5 Boards and Officers 6 Executive Board 8 The Hannover Re share 12 Strategy and self-image 14 The Hannover Re Group's global presence 16 Management report of the Hannover Re Group 16 "As-if-pooling" method 16 Economic climate 17 Business development 19 Our business groups 19 Property and casualty reinsurance 30 Life and health reinsurance 44 Financial reinsurance 46 Program business 51 Investments 53 Risik report 59 Human resources report 62 Outlook for 2005 66 Proposal for the distribution of profits 67 Consolidated accounts 68 Consolidated balance sheet 70 Consolidated statement of income 72 Cash flow statement 74 Segmental report 79 Notes 120 Auditors' report 121 Report of the Supervisory Board 123 Corporate Governance report 126 Branch offices and subsidiaries 129 Glossary
Hannover Congress Centrum Theodor-Heuss-Platz 1–3 30175 Hannover, Germany 11 August 2005 Interim Report 2/2005 10 November 2005 Interim Report 3/2005 12 May 2006 Annual General Meeting Beginning 10:30 a.m.
Hannover Congress Centrum Theodor-Heuss-Platz 1–3 30175 Hannover, Germany 12 May 2006 Interim Report 1/2006 10 August 2006 Interim Report 2/2006 09 November 2006 Interim Report 3/2006
Value of in-force business (life/health) 1 495.2 +9.9% 1 361.1 1 206.0 1 048.0 874.0
Earnings per share (diluted) in EUR 2.56 (21.0%) 3.24 2.75 0.11 4.13
Previous year 1) Incl. bonus of EUR 0.08 2) Operating profit (EBIT)/net premiums earned
We are pleased to provide you also with the individual Annual Report of Hannover Rückversicherung AG in German or English.
True to our "More from less" initiative we again analysed our portfolio in the year under review with an eye to long-term profitability considerations and relinquished treaties that failed to meet our profitability standards. We replaced high-volume but frequently low-margin proportional business with more profitable non-proportional arrangements. As our shareholders, you know that we are guided solely by profit – not volume – targets. For this reason, too, we are not concerned about the appreciable decline in our gross premium income, not least because it is in large measure due to the sustained weakness of the US dollar. Far more significant is the fact that – despite the exceptional loss burden suffered in property and casualty reinsurance – we were still able to boost net income for this business group by more than 50%.
Life and health reinsurance similarly developed very favourably again in the year under review. In this business group we rank among the world’s five largest providers. Following the expansionary phase of recent years we now have consolidated our market position at a high level. Gross premium income in 2004 was slightly lower than in the previous year, a reflection not only of adverse exchange rate movements but also of the elimination of a major business relationship in the United Kingdom. Yet, in the year under review we made a number of important new moves in the direction of profitable growth: in core markets such as Germany and the United Kingdom we were successful in developing new products and in establishing as well as expanding attractive customer relationships. Special products for senior citizens, a sector of the population that has been especially neglected in Germany compared to other countries, is a promising market for the future in which we are positioning ourselves.
It was only our fourth business group, program business, that delivered a wholly unsatisfactory performance in 2004. For the first time since our 1999 acquisition of the US market leader in program business, Clarendon Insurance Group, the com-
I am largely satisfied with developments on the financial markets: most notably, write-downs on securities were substantially lower than in the previous year. Ordinary investment income fell slightly short of the previous year’s figure. Positive underwriting cash flows did not fully offset the low level of interest rates throughout the portfolio. On balance, net investment income was modestly higher.
The Hannover Re share recorded another, albeit modest, increase in value in the year under review. The price rose by 3.7% over the course of the year, and the performance including the dividend amounted to 7.3%. Once again, therefore, we have no reason to shy away from comparisons with our competitors. Adjusted for exchange-rate effects, we thus outperformed our benchmark, the unweighted "Reactions" World Reinsurance Index (which includes all listed reinsurers worldwide), by 8.5 percentage points in 2004.
I would like to close with a brief word on our strategic orientation: it is my firm conviction that our long-term success and economic independence are founded on above-average and sustained profitability. It is for this reason that our mindset and
our actions in 2005 will again be focused exclusively on profitability considerations. This is the only maxim that guides us as we write our business, invest our assets and conduct our capital management activities.
Wolf-Dieter Baumgartl 1) 2) Chairman of the Executive Board Hannover Talanx AG Chairman HDI Haftpflichtverband der
Karl Heinz Midunsky Former Corporate Vice President and Treasurer Munich Siemens AG
Dr. Klaus Sturany 1) Member of the Executive Board Dortmund RWE Aktiengesellschaft
Details of memberships of legally required supervisory boards and comparable control boards at other domestic and foreign business entreprises
Controlling, Internal Auditing; Investor Relations, Public Relations; Corporate Development; Human Resources Management; Underwriting & Actuarial Services; Program Business
Specialty Division (worldwide Facultative Business; worldwide Treaty and Facultative Business Marine, Aviation and Space); Property and Casualty Treaty Reinsurance Great Britain and Ireland; Retrocessions
Our share showed similarly marked inconsistencies in the course of the year, although it closed with a gain of 3.72% at a price of EUR 28.75 as at 30 December 2004. Including the dividend this corresponded to a performance of 7.30% for the year. Although the Hannover Re share thus lagged considerably behind the MDax,
Performance of the Hannover Re share compared with standard German benchmark indices since stock market listing 30 N ove mber 30 A pril 30 Sep te mber 29 Fe bru ary 30 Ju ly 1996 30 D ec em ber 30 M ay 1997 30 O cto ber 30 M arch 30 A ugust 30 Ja nuary 30 Ju ne 1 30 N ove mber 30 A pril 30 Sep te mber 28 Fe bru ary 30 D ec em ber 30 Ju ly 2001 30 M ay 2002 30 O cto ber 30 M arch 30 A ugust 30 Ja nuary 15 Fe bru ary 30 N ove mber 30 Ju ne 2
The Hannover Re share problems at a number of our competitors, lawsuits filed in the USA by New York Attorney General Eliot Spitzer and a whole string of natural catastrophes in the Caribbean, the United States and Asia. Caught up in the wake of these events, our share fell to its lowest point of the year on
Internal benchmark surpassed by 85 percentage points in a three-year comparison
The Hannover Re share in comparison with the unweighted "Reactions" World Reinsurance Index (in USD)
March 15 A pril 30 A pril 15 M ay 2004 30 M ay 2004 14 Ju ne 2 29 Ju ne 2 14 Ju ly 2004 29 Ju ly 2004 13 A ugust 28 A ugust 12 Sep te mber 27 Sep te mber 12 O cto ber 27 O cto ber 11 N ove mber 26 N ove mber 11 D ec em ber 30 D ec em ber
Having already established our Investor Relations activities at a high level in 2003, we continued to build on these standards in the year under review. We used our personal contacts with international investors, financial analysts and private shareholders to raise Hannover Re's public profile. In the year under review we organised 22 international roadshows in all the world's major financial centres, participated in 24 investor conferences and invited 36 investor delegations to Hannover Re's offices. What is more, in July we hosted an international seminar for investors in London that was attended by a record number of more than 60 financial analysts and institutional investors.
Free float and liquidity: HNR1 flying high 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Shareholding structure Talanx AG: 51.2% as at 31 December 2004: Free float: 48.8%
Optimal diversification: We seek to generate maximum profits with our available equity by making flexible use of capital in those business groups, regions and lines which offer the highest returns.
Economic independence: For us this means financing growth with selfgenerated profits and avoiding difficulties that would necessitate contributions by shareholders.
Target Actual 1) Earnings per share calculated in accordance with US GAAP
(stock split of 15 July 2002 in a ratio of 3 for 1 taken into account for all figures) 2) Minimum target: 750 basis points in excess of the average five-year yield on 10-year government bonds 3) Commercial treatment: on the need to apply the "as-if-pooling" method under US GAAP cf. p. 16 of the annual report in EUR
7. Organisation and infrastructure • An effective and efficient organisation oriented towards our business processes • Investment priority for information management as an increasingly significant competitive factor 3. Share price • Price development surpassing the performance of the weighted ABN Amro Rothschild Global Reinsurance Index* on a moving three-year average. This facilitates - a sustained increase in the value of the shareholders' investment - the lowest possible costs of raising equity
Strategic action fields 10. Performance Excellence • Constant improvements in leadership, the definition and communication of business policy, the quality of employees and in the management of resources and processes
Global equity markets were highly volatile with no clear trend emerging in the course of the year under review. The first hikes in key interest rates by the US Federal Reserve Board initially failed to impact global interest rates and no significant increases had been observed by year-end.
The German economy was nevertheless able to consolidate its position somewhat in the first half of 2004, although domestic demand was not strong enough to induce a more lively upswing. Although the global economic climate was relatively muted, Germany profited in some
The business figures for 2003 are presented in two forms in the present annual report: firstly, in accordance with the "as-if-pooling" method, and secondly, in accordance with the "commercial treatment". The reason for this is as follows: As part of our capital increase of 12 June 2003 our majority shareholder Talanx AG transferred its shares in what is now Hannover Reinsurance (Dublin) Ltd. – formerly HDI Reinsurance (Ireland) Ltd. – to the Hannover Re Group effective 1 July 2003 as a contribution in kind against issuance of 13,716,814 new shares valued at EUR 310 million.
The effective commercial date of this transaction (1 July 2003) was deemed determinative for the first-time consolidation of the transferred company. It was therefore consolidated for the first time in the quarterly financial statements as at 30 September 2003 with effect from 1 July 2003. Contrary to this commercial treatment, however, under US GAAP the "as-if-pooling" accounting method has to be applied to this transaction since Talanx AG – as the ultimate parent company of Hannover Re and Hannover
Reinsurance (Dublin) Ltd. – formally exercised "common control" over both companies.
Management report business development respects with exports – already at a high level – growing by a further 10% in 2004. Germany was thus again the world's number one exporter. Overall, economic growth in the order of 1.7% was generated – the first appreciable gain in three years.
This record burden of catastrophe losses was cushioned in property and casualty reinsurance by the very favourable rates and conditions prevailing in our most important markets. However, since we also had to absorb strains in program business we were compelled to revise our original profit targets in October 2004 as a consequence of the hurricane losses.
