EUR 503.9 million (EUR 524.6 million).
The technical result across all the company's business segments was excellent in the year under review. Not
A new initiative that we are also supporting through our Paris life branch consists of so-called microinsurances –
France, Maghreb and Arab countries a counterpart to the microloans that enable rural populations in developing countries to start their own independent commercial activities for the first time. In this sector we concluded our first group reinsurance treaties for business in Egypt and Morocco, and in the coming years we expect to see appreciable extension of this initiative to various Asian and Latin American markets.
EUR 26.3 million (EUR 16.9 million). The EBIT margin amounted to 28.2% of net premium earned, while net income after tax came in at EUR 19.7 million (EUR
Following substantial changes in the regulatory environment last year and given the favourable general economic climate, Russia is seeing the onset of a rapid upturn in the private life insurance industry.
The US market is served by our subsidiary Hannover Life Re America based in Orlando/Florida, which also enjoys the support of an underwriting office for group covers on Long Island/New York. Several Canadian life insurers owned by the country's leading banks are placing a growing volume of reinsurance business with Hannover Life Re. What is more, the Canadian market holds special significance for us inasmuch as our most important retrocessionaires are based here. Geared very much to the long term, our close and trusting cooperation with these partners plays a vital role in Hannover Life Re's worldwide risk management.
In the area of seniors' health insurance we entered into a substantial participation in the Medicare Part D segment launched last year as part of government prescription drug coverage for seniors; around 44 million US citizens are enrolled in the Medicare programme.
Business in these countries is written directly from Hannover Home Office, although our service and marketing offices in Milan and Madrid provide valuable support. Total premium income came in at EUR 76.3 million in 2007, with the Greek market displaying appreciable growth impetus in the bancassurance segment.
The operating profit (EBIT) totalled EUR 5.7 million (EUR 3.3 million); this was equivalent to an EBIT margin of 9.6% of net premium earned. Net income after tax grew by 131.1% to EUR 4.8 million.
America, made exceptionally pleasing progress in the course of the year; most notably, the extensive support afforded to our clients in the area of underwriting met with a highly favourable response. Profitability remained good.
The markets of South America are served by Hannover Home Office. On the back of lively acquisition efforts we have made considerable advances in recent years, especially in the northern part of South America. The premium volume (including Mexico) is consequently now in the order of EUR 70 million. Results, as in the past two years, were most satisfactory.
Asia As in the previous years, we provide underwriting support for life and health reinsurance business in Asia from two regional centres operated as branches of Hannover Re: the operation in Kuala Lumpur is responsible for the ASEAN markets and the Indian Subcontinent, while our branch office in Hong Kong handles the Chinese-speaking economic region, (South) Korea and Japan. Underwriting activities are focused on risk-oriented reinsurance treaties in the life, critical illness and personal accident lines.
Following the rapid growth of more than 50% posted in the previous year, gross premium income retreated in 2007 and came in at EUR 89.7 million (EUR 103.6 million). We strengthened our infrastructure in China, established a branch in Shanghai and plan to open a branch in Seoul in 2008. The foundation is thus in place for sustained growth of 15% a year in these regions.
Underwriting activities are concentrated on the writing of life and critical illness (known as trauma here) lines as well as disability annuities. The company also operates as a primary insurer in the vigorously growing segment of occupational retirement provision in Australia through superannuation funds, an area where it has received top marks for quality from its customers over a number of years.
Sharp volatility was a hallmark of financial markets in the year under review. The German stock index (Dax) put on around 22.3% between January and December and was thus one of the top performers by global standards. During the year the index touched its lowest points in March at around 6,450, while soaring to a high in excess of 8,100 points in July and flirting with this level again in December. The S&P 500 in the United States – the bellwether index for international equity markets – and the EuroStoxx 50 both recorded single-digit percentage gains over the course of the year.
Responding to the liquidity crisis and credit crunch in the US triggered by the collapse of the American mortgage market, the Federal Reserve Board cut its prime rate incrementally from 5.25% to 4.25%. In light of the better economic conditions prevailing in Europe the European Central Bank chose not to make any reductions in base rates.
In this context we observe centrally implemented investment guidelines and are guided by dynamic financial analysis based on the latest scientific insights. These measures ensure that at all times we are able to meet our payment obligations in light of our liabilities profile.
Deposit interest and expenses contributed EUR 220.1 million (EUR 221.9 million) on balance to net investment income. Gains of altogether EUR 244.0 million were realised on disposals in the reporting period as part of our active management approach, as against losses of EUR 69.7 million. The positive balance of EUR 174.3 million was thus lower than in the previous year (EUR 217.4 million). Net investment income consequently contracted by 5.7% year-on-year to EUR 1,121.7 million (EUR 1,188.9 million).
Our portfolio of fixed-income securities amounted to EUR 15.7 billion as at 31 December 2007, a decrease of 2.1%. In view of the crisis on the mortgage market and the minimal yield advantages enjoyed by corporate bonds over government bonds up until the middle of 2007, we attached special importance to high quality in the year under review. The holdings of corporate bonds were therefore left virtually unchanged. Our preferred asset classes in Europe were debt securities issued by
Net investment income from assets under own management 901.6 -6.8% 967.0 764.3 697.8 598.0
Net investment income 1) Excluding expenses on funds withheld and contract deposits 2) Portfolio at fair value through profit or loss and trading 3) Including depreciation/impairments on real estate semi-governmental entities and jumbo mortgage bonds. New investments were made primarily in short- or mediumduration instruments. Losses on fixed-income securities recognised in shareholders' equity totalled EUR 103.4 million as at 31 December 2007, compared to losses of EUR 118.9 million in the previous year.
The quality of our fixed-income securities – measured in terms of rating categories – was maintained on a consistently high level. The proportion of securities rated "A" or better – at 92.3% – was slightly lower than in the previous year (93.3%).
In order to achieve this objective we have developed tools that enable us, on the one hand, to measure how close we are to accomplishing our goal and, on the other, to break it down to the level of individual profit centres.
• use IVC – as the core business result within the scope of our holistic management system Performance Excellence (PE) – to measure the extent to which we are able to execute our strategy.
Life and health reinsurance Gross premium growth 12–15% 10.4% 15.2% 11.4% (4.4%) (7.9%)
1) Figures for 2005 to 2003 in accordance with old segmentation 2) Operating profit (EBIT)/net premium earned 3) 750 basis points above the risk-free interest rate (as at 31 December 2007 = 3.91% = current 5-year average) 4) xRoCA = Excess return on capital allocated 5) In 2003 and 2004 the present value components are based on the value of in-force business, from 2005 to 2007 they are based on the European Embedded Value (EEV)
Both business groups of the Hannover Re Group have clearly defined long-term objectives; in view of the cyclical nature of non-life reinsurance we have not defined any targets for premium growth here, but solely for profit growth.
Intrinsic Value Creation and excess return on capital allocated 1) In 2003 and 2004 the present value components are based on the value of in-force business, from 2005 to 2007 they are based on the European Embedded Value (EEV).
We use the following formula to calculate the IVC: Adjusted operating profit (EBIT) – (capital allocated x weighted cost of capital) = IVC
In calculating the cost of capital, our assumption for the cost of shareholders' equity – based on a Capital Asset Pricing Model (CAPM) – is that the investor's opportunity costs are 350 basis points above the risk-free interest rate. Value is created in excess of this return. The definition of our targeted minimum return on equity as 750 basis points above "risk-free" thus already contains a not insignificant target value creation. Interest is calculated on the balancing items for present value at the underlying interest rates, and on debt capital at the actually paid interest for our hybrid capital. Weighted according to the composition of the allocated capital defined above, the weighted cost of capital applicable to all profit centres is calculated from these interest rates. We allocate equity sparingly and make efficient use of hybrid capital as well as other equity substitutes; our weighted cost of capital is consequently the lowest in the industry (6.6%
When seeking to identify these value drivers, it is first necessary to break the IVC down into individual decision fields. Even in the case of performance measurements, e.g. in connection with Management by Objectives, this approach makes it possible to take as a basis only those IVC components whose value drivers the manager in question can influence. Thus, for example, an underwriter at Hannover Home Office will only be accountable for the "Underwriting" decision field, whereas the manager of a subsidiary will also bear responsibility for all other decision fields.
Since comparison of absolute amounts is not always meaningful, we have introduced the xRoCA (excess return on capital allocated) in addition to the IVC. This describes the IVC in relation to the allocated capital and shows us the relative excess return generated above and beyond the weighted cost of capital.
faction with their employment situation. Our company enjoys a good reputation – not only among clients, but also among young people at universities and schools. At graduate recruitment fairs we always receive betterthan -average ratings. What is more, with the aid of our holistic management system Performance Excellence we demonstrated the exceptionally successful execution of our Group's human resources strategy in an externally conducted assessment (IQNet Business Excellence Class).
At Hannover Re personnel management is considered a key factor in the successful execution of strategy. Our Group's human resources strategy therefore concentrated on three goals in the year under review: the order of the day was to strengthen the satisfaction and affinity of the workforce, boost the company's appeal as an employer and enhance our personnel processes. In the year under review our staff were surveyed for the fourth time on their attitude towards their company: the finding was that, overall, they indicated again a high level of satis-
Employee responsibility clients in a manner that is honest, fair and law-abiding. These and other principles are intended to help our staff successfully cope with the often complex ethical and legal challenges facing them in their daily tasks.
At our company, there is a direct correlation between the achievement of objectives and compensation: in recent years we have consistently expanded the share of remuneration attributable to variable salary components. In the case of senior executives the variable salary components are controlled through the agreement of individual objectives, achievement of which is verified. In 2004 we implemented a compensation system linked to the company's performance, the Group Performance Bonus, for employees on or above the level of manager.