In life and health reinsurance the gross premium volume contracted by a modest 4.4% to EUR 2.2 billion (EUR 2.3 billion). Adjusted for exchange-rate effects the decline would have been a mere 0.8%. The discontinuation of a major customer relationship was a further reason for the decrease. Net premiums climbed slightly by 1.0% to EUR 2.0 billion (EUR 1.9 billion ) thanks to a somewhat higher retention. Life and health reinsurance also produced highly gratifying income. We are well on course to achieve our medium-term goal of generating a net return on premium of at least 5.0% by 2006. This ratio stood at 4.7% in the year under review, compared to 3.2% in the previous year. The increase in net income of 7.4% to EUR 50.0 million (EUR 46.6 million) was similarly pleasing.
Financial reinsurance had its share of ups and downs in the year under review, most notably in connection with the New York Attorney General's probe into financial reinsurance practices. In our assessment, we have every reason
Program business was hardest hit by the four hurricanes in Florida and closed the year with a deficit for the first time. Gross premium income contracted by 20.3% to EUR 2.1 billion, influenced in part by exchange-rate effects – without which the decrease would have been just 13.0%. Net premiums declined by a somewhat less marked 18.4% to EUR 943 million (EUR 1.2 billion). The business group showed a net loss of EUR 88.5 million, compared with net income of EUR 42.2 million in the previous year.
Return on equity * Return on equity calculated in accordance with the German Commercial Code (HGB) ** After minority interests
We conduct operations in altogether four strategic business groups: property and casualty reinsurance, life and health reinsurance, financial reinsurance and program business. In addition to the following explanatory remarks on the business development, the segmental report provided on pages 74 to 77 of the annual financial statements shows the key balance sheet items and profit components broken down into each business group.
tional business increased to 83% (81%). This regrouping of our portfolio, however, combined with the restructuring of the business accepted from our HDI affiliates and the weakness of the US dollar, also caused premium income in property and casualty reinsurance to contract sharply in the year under review.
We use retrocession as a risk optimisation tool, i.e. we pass on parts of the risks that we cover to other (re-)insurers. As at year-end the volume of receivables due from other reinsurers stood at EUR 4.2 billion. This figure represents a sharp reduction of 38.4% compared to the highest level of EUR 6.8 billion in 2001. Our retrocession receivables also decreased again relative to the previous year (EUR 4.4 billion). We continue to attach the utmost importance to the quality of our retrocessionaires: more than 90% of the companies with which we maintain business relations have received an investment grade rating of "BBB" or better from Standard & Poor's.
The claims situation in industrial fire insurance, including business interruption cover, was very relaxed, prompting sharply fiercer competition. In motor insurance, too, competition in the private customer segment was stepped up through tariff cuts. Overall, most insurers were able to post an underwriting profit for the second year in succession following the years of heavy losses
Our subsidiary E+S Rückversicherung AG, which operates exclusively in the German market, is highly valued as a reliable partner thanks to its financial standing and continuity. E+S Rück ranks third in the German market, the secondlargest non-life market in the world. Along with newly acquired business we were also able to expand our position with some of our long-standing accounts, thereby enlarging our market share still further. A special highlight was the addition of another highly reputed mutual insurer to the group of E+S Rück's shareholders.
The major loss experience in Germany was very positive in the year under review, with just two major claims reported: in January the "Pride of America" vessel sank at dock during construction work in Bremerhaven, while August saw a spectacular motor third party liability claim on the Wiehltalbrücke motorway bridge near Gummersbach. These two claims produced a total net loss of EUR 10.4 million for our company.
In credit and surety insurance it was finally possible to uncouple underwriting results from the protracted adverse credit cycle. Insurers achieved low loss ratios through continued adherence to a restrictive underwriting policy. This pleasing state of affairs was also reflected on the reinsurance side. The remaining established reinsurers wrote higher shares. E+S Rück cemented its position as the third-largest provider in the year under review.
Marine and aviation business developed satisfactorily in the year under review. The market environment in marine (re-)insurance was to a very large extent stable. The market was characterised by relatively constant rates and conditions and no major losses other than the "Pride of America" claim. In aviation reinsurance rates fell sharply. This segment, too, was virtually spared any major claims. Following the winding up of the German Aviation Pool we were able to significantly enlarge our share of aviation business in the German market.
United Kingdom and Ireland Rates in the primary insurance sector came under pressure towards the end of the year under review, and it can therefore be assumed that the hard market in the United Kingdom has already passed its peak. This is particularly true of the property lines, but it also applies to casualty insurance – and here most notably professional indemnity and directors' and officers' covers.
The development of the reinsurance market, however, again gave grounds for satisfaction. Although rates in property business were flat, they remained at a high level. In the casualty lines it was even possible to secure further improvements in rates and conditions.
Our property business written on the London Market was impacted by several major loss events in the year under review. Most notable here were the four hurricanes in the USA as well as a gas explosion at a petrochemical liquefied gas (LPG) plant in Algeria.
In marine business, too, we rank as one of the foremost reinsurers on the London Market. A number of players in the primary sector have either withdrawn or been taken over, although on the other hand some new companies also entered the fray.
the bulk of the portfolio derives from North America – are already written here.
The illustration shows the regional breakdown of gross premium income in catastrophe business in the year under review.
The most spectacular major loss in the French market was the collapse of a section of the terminal roof at the Charles de Gaulle Airport outside Paris. Hannover Re's exposure in this case, however, was not appreciable. A more sizeable loss event for our company was the crash of a Flash Airlines plane in January 2004, although this, too, did not significantly impact the business result. Rates in travel accident insurance climbed as a consequence of this loss.
Northern Europe As in previous years, market conditions in this region were not uniformly positive. Fierce competition was a hallmark of some areas of the primary insurance market in the year under review. In the reinsurance market we noted higher retentions across the board. Hannover Re ranks among the most prominent reinsurers in Northern Europe. Thanks to our expertise and very good rating, we are a sought-after partner and were able to enlarge our market share.
Eastern Europe Eastern European markets again recorded considerably above-average growth in the year under review. The accession of several Central and Eastern European countries to the European Union added a further boost to the economic mood.
Rate movements in the individual countries varied. Following higher premiums in recent years, rates in property insurance were stable in the Czech Republic and Slovakia. The pricing climate in Poland, Russia, Ukraine and Romania was competitive.
On the reinsurance side the hard market was sustained, although initial softening tendencies could be observed. In this region, too, we focus on writing non-proportional business. In the year under review we analysed our portfolio in light of strict profitability criteria and relinquished business that offered insufficient returns. The premium volume was slightly enlarged.
Leaving aside two fire losses in Russia and a number of other claims, the year under review was spared sizeable loss events. We were therefore able to generate an underwriting profit and in Eastern European markets, too, we can feel highly satisfied overall with the business development.
Despite the accumulation of hurricane losses in the third quarter of 2004, American insurers found themselves in a largely favourable situation in the year under review: the sharp rise in insurers' capital resources was sustained in 2004. The combined ratio again improved slightly on the previous year and moved below 100%. Had it not been for the effects of the four hurricanes, the combined ratio would have made far greater progress towards the 90% mark. Rate increases, however, were by no means the general rule any longer in the primary insurance market. Overall, though, most US insurers are comfortably poised to tackle the challenges of a softening market.
One event that occurred in the year under review was of special significance not only to the North American market: the investigation conducted by New York Attorney General Eliot Spitzer. The presentation of the findings that emerged from these investigations into business practices on the primary insurance market reached its peak in mid-October in a lawsuit filed against the world's largest insurance broker. In connection to this a number of reinsurers also found themselves facing investigations into how they conduct their business with brokers. Yet it quickly became clear that Spitzer's allegations were first and foremost a matter concerning the primary insurance sector.
Particularly in casualty business, rates and conditions continued to be highly satisfactory and indeed, further improvements were even obtained. Overall, the reinsurance market still found itself under pressure to achieve combined ratios significantly under 95% in order to generate returns on equity in the order of 15%. Although these efforts did not prove uniformly successful across the market, the combined ratio for the market as a whole – despite the hurricane losses – made further progress towards this target.
Significant enlargement of our market share in North America since 2001
True to our anticyclical underwriting strategy of disproportionately strong growth in a hard market, we have significantly enlarged our premium volume in recent years – not only in relative but also in absolute terms. In the year under review, as part of these moves, we again expanded our portfolio, inter alia in attractive areas of casualty business. The dramatic doubledigit – in some cases even triple-digit – rate increases of recent years in the casualty sector were not sustained to the same extent in the year under review, although further rises were still the general rule.
In areas that no longer offered such attractive business prospects, such as industrial property insurance lines, we scaled back our involvement and increasingly reweighted our portfolio in favour of more profitable non-proportional programmes at the expense of proportional covers.
Thanks to our conservative reserving policy and our reduced participation in the soft market years, we again had no need to establish significant additional reserves for past underwriting years.
The market environment in marine reinsurance was very largely stable, although rates in some lines showed initial signs of softening. Only in offshore business did rates deteriorate sharply as the year progressed – a trend that was abruptly halted by the losses inflicted by hurricane "Ivan". Triggering business interruptions in oil production in the Gulf of Mexico, this event caused the largest insured loss of all time in marine and offshore business.
Given the four severe hurricanes in the third quarter, natural catastrophe reinsurance suffered such a heavy burden of losses that this sector closed with a deficit in the United States. However, these events also served to halt the price erosion that had begun to creep into this segment.
Latin America The state of the primary insurance markets in this region remained unchanged from the previous year: property business was fiercely competitive in both the insurance and reinsurance sectors. Rates and conditions consequently showed further slight deterioration. Our withdrawal from proportional business was reflected in sharply reduced premium income. Mexico, Argentina, Colombia and Venezuela continue to be Hannover Re's most important markets. Motor business remains the largest segment in these markets. Since we adhere to a prudent underwriting policy in this region, too, and given the absence of major losses, we were highly gratified by the performance of our Latin American portfolio – both on the treaty side and in facultative business.
The South African insurance market posted good results in the year under review, despite marked softening tendencies in property business. Reinsurers, on the other hand, are adopting a relatively disciplined approach.
Business in Taiwan and Hong Kong, where we concentrated increasingly on excess of loss covers, developed satisfactorily. Following the failure of a number of market players, our clients attach even greater importance to financial strength considerations – with the result that in this region, too, we are a sought-after reinsurance partner.
In all developed markets and indeed in a growing number of emerging markets issues surrounding individual provision for retirement and dependants are assuming ever-greater prominence. This trend can be attributed to the combination of declining birth rates and longer life expectancy. It is becoming increasingly clear that traditional contribution-based systems of state provision can no longer be funded as a consequence of these massive shifts in the age structure, and there will therefore be a growing need to fall back on models oriented towards the private sector.
In the coming decades, too, this will give rise to a favourable environment for life insurers that will generate increased demand for individual products tailored to a particular life situation. Life insurers will have to broaden their product range to include offerings designed to preserve living standards in the third phase of people's lives.
cant at present, and we intend to wait for more attractive market conditions.
Overall, we are satisfied with the development of our Asian business.
New Zealand again developed highly satisfactorily. Although early signs of a softening in the hard market could be detected in the year under review, rates remained at a very high level. As a reinsurer we are enjoying a very favourable market climate; our required margins were satisfied in most lines of business.
Breakdown of gross premiums by business centers in % (before consolidation)
All underwriting decisions of Hannover Life Re are taken on the basis of our General Underwriting Guidelines. Our underwriting policy, which is clearly defined in these guidelines, is conservative and geared to generating stable, longterm earnings. Above all, it avoids derivative risks on the casualty side of the balance sheet. For this reason we do not participate in the reinsurance of derivative components of unit-linked US annuity policies, an area that has attracted negative headlines of late. Our exposure to longer-term US term life policies, the reserving of which has been dominated by "Regulation XXX" since 2000, is also minimal.
In the year under review we participated for the first time in a customer survey conducted by the US Flaspöhler Research Group among European life reinsurers: the study confirmed that Hannover Life Re has now established itself as a leading provider in Europe. Of the 15 European reinsurers included in the survey, we received particularly good marks for our security, financial strength and customer orientation.
Customer Relationship Management continues to be of essential importance to our worldwide marketing activities. We value long-term client loyalty and emphasise business relationships that generate profits for insurer and reinsurer alike.
Geographical breakdown of life and health reinsurance as % of gross premiums
Consolidated gross premium income contracted by 4.4% year-on-year to EUR 2.2 billion (EUR 2.3 billion). This was due, on the one hand, to the weakness of various foreign currencies – first and foremost the US dollar and other currencies pegged to it – and, on the other hand, to the loss of new business from a major account in the United Kingdom. At the same time, however, we also acquired new accounts in the German market.
Following additional withdrawals from health business in South Africa, the portfolio mix shifted in the year under review further towards the preferred lines of life, annuity and personal accident, which in sum now account for 85% (80%) of our total premium income.
The effects of the tsunami that struck South and Southeast Asia on 26 December 2004 were only marginal for international life reinsurers owing to the low insurance density in these countries.
In the Asian region itself the burden of losses for our portfolio is estimated to be in the order of EUR 1.2 million. We do, however, anticipate some expenditure from various European markets in connection with tourists who were also affected by this event. The amount is unlikely to exceed EUR 4.0 million.
Hannover Life Re's performance is primarily determined by four factors: • Development of the biometric risks of mortality, morbidity and longevity
Since we are heavily involved in the area of international financing transactions – under which we finance new business acquisition costs (generally for larger portfolios of individual life policies) –, the risk associated with the persistency of the in-force reinsured portfolios as well as the credit risk attached to the cedent are of considerable importance to our company. Our experience here was especially gratifying in the year under review: lapse rates for all major customer relationships were in line with (or better
Gross premiums incl. premium deposits 2 487.9 (1.8%) 2 534.2 2 728.3 2 660 2 495
Management report life and health reinsurance than) the actuarial expectations. The credit status of our clients continues to rate as good to very good: none of our cedents experienced any financial difficulties.
The biometric risks of mortality and morbidity developed highly satisfactorily overall, albeit subject to considerable regional variation.
The mortality experience in Europe, South Africa, Australia and Asia was significantly below our expectations. Japan showed a marked improvement compared to the previous two years – while in the USA our relatively small portfolio of conventional life business recorded slightly increased mortality rates.
The longevity risk, which in our portfolio is of greatest relevance to enhanced annuities in the United Kingdom, is monitored particularly closely. Furthermore, we review the risk situation for all treaties on a regular basis by performing detailed actuarial analyses.
Based on a prudent investment policy built around first-rate bonds of short- to medium-term duration we were willing to accept a slightly lower return in the year under review so as to be better equipped for a possible upturn in interest rates. Extraordinary investment income was scarcely realised in the year under review: the balance of extraordinary profits and losses on disposals was a mere EUR 3.5 million.
A large portion of our assets is attributable to funds that for regulatory reasons are deposited with ceding companies. In all such cases we received the contractually agreed return, which is geared to the actuarial interest rate of the reinsured policies; we do not carry any investment risk (market risk) in this regard.
Overall, Hannover Life Re generated another significantly improved operating profit (EBIT) of EUR 90.9 million in the year under review. This represents an increase of 49.1% compared to the previous year and is a new record level. The net return on premium, calculated as a quotient of the operating profit (EBIT) and net premiums earned, thus stood at 4.7%. The net income after tax climbed by 7.4% year-on-year to EUR 50.0 million. This was equivalent to earnings of EUR 0.41 (EUR 0.43) per share.
2004: AUD 22.2 million 2003: AUD 14.4 million 2002: AUD 11.2 million
tion-specific projections, which are even drawn up for individual underwriting years in the case of substantial arrangements.
• costs for solvency are taken into account on the basis of local capital adequacy requirements
80% of the value of in-force business derives from financing transactions. In these instances it is calculated on the basis of transac-
• For the most part use of the existing model (risk-free interest rate + risk premium of 350 basis points, adjusted to the relevant interest rate level)
Hannover Life Re Germany (E+S Rück), Hannover 271.1 214.3 226.7 194 172
Hannover Life Re Australasia, Sydney 3.9 – (5.8) 6.0 (4.0) 3.4 (2.3) 2.9
Some elements of the future technical profit flows included in the value of in-force business are already recognised under US GAAP, for example the amortisation of deferred acquisition costs (DAC). If, therefore, in addition to the net income calculated under US GAAP allowance is to be made for the value creation expressed in the growth of the value of in-force business, the latter needs to be adjusted by factoring out certain components. With this in mind, for a number of years now we have been calculating the socalled non-capitalised portfolio value on a pretax basis. Amounting to EUR 496.8 million as at the balance sheet date, the table below shows its composition and development in recent years: Development of non-capitalised portfolio value
We are devoting special attention to the newly emerging senior citizens' market and are taking a proactive role in marketing and sales solutions. With this in mind we have participated in a specialised marketing company.
Gross premium income grew by 11.1% compared to the previous year to reach EUR 404.7 million; the underwriting result was strongly positive thanks to a favourable claims experience and good persistency of the in-force reinsured portfolios.
Ireland Our subsidiary Hannover Life Re Ireland writes treaty business on a worldwide basis, predominantly in the USA, Canada, South Africa and the UK. In many instances the company is able to make the most of the favourable regulatory environment in Ireland to offer clients bespoke and financially optimised solutions.
France, Italy, Spain and Arab countries In these markets, where we are represented by our life branch in Paris and service offices in Milan and Madrid, we have been active for many years in the bancassurance sector and in the area of independent distributors.
In the North American market we are positioned as a reinsurer of small and mid-sized US life insurers through our subsidiary Hannover Life Re America based in Orlando/Florida. We focus on specialty products for the senior citizens' market, Latin American risks and block assumption transactions (BATs) in life and annuity business. Hannover Life Re America's underwriting office in New York concentrates on covers from the areas of group life insurance and occupational pension schemes.
Our total portfolio of life business in force grew by 7.9% to EUR 44.9 billion. Gross premiums contracted – in part due to exchange-rate effects – to EUR 513.3 million and net premiums earned fell to EUR 228.0 million. As in previous years, intensive use was made of intergroup retrocessions to Hannover Life Re International, Hannover, and Hannover Life Re Ireland, Dublin.
Following the previous year's record level of EUR 18.0 million, Hannover Life Re America's results normalised in the year under review. The operating profit (EBIT) of EUR 17.8 million was entirely in line with our expectations. Net income amounted to EUR 10.2 million.
Africa On the African continent we write risk-oriented life, critical illness and disability business from the markets of southern Africa through our Johannesburg-based subsidiary Hannover Life Re Africa. The focus is on South Africa, which contributes more than 71% of this region's premium volume. The company cemented its position as Africa's second-largest life reinsurer in the year under review.
We further scaled back the health portfolio by means of a substantial portfolio withdrawal and thus forged ahead with our envisaged portfolio optimisation in South Africa. As planned, the portfolio mix shifted in favour of the preferred lines of life and critical illness, which now account for 69.6% of the total portfolio.
Gross premiums recorded gratifyingly vigorous growth of 49.2% to reach EUR 100.7 million, an impetus that also carried over to the operating profit. EBIT moved back into positive territory at EUR 1.5 million, following an operating loss of more than EUR 6 million in the previous year.
The difference between financial reinsurance and property/casualty reinsurance can be traced principally to the reinsurance needs of the individual client. Whereas in property and casualty reinsurance the emphasis is on the risk transfer between insurer and reinsurer in the context of a single portfolio or segment, in financial reinsurance our clients typically seek to optimise their entire book of business. These frequently highly specific requirements call for solutions that are specially tailored to the particular client.
When it comes to underwriting the risks, however, financial reinsurance uses the same actuarial models and similar methods and resources to those found in traditional property and casualty reinsurance. For organisational purposes many reinsurers therefore include it within this business group. For Hannover Re, however, financial reinsurance constitutes a separate business group that we have established under the brand Hannover Re Advanced Solutions. By taking this approach we believe that we have created optimal transparency for our clients and shareholders.
Three issues dominated market events in financial reinsurance in the year under review. Firstly, some cedents were still struggling with runoff losses from the underwriting years 1997 to 2001. Our company was not, however, significantly impacted thanks to additional premiums based on the claims experience that formed an integral part of our covers. These run-off losses were combined with sustained premium growth in the hard market and further increases in the level of retained premiums. As a result the solvency margins of many insurers and reinsurers – despite improved equity positions – continued to come under some pressure. This served to steady demand in financial reinsurance, without entirely making up for the decline in solvencystabilising products such as surplus relief covers.