Expansion of our range of training opportunities a shift towards a supply market. We have responded accordingly: in future, we shall not only offer training as a certified insurance practitioner but will also assist our staff in obtaining a Bachelor of Science degree in business informatics or indeed in qualifying as a chef in our internal facilities management unit.
Does the company recognise my individual performance? Am I proud to tell others that I work here? Do the staff care about one another's well-being? How better to obtain answers to these questions than through an independently conducted survey? In the year under review we commissioned this employee survey for the fourth time – on a rotating basis either as part of the competition "Germany's Best Employer" or in the form of a company -specific employee survey.
In 2007 the survey was again addressed to the entire workforce: three quarters of all our staff took this opportunity to give us their feedback. It was gratifying to hear from 90% of the participants that they consider our company a good employer. 85% enjoy coming to work. That 77% of them are highly or exceptionally highly motivated bears out the dedication of our staff to their work.
culture, and the avoidance of discrimination is already enshrined in our business principles. Employees from 25 nations working at our Hannover Home Office are the guarantors that diversity is an integral part of lived daily experience at our company.
The transfer of knowledge between business and research is indispensable for the reinsurance of catastrophe risks. For some years now we have therefore supported the Geo Research Center in Potsdam, which engages in the systematic investigation and early detection of earthquakes.
Research and development our dialogue with other universities. We assist a number of institutions of higher learning in Germany in a variety of ways – for example the University of Göttingen, where we sponsor a guest professorship in Anglo-American law to promote the internationalisation of legal training.
Hannover Re identified 16 measures from the "Ecoprofit" Hannover catalogue that related primarily to the lighting system for the entire building complex at Hannover Home Office. Ten of these measures could be implemented immediately at minimal cost or through targeted management of the already existing building technology, as
In order to compensate for the CO2 pollution caused by business flights we also pay a carbon offset levy for each kilometre flown to an international organisation that puts the funds collected towards climate protection. Inter alia, they are invested in solar, hydroelectric, biomass and energy-saving projects so as to reduce greenhouse gases to an extent comparable with the effect on the climate of the emissions produced by flying. The money is used primarily to finance projects in developing countries.
run under the auspices of Hannover Re's individual branch offices and subsidiaries, including for example the "Food for homeless children" project in South Africa or the awarding of grants to needy students combined with vocational training and subsequent employment with the company. Most of these activities involve voluntary unpaid work performed by the staff, who collect donations through their efforts. Similarly, our life reinsurance operations in the United States and Australia participated in a variety of projects for people in need of help.
Hannover Re also sets great store by its support for the fine arts: as long ago as 1991, as a way of marking the occasion of Hannover Re's twenty-fifth anniversary, we launched an art foundation that benefits the Sprengel
We also sponsor the Kestnergesellschaft through our involvement in the latter's partner programme. Hannover Re functions as a "kestnerpartner" – which means that we give the society continuous and lasting support in its work.
As an internationally operating reinsurer we are confronted with a broad diversity of risks that are directly connected with our entrepreneurial activities and which manifest themselves differently in the individual strategic business groups and geographical regions. Our risk management therefore forms an integral component of our value-based enterprise management and hence of all higher-order decision-making processes. Our goal is to optimally utilise opportunities while appropriately controlling and managing the risks associated with our business operations. Risk management is accorded a high status in Hannover Re's strategy. It is a matter of existential importance to us that the core elements of our risk management are optimally harmonised and closely interlinked with one another. Only in this way can we make a holistic assessment not just of the risks on the asset and liabilities side of our balance sheet, but also of the opportunities.
Group Risk Management 2) • Risk monitoring function • Methodological competence, inter alia for
Central elements of the risk management system 1) Members: Chairman of the Executive Board, Chief Financial Officer, member of the Board responsible for life/health reinsurance, member of the Board responsible for coordinating non-life reinsurance, Central Divisional Manager Controlling and Chief Risk Officer.
3) Treaty departments and service units within the non-life and life/health reinsurance business groups and in the investments sector.
The following seven factors are hallmarks of our risk management system: • central coordination by Group Risk Management and local risk responsibility in the various areas
• use of efficient steering and controlling systems, e.g. DFA risk budgets
• feedback-control-based review of the efficiency of the systems and adjustment as necessary in line with the prevailing business environment and/or changed risk situation.
We have developed an internal risk model in order to quantify the risks to which Hannover Re is exposed. It encompasses statistical models both for individual risks (e.g. capital market risks such as interest rate changes or underwriting risks such as exposure to natural disasters) and for the aggregation of such individual risks. This enables us to measure our exposure not only in relation to individual risks but also in relation to the overall risk and to limit the exposure on the basis of our risk tolerance. Our overarching risk/return management is geared to probability distributions for our Group's key balance
Management of risks across the Group sheet variables and performance indicators (including the operating profit (EBIT) and shareholders' equity) that are determined by the internal risk model. Our internal model is oriented towards standard market practice and is subject to constant refinement. The importance of the internal model – an indispensable element for our company in the calculation of the necessary equity resources – will continue to rise in view of the future requirements of the first pillar of Solvency II.
Our overriding strategic objective is to generate valueoriented growth as an optimally diversified and economically independent reinsurance group of average profitability. All other goals are derived from and subordinate to this overriding objective. Strategic risks may derive from an imbalance between the defined corporate strategy and the continually changing general economic conditions. Such an imbalance might be caused, for example,
Within the scope of accumulation control – i.e. monitoring of the exposure of Hannover Re's portfolio – the full Executive Board defines the willingness to assume natural hazards risks once a year on the basis of the company's overall risk strategy. In order to manage the portfolio with this consideration in mind, maximum underwriting limits ("capacities") are stipulated for various extreme loss scenarios and return periods /probabilities in light of profitability criteria.
Adherence to these limits is constantly monitored by the "Aggregate Control" section of Group Risk Management and the Risk Committee. For this purpose, we establish the portfolio risk for the scenario in question (e.g. hurricanes in the US, windstorms in Europe, earthquakes in the US) in the form of probability distributions on a gross basis, i.e. our natural hazards experts calculate specific
In life and health reinsurance biometric risks are of special importance to our company. This term refers to all risks directly connected with the life of an insured person, such as miscalculation of mortality, life expectancy and the probability of disability. Since we also prefinance our cedants' new business acquisition costs, lapse and credit risks are of significance too.
We reduce these potential risks with a broad range of risk management measures. For example, the reserves in life and health reinsurance are calculated in accordance with actuarial principles using secure biometric actuarial bases and with the aid of portfolio information provided by our clients. Through our own quality assurance we ensure that the reserves established by ceding companies in accordance with local accounting principles satisfy all requirements with respect to the calculation methods used and assumptions made (e.g. use of mortality and disability tables, assumptions regarding the lapse rate etc.). New business is written in all regions in compliance with internationally applicable Global Underwriting Guidelines, which set out detailed rules governing the type, quality, level and origin of risks. These global guidelines are revised every two years and approved by the full Executive Board. They are supplemented by countryspecific "Special Underwriting Guidelines" that cater to the special features of individual markets. In this context the quality standards set for the portfolio reduce the potential credit risk stemming from an inability to pay or deterioration in the credit status of cedants. Regular audits verify compliance with these guidelines. 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, inter alia with an eye to the lapse risk.
The Group net income or loss generated by the Hannover Re Group is fundamentally determined by two components, namely the "underwriting result" and the "investment income". The asset portfolios derive in substantial measure from insurance premiums that must be set aside for future loss payments. The risks in the investment sector encompass, most notably, market, credit and liquidity risks as well as currency exposures.
The above remarks describe the diverse spectrum of potential risks to which we, as an internationally operating reinsurance group, are exposed. These risks can have a not inconsiderable impact on our assets, financial position and net income. Yet it is inappropriate to consider only the risk aspect, since risks always go hand-in-hand with opportunities. With the aid of our effective controlling tools as well as our organisational structure and process organisation, we ensure that we are able to identify risks in a timely manner and maximise our opportunities. Based on our currently available insights arrived at from a holistic analysis of the risk situation, we cannot discern any risks that could jeopardise the continued existence
Assessment of the risk situation 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".
Although cyclical risks have increased, the global economy should continue to grow in 2008: at the beginning of the current year, however, events surrounding the mortgage crisis and credit crunch initially helped to fan fears of a recession in the United States and its negative implications for Europe and Asia. The cut in the prime rate made by the Federal Reserve Board – first by 75 and then by a further 50 basis points – proved helpful and initially helped to stop the massive price slumps suffered by international stock markets on 21 January
In the United States the signs are that economic growth will slow in 2008, with only a marginal rise in gross domestic product. Similarly, output in other industrial nations will likely grow only at a subdued pace. Despite the clouds hanging over the general economic landscape, however, the vigorous growth in emerging markets – especially China and India – should be sustained.
The cyclical downturn in the United States could also drain appreciable impetus from the economic upturn in Germany. Against the backdrop of a continuing strong euro, export growth will be considerably softer than in the previous year. The high price of oil should also prove a drag on the German economy. Nevertheless, company order books are healthy, and this should help to stabilise the overall business outlook.
Overall, we were satisfied with the outcome of the treaty renewals as at 1 January 2008 – the date when around two-thirds of our treaties were renegotiated. Despite discernible softening tendencies in the market, the rate reductions were broadly smaller than anticipated. It was particularly gratifying to note that, by and large, the prices and conditions that could be obtained were still commensurate with the risks. At the same time we benefited from lower expenditure on our own protection covers. More pronounced premium decreases in some segments were virtually offset by increases in our market share on the German market and in worldwide credit and surety reinsurance. Net premium in non-life reinsurance is expected to remain stable in original currencies.
Non-life reinsurance able to further extend our already large market share thanks to new customer relationships and increased treaty shares under existing accounts, thereby cementing and expanding our position as one of the leading reinsurers in the profitable German market. Due to its significant premium growth Germany constitutes the largest single non-life reinsurance market in the current financial year.