The second major theme in the year under review was the preparations made by European insurers for the implementation of International Financing Reporting Standards (IFRS). These will give rise to greater volatility in the results reported in our clients' balance sheets. The resulting increased capital requirement is already reinvigorating the debate surrounding and the demand for cost-effective financial reinsurance solutions.
Re Australasia bears responsibility for the markets of Australia, New Zealand and Oceania. With a market share of 25% to 30% it has long enjoyed the role of market leader in Australia, a position which it successfully defended in the year under review.
The company operates primarily as a riskoriented reinsurer in the life and critical illness lines as well as in Australia's important disability pension sector. It additionally writes a sizeable portfolio of biometric risks associated with occupational pension schemes, which it also administers for the fund trustees.
Financial reinsurance is transacted under the Hannover Re Advanced Solutions brand
Despite the persistent weakness of the US dollar and the roughly two-thirds of our premium volume deriving from the American market – these two effects combined had a markedly adverse impact on total premium in the segment – we consolidated and further expanded our market position. Particularly vigorous growth was generated in Europe. In this context we stood by our historically conservative underwriting policy – in terms of the concepts, types of risk and level of risk transfer. In the latter case we continue to specialise in the low-risk sector, meaning that we prefer to write covers that represent a significantly lower risk transfer than traditional property and casualty reinsurance covers. Our accustomed conservative assessment of underwriting, timing and insolvency risks remains unchanged.
In the USA financially oriented products such as surplus relief covers were written less often than in the previous year because cedents' own capital resources have improved significantly. Demand for catastrophe excess of loss covers, on the other hand, increased appreciably. On a worldwide scale we are seeing a balanced mix in demand for aggregate XL (e.g. stop loss), spread loss and quota share arrangements. We have tapped into this demand to build a balanced international portfolio – admittedly with a certain unavoidable US bias – that is diversified not only geographically but also by lines of business (e.g. property and casualty).
There were no major consolidation measures to report in the year under review. One sizeable European competitor withdrew, while a number of companies – especially the newly established players based in Bermuda – entered the market. Major claims were incurred most notably in connection with the four hurricanes in the Caribbean and the USA. In addition to the losses inflicted in other lines, these events left their mark on the financial reinsurance business group in an amount running into the single-digit million euros.
All in all, the performance of financial reinsurance was satisfactory in the year under review. Gross written premiums were substantially lower – falling by 27.6% to EUR 1.2 billion (EUR 1.6 billion) – in part because of adverse exchange -rate movements. At constant exchange rates the decline, which was further attributable to the reduced demand for surplus relief treaties, would have been 22.6%. Net premiums earned presented the same picture, contracting by an appreciable 22.9% to EUR 1.2 billion (EUR 1.6 billion). The retention of 93.3% was virtually unchanged from the previous year (94.3%). The operating profit (EBIT) dipped by 10.5% to EUR 132.6 million (EUR 148.2 million). The net income of EUR 89.0 million fell short of the exceptionally good level achieved in the previous year (EUR 99.1 million). This business group thus contributed earnings of EUR 0.74 (EUR 0.90) per share.
Hannover Re's activities in program business are conducted principally through four subsidiaries. By far the largest share of the total portfolio is written by our US subsidiary Clarendon Insurance Group, Inc., New York, the market leader in program business in the United States. We are further represented by the American company Insurance Corporation of Hannover (ICH), Chicago, the UK-based International Insurance Company of Hannover Ltd. (Inter Hannover), Bracknell /London, and Compass Insurance Holdings (Pty) Ltd., Johannesburg, South Africa.
Clarendon has the required licences in all US states and is one of the few companies in the country to concentrate exclusively on program business. The individual contracts are written by around 50 managing general agents (MGAs) that have links with Clarendon.
Rates were favourable in the year under review. The combination of a hard market in primary insurance, the relatively manageable number of competitors in this business group and the small number of new players ensured that program insurers enjoyed a strong market position. The price increases obtained were generally better than the claims trend of the business. Contract conditions were also maintained on the current highly attractive level for insurers.
The business results posted by Clarendon in the year under review were disappointing – principally due to the strains associated with the four hurricanes in Florida. Gross premium income contracted by 22.8% to EUR 1.8 billion (EUR 2.4 billion). The decrease was in part so dramatic because of the weakness of the US dollar against the euro – at constant exchange rates the decline would have been 15.1%. Strengthening of the loss and loss adjustment expense reserves, a move that further reinforced the confidence level of the reserves, was another factor here. This produced additional strains running into the mid-range double-digit millions in the fourth quarter of the year under review. Overall, therefore, Clarendon recorded a net loss after tax of EUR 91.4 million, compared with net income of EUR 37.3 million in the previous year.
Within the Hannover Re Group Clarendon was especially hard hit by the four hurricanes in Florida. Multiple loss events on this scale in this region – remembering that Clarendon writes property insurance exclusively in Florida – were the worst possible scenario that the company could have faced. Had there been only one event – albeit with higher insured losses – or several hurricanes in other US states, the burden incurred by
From the outset of 2004 the issue of interest rate rises dominated expectations among players on the bond markets. By the middle of June 10-year US yields had initially climbed to roughly 4.9%. Furthermore, on 30 June 2004 the US Federal Reserve Board initiated a change of course in monetary policy, hiking the prime rate by altogether 125 basis points to 2.25% by yearend. Yields in the Eurozone fell markedly with a base rate of 2%. With interest rates moving in different directions in the USA and the Eurozone, the yield gap between 10-year government bonds in the respective markets widened to more than 60 basis points.
Our portfolio of fixed-income securities increased by 10.3% from EUR 11.6 billion to EUR 12.8 billion. We used the decline in yields in Euroland and the continued diminishing yield advantage of corporate bonds over government bonds to realise price gains of EUR 82.6 million on balance. The opposite movement on USD markets to some extent offset the aforementioned positive effects, with the result that net unreal-
Management report investments ised gains in our portfolio of fixed-income securities remained virtually on a par with the previous year at EUR 159.4 million (EUR 159.6 million). In view of the extremely low interest rate level and the very tight spreads we emphasised short durations and high quality. Caution was the hallmark of our investment policy in the area of fixed-income securities in the year under review. The quality of the securities remained on a high level since greater exposure in this area appeared inadvisable in light of the risk/yield ratio on the credit markets. Our primary focus was on government bonds and liquid issues of sovereign entities as well as jumbo mortgage bonds in Europe. In addition, our duration management had a defensive posture, enabling us to respond appropriately at short notice to movements in interest rates. New investments were made primarily in short- or medium-duration instruments.
As at year-end 2004 we held a total amount of EUR 549.2 million in short-term assets, including overnight money and time deposits, and EUR 480.8 million in current assets. Funds held by ceding companies climbed by EUR 1.3 billion to EUR 9.0 billion.
The equity holdings in our portfolio increased by 19.5% to EUR 1.1 billion (EUR 0.9 billion). This corresponded to an equity alloca-
The ordinary income of EUR 1.0 billion fell slightly short of the previous year (EUR 1.1 billion ). This was due to the fact that the decline in average yields over recent years continued to be reflected in the portfolio and more than offset the absolute growth in the asset volume. The contribution to ordinary income generated by deposit interest – at EUR 432.5 million – was lower than in the previous year and thus similarly reflected the yield trend in Europe.
Average quality of fixed-income securities slightly improved over the course of the year
• Local risk controllers are charged – on the level of specific business groups –with aggregating and controlling individual risks and, where necessary, initiating appropriate risk-minimisation measures.
• Centralised risk controlling steers the entire process and describes the risk situation of the entire Group across all business groups.
The total net investment income of EUR 1,116.7 million increased by 4.2% compared to the previous year (EUR 1,071.5 million). At constant exchange rates it would have been substantially higher. In view of the volatile state of the markets in the year under review, we are nevertheless thoroughly satisfied with this performance.
although only if the associated opportunities promise a commensurate increase in the value of the company. A professional set of tools for the appropriate controlling of risk acceptances is therefore indispensable for our company.
Organisation of risk management mission-critical factors ensures early detection of undesirable developments and facilitates implementation of appropriate countermeasures. In addition, an annual risk inventory, in which all risks or risk groups that could potentially jeopardise the company's survival are thoroughly analysed and quantified, ensures that the risk portfolio is up-to-date. Regular process-independent controlling of the entire risk management system ensures that developments which could threaten the company's continued existence are detected at an early stage.
We have categorised the Hannover Re Group's risks as follows: • global risks, • strategic risks, • operating risks, which we subdivide into
• Analysis of the findings of worldwide scientific research studies into possible changes in the risk situation associated with natural catastrophes (e.g. storm frequencies and intensities due to climate change) and their implications for potential losses. To this end we use recognised simulation models and also employ our own scientists, who control the quality of licensed models and develop our own tools. The most significant events for Hannover Re in the year under review were the hurricanes "Charley", "Frances", "Ivan" and "Jeanne" (Caribbean and USA) as well as typhoon "Songda" (Japan). Our burden of losses from these events amounted to EUR 676.6 million for gross account and EUR 295.9 million net.
• Tracking of relevant trends in court practice around the world (antitrust and regulatory law, liability issues, corporate compliance) and changes in relevant accounting standards (US GAAP/IFRS) by specialised service units within Hannover Re.
Strategic risks derive primarily from an imbalance between the defined corporate strategy and the constantly fluctuating business environment. Ongoing monitoring of mission-critical parameters and regular review of our underlying assumptions are therefore essential. The following components are crucial to our long-term success: • optimal diversification, • systematic cycle management, • efficient capital management and risk-optimised investments, • opportunistic use of retrocessions, • low administrative expenses, • internationally optimised tax policy.
Technical operating risks are of special importance to reinsurance enterprises. They derive principally from the possibility that payment flows vital to the insurance business may deviate from the expected amounts. Possible reasons
The reserves in life and health reinsurance are always based upon the information provided by our clients. These reserves are reviewed on the basis of secure biometric actuarial bases with statistically adequate safety margins. Biometric risks lie in the miscalculation of probabilities, e.g. of death, disablement or longevity. For example, the morbidity risk (e.g. in the case of health, critical illness or disability risks) is estimated and monitored through actuarial studies of the morbidity experience. Furthermore, local supervisory authorities ensure that the reserves calculated by ceding companies satisfy all local requirements with respect to actuarial methods and assumptions (e.g. use of mortality and disability tables, assumptions regarding the lapse rate etc.).
The overall success of a reinsurance enterprise is determined by two main components: the "underwriting result" and the "investment income ". The profit-oriented steering of the Hannover Re Group's business activities thus gives rise to the following subtasks: • steering of the underwriting portfolio (liability management)
The consistent principle underlying our investment activities is the goal of generating an optimal contribution to the business result. For us this means: • We strive for stable, plannable and tax-optimised income while at the same time preserving the high quality standard of the portfolio.
• Our investment policy is governed by the principle of risk diversification.
• Currency exposures are managed according to the principle of matching currency cover.
An essential component of risk management is the principle of separation of functions – i.e. keeping a distinction between portfolio management, settlement and risk controlling. Risk controlling – which is organisationally and functionally separate from portfolio management – bears responsibility for monitoring all risk limits, evaluating financial products and verifying that all transactions are effected in line with market conditions. In this respect our management and control mechanisms are geared to the rules adopted by the Federal Financial Supervisory Authority (BaFin).
Currency exposures restricted according to the principle of matching currency cover
Rating in % in EUR million in % in EUR million in % in EUR million in % in EUR million
• inadequacy or failure of internal procedures • human error or system failure • external events (e.g. legal risks)
The most important operational risks include: • risks of business interruption and system failure • process management risks • risks of fraud
Breaches of antitrust law can lead to not inconsiderable fines and damage the company's image. Particularly for staff who come into contact with cedents or other reinsurers, systematic training sessions were held in the year under review in order to avoid conduct that might breach antitrust provisions. What is more, a detailed guideline was drawn up with Group-wide validity setting out a code of conduct for all employees in accordance with antitrust law. On the basis of this guideline Internal Auditing will also include relevant antitrust issues within the scope of its audits. The company's offices abroad have similarly been instructed to adopt appropriate local guidelines. In this way we ensure that actions throughout the Group comply with antitrust provisions.
Like all other organisational units within our company, the Central Division of Human Resources Management constantly seeks to analyse and enhance its value contribution to the Hannover Re Group. Using our holistic management system "Performance Excellence" (PE) we continuously review the value-added contribution made by our core processes and measures to the entire Hannover Re Group and determine key figures that facilitate transparent and goaldirected steering of our personnel management policy. In accordance with our decentralised PE approach we have thus been able to simply, but efficiently dovetail the strategy of our Central Division with the overall Group strategy.
The staff turnover of 2.3% (2.6%) – measured in relation to the average workforce of 810 employed at Home Office in Hannover – dropped to its lowest level in years. Along with the current state of the labour market, there can be no doubt that the credibility of our management culture and our systematic approach to personnel development are positive influencing factors in this regard.
Our personnel development work is founded upon the Hannover Re Group's corporate strategy, and in particular the "Human Resources Management Policy" defined therein: "For a globally operating financial services provider with a professional clientele, employee skills and motivation are performance factors that rank alongside capital resources. Our human resources and managerial development activities are aimed at consistently promoting the expertise and motivation of our staff."
For us, human resources development begins with our personnel marketing activities and the selection process prior to recruitment. Personnel development supports every member of staff, starting with their job familiarisation, through all positions and levels of their career with the Hannover Re Group. In this context we see personnel development as an interplay between management, staff and Human Resources.
The "Employee Self-Service" and "Manager Self-Service" facilities are used by employees and management as support tools for updating and accessing data.
Hannover Re's Applicant Management System was also optimised with the aid of electronic data processing. Thanks to our innovative "eRecruiting " approach more than half of all applications were received online in the year under review – and the tendency is rising. The online application form already available in the Internet was improved such that all data are now transferred directly to an applicant database, thereby substantially cutting administrative expenses.
• Am I proud to tell others that I work here?
How better to answer these questions than through an independent survey carried out among the workforce? Within the scope of the study "Germany's best employer 2004", conducted by a highly reputed Cologne research and consulting institute in cooperation with the business magazine Capital, staff from more than 100 companies were surveyed in 2004. With an overall mark of 2 Hannover Re ranks among Germany's most popular employers. This score
Global Performance Bonus – employees also share in the company's success
The crucial factors for the global economy in the current year will be movements in the price of crude oil and other raw materials, the US dollar 's performance against other key currencies and the approach to monetary policy adopted by the major economic powers.
In the treaty renewals as at 1 January 2005 – the date when almost two-thirds of our portfolio was renegotiated – it became clear that ceding companies are looking even more closely at a reinsurer's rating than was the case in the past. Especially when it comes to writing casualty business, a very good rating is absolutely indispensable. Only around 10% of reinsurers still satisfy this requirement: with ratings of "AA-" from Standards & Poor's and "A" from A.M. Best, Hannover Re is one of them; the outlook for both ratings is described as "stable".
Although a considerably softer market had already been expected in the year under review, there are still few signs of this materialising in 2005. Whilst we continue to assume that the hard market has reached its peak, a virtually unchanged attractive market climate is anticipated for the current year. Rates are also supported by the very low interest rate level prevailing around the world, which compels insurers and reinsurers to focus on a solid underwriting policy. Stable rates and conditions were preserved in most segments. In some lines, including for example hurricane - and flood-battered catastrophe business, it was even possible to obtain further modest improvements.
Price erosion was observed in those areas that had recorded the sharpest rate increases in recent years, e.g. aviation fleet business: in view of these circumstances we wrote our business highly selectively and systematically reduced our share. The situation in marine reinsurance proved to be better than originally anticipated. Price erosion in the offshore segment was halted following the losses inflicted by Hurricane "Ivan" in the Gulf of Mexico.
In credit and surety reinsurance the situation remains positive. Profitability has fallen off somewhat, but is still on a high level. Particularly in North America, this line will experience another hard market in 2005. In Germany the primary sector is showing early signs of increased competition. Pointing to the very good rehabilitation successes achieved in recent years, many cedents believe that the time has now come to roll back the improved conditions obtained by reinsurers. Consequently, the reinsurance market is also likely to see slight tendencies towards softening.
The treaty renewal season for property/ casualty business in Germany passed off highly successfully; the price structure exhibited unexpected stability. Adequate terms and conditions enabled us to substantially expand our position in this market, where we rank as one of the three leading reinsurers. We made the most of the advantageous market environment and therefore expect to show a good result, provided – as in the year under review – we are spared any unusual incidence of major losses.
Given our focus on non-proportional business, however, the effect on our portfolio will be less severe. Due to difficulties affecting a competitor we will be able to enlarge our market share. Competition is intensifying in France following the entry of new Bermuda-based reinsurers into the market. The pressure on prices there is growing, especially in catastrophe business. In Italy we do not currently anticipate any general deterioration in reinsurance conditions.
Attractive market climate expected to remain unchanged in property and casualty reinsurance
The reinsurance market in North America will not be able to entirely resist the softening tendencies on the original market. A "soft landing " is nevertheless anticipated. We expect to generate further profitable business, especially in the casualty lines where we are a sought-after partner for long-tail business due to our excellent rating. Even as the market softens this is likely to lend stability to our portfolio structure. In catastrophe reinsurance, where the hurricanes halted any price erosion, rates are stable.
Business in Australia is developing very favourably. Here, too, some treaties were renewed as at 1 January; no tendencies towards a softer market can be observed as yet. We are particularly pleased with the situation in casualty insurance, where rates and conditions are again comfortably adequate.
Especially in European markets, life and health reinsurance is expected to generate vigorous new business in the current year. The most notable growth is anticipated in unit-linked life insurance (Germany) and the traditional products of term life and critical illness (United Kingdom ). After enjoying a boom year in 2004, the German market will likely be somewhat calmer, although the overall pace of market growth will surpass the average level of recent years.
In the USA we shall press ahead with our successful niche strategy focussed on high-value financing transactions, the steadily growing senior citizens' market and Latin American risks. We are monitoring with considerable interest developments in regulatory rules governing the establishment of adequate reserves for longerterm US term life policies with guaranteed premium levels. In our assessment this is an area where a substantial risk potential will build for the US life reinsurance market over the next ten years. According to the analyses of expert market watchers, by 2014 – compared to the position as at 31 December 2003 – the capacity required to secure reserves amounting to more than USD 50 billion needs to be tripled. Taking into account new business written in the year under review and subsequent years, this amount will probably run into the triple-digit billions. The market participants are working intensively on capital market solutions so as to cope with this challenge in the coming years. We are only very minimally affected by the problem, however, since in past years too we largely avoided this business.
Chinese regulatory authority, we expect to commence business operations in the first half of 2006 at the latest.
All in all, double-digit increases in premium volume and net income are forecast for the current year. What is more, we are optimistic of achieving further appreciable growth in the value of in-force business – a key figure that reflects the future earnings potential of our portfolio.
The 2005 financial year has got off to a highly auspicious start. We still see attractive opportunities in property and casualty reinsurance, and the hard market continues to prevail. In the treaty renewals as at 1 January 2005 we obtained advantageous rates and conditions, especially in the casualty lines and natural catastrophe reinsurance. Although price erosion could be detected in some lines, particularly in those that had seen the greatest rate increases over the past few years, there has been no softening of the hard market in 2005. Indeed, it can be assumed that even in 2006 the very favourable terms and conditions in casualty business will be sustained. At least adjusted for exchange-rate effects, the total portfolio is expected to generate premium growth.
The Executive Board and Supervisory Board intend to propose to the Annual General Meeting that the net income should be distributed as follows: Proposal for the distribution of profits
Payment of a dividend of EUR 1.00 on each eligible no-par-value share 120 597 134.00
Fixed-income securities – held to maturity 5.1 470 254 498 695 498 695
Fixed-income securities – available for sale 5.1 12 341 748 11 119 567 11 119 567
Reinsurance recoverables on other reserves 5.2 9 903 41 528 41 528
Funds held under reinsurance treaties 955 636 1 080 491 1 080 491
Unrealised appreciation/depreciation of investments, net of deferred taxes 170 496 157 569 160 862
Other changes in cumulative comprehensive income (2 890) (22 685) (22 685)
Change in ceded unearned premiums (43 436) (3 421) 10 206
Change in policy benefits for life and health contracts 5.2 253 796 297 797 297 797 * On the need to apply the “as-if-pooling” method under US GAAP cf. management report p. 16 and the explanations provided in the “Capital consolidation” section of the Notes.