In response to the losses incurred in connection with "Kyrill" in January 2007, stronger demand is emerging for catastrophe covers. We were able to raise rates for the property catastrophe business reinsured with our company. The development of motor liability insurance is also satisfactory; rates here remained stable on a high level under the non-proportional treaties. The premium erosion that had been forecast as recently as the 2007 reinsurance gathering in Baden-Baden – for example in non-proportional liability insurance – largely failed to materialise. Industrial fire insurance saw further premium erosion in 2008 attributable to the moderate major claims experience in 2007. As one of the leading reinsurers in Germany, E+S Rück – our subsidiary that bears responsibility for the German market – will again be a reliable partner for its clients in 2008 and will stand by its profitoriented underwriting policy of past years.
In the United Kingdom we scaled back our casualty business with clients on the London Market in response to softening prices. Renewals in motor insurance, on the other hand, passed off exceptionally satisfactorily. We stepped up our participation in light of rate increases.
Given the absence of major claims in international marine business in both 2006 and 2007, rate cuts were seen in this segment; nevertheless, rates were still appreciably higher than the level of 2005, the year notable for the severe hurricanes "Katrina", "Rita" and "Wilma". More marked price declines were booked in Asia as a consequence of fierce competition. In addition to markdowns on rates we expect insurers to further raise their retentions, since reinsurance prices are falling considerably less sharply than insurance prices. In view of declining rates we further reduced our risk in regions with natural catastrophe exposure, such as the Gulf of Mexico,
Management report forecast as a result of which premium income contracted by 9% after the renewals on 1 January 2008.
In Northern European countries we expect to see a satisfactory development. Rates will, however, decrease in all lines owing to intense competition.
In our assessment, France offers further attractive business opportunities in builder's risk insurance, and we shall therefore keep an eye on this line over the long term. Rates in motor business were stable during the renewals. In property business, on the other hand, they are likely to fall slightly in both Belgium and France. We anticipate a slight increase in premium income. Effective 1 January 2008 we combined our service company and branch office in Paris so as to leverage synergies and cut costs.
In Italy too the treaty renewals were most satisfactory; we were able to significantly enlarge our premium volume here.
+++ Absence of catastrophe losses in North America prompts rate reductions +++
The absence of catastrophe losses had corresponding implications for rate movements on the reinsurance side. Property and property catastrophe business consequently saw rate reductions. The margin requirements will, however, still be comfortably surpassed, and the price level that is ultimately achieved should still match up to that called for by modelling and rating agencies. Reinsurance conditions in casualty business are still relatively acceptable despite a softening market. Workers' compensation saw appreciable rate reductions, although the business is still attractive overall. Even in directors' and officers' insurance, where continuously decreasing rates are the hallmark of the original market, the reinsurance market proved to be stable with slight improvements. In longtail casualty business a very good rating continues to be essential, and we therefore enjoy a clear competitive advantage. For 2008 we expect our premium volume in North America to contract.
Premium volume from these markets is likely to contract. In Japan – where treaties are for the most part renewed on 1 April – we similarly anticipate softening rates, although they should still be commensurate with the risks.
In view of the increasing consolidation in Central America we anticipate a decline in demand for reinsurance covers. In this region we are striving, in particular, to cultivate our motor portfolio. The parliament in Brazil approved the abolition of that country's reinsurance monopoly. However, given that growth in Brazil is disproportionately slow compared to other emerging markets and since we initially expect reinsurance supply to outstrip demand, we assess the current profit outlook as modest. We are currently reviewing whether it would make sense to open a local representative office. It is our expectation that the premium lost in Latin America as a consequence of premium erosion will be largely offset by growth in the agricultural segment.
Nevertheless, driven by our specialty business we expect the premium volume for the current year to grow.
Particularly following the sale of Praetorian, our primary insurance and facultative premium volume from socalled specialty business contracted substantially in the year under review. Although original rates are falling and the US dollar is weak, we expect our premium in-
Management report forecast come in facultative reinsurance to hold steady thanks to our diversification. Since Clarendon Insurance Group, Inc. is only managing existing business, we generate new business solely through our subsidiaries Compass Insurance Company Ltd. in South Africa and International Insurance Company of Hannover Ltd. in the United Kingdom. These two companies are expected to record consistent premium growth and satisfactory results.
We are confident of our ability to boost our result in nonlife reinsurance despite rate reductions in the current and coming year. This is subject to the premise that the burden of catastrophe losses and major claims remains within the expected level of around 10% of net premium. The following aspects, in particular, are central to this positive outlook: • Rates and conditions are still commensurate with the risk, hence enabling us to at least generate our cost of capital; • We were able to enlarge our market shares in profitable segments, e.g. in German business and the credit and surety lines; • Reduced share of liability business has a favourable effect on the combined ratio; • Run-off profits are likely from reserves constituted for US casualty business in the years 2002–2006; • Thanks to substantially lower retrocession costs, the quality of the net premium remained virtually unchanged for 2008; • The 2008 calendar year will profit in some areas from the hard market of previous underwriting years.
In the area of block assumption transactions we kicked off the current year in the United States with the largest transaction in the history of Hannover Life Re; it is designed to realise the embedded value of individual life endowment policies and individual life unit-linked products. Another major transaction in this segment related to a block of deferred annuity policies of a leading US insurer.
In critical illness business we were one of the key players in the 2007 launch of the new product generation in the United Kingdom, under which policyholders for the first time receive partial benefits in the event of a milder form of illness. It is our assumption that this product variant – which offers the possibility of drawing graduated benefits – will generate considerable interest in other countries too going forward.
Also in the United Kingdom, we intend to expand our business with enhanced annuities and enlarge our client base for these products in the interests of diversification. In addition, we entered into cooperations last year with a number of specialist insurers that assume entire portfolios of occupational retirement provision and costefficiently run off both current and future pension obligations. Here too we see considerable potential for the coming years.
Going forward, as in the past, we are looking to promising market opportunities in the US in the areas of block assumption transactions and healthcare coverage for senior citizens. We are continuing to focus on the implementation of system-aided risk decision systems at point of sale, thanks to which the application process for simple life insurance products can be dramatically shortened. The experiences with our pilot clients will open up further growth potential for us this year and next.
Especially in Asia, we are stepping up our regional focus: for the first half of the current year we plan to commence operational business at two new branches in Shanghai and Seoul. In India we intend to set up a service company in Mumbai in 2008 so as to be able to derive maximum benefit from the future potential of that country's life market over the long term. The planned strategic cooperation with a highly reputed Indian reinsurer will speed up our market entry on this subcontinent.
Management report forecast to remain unchanged thanks to Hannover Life Re's special positioning; for the next two years we again anticipate an EBIT margin in the range of 6.5% to 7.5% of net premium earned.
Based on the double-digit premium growth in original currencies anticipated for both the current and coming years, the operating profits (EBIT) are expected to come in comfortably in excess of EUR 200 million; no allowance is made here for non-recurring special effects.
Overall business outlook and alternative asset categories, we should be able to generate another stable profit contribution.
We define our long-term goals as follows: In non-life reinsurance we are guided exclusively by profit rather than growth targets. Our goal here is to increase the operating profit (EBIT) by at least 10% each year.
On the Group level our return-on-equity target is at least 750 basis points above the risk-free interest rate; this currently stands at 11.4%.
Both the earnings per share and the book value per share also constitute central management ratios and performance indicators for our company: our strategic objective is to increase these key figures – together with the operating profit (EBIT) – by double-digit margins every year (Triple 10 target).
Fixed-income securities – at fair value through profit or loss 7.1 158,740 166,463
Other financial assets – at fair value through profit or loss 7.1 20,385 32,575
Liabilities related to assets classified as held for sale 5.2 – 2,540,847
Commission and brokerage, change in deferred acquisition costs 7.2, 7.14 1,759,010 1,940,353
Tax effects on income and expense directly recognised in equity 12,870 37,888 (18) 7,559 58,299
Cash and cash equivalents at the end of the period 335,422 351,776
The segments are shown after consolidation of internal transactions within the individual segment, but before consolidation across the segments. This is reported separately in the "Consolidation" column.
Liabilities related to assets classified as held for sale – 2,478,513
Our secondary segmental reporting covers the continuing operations and is based on the regional origin of the investments and gross written premium.
NOTES Contents 1. Company information 92 2. Accounting principles 92 3. Accounting policies 94 3.1 Change in accounting policies 94 3.2 Summary of major accounting policies 95 3.3 Major discretionary decisions and estimates 98 4. Consolidated companies and consolidation principles 100 5. Major acquisitions, new formations and other corporate changes 105 5.1 Acquisitions and new formations 105 5.2 Disposals and discontinued operations 106 5.3 Further corporate changes 108 6. Management of technical and financial risks 109 6.1 General risk management 109 6.2 Technical risks 113 6.3 Investment risks 115 7. Notes on the individual items of the balance sheet and statement of income 118 7.1 Investments including income and expenses 118 7.2 Technical assets and liabilities 134 7.3 Contracts without sufficient technical risk 143 7.4 Goodwill; present value of future profits on acquired life reinsurance portfolios 143 7.5 Taxes and deferred taxes 145 7.6 Staff and expenditures on personnel 147 7.7 Provisions for pensions and other post-employment benefit obligations 148 7.8 Debt and subordinated capital 153 7.9 Shareholders' equity and minority interests 156 7.10 Other comprehensive income 157 7.12 Earnings per share 158 7.13 Other assets and liabilities 158 7.14 Technical statement of income 164 7.15 Other income/expenses 166 8. Related party disclosures 166 8.1 Transactions with related parties 166 8.2 Remuneration and shareholdings of the management boards of the parent company 169 8.3 Share-based payment 169 8.4 Mortgages and loans 172 9. Other notes 172 9.2 Contingent liabilities and commitments 172 9.3 Long-term commitments 173 9.4 Rents and leasing 174 9.5 Currency translation 175 9.6 Fee paid to the auditor 176 9.7 Events after the balance sheet date 176
With the aim of focusing on our reinsurance business and following the sale of Praetorian Financial Group, Inc., New York, we have divided our segmental reporting drawn up in accordance with the provisions of IAS 14 "Segment Reporting " into the business groups of non-life reinsurance and life and health reinsurance. Financial reinsurance – as part of the product range of non-life reinsurance – as well as the remaining portion of the specialty insurance business group are now reported together with and in the non-life reinsurance business group. The figures for the previous period shown for comparative purposes have been adjusted retrospectively.