Net unrealised appreciation/depreciation of investments 9 634 114 442 116 932
Cumulative foreign currency conversion adjustments (72 321) (252 226) (248 852)
Net realised gains and losses on investments (161 220) (140 772) (140 455)
Changes in prepaid reinsurance premiums (net) (125 630) (25 002) 93 097
Changes in benefit reserves (net) 1 501 725 501 944 501 944
Changes in deferred acquisition costs (381 755) (305 194) (358 144)
Cash flow from operating activities 608 319 1 844 006 1 815 873
Net changes in contract deposits 1 034 285 294 123 294 123
IV. Exchange rate differences on cash (3 101) 49 047 49 034
Change in cash and cash equivalents (I.+II.+III.+IV.) 94 676 (285 732) (286 710)
Loss and loss adjustment expense reserve 8 820 198 8 396 999 1 053 719 929 396
Policy benefits for life and health contracts – – 5 253 328 4 001 148
Funds held under reinsurance treaties 557 880 559 333 153 396 216 185 * The figures for the commercial treatment and under the US GAAP "as-if-pooling" method are identical.
Commission and brokerage and other technical income/expenses 629 680 285 862 285 862 572 230 427 836 427 836 * On the need to apply the “as-if-pooling” method under US GAAP cf. management report p. 16 and the explanations provided in the “Capital consolidation” section of the Notes.
1. General accounting principles 80 2. Accounting principles including reporting and valuation methods 81 3. Consolidated companies and consolidation principles 81 4. Major acquisitions/new establishments 86 5. Notes on the individual items of the balance sheet and statement of income 86 5.1 Investments including income and expenses 86 5.2 Underwriting assets and liabilities 94 5.3 Contracts with no technical risk 98 5.4 Goodwill; present value of future profits on acquired life reinsurance portfolios 98 5.5 Taxes and deferred taxes 99 5.6 Staff and expenditures on personnel 101 5.7 Provisions for pensions and similar liabilities 102 5.8 Surplus debenture and loans 105 5.9 Stockholders' equity and minority interests 106 5.10 Other comprehensive income 107 5.11 Treasury stock 107 5.12 Earnings per share 107 5.13 Other assets and liabilities 108 5.14 Technical statement of income 109 5.15 Other income/expenses 109 6. Related party disclosures 109 6.1 Transactions with related parties 109 6.2 Compensation and stockholding of the management boards of the parent company and further information with respect to the German Corporate Governance Code 112 6.3 Stock appreciation rights (SARs) 113 6.4 Mortgages and loans 115 7. Other notes 115 7.2 Contingent liabilities 115 7.3 Long-term commitments 116 7.4 Derivative financial instruments 116 7.5 Rents and leasing 118 7.6 Currency conversion 119
The consolidated financial statement of Hannover Re has been drawn up fully in accordance with United States Generally Accepted Accounting Principles (US GAAP). All Statements of Financial Accounting Standards (SFAS) issued by the FASB on or before 31 December 2004 with binding effect for the 2004 financial year have been observed in the consolidated financial statement.
In November 2003 and March 2004 the EITF reached a consensus on some parts of EITF Issue 03–1 "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments". EITF Issue 03–1 discusses the meaning of other-than-temporary impairment and provides guidance for its application to certain investments that fall within the categories of "available-for-sale" and "held-to-maturity" pursuant to SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities " as well as to equity investments carried at cost in accordance with the "cost method" of accounting. The standard requires certain quantitative and qualitative information (inter alia regarding unrealised losses) for investments allocated to these categories. The recognition and measurement guidance in EITF Issue 03–1 has been delayed until publication of further implementing guidance. Hannover Re is currently exploring the implications of EITF Issue 03–1 for the consolidated financial statement.
In December 2003 the FASB issued FASB Interpretation No. 46 (FIN 46) (revised December 2003) "Consolidation of Variable Interest Entities" (FIN 46R). Hannover Re has applied the standards of FIN 46R to special purpose entities since 31 December 2003 and to all other companies with effect from 31 March 2004. The application of FIN 46R did not result in the additional consolidation of entities above and beyond the group of consolidated companies described herein. More detailed explanations are provided in section 5.1 on the securitisation of reinsurance risks.
The application of this standard did not have any significant impact on the consolidated financial statement.
GbR Hannover Rückversicherung AG/ E+S Rückversicherung AG Grundstücksgesellschaft Hannover/Germany 70.1 EUR 60 013 1 214
E+S Rückversicherung AG, Hannover/Germany 2) 55.8 EUR 464 281 44 000
Hannover Life Reassurance Company of America, Orlando/USA 2) 100.00 USD 85 884 (5 242)
Hannover Reinsurance (Dublin) Ltd., Dublin/Ireland 3) 100.00 EUR 277 212 35 369
Hannover Reinsurance (Ireland) Ltd., Dublin/Ireland 100.00 EUR 550 099 58 647
Hannover Services (UK) Ltd., Virginia Water/United Kingdom 2) 100.00 GBP 686 50
Hannover Finance, Inc. compiles its own sub-group financial statement, including the following major companies in which it holds the following shares: Clarendon America Insurance Company,
Hannover Reinsurance Group Africa (Pty) Ltd., Johannesburg/South Africa 2) 100.0 ZAR 404 405 101 812
Hannover Life Reassurance Africa Ltd., Johannesburg/South Africa 2) 100.0 ZAR 43 411 10 428
Penates A, Ltd., Tortola/British Virgin Islands 6) 88.1 USD 79 437 7 361
WPG Corporate Development Associates IV (Overseas), L.L.C., Grand Cayman/Cayman Islands 26.8 USD 1 974 (20)
Results for the last financial year 1) Financial year as at 30 September 2004 2) Provisional (unaudited) figures 3) Formerly HDI Reinsurance (Ireland) Ltd. 4) Financial year as at 31 December 2003 5) Company inactive for over a year 6) Figures as per US GAAP 7) Company inactive since 2004 8) Financial year as at 31 July 2004 9) Voting shares: 16.26% 10) After shifting of profits 11) Consolidated figures
The capital consolidation is based upon the standards set out in SFAS 141. Under the "purchase method" of accounting, the purchase costs of the parent company are netted with the proportionate stockholders' 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 SFAS 141 are to be accounted for separately from goodwill, the difference between the revalued stockholders' equity of the subsidiary and the purchase price is recognised as goodwill.
Effective 1 January 2002 scheduled amortisation is no longer taken on acquired goodwill and intangible assets with an indefinite useful life. Instead, they are tested for impairment at least once a year or upon occurrence of significant events or changes in circumstances which would suggest that the current value of one of the Group’s reporting units falls short of its book value. Prior to 1 January 2002 straight-line amortisation was taken on goodwill across estimated useful lives of up to 40 years.
SFAS 141 "Business Combinations" Para. 11 in conjunction with Appendix D 11 to 18 sets out standards governing the accounting of transfer transactions between entities under common control. This statement requires that the assets and liabilities of the transferred entity be carried over with the book values at the transferring parent company, and no fair value or goodwill is recognised. The consolidated financial statement of the acquiring entity is to be drawn up as if the transferred entity had already been part of the consolidated group since the commencement of the financial year ("as-ifpooling " method). In the previous year, as part of a capital increase for a contribution in kind, Talanx AG transferred its shares in HDI Reinsurance (Ireland) Ltd. to Hannover Re effective 1 July 2003 against issuance of new shares. Since this transfer constituted a transaction between entities under common control, US GAAP required that the company be consolidated at the book values of Talanx AG as if it had already belonged to the Group at the commencement of the previous year.
Immaterial and negative goodwill were booked to earnings in the year of their occurrence.
DSP Deutsche-Senior-Partner AG, Bonn, in which Hannover Re holds an interest of 49%, was established effective 27 January 2004. The object of the company, which has specialised in meeting the needs of senior citizens, is to serve as a distributor for insurance products and services, products from the regulated capital market as well as real estate and the accompanying financial services. In the 2004 financial year the interests were reported in the consolidated financial statement at purchase cost.
Due after five through ten years 302 151 321 342 295 000 298 825
Due after five through ten years 1 728 974 1 773 312 2 150 603 2 196 050
Fixed-income securities – available-for-sale 571 723 306 284 4 970 722 1 012 421 111 568 5 105 905 56 603 206 522 12 341 748
Equity securities – available-for-sale – 1 936 902 731 5 225 – 182 976 11 489 657 1 105 014
Equity securities – available-for-sale 18 960 2 292 690 299 12 779 10 953 178 363 11 423 526 925 595
FIN 46R was applied to all relevant entities with effect from 31 March 2004. Prior to this date we applied FIN 46R to all variable interests in special purpose entities. In addition, FIN 46R contains disclosure requirements with respect to existing relationships with variable interest entities that are to be satisfied even if such entities are not consolidated.
Since 2 November 2001 Hannover Re has held the equity of a special purpose entity for the purchase and handling of so-called "life settlements". The company’s total financing volume remained unchanged from the previous year at EUR 269.6 million. The entire underwriting risk of the special purpose entity is borne by an insurance company. This cedent retrocedes part of the risk to Hannover Re. The contract has been terminated with effect from 31 December 2003. The special purpose entity is closed for the acceptance of new business and is currently in the process of winding up. The maximum risk of loss for Hannover Re from this transaction is EUR 19.3 million (EUR 20.6 million). Hannover Re is not the primary beneficiary in this relationship.
The maximum risk of loss for the Hannover Re Group from the sum of these transactions amounted to EUR 83.6 million as at 31 December 2004. On the basis of our analysis we came to the conclusion that although – for Hannover Re's part – relations exist in the form of variable interests, there are no grounds to consider the Group the primary beneficiary in any of these transactions. A consolidation requirement therefore does not exist.
Since May 1994, Hannover Re has participated in a number of special purpose entities for the securitisation of catastrophe risks by taking up certain capital market securities known as "disaster bonds" (or "CAT bonds"). Hannover Re's relations with these entities constitute variable interests. Hannover Re is not the primary beneficiary in any of these transactions, and there is therefore no consolidation requirement. The maximum risk of loss for Hannover Re resulting from these participations is EUR 33.0 million (EUR 48.5 million) as at 31 December 2004.
SFAS 60 "Accounting and Reporting by Insurance Enterprises" requires that acquisition costs be capitalised as assets and amortised via the statement of income in proportion to the earned premiums. In the case of reinsurance treaties for unit-linked life insurance policies classified as "universal life-type contracts" pursuant to SFAS 97, acquisition costs were amortised based on a constant percentage of the present value of estimated gross profit margins from the reinsurance treaties.
Currency exchange rate differences between valuation at the average rate and the year-end rate 346 (7 752)
Reserve as at 31 December of previous year (retro) 4 396 564 6 181 645
Reserve as at 31 December of previous year (net) 14 306 606 13 738 185
Effects of currency conversion at exchange rates on 31 December of year under review (net) (92 004) (79 706)
Reserve as at 31 December of year under review (net) 14 084 316 14 306 606
The disposals in the previous year were attributable to the sale of shares in E+S Rück.
Policy benefits for life and health contracts 378 047 107 205
Tax expense not attributable to the reporting period 3 122 66 030
On 1 April 1993 (1 June 1993 in the case of managerial staff) the 1993 pension plan came into effect. This pension plan provides for retirement, disability and surviving dependants' benefits. The scheme is based upon annual determination of the pension contributions, which at 1% up to the assessment limit in the statutory pension insurance scheme and 2.5% above the assessment limit of the pensionable employment income are calculated in a range of 0.7% to 1% and 1.75% to 2.5% respectively depending upon the company’s performance. The pension plan closed as at 31 March 1999.
Figures in EUR thousand a) Wages and salaries aa) Expenditures on insurance business 92 332 87 106 ab) Expenditures on the administration of investments 8 148 9 636 b) Social security contributions and expenditure on provisions and assistance ba) Social security contributions 13 736 11 255 bb) Expenditures for pension provision 10 108 12 601 bc) Expenditures for assistance 332 271
Provisions for pensions are established in accordance with actuarial principles and are based upon the commitments made by the Hannover Re Group for retirement, disability and widows' benefits. The amount of the commitments is determined according to length of service and salary level. The calculation of the provisions for pensions is based upon the following assumptions: • Discount rate: 5.00% to 6.25% • Rate of compensation increase: 2.25% to 5.50% • Projected long-term yield on plan assets (US plans): 6.00% to 7.50%
Projected benefit obligation at the beginning of the reporting year 54 581 54 024
In order to hedge against the risk of interest rate changes associated with this loan, the issuing company purchased interest rate swaps in 1999 in the same amount which expire on 31 March 2009. In commercial terms, therefore, the interest rate is converted from a floating rate to a fixed rate for a period ending commensurate with the first opportunity to redeem the loan. The annual interest rate arising after allowance is made for the interest rate swap amounts to 6.69% until 31 March 2009.
In February 2004 Hannover Re bought back 92.5% (USD 370.0 million) of the debt.
In order to safeguard the sustained financial strength of the Hannover Re Group, Hannover Re issued additional subordinated debt. In 2001 a subordinated loan was placed through Hannover Finance (Luxembourg) S.A. – a wholly owned subsidiary of Hannover Re – on the European capital market. The debt, which is secured by Hannover Re, was issued in the amount of EUR 350 million with a term of 30 years. It may be redeemed by the issuer after 10 years at the earliest.
Other financial facilities In order to protect against possible future major losses, Hannover Re took out a new credit line of EUR 500.0 million in 2004 in the form of a syndicated loan. The facility, which replaces the existing credit line of EUR 250.0 million, has a term of five years and is due in August 2009.
E+S Rück has a credit line of EUR 40.0 million, which is extended on a half-yearly basis and can be drawn on as required.
Additional paid-in capital 724 562 – – – – 724 562
Fully diluted earnings per share 309 140 120 597 134 2.56 418 321 116 224 758 3.60 5.10 Other comprehensive income
The basic earnings per share and the fully diluted earnings per share as at 31 December 2004 shown in the statement of income are calculated as follows on the basis of the year-end result: Figures in EUR thousand 2003
In accordance with the "as-if-pooling" method, our calculation of the earnings per share in the previous year was based on the assumption that Hannover Reinsurance (Dublin) Ltd. (formerly: HDI Reinsurance (Ireland) Ltd.) already belonged to Hannover Re at the beginning of 2002. The weighted average number of shares was therefore increased by the number of shares issued for the capital increase against a contribution in kind (13,716,814) with effect from this date onwards.
As part of a portfolio withdrawal Hannover Re transferred treaties in the area of life and health reinsurance to Hannover Life Reassurance Company of America for regional handling. E+S Rück is involved in the transfer of the portfolio through internal retrocession arrangements.
In accordance with a partner's resolution dated 17 May 2004 the additional paid-in capital of Hannover Rück Beteiligung Verwaltungs-GmbH in the amount of EUR 10.1 million was released and transferred in full to Hannover Re as the sole partner.
By way of an agreement dated 21 December 2004 Hannover Re disbursed to Clarendon National Insurance Company a loan of USD 100.0 million as an equity substitute. Interest is payable at six-month Libor plus 300 basis points.
Hannover Re has made time money lendings of between USD 3.4 million and USD 31.9 million to Hannover Finance, Inc. The interest payable ranges from 1.15% to 2.50%.
Effective 28 December 2004 E+S Rück assumed from HDI Industrie Versicherung AG receivables in the amount of EUR 100.0 million due from reinsurance companies – including an amount of EUR 87.3 million due from Hannover Re. Under the agreement E+S Rück charged HDI Industrie Versicherung AG pro-rata interest for 2004 at six-month Euribor in an amount totalling EUR18,500.
Since 2002 Hannover Re and HDI Privat Versicherung AG have each held interests of EUR 12.5 million (50.0%) in Oval Office Grundstücks GmbH. By a partners' resolution of 21 February 2003 the partners individually committed themselves to contribute up to a total of EUR 31.7 million in additional cash payments to the company's equity capital. In the 2004 financial year Hannover Re contributed a total of EUR 15.9 million.
As at 31 December 2001 Hannover Re and E+S Rück each took up limited partnership interests of EUR 25.0 million in Hannover Euro Private Equity Partners II GmbH & Co. KG. In the 2004 financial year Hannover Re and E+S Rück both paid five capital calls – totalling EUR 4.4 million each – on the amount subscribed. In addition, in accordance with the articles of partnership, three cash distributions were made to both Hannover Re and E+S Rück in the amount of EUR 2.3 million each.
Total compensation of EUR 3,609 thousand (EUR 2,786 thousand) was paid to the Executive Board and EUR 694 thousand (EUR 446 thousand) to the Supervisory Board in the year under review. Former members of the Executive Board and their surviving dependants received EUR 896 thousand (EUR 823 thousand), and a liability of EUR 9,786 thousand (EUR 9,970 thousand) was shown as at year-end.
The total compensation received by the members of the Executive Board included variable components of EUR 1,515 thousand (EUR 1,424 thousand). The variable remuneration of the Executive Board is determined on the basis of the year-end result and the value creation. The value creation is measured using an appropriate benchmark (the performance of the Hannover Re share relative to the unweighted "Reactions" World Reinsurance Index). The benchmarks cannot be retroactively changed.
Transactions implemented by Executive Board and Supervisory Board members of Hannover Re and by their spouses or registered partners and first-degree relatives involving shares, options or derivative financial instruments of Hannover Re as well as of the parent companies (so-called "Directors' Dealings"), which with effect from 1 July 2002 are to be reported in accordance with § 15a of the German Securities Act (WpHG), are set out in the table below: Figures in EUR thousand Position as at 1.1.2004 Addition Repayment Position as at
André Arrago Buy Call warrant DE 000743 488 8 17.05.2004 100 000 0.29
André Arrago Buy Call warrant DE 000743 488 8 17.05.2004 100 000 0.30
André Arrago Sell Call warrant DE 000743 488 8 07.12.2004 100 000 0.29
Wilhelm Zeller Buy Stock DE 000 840 221 5 04.11.2004 1 000 25.93
With effect from 1 January 2000 the Executive Board of Hannover Re, with the consent of the Supervisory Board, introduced a virtual stock option plan that provides for the granting of stock appreciation rights (SARs) to certain managerial staff. 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.
Upon exercise of a stock appreciation right the amount paid out to the entitled party is the difference between the basic price and the current market price of the Hannover Re share at the time when the option is exercised. In this context, the basic price corresponds to the arithmetical mean of the closing prices of the Hannover Re share on all trading days of the first full calendar month of the allocation year in question. The current market price of the Hannover Re share on the date when an option is exercised is determined by the arithmetical mean of the closing prices of the Hannover Re share on the last twenty trading days prior to the first day of the relevant exercise period.
The calculations are based on the year-end closing price of the Hannover Re share as at 30 December 2004 of EUR 28.75, volatility of 22.43%, a dividend yield of 3.52% and risk-free interest rates of 3.30% for the 2000 allocation year, 3.57% for the 2002 allocation year and 3.69% for the 2003 allocation year.
Total options existing at 1 January 1 673 499 24.78 1 097 235 25.50 1 138 005 25.50
* The exercise price is the basic price at the time when the stock appreciation rights are granted pursuant to § 9 of the Conditions for the Granting of Stock Appreciation Rights
In February 2004 we placed subordinated debt in the amount of EUR 750.0 million on the European capital markets through our subsidiary Hannover Finance (Luxembourg) S.A. Hannover Re has secured the debt by a subordinated guarantee.
Hannover Re has also secured by subordinated guarantee further subordinated debt in the amount of EUR 350.0 million issued by Hannover Finance (Luxembourg) S.A.
Within the scope of a novation agreement regarding a life insurance contract we assumed contingent reinsurance commitments with respect to due date and amount estimated at EUR 29.2 million as at the balance sheet date.
Following the termination of the German Aviation Pool with effect from 31 December 2003, our participation consists of the run-off of the remaining contractual relationships. Several Group companies are members of the association for the reinsurance of pharmaceutical risks and the association for the insurance of German nuclear reactors. In the event of one of the other pool members failing to meet its liabilities, an obligation exists to take over such other member's share within the framework of the quota participation.
Hannover Re calculates the fair value of the embedded derivatives using the market information available on the valuation date on the basis of a "credit spread" method. Under this method the derivative is valued at zero on the date when the contract is concluded and its value then fluctuates over time according to changes in the credit spread of the securities.