The consolidated financial statement reflects all IFRS in force as at 31 December 2007 as well as all interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), application of which was mandatory for the 2007 financial year.
Since 2002 the standards adopted by the International Accounting Standards Board (IASB) have been referred to as "International Financial Reporting Standards (IFRS)"; the standards dating from earlier years still bear the name "International Accounting Standards (IAS)". Standards are cited in our Notes accordingly; in cases where the Notes do not make explicit reference to a particular standard, the term IFRS is used.
As a consequence of the amendment of IAS 1 "Presentation of Financial Statements", disclosures are to be provided in the Notes that enable readers to understand the entity's objectives, policies and processes for managing capital and expand on the information contained in the statement of changes in shareholders' equity. The amended standard is mandatory for financial years beginning on or after 1 January 2007. We would refer the reader to our remarks on valuebased management on pages 53 et seq. of this report as well as to our additional comments in Section 7.9 "Shareholders ' equity and minority interests".
Also in November 2006 the IFRIC published IFRIC 11 "IFRS 2 – Group and Treasury Share Transactions". The interpretation contains guidelines for how to apply IFRS 2 "Share-based Payment" to share-based payment arrangements involving an entity's own equity instruments or rights to equity instruments awarded within the same group. IFRIC 11 is mandatory for financial years beginning on or after 1 March 2007. Hannover Re does not currently expect application of the interpretation to have any influence on the consolidated financial statement.
Effective 28 December 2007 guarantees given by Talanx AG were transferred with legal force from Hannover Re to Hannover Reinsurance (Ireland) Ltd. The guarantees relate to a group of reinsurance contracts and provide for cash compensation from the guarantor in the event that the technical balances plus interest paid on certain measurement dates are not covered by the present value of the future earnings from these contracts. The contracts in question are classified as financial instruments with the character of loans and receivables in accordance with IAS 39 and measured at amortised cost (so-called "investment contracts"; please see also the explanatory remarks below on reinsurance contracts in Section 3.2 "Summary of major accounting policies"). In this context, the technical balances as at the balance sheet date represented the amortised cost of the financial instruments. The adjustment was made retroactively as required by IAS 8. This gave rise to a reallocation within the balance sheet of deferred acquisition costs totalling EUR 249.8 million (EUR 248.0 million) to the investment category of loans and receivables as well as a reallocation from the reinsurance underwriting result to ordinary investment income in an amount of EUR 12.5 million (EUR 7.8 million). The figures for the previous year have been adjusted retrospectively for comparative purposes as required by IAS 8. This reclassification, which affected the life and health reinsurance and non-life reinsurance business groups, did not affect the premium, operating profit (EBIT) or net income or the shareholders' equity.
Financial assets: as a basic principle we recognise the purchase and sale of directly held financial assets as at the settlement date.
Financial assets classified as available for sale are carried at fair value; accrued interest is recognised in this context. We allocate to this category those financial instruments that do not satisfy the criteria for classification as held to maturity, loans and receivables, at fair value through profit or loss, or trading. Unrealised gains and losses arising out of changes in the fair value of securities held as available for sale are recognised – with the exception of currency valuation differences on monetary items – in shareholders' equity after deduction of deferred taxes.
The fair value of fixed-income and variable-yield securities is determined primarily by means of prices fixed on publicly quoting markets or exchanges on the basis of "bid" prices. If such financial assets are not quoted on public markets, the fair value is calculated on the basis of the acknowledged effective interest rate method or estimated using other financial assets with similar credit rating, duration and return characteristics. Under the effective interest rate method the
Notes accounting principles current market interest rate levels in the relevant fixed-interest-rate periods are always taken as a basis. The fair value of equities and equity-like financial assets is also calculated primarily on the basis of prices fixed on publicly quoting markets and exchanges.
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, below acquisition cost. In accordance with IAS 39.69 the reversal of impairment losses on equities to the statement of income once impairment has been taken is prohibited, as is adjustment of the cost basis. Impairment is tested in each reporting period using the criteria defined by Hannover Re. If a security is considered to be impaired on the basis of these criteria, IAS 39.68 requires that a value adjustment be recognised in the amount of the fair value less historical cost and less prior value adjustments, meaning that depreciation is taken on the fair value as at the closing date – if available, on the publicly quoted stock exchange price.
Other invested assets are for the most part recognised at nominal value. Insofar as such financial assets are not listed on public markets (e.g. participating interests in private equity firms), they are carried at the latest available "net asset value" as an approximation of the fair value.
Deferred tax assets: IAS 12 requires that assets-side deferred taxes be established if assets had to be recognised in a lower amount or liabilities in a higher amount in the consolidated balance sheet than in the tax balance sheet and if these differences will be cancelled out again for tax purposes in the future (so-called temporary differences). Deferred tax assets are also to be recognised on tax loss carry-forwards. Insofar as unrealised losses on securities are carried directly in shareholders' equity (cf. explanatory notes on financial assets held as available for sale), the resulting deferred tax assets are also recognised outside the statement of income. Valuation allowances are made for deferred tax assets as soon as realisation of the receivable no longer appears likely.
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 safety margin for the risks of change, error and random fluctuation. They correspond to those used in the premium calculation and are adjusted if the original safety margins no longer appear to be sufficient.
Shareholders' equity: the items "common shares" and "additional paid-in capital" are comprised of the amounts paid in by the parent company's shareholders on its shares. In addition to the statutory reserves of the parent company and the allocations from net income, the retained earnings consist of reinvested profits generated by the Hannover Re Group companies in previous periods. What is more, in the event of a retrospective change of accounting policies, the adjustment for previous periods is recognised in the opening balance sheet value of the retained earnings and comparable items of the earliest reported period. Unrealised gains and losses from the fair value measurement of financial instruments held as available for sale are carried in cumulative other comprehensive income under unrealised price gains/losses from investments. Translation differences resulting from the currency translation of separate financial statements of foreign subsidiaries are recognised under gains and losses from currency translation.
Minority interests are shares in the equity of affiliated companies not held by companies belonging to the Group. IAS 1 "Presentation of Financial Statements" requires that minority interests be recognised separately within Group shareholders' equity. The minority interest in profit or loss is shown separately as profit appropriation following the net income ("thereof" note). This item refers mainly to minority interests in E+S Rück and its subsidiaries.
In order to measure the "ultimate liability" the expected ultimate loss ratios are calculated in non-life business with the aid of actuarial methods such as the "chain ladder" method. The development until completion of the run-off is projected on the basis of statistical triangles from the original notifications of ceding companies. In this context it is generally assumed that the future rate of inflation of the loss run-off will be analogous to the average rate of the past inflation contained in the data. The more recent underwriting years in actuarial projections are of course subject to greater uncertainty, although this can be considerably reduced with the aid of a variety of additional information on improvements in the rates and conditions of the business written and on loss trends. The amounts arrived at as the difference between the ultimate losses and the reported losses are set aside as the IBNR reserve for losses that have been incurred but are not yet known or have still to be reported.
In life and health reinsurance business too the calculation of reserves and assets is crucially dependent on actuarial projections of the covered business. So-called model points are defined according to the type of business covered. The main distinguishing criteria are the age, sex and (non-)smoker status of the insured, tariff, policy period, period of premium payment and amount of insurance. The portfolio development is simulated for each model point, in which regard the key input parameters are either predefined by the tariff (e.g. allowance for costs, amount of premium, actuarial interest rate) or need to be estimated (e.g. mortality or disability rates, lapse rates). These assumptions are heavily dependent on country-specific parameters and on the sales channel, quality of the cedant's underwriting and claims handling, type of reinsurance and other framework conditions of the reinsurance treaty. The superimposition of numerous model points gives rise to a projection, which incorporates inter alia assumptions concerning the portfolio composition and the commencement of covered policies within the year. Such assumptions are estimated at the inception of a reinsurance treaty and subsequently adjusted to the actual projection.
Notes consolidated companies and consolidation principles 4. Consolidated companies and consolidation principles
Hannover Rückversicherung AG is the parent company of the Group. The consolidated financial statement includes fourteen (eleven) German and nineteen (eighteen) foreign companies, as well as three (three) foreign subgroups. Three (three) German and three (three) foreign associated companies were consolidated using the equity method.
In conformity with Item 7.1.4 of the recommendations of the German Corporate Governance Code as amended on 14 June 2007, the following table also lists major participations in unconsolidated third companies.