The application of DIG B 36 had no significant impact on the consolidated financial statement in the financial year. The fair values of the embedded derivatives were recognised in the investments as at the balance sheet date and to this extent increased the investment income. The pre-tax effect on the investment income amounted to altogether EUR 10.3 million (EUR 3.3 million) as at the balance sheet date. In the course of the full 2004 financial year the fair value of the embedded derivatives increased by EUR 7.0 million (EUR 7.4 million adjusted for exchange-rate effects) before tax compared to the previous year.
The fair values of the derivative financial instruments were determined on the basis of the market information available as at the balance sheet date and by using the valuation methods set out below. If the underlying transaction and the derivative cannot be reported as a single unit, the derivative is recognised under the "trading portfolio" or "other liabilities" item in the balance sheet.
Cash flow hedges In the case of a cash flow hedge, the hedge-effective part of the changes in fair value is initially recognised under the stockholders' equity (cumulative comprehensive income). It is only reported in the statement of income when the underlying hedged transaction has been recognised in the statement of income. The hedge-ineffective part of the changes in fair value is recognised in the statement of income immediately.
The fair value of derivatives used in fair value hedges amounted to EUR 2.5 million and was recognised in the trading portfolio.
Nine derivative contracts matured in the year under review; this gave rise to profits on disposals of EUR 4.9 million and losses on disposals of EUR 1.4 million.
As at the balance sheet date the portfolio did not contain any forward purchase options or forward exchange transactions.
The Insurance Corporation of Hannover and the Clarendon Group have multi-year contracts for the lease of business premises. In the latter case, a lease agreement for business premises was concluded in 2003 with a term of 20 years. The lease ends on 29 August 2023. The rent instalments are fixed for the lease term, although adjustments in line with changed market conditions are possible at contractually agreed times.
In 2002 Hannover Reinsurance Africa Ltd. concluded a sale-and-lease-back contract for land and business premises for a period of eight years. SFAS 13 requires that this be recognised as an operating lease.
As part of its discussion of important individual projects the Supervisory Board considered inter alia the issue of subordinated debt by the financial holding company Hannover Finance (Luxembourg) S.A. in the amount of EUR 750 million. Issued in a favourable financing climate with a fair market coupon, the loan served to enhance the quality of the Hannover Re Group's capital and create contingent capital for any anticipated increases in capital adequacy requirements on the part of rating agencies and regulators. The inflow of cash was also used, inter alia, to buy back – at extremely favourable terms – a large portion of a subordinated debt in the amount of USD 400 million, which had been issued in March 1999 by the US financial holding company Hannover Finance, Inc. and guaranteed by Hannover Re. The Supervisory Board obtained information from specialist analysts about the development of particularly significant business segments. The focus in the year under review was on a discussion of the opportunities, risks and potential for growth in Greater China, i. e. China proper, Taiwan and Hong Kong.
The Supervisory Board also continued to keep a close eye on the development of the Group's principal subsidiaries and participations. In 2004 the primary focus here was on two capital increases at subsidiaries. The capital increase of EUR 300 million to EUR 850 million at Hannover Re Bermuda was the most significant. This capital measure was implemented as an appro-
"Good and transparent Corporate Governance ensures that an enterprise is responsibly managed and supervised with an orientation towards value creation. It serves the goal of strengthening and consolidating on a lasting basis the trust placed in the enterprise by present and future shareholders, business partners, clients, employees and the general public". This fundamental idea, which already prefaced last year's Corporate Governance report, remains valid for Hannover Re without the slightest reservation.
The Executive Board and Supervisory Board of Hannover Re support the principles of valueoriented and transparent enterprise management and supervision as defined in the German Corporate Governance Code (DCGK) and recognise their importance in guiding their activities. On the basis of the DCGK we have drawn up our own Corporate Governance principles and thus created a state-of-the-art company-specific set of rules for the practical implementation of the DCGK standards. We are playing our part in enhancing the DCGK and the concept of Corporate Governance in Germany, inter alia by providing willing support for empirical studies on this topic. We are making this contribution because we concur with the German Corporate Governance Code Government Commission that it is in the German business community's own interest to put more trust in voluntary transparency, rather than simply being compelled to comply with legislative requirements.
The goal of generating sustained value enhancement for all shareholders of Hannover Re has always been and continues to be firmly enshrined in our corporate philosophy. With this in mind, we had already been practising Corporate Governance before the DCGK came into force. Key requirements of the Code, such as variable compensation for the Executive Board linked to the growth in the company's value (stock option plan), equal rights to information for all investors ("fair disclosure") and the holding of regular meetings with analysts, have long been standard practice at our company.
• Representatives of the company also met with roughly 40 international analysts and investors in Hannover for one-to-one discussions.
The entry into force at the end of October 2004 of the German Investor Protection Improvement Act (Anlegerschutzverbesserungsgesetz ), with its extensive modifications of the Securities Trading Act (Wertpapierhandelsgesetz), was discussed at length by the Executive Board. Members of staff who have access to insider information as defined by the Act were advised of the tighter rules governing insider trading and of their inclusion in the list of persons with access to insider information ("insider directory").
The Supervisory Board again devoted considerable attention to the issue of Corporate Governance. At the beginning of the year a written efficiency audit was conducted to examine the work of the Supervisory Board. The questionnaires were evaluated in the strictest confidentiality by the company's Corporate Governance Officer and the results were then discussed within the Supervisory Board with the goal of further enhancing the quality of the body's work. Various measures adopted with a view to accomplishing this goal were subsequently implemented in the course of the year.
On 2 June 2004 the Annual General Meeting adopted an amended version of the Articles of Association in order to implement even more extensively the recommendations of the DCGK. The amendments provide for separate specification of compensation for the chair and members of Supervisory Board committees (Code Item 5.4.5 Para. 1 Sentence 3). In this connection, the link envisaged in the previous Supervisory Board compensation arrangements between the variable, performance-based compensation and the dividend paid by the company was also removed. It was replaced by a reference to a fixed percentage of the earnings before interest and taxes (EBIT) as reported in the consolidated financial statements in accordance with US GAAP. The
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 diverges from the German Corporate Governance Code (amended version of 21 May 2003) in the following aspects: Declaration of conformity pursuant to § 161 Stock Corporation Act (AktG) regarding compliance with the German Corporate Governance Code at Hannover Rückversicherung AG
enables our shareholders to fully assess the appropriateness of the total amount of compensation.
The compensation received by the members of the Executive Board and the Supervisory Board is supposed to be reported in the notes to the consolidated financial statements on an individualised basis broken down into its constituent elements. Hannover Re is of the opinion that the legal protection of rights of personality should take precedence over the disclosure and transparency interests of investors. For this reason, as has been the case to date, a summary presentation of the compensation and its constituent elements is provided in the notes to the consolidated financial statements. This disclosure
Hannover Services (UK) Ltd. London Office 2nd Floor 69–70 Mark Lane London EC3R 7HJ
Hannover Rückversicherung AG Canadian Branch – Facultative Office 150 York Street, Suite 1008 Toronto, Ontario M5H 3S5
Hannover Reinsurance (Dublin) Ltd. No. 2 Custom House Plaza, IFSC Dublin 1
Italy Hannover Re Services Italy Srl Via Mazzini, 12 20123 Mailand
Japan Hannover Re Services Japan KK 7th Floor, Hakuyo Building 3-10 Nibancho Chiyoda-ku Tokyo 102-0084
Korea Hannover Rückversicherung AG Seoul Representative Office German Office Shintown Plaza Building 28-2 Hannam-dong Yongsan-ku Seoul 140-210
Hannover Reinsurance Africa Limited P. O. Box 10842 Johannesburg 2000 www.hannover-re.co.za Managing Director: Achim Klennert
Insurance Corporation of Hannover 500 Park Blvd. Suite 1350 Itasca, Illinois 60143
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 to pay to a reinsurer under a reinsurance treaty. In this case, the retaining company shows a deposit received, while the company furnishing the collateral shows a deposit with a ceding company.
Financial reinsurance: reinsurance with limited potential for profits and losses; the primary objective is to strive for risk equalisation over time and to stabilise the ➞ cedent 's balance sheet.
Issuer: private enterprise or public entity that issues securities, e.g. the federal government in the case of German Treasury Bonds and a joint-stock corporation in the case of shares.
Modified Coinsurance- (Modco) Treaty: type of reinsurance treaty where the ceding company retains the assets supporting the reinsured reserves by withholding a fund, thereby creating an obligation to render payments to the reinsurer at a later date. Such payments include a proportional share of the gross premium plus a return on the assets.
Obligatory (also: treaty) reinsurance: reinsurance treaty under which the reinsurer participates in a ➞ cedent's total, precisely defined insurance portfolio. This is in contrast to ➞ facultative reinsurance.
Program business: a well-established business model in the US primary insurance market. It is transacted by primary insurers ("program insurers") in very close cooperation with highly specialised managing general agents (MGAs). The business group is focused on strictly defined, homogeneous primary insurance portfolios (programs), typically comprising niche and non-standard coverages, i.e. risks that are impossible or difficult to place with conventional insurers. Functions normally performed by the insurer, such as sales, closing contracts, issuing policies, collection, policy administration and claims settlement, are assumed by the MGAs or by other external serviceproviders.
Retention: the part of the accepted risks which an insurer/ reinsurer does not reinsure, i.e. shows as ➞ net (retention ratio: percentage share of the retention relative to the gross written premiums).
Stochastic banking: targeted provision of financial support for primary insurers through reinsurance arrangements under which the reinsurer participates in the original costs of an insurance portfolio and receives as a consideration a share of the future profits of the said portfolio. This approach is used primarily for long-term products in personal lines, such as life, annuity and personal accident insurance.
Underwriting: process of examining, accepting or rejecting (re-)insurance risks and classifying those selected in order to charge the proper premium for each. The purpose of underwriting is to spread the risk among a pool of (re-)insureds in a manner that is equitable for the (re-) insureds and profitable for the (re-)insurer.
Variable Interest Entity: legal entity not bound to a certain form of organisation for which the traditional approach to consolidation based on voting rights is ineffective in identifying where control of the entity really lies, or in which the equity investors do not bear the economic risks and rewards of the entity. The definition is broader than the previously used term ➞ special-purpose entity (SPE).