Zweite Hannover Rück Beteiligung Verwaltungs-GmbH, Hannover/Germany 1) 100.0 EUR 500,000 EUR –
HAPEP II Holding GmbH, Hannover/Germany 3) 95.3 EUR 47,813 EUR 3,081
GbR Hannover Rückversicherung AG/ E+S Rückversicherung AG Grundstücksgesellschaft, Hannover/Germany 1) 81.9 EUR 60,494 EUR 727
Hannover Re Euro RE Holdings GmbH, Cologne/Germany 3) 81.9 EUR 125 EUR (37)
Hannover Euro Private Equity Partners III GmbH & Co. KG, Hannover/Germany 3) 67.1 EUR 46,788 EUR 2,589
Hannover Euro Private Equity Partners II GmbH & Co. KG, Hannover/Germany 3) 57.7 EUR 15,427 EUR 2,023
Hannover Life Reassurance Bermuda Ltd., Hamilton/Bermuda 100.0 EUR 120,150 EUR 876
Hannover Life Reassurance Company of America, Orlando/USA 100.0 USD 136,570 USD 30,319
Hannover Life Reassurance (Ireland) Ltd., Dublin/Ireland 1) 100.0 EUR 278,346 EUR 38,686
Hannover Re Advanced Solutions Ltd., Dublin/Ireland 4) 100.0 EUR 31 EUR –
Hannover Re (Bermuda) Ltd., Hamilton/Bermuda 1) 100.0 EUR 968,000 EUR 138,652
Hannover ReTakaful B.S.C. (c), Manama/Kingdom of Bahrain 1) 100.0 BHD 20,103 BHD 103
International Insurance Company of Hannover Ltd., Bracknell/United Kingdom 100.0 GBP 96,988 GBP 920
Hannover Reinsurance Africa Ltd., Johannesburg/South Africa 1) 100.0 ZAR 558,234 ZAR 114,117
Hannover Re Real Estate Holdings, Inc., Orlando/USA 1) 7) 95.1 USD 111,641 USD 5,338
Penates A, Ltd., Tortola/British Virgin Islands 7) 90.3 USD 145,759 USD (82)
WRH Offshore High Yield Partners, L.P., Wilmington/USA 7) 89.1 USD 67 USD 464
Only subsidiaries of minor importance for the assets, financial position and net income of the Hannover Re Group are exempted from consolidation. For this reason thirteen foreign service companies, the business object of which is primarily the rendering of services for reinsurance companies within the Group, were not consolidated in the year under review.
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.
WPG CDA IV Liquidation Trust, Grand Cayman/Cayman Islands 9) 10) 27.3 USD 444 USD (461)
Mediterranean Re, PLC, Dublin/Ireland 9) 12) 33.3 USD 3,925 USD 20
Securitisation of reinsurance risks The securitisation of reinsurance risks is largely structured through the use of special purpose entities. The existence of a consolidation requirement in respect of such entities is to be examined in accordance with SIC–12 "Consolidation – Special Purpose Entities". In cases where IFRS do not currently contain any specific standards, Hannover Re's analysis – in application of IAS 8.12 – also falls back on the relevant standards of US GAAP.
In March 2007 Hannover Re placed on the capital market a protection cover on its worldwide natural catastrophe business in an amount of USD 200.0 million with a term of two years. It provides Hannover Re with aggregate excess of loss coverage. The special purpose entity Kepler Re, a separate cell within Kaith Re Ltd., was used for the transaction. The volume as at the balance sheet date totalled EUR 135.9 million. The underlying portfolio consists of the natural catastrophe business retained under the existing "K5" securitisation. The cover attaches upon occurrence of an aggregated 83-year-event for "K5" and is fully utilised upon occurrence of a 250-year accumulation. Within this spread the outside investors in this and the "K5" transaction combined assume 90% of the "K5" losses, while the remaining 10% remain with Hannover Re. Hannover Re does not bear the majority of the economic benefits or risks arising out of this company 's activities through any of its business relations with the special purpose entity.
Hannover Re participates in a number of special purpose entities for the securitisation of catastrophe risks by taking up certain capital market securities known as "disaster bonds" (or "CAT bonds"). Since Hannover Re does not exercise a controlling influence in any of these transactions either there is no consolidation requirement.
On 7 February 2007 we reported on the permanent establishment of a branch of Hannover Re under formation in Shanghai, People's Republic of China, for which we had received a licence in the previous year from the China Insurance Regulatory Commission (CIRC) to transact life reinsurance business. The company formation process was still ongoing at the balance sheet date.
The company Castellum Holdings Ltd. and its subsidiary Castellum Re Ltd. held by Hannover Re (Bermuda) Ltd., Hamilton, were liquidated effective 21 March 2007.
Effective 8 January 2007 Hannover Re sold its 49% interest in DSP Deutsche Senior Partner AG, Bonn – which was recognised at equity in the consolidated financial statement – at book value to the company's majority shareholder.
As at 31 December 2007 the net income recognised from discontinued operations included a disposal gain of EUR 23.6 million after taxes and less costs to sell. Due to the effect of items which are not tax-deductible, the tax expenditure attributable to this disposal gain amounted to EUR 70.7 million.
Effective 1 January 2007 Hannover Re completed a reorganisation of some of its Irish group companies with no effect on income within the Group. With the exception of specific reinsurance contracts, the business operations of E+S Reinsurance (Ireland) Ltd. and Hannover Reinsurance (Dublin) Ltd. were transferred by sale to Hannover Reinsurance (Ireland) Ltd. Since that date E+S Reinsurance (Ireland) Ltd. and Hannover Reinsurance (Dublin) Ltd. have been in run-off and are no longer writing new business.
On 11 April 2007 Hannover Rück Beteiligung Verwaltungs-GmbH (HRBV) acquired effective 1 April 2007 the 10% stake held by a minority shareholder, CiV Lebensversicherung AG, Hilden (CiV Leben), in E+S Rück for a purchase price of EUR 135.2 million, thereby increasing its participation in the company to 65.78%. CiV Leben, a subsidiary of Talanx AG, is an affiliated company as defined by IAS 24. This increase in the share held in an already consolidated Group company with no change in control status constitutes a transaction between entities under common control. In accordance with the applicable requirements of IFRS 3 in conjunction with IAS 27 we dispensed with a revaluation of the net assets and recognised the difference between the purchase price of the acquired shares and the pro-rata assets at existing book values in an amount of EUR 6.8 million as goodwill.
Effective 1 October 2007 Hannover Re acquired the 50% stake held by E+S Rück in Hannover Life Re of Australasia Ltd., Sydney, Australia, for a purchase price of EUR 96.8 million; full allowance was made for transaction costs. Hannover Re thus holds all shares in the company. All intercompany profits arising out of this transaction were eliminated.
Risk capital* required per business group without diversification effect * Capital requirement calibrated to the 99.97% quantile as per internal risk model 39.5% Diversification
Parallel upward shift in the overall interest rate curve by 100 basis points (401.3) 396
1) Stress associated with the risk factors for these scenarios as specified by the Swiss Solvency Test
Figures in EUR million Effect on forecast net income 100-year loss California earthquake (222.9) (270)
Scenario analyses As part of our holistic approach to risk management across all business groups, we take into account all scenarios that we consider to be relevant. In addition, we analyse certain (extreme or stress) scenarios, determine their effect on key balance sheet variables and performance indicators and evaluate them in relation to the planned figures.
Credit risks 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. This is also true of our broker relationships, under which risks may occur inter alia through the loss of the premium paid by the cedant to the broker or through double payments of claims. The associated risks are therefore minimised with the aid of a number of mechanisms. For example, 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.
2) Before consolidation, without minority interests 3) For contracts in foreign currencies
Retrocession, that is to say the passing on of portions of our assumed risks, gives rise to claims that we hold against our retrocessionaires. These reinsurance recoverables – i. e. the reinsurance recoverables on unpaid claims – amounted to EUR 2,471.6 million (EUR 3,048.5 million) as at the balance sheet date.
The following chart shows the development of reinsurance recoverables on unpaid claims: The retention, i.e. the portion of assumed risks that we do not retrocede, developed as follows in recent years: The chart shows that around one-third of our reinsurance recoverables are secured both at the balance sheet date and consistently over time and also provides insight into the ratings of our retrocessionaires.
1) Figures for 2003–2005 before new segmentation 1) Figures for 2003–2005 before new segmentation
The correct measurement of loss reserves for asbestos- and pollution-related claims is a highly complex matter since decades may elapse between causation of the loss and reporting of the claim. Hannover Re's exposure to asbestosrelated claims and pollution damage is, however, comparatively slight. The adequacy of these reserves is measured using the so-called "survival ratio". This ratio expresses how many years the reserves would cover if the average level of paid claims over the past three years were to continue. As at the end of the year under review our survival ratio stood at 26.2 years.
Our remarks on technical and other assets which are unadjusted but considered overdue as at the balance sheet date as well as on significant unscheduled depreciation taken in the year under review constitute further information with a bearing on credit risks. In this context the reader is referred to Section 7.2 "Technical assets and liabilities" and Section 7.13 "Other assets and liabilities".
1) (Shareholders' equity + minority interests + hybrid capital)/net written premium 2) Hybrid capital/(shareholders' equity + minority interests) 3) EBIT/interest on hybrid capital 4) Net reserves/net premium earned (Group) 5) Figures from 2006 onwards in accordance with new segmentation
The following catastrophe losses and major claims were of relevance to our Group in the financial year: Catastrophe losses and major claims
Damage to an oil platform in Mexico, 23 October 6.8 6.5
The VaR of the Hannover Re Group determined in accordance with these principles specifies the decrease in the fair value of our total portfolio that with a probability of 95% will not be exceeded within ten trading days. Our VaR developed favourably in the course of the year, as shown in the graph below: The combined ratio is tracked over time in non-life reinsurance in order to monitor the risk of losses exceeding premiums: Value at Risk1) in the Hannover Re Group 1) VaR upper limit according to Hannover Re's investment guidelines: 2.5%
In order to monitor interest rate risks and share price risks we also use stress tests that estimate the loss potential under extreme market conditions as well as sensitivity and duration analyses that complement our range of risk management tools.
Share price risks derive from unfavourable changes in the value of equities and equity or index derivatives due, for example, to downward movements on particular stock indices. We spread these risks through systematic diversification across various sectors and regions.
Listed equities (direct holdings and investment funds) At most 17.5 10.1 8.2
The liquidity risk refers to the risk that it may not be possible to sell holdings or close open positions due to the illiquidity of the markets – or to do so only with delays or price markdowns – as well as the risk that the traded volumes influence the markets in question. Regular liquidity planning and a liquid asset structure ensure that Hannover Re is able to make the necessary payments at all times. We manage the liquidity risk inter alia by allocating a liquidity code to every security. Adherence to the limits defined in our investment guidelines for each liquidity class is subject to daily control. The spread of investments across the various liquidity classes is specified in the monthly investment reports and controlled by limits. The proportion of investment holdings that can be liquidated on any trading day without a mark-down was more than 50% as at the balance sheet date, a reflection of the high liquidity of our portfolio.
For basic qualitative statements, e.g. regarding organisation of our risk management or assessment of the risk situation, please see the risk report contained in the management report.
For further explanation please see Section 3.2 "Summary of major accounting policies".
Maturities of the fixed-income and variable-yield securities 1) Including short-term investments and cash
due after three through four years 194,052 195,724 21,615 21,749 due after four through five years 251,385 254,908 203,263 204,026 due after five through ten years 962,695 966,897 1,271,484 1,281,502 due after ten years 9,959 10,396 11,178 11,357
Debt securities issued by semi-governmental entities 455,039 8,305 1,709 9,402 471,037
Government debt securities of EU member states 19,979 – 468 168 19,679
Government debt securities of EU member states 901,704 4,112 5,851 16,732 916,697
Government debt securities of EU member states 980,946 1,747 12,241 15,982 986,434
1) Including income from associated companies 2) Excluding other investment expenses
Allocation to gains/losses from the fair-value measurement of the available-for-sale portfolio 103,639 (84,444)
Transfer of gains/losses from the fair-value measurement of the available-for-sale portfolio to the result for the period (48,513) (29,662)
Fixed-income securities – loans and receivables 316,530 570,013 599,189 43,687 161 20 – 8,289 1,537,889
Other financial assets – at fair value through profit or loss – – 26,296 – – 6,279 – – 32,575
Fixed-income securities – loans and receivables – 7,095 1,415,113 21,155 – 67,034 – 27,492 1,537,889
As at 31 December 2007 the portfolio contained 4,400 put options bought in the year under review on the German Dax index with a floor of 7,150 as well as 22,000 put options on the EuroStoxx 50 index with a floor of 4,050. A total equity portfolio of EUR 124.2 million was thus secured at the aforementioned values. The fair value of this type of derivative financial instruments amounted to EUR 1.9 million as at 31 December 2007 and was recognised under other financial assets at fair value through profit or loss. The change in the fair value of these contracts totalled EUR 1.8 million in 2007 and was recognised under unrealised gains in the net investment income.
The short call option contracts on the S&P 500 index held at 31 December 2007 were closed in the year under review. The resulting losses of EUR 2.3 million were recognised in net investment income under realised losses on investments.
The "Merlin" transaction also gives rise to a derivative, the fair value of which as at the balance sheet date was EUR 5.8 million and which we recognised under other financial assets at fair value through profit or loss. Measurement of this derivative resulted in an increase in investment income of EUR 5.8 million in the year under review. We would refer the reader to the explanatory remarks in Section 4 "Consolidated companies and consolidation principles" regarding the securitisation of reinsurance risks.
Net book value at 31 December of the previous year 166,646 170,414
Net book value at 31 December of the year under review 170,839 166,646
The net book value of associated companies includes 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".
The fair value of investment property amounted to EUR 21.3 million (EUR 22.4 million) as at the balance sheet date. The market value of the real estate was determined using the discounted cash flow method.
Gross book value after currency translation at 1 January of the year under review 41,258 280,605
Gross book value at 31 December of the year under review 41,370 42,215
Cumulative depreciation at 31 December of the previous year 24,236 92,385
Technical assets The retrocessionaires' portions of the technical provisions are based on the contractual agreements of the underlying reinsurance treaties. For further details please refer to our comments on the technical provisions in this section as well as to the explanatory remarks in Section 6.1 "General risk management".
Net book value at 31 December of the year under review 1,807,143 1,980,102
Within the scope of our management of receivables we expect to receive payment of accounts receivable within three months of the date of creation of the debit entry – a period for which we also make allowance in our risk analysis. Please see our comments in Section 6.1 "General risk management". .
The value adjustments on accounts receivable that we recognise in adjustment accounts changed as follows in the year under review: Figures in EUR thousand 2007 2006
With regard to the credit risks resulting from technical assets we would also refer the reader to our comments in Section 6.1 "General risk management" and Section 6.2 "Technical risks".
Loss and loss adjustment expense reserve 16,553,888 2,471,585 14,082,303 17,596,325 3,048,496 14,547,829
Specific value adjustment for retrocessions – (27,061) 27,061 – 53,500 (53,500)
The changeover in the segmental reporting to the business groups of non-life reinsurance and life/health reinsurance following the sale of Praetorian Financial Group, Inc., New York, led to changes in the run-off triangles for the previous periods shown.
The run-off triangles of the former financial reinsurance segment – as part of the product range included within non-life reinsurance – as well as the run-off triangles of the remaining portion of the former specialty insurance business group are now reported with and in the run-off triangles of the non-life reinsurance business group. The figures for previous periods have been adjusted retrospectively.
The development of the euro relative to major foreign currencies is also a significant influencing factor in this context. In particular, the decline of 11.6% (11.4%) in the US dollar against the euro compared to the previous year led to an appreciable reduction in the loss and loss adjustment expense reserve on a euro basis.
Net run-off result of the loss reserve 830.3 52.4 (199.7) (382.3) 1,018.6 1,197.2 154.8 59.5 1,929.9 914.0
As percentage of original loss reserve 9.1 (1.7) (12.2) (16.1) (2.8) 1.6 (1.0) 0.7 4.9 1.4
IFRS 4.38 in conjunction with 4.39(d) requires information which helps to clarify the amount and timing of cash flows expected from reinsurance contracts. In the following tables we have shown the future maturities of the technical reserves and broken them down by the expected remaining durations. As part of our duration analysis we have directly deducted the deposits put up as security for these reserves, since the cash inflows and outflows from these deposits are to be allocated directly to the ceding companies. For further explanation of the recognition and measurement of the reserves please see Section 3.2 "Summary of major accounting policies".
Due after one through five years 6,541,158 1,247,510 5,293,648 202,936 4,748 198,188
Due after ten through twenty years 1,815,824 297,507 1,518,317 591,278 21,976 569,302
At the inception of every reinsurance contract, assumptions about the three parameters are made and locked in for the purpose of calculating the benefit reserves. At the same time, safety/fluctuation loadings are built into each of these components. In order to ensure at all times that the originally chosen assumptions continue to be adequate throughout the contract, checks are made on a regular – normally annual – basis in order to determine whether these assumptions need to be adjusted ("unlocked').
Benefit reserves are established in accordance with the principles set out in SFAS 60. The provisions are based on the Group companies' information regarding mortality, interest and lapse rates.
The unearned premium reserve derives from the deferral of ceded reinsurance premium. The unearned premium is determined by the period during which the risk is carried and established in accordance with the information supplied by ceding companies. In cases where no information was received, the unearned premium was estimated using suitable methods. Premium paid for periods subsequent to the date of the balance sheet was deferred from recognition within the statement of income.
Reserve at 1 January of the year under review 5,785,018 443,774 5,341,244 5,662,924 91,121 5,571,803
Net book value at 31 December of the year under review 6,143,460 255,076 5,888,384 6,109,154 447,537 5,661,617
Reserve at 1 January of the year under review 1,449,495 306,116 1,143,379 1,828,475 426,958 1,401,517 from discontinued operations – – – 120,691 (39,084) 159,775
We have identified insurance contracts which do not satisfy the requirements of SFAS 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts". These involve reinsurance treaties under which the risk transfer between the ceding company and the reinsurer is of merely subordinate importance. These contracts were recognised using the so-called "deposit accounting" method and hence eliminated from the technical account. The profit components were netted under other income/expenses. The payment flows resulting from these contracts were reported in the cash flow statement under operating activities. The balances were shown as contract deposits, the fair values of which corresponded approximately to their book values.
Net book value at 31 December of the previous year 152,639 193,098
Net book value at 1 January of the year under review 140,199 175,628
The additions were for the most part attributable to the acquisition of additional interests in E+S Rück. In this regard please see our remarks in Section 5.3 "Further corporate changes".
Disposals in an amount of EUR 107.5 million resulted from the sale of Praetorian Financial Group.
Net book value at 31 December of the previous year 5,102 7,472
Net book value at 1 January of the year under review 4,778 7,491
Deferred tax assets and liabilities are booked in accordance with IAS 12 for tax reductions and additional tax charges expected in subsequent financial years, insofar as they result from different valuations of individual balance sheet items. In principle, such valuation differences may arise between the national tax balance sheet and the national commercial balance sheet, the uniform consolidated balance sheet and the national commercial balance sheet as well as from tax loss carry-forwards and tax credits.
Deferred taxes at the Group level were booked using the Group tax rate of 32% (40%).
The deferred taxes recognised directly in shareholders' equity at the end of the financial year amounted to EUR 3.7 million (EUR 24.0 million). They resulted from items that were charged or credited directly to equity.
Availability of loss carry-forwards and tax credits that have not been capitalised 7.6 Staff and expenditures on personnel
Reconciliation of the expected expense for income taxes with the actual expense
Expenditures on personnel The expenditures on insurance business, claims expenses (claims settlement) and expenditures on the administration of investments include the following personnel expenditures: The table shows the personnel expenditures of the continuing operations. In the year under review additional wages and salaries of EUR 11.5 million (EUR 34.3 million) and social security contributions of EUR 0.8 million (EUR 7.5 million) were recognised in profit or loss from the discontinued operation.
The nationalities of the workforce as at the balance sheet date were as follows: Notes notes on the individual items
Number of employees (excluding board members) 2,081 1,849 1,855 1,825 1,922 2,002 1,988
and 2.5% above the assessment limit of the pensionable employment income are calculated in a range of 0.7% to 1% and 1.75% to 2.5% respectively depending upon the company's performance. The pension plan closed as at 31 March 1999.
The calculation of the provisions for pensions is based upon the following assumptions: Notes notes on the individual items
Projected long-term yield on plan assets – 7.50 7.00 – 7.50 7.00
Projected benefit obligation at the beginning of the year under review 77,400 85,233
Fair value at the beginning of the year under review 7,302 10,500
The structure of the asset portfolio underlying the plan assets was as follows.
Defined benefit obligations at the end of the year under review 79,135 77,400
Fair value of plan assets at the end of the year under review 9,372 7,302
In determining the actuarial gains and losses to be recognised in the statement of income the corridor method provided for as an option in IAS 19 continued to be applied even after the amendments to the standard.
The net periodic pension cost was recognised in the consolidated statement of income in amounts of EUR 3.8 million (EUR 5.3 million) under administrative expenses, EUR 1.4 million (EUR 2.6 million) under other expenses and EUR 0.7 million (EUR 1.0 million) under other investment expenses.
Actuarial gains of EUR 0.4 million (EUR 0.4 million) were recognised as at the balance sheet date in other comprehensive income.
In December 2005 the Praetorian Financial Group, Inc. – which was classified as a discontinued operation in the previous year and sold effective 31 May 2007 – issued "Trust Preferred Securities" in an amount of USD 80.0 million with a term of 30 years and a yield of quarterly LIBOR +310 basis points. The "Trust Preferred Securities" were placed with institutional investors. These securities, which in the previous year were allocated to the discontinued operations, were eliminated from the Group as part of the aforementioned sale.
New individual registered shares may be issued on one or more occasions for contributions in cash or kind. Of the total amount, up to EUR 1,000 thousand may be used to issue employee shares.
Cumulative other comprehensive income amounted to EUR 6.5 million (-EUR 1.5 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 3 May 2007, the company was authorised until 31 October 2008 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.
Hybrid capital, no maturity 1) CAGR: Compound annual growth rate 2) Capital increase: +EUR 530 million 3) Hybrid capital: +EUR 750 million -USD 380 million repurchase -EUR 118 million repayment 4) Hybrid capital: +EUR 500 million new issue -EUR 212 million exchange 5) US GAAP
Neither in the year under review nor in the previous reporting period were there any dilutive effects or other extraordinary components of income which should have been recognised or disclosed separately in the calculation of the earnings per share.
Present value of future profits on acquired life reinsurance portfolios 2,911 5,102
Gross book value at 31 December of the previous year 83,344 85,606
Cumulative depreciation at 31 December of the previous year 59,612 55,389
Cumulative depreciation at 31 December of the year under review 69,571 59,612
Net book value at 31 December of the previous year 23,732 30,217
With regard to the measurement of fixtures, fittings and equipment, the reader is referred to our explanatory notes on the other assets in Section 3.2 "Summary of major accounting policies".
Gross book value at 31 December of the previous year 141,242 129,566
Gross book value at 31 December of the year under review 155,429 141,242
Net book value at 31 December of the year under review 56,390 45,030
Value adjustments were taken on other receivables in an amount of EUR 0.2 million (EUR 0.7 million) in the year under review on the basis of specific impairment analyses.
The other liabilities include sundry non-technical provisions of EUR 67.4 million (EUR 71.5 million), which developed as shown in the following table.
The age structure of the other receivables which were unadjusted but considered overdue as at the balance sheet date is presented below.
With regard to the claims and claims expenses as well as the change in benefit reserves the reader is also referred to Section 7.2 "Technical assets and liabilities". The change in benefit reserves relates exclusively to the life and health reinsurance segment.
The underwriting profit of EUR 64.1 million booked by HDI Direkt Versicherung AG resulted largely from the release of reserves constituted for liability claims from previous periods.
HDI HANNOVER International España, Cia de Seguros y Reaseguros S.A. 19,176 4,241
Hannover Re (Bermuda) Ltd. has extended a loan due on 31 May 2012 with a coupon of 4.98% to Talanx AG, the volume of which as at the balance sheet date was EUR 51.5 million. The book value includes accrued interest of EUR 1.5 million. This instrument was recognised under other invested assets.
As part of long-term lease arrangements companies belonging to the Hannover Re Group rented out business premises in 2007 to AmpegaGerling Investment GmbH, HDI Service AG, HDI Industrie Versicherung AG, HDI Direkt Versicherung AG (formerly HDI Privat Versicherung AG) and Protection Reinsurance Intermediaries AG, all based in Hannover. IT and management services were also performed for the latter under three service contracts. IT services were also rendered for AmpegaGerling Asset Management GmbH.
All transactions were effected at usual market conditions. We gave an account of these transactions with regard to Hannover Re and E+S Rück in the corresponding dependent company reports pursuant to § 312 Stock Corporation Act (AktG).
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 2007 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 content of the stock option plan is based solely on the Conditions for the Granting of Stock Appreciation Rights. All the members of the Group's management are eligible for the award of stock appreciation rights. Exercise of the stock appreciation rights does not give rise to any entitlement to the delivery of Hannover Re stock, but merely to payment of a cash amount linked to the performance of the Hannover Re share. Recognition of transactions involving stock appreciation rights with cash settlement is governed by the requirements of IFRS 2 "Share-based Payment".
Stock appreciation rights were first granted for the 2000 financial year and are awarded separately for each subsequent financial year (allocation year), provided the performance criteria defined in the Conditions for the Granting of Stock Appreciation Rights are satisfied.
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 all 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.
The allocations for the years 2000, 2002 to 2004 and 2006 gave rise to the following commitments in the year under review. No allocations were made for 2001 or 2005.
Waiting period 2 years 2 years 2 years 2 years 2 years
Expense in the 2007 financial year (in EUR million) 1.69 (0.11) 0.25 0.13 (0.01)*
In the year under review the waiting period expired for 100% of the stock appreciation rights awarded in 2000, 80% of those awarded in 2002, 60% of those awarded in 2003 and 40% of those awarded in 2004. 3,753 stock appreciation rights from the 2000 allocation year, 110,426 stock appreciation rights from the 2002 allocation year, 155,840 stock appreciation rights from the 2003 allocation year and 12,956 stock appreciation rights from the 2004 allocation year were exercised. The total amount paid out stood at EUR 2.4 million.
The calculations were based on the year-end closing price of the Hannover Re share of EUR 31.55 as at 28 December 2007, expected volatility of 26.30% (historical volatility on a five-year basis), an expected dividend yield of 8.08% and risk-free interest rates of 4.11% for the 2000 allocation year, 4.20% for the 2002 allocation year, 4.25% for the 2003 allocation year, 4.30% for the 2004 allocation year and 4.41% for the 2006 allocation year.
The guarantees given by Hannover Re for the subordinated debts attach if the issuer in question fails to render payments due under the bonds. The guarantees cover the relevant bond volumes as well as interest due until the repayment dates. Given the fact that interest on the bonds is partly dependent on the capital market rates applicable at the interest payment dates (floating rates), the maximum undiscounted amounts that can be called cannot be estimated with sufficient accuracy. Hannover Re does not have any rights of recourse outside the Group with respect to the guarantee payments.
As security for our technical liabilities, various financial institutions have furnished sureties for our company in the form of letters of credit. The total amount of the letters of credit as at the balance sheet date was EUR 2,150.0 million (EUR 2,684.2 million). Here too the appreciable decrease was mainly due to exchange rate fluctuations.
Outstanding capital commitments with respect to special investments exist on the part of the Group in the amount of EUR 235.2 million (EUR 246.3 million). These primarily involve as yet unfulfilled payment obligations from participations entered into in private equity funds and venture capital firms.
The decrease in the total leasing commitments resulted from the cancellation of long-term lease agreements in the previous year. The lease agreement concluded by the Clarendon Group in 2003 for business premises, the term of which originally ran until 29 August 2023, was cancelled effective March 2007 and replaced with a new lease agreement for other business premises that runs until June 2011.
Rented property Altogether, non-cancellable contracts will produce the rental income shown below in subsequent years.
Notes other notes 1 EUR corresponds to: Mean rate of exchange on the balance sheet date Average rate of exchange
Total fees of EUR 6.5 million (EUR 7.3 million) were incurred for accountants' services throughout the Hannover Re Group worldwide in the year under review. They were principally comprised of auditing and tax consultancy fees.
Effective 1 January 2008 we increased the volume of the "K5" risk transaction by a further USD 10.0 million to USD
In a press release dated 7 January 2008 we announced our intention to establish a branch office for life and health reinsurance in South Korea in June 2008. The Korean insurance regulator has already issued a provisional licence for the Seoul-based branch.
We have audited the consolidated financial statements prepared by the Hannover Rückversicherung AG, Hannover, comprising the balance sheet, the income statement, statement of changes in equity, cash flow statement and the notes to the consolidated financial statements, together with the group management report for the business year from 1 January to 31 December 2007. The preparation of the consolidated financial statements and the group management report in accordance with IFRS, as adopted by the EU, and the additional requirements of German commercial law pursuant to § 315a Para 1 HGB and supplementary provisions of the articles of incorporation are the responsibility of the parent company's management. Our responsibility is to express an opinion on the consolidated financial statements and on the group management report based on our audit.
The Supervisory Board again devoted considerable attention to the issue of Corporate Governance. The findings of an efficiency audit of the Supervisory Board's work conducted in strict confidentiality were discussed by the Supervisory Board at the beginning of 2007. In this context it was established that appreciable improvements had been achieved compared to the last audit in 2004 and that the measures agreed upon at that time had been successful. Further optimisations were approved in order to organise the work of the Supervisory Board even more efficiently in the future.
In accordance with a new recommendation of the German Corporate Governance Code (DCGK), the Supervisory Board formed a Nomination Committee. The considerable importance that the Supervisory Board attaches to the standards of good and responsible enterprise management set out in the Corporate Governance Code is also evident from the Declaration of Conformity 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 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 in this 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.
With effect from the end of the Annual General Meeting on 3 May 2007 Ms. Renate Schaper-Stewart – who has been a Supervisory Board Member for 15 years – and Mr. Hans-Günter Siegerist stepped down from the Supervisory Board in their role as staff representatives. The Supervisory Board thanked them for their many years of constructive work and praised their contribution to the company's development. As their successors, Mr. Uwe Kramp and Mr. Gert Waechtler were elected as staff representatives to the Supervisory Board effective 3 May 2007. The Annual General Meeting elected Dr. Erhard Schipporeit as a new member of the Supervisory Board.
The Supervisory Board thanks the members of the Executive Board and all staff for their work in the year under review. They made vital contributions to the excellent earnings performance.
This year the company was again in compliance with the recommendations of the German Corporate Governance Code (DCGK) in all respects. In so doing Hannover Re once more – as in previous years – ranked as one of the leaders among MDax-listed companies when it came to compliance with the provisions of the Code. This is borne out by an independent survey of acceptance of the Code's recommendations and suggestions conducted by the Berlin Center of Corporate Governance, which found that on average the companies included in the MDax only satisfied around 90% of the recommendations set out in the version of the Code dated 12 June 2006.
Another point worth highlighting is that at the 2007 Annual General Meeting of Shareholders the elections to the Supervisory Board were for the first time conducted in the form of an election of individual candidates. The suggestion added to the Code in 2006 that the Annual General Meeting should end after no more than four to six hours was again observed in the year just-ended.
As is evident from the activities set out above, Corporate Governance describes for the Executive Board and Supervisory Board of Hannover Re a changing institutional framework for the management and supervision of the company in all key areas of enterprise constitution. The goal is to bring about sustained growth in the value of the company as well as to strengthen and consolidate on a lasting basis the trust placed in the enterprise by our shareholders, business partners, clients, employees and the general public. On this basis Hannover Re supports the principles of value-based and transparent enterprise management and supervision as defined in the German Corporate Governance Code (DCGK) and recognises their importance in guiding its activities.
Remuneration report for the Executive Board and individualised disclosure of the remuneration received by Supervisory Board members pursuant to Items 4.2.5 and 5.4.7 of the German Corporate Governance Code
The information regarding these items is provided in the remuneration report.
Securities transactions pursuant to Item 6.6 of the German Corporate Governance Code
With regard to this information we would also refer the reader to the remuneration report.
Information in this respect is also provided in the remuneration report.
Share-based payment pursuant to Item 7.1.3 of the German Corporate Governance Code
The remuneration report is based on the recommendations of the German Corporate Governance Code and contains information which forms part of the notes to the 2007 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 of the information discussed in the remuneration report in the Group management report or Group notes.
Objective The purpose of the remuneration system for the Executive Board is to appropriately recompense the members of the Executive Board according to their scope of activity and responsibility. In this context, a large variable portion of the total remuneration makes direct allowance for the joint and individual performance of the Executive Board as well as for the performance of the company.
The members of the Executive Board are entitled to receive stock appreciation rights under the virtual stock option plan implemented in 2000 for certain members of the Group's management.
Exercise of the stock appreciation rights does not give rise to any entitlement to the delivery of Hannover Re stock, but merely to payment of a cash amount linked to the performance of the Hannover Re share. The amount paid out is limited to a maximum calculated as a quotient of the total volume of compensation to be granted in the allocation year and the total number of stock appreciation rights awarded in the year in question.
In the 2007 financial year stock appreciation rights totalling EUR 1.2 million (previous year: none) were granted for the 2006 allocation year; stock appreciation rights granted in previous years were exercised in an amount of EUR 0.4 million (EUR 1.0 million).
The Annual General Meeting of Hannover Re held on 12 May 2006 resolved by a voting majority of 85.5% to avail itself until 31 December 2010 of the option contained in the Act on the Disclosure of Management Remuneration (VorstOG) not to specify the remuneration of the Executive Board on an individualised basis by name for a period of at most five years from the date when the resolution is adopted.
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 2.0 million (EUR 1.0 million) was allocated to the provision for pensions in the year under review. This includes the allocation to the employee-funded provision constituted from deferred compensation – an allocation that is made from the variable bonus for the previous year. The provision for pensions stood at EUR 8.4 million (EUR 6.4 million) as at 31 December 2007.
Amount of remuneration received by the Executive Board The total remuneration received by the Executive Board of Hannover Re on the basis of its work for Hannover Re and its affiliated companies is calculated from the sum of all compensation accruing in cash as well as in pecuniary advantages from non-cash compensation. It can be broken down as follows in the year under review:
Wolf-Dieter Baumgartl Chairman of the – Supervisory Board – Standing Committee – Balance Sheet Committee – Nomination Committee 185.6
Dr. Klaus Sturany Deputy Chairman of the Supervisory Board (since 3 May 2007) Member of the Standing Committee 49.7
Dr. Paul Wieandt Deputy Chairman of the Supervisory Board (until 20 March 2007) 74.1
Karl Heinz Midunsky Member of the – Supervisory Board – Nomination Committee 43.6
In order to avoid potential conflicts of interest, Hannover Re may only grant loans to members of the Executive Board or the Supervisory Board or their dependants with the approval of the Supervisory Board.
In 2007 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.
Dealings in shares, options and derivatives of Hannover Rückversicherung AG effected by members of the Executive Board or Supervisory Board of Hannover Re or by other persons with managerial functions who regularly have access to insider information concerning the company and who are authorised to take major business decisions – as well as such dealings conducted by certain persons closely related to the aforementioned individuals – in excess of EUR 5,000 are to be reported pursuant to § 15a Securities Trading Act (WpHG). The following reportable transactions took place in the 2007 financial year.
The German Corporate Governance Code sets out major statutory requirements governing the management and supervision of German listed companies. It contains both nationally and internationally recognised standards of good and responsible enterprise management. The purpose of the Code is to foster the trust of investors, clients, employees and the general public in German enterprise management. Under § 161 Stock Corporation Act (AktG) it is incumbent on the Management Board and Supervisory Board of German listed companies to provide an annual declaration of conformity with the recommendations of the "German Corporate Governance Code Government Commission" published by the Federal Ministry of Justice or to explain which recommendations of the Code were/are not applied. Implementation of the recommendations by Hannover Rückversicherung AG does not diverge from the German Corporate Governance Code (amended version of 14 June 2007) in any respect.
With respect to the non-mandatory provision of the Code requiring individualised specification of the remuneration received by members of the Executive Board, we are following the resolution of the Annual General Meeting of 12 May 2006, according to which the disclosures required in § 285 Clause 1 No. 9 Letter a Sentences 5 to 9 and § 314 Para.1 No. 6 Letter a Sentences 5 to 9 German Commercial Code as amended by the Act on Disclosure of Executive Board Compensation (Vorstandsvergütungs-Offenlegungsgesetz) shall be omitted.
America Hannover Rückversicherung AG Canadian Branch - Chief Agency Toronto, Canada
France Hannover Rückversicherung AG Succursale Française 7 rue Montalivet, 4th Floor, 75008 Paris
United Kingdom Hannover Life Reassurance (UK) Limited Hannover House Virginia Water Surrey GU25 4AA
Hannover Life Reassurance Africa Limited P. O. Box 10842 Johannesburg 2000
Accumulation loss: sum of several individual losses incurred by various policyholders as a result of the same loss event (e.g. windstorm, earthquake). This may lead to a higher loss for the direct insurer or reinsurer if several affected policyholders are insured by the said company.
Deposits with ceding companies/deposits received from retrocessionaires (also: funds held by ceding companies/funds held under reinsurance treaties): collateral provided to cover insurance liabilities that a (re-)insurer retains from the liquid funds which it is
Intrinsic value creation (IVC): the IVC is calculated according to the following formula: real operating value creation = adjusted operating profit (EBIT) – (capital allocated x weighted cost of capital ). IVC is a tool of value-based enterprise management used to measure the accomplishment of long-term targets on the level of the Group, the individual business groups and the operating units (profit centres).
Matching currency cover: coverage of technical liabilities in foreign currencies by means of corresponding investments in the same currency in order to avoid exchange-rate risks.
Reinsurer: company which accepts risks or portfolio segments from a ➞ direct insurer or another reinsurer in exchange for an agreed premium.
Retrocession: ceding of risks or shares in risks which have been reinsured. Retrocessions are ceded to other reinsurers in exchange for a pro-rata or separately calculated premium.
Statement of Financial Accounting Standards, SFAS (also: Financial Accounting Standards, FAS): standards published by the Financial Accounting Standards Board on accounting and reporting.
Surplus relief treaty: a portfolio reinsurance contract under which an admitted reinsurer assumes (part of) a ceding company's business to relieve stress on the cedant's policyholders' surplus.
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.
Volatility: measure of the variability of stock prices, interest rates and exchange rates. Standard practice is to measure the volatility of a stock price by calculating the standard deviations of relative price differences.
12 March 2008 Annual Results Press Conference Hannover Re Karl-Wiechert-Allee 50 30625 Hannover, Germany 13 March 2008 DVFA Analysts' meeting, Frankfurt 13 March 2008 Analysts' meeting, London 06 May 2008 Annual General Meeting Beginning 10:30 a.m.
Hannover Congress Centrum Theodor-Heuss-Platz 1–3 30175 Hannover, Germany 06 May 2008 Interim Report 1/2008 07 August 2008 Interim Report 2/2008 05 November 2008 Interim Report 3/2008 05 May 2009 Annual General Meeting Beginning 10:30 a.m.