Details of memberships of legally required supervisory boards and comparable control boards at other domestic and foreign business enterprises
Following the surge in prices in the stock market year just-ended, some capital market players see a need for consolidation on certain German indices – especially those for second-line stocks. In the assessment of other experts, however, the German equity market is on the verge of its fifth good year in succession – with the DAX already having the 7,000 mark in its sights. Irrespective of whichever scenario one considers to be more accurate, Hannover Re continues to enjoy a fundamentally favourable valuation and therefore offers further scope for improvement. Based on the consensus profit estimates as at the end of the year under review, the Hannover Re share is being traded with a price/earnings (P/E) ratio of around 8.7 for the 2007 financial year (MDax average: 19.8). The price/book (P/B) ratio as at year-end was about 1.4 (MDax average: 2.8).
The appointment and withdrawal of members of the Executive Board are determined by §§ 84 et seq. Stock Corporation Act. Amendment of the Articles of Association is governed by §§ 179 et seq. Stock Corporation Act in conjunction with § 16 Para. 2 of the Articles of Association of Hannover Re.
The powers of the Executive Board with respect to the issue and repurchase of shares are defined in § 6 "Contingent capital" and § 7 "Authorised capital" of Hannover Re's Articles of Association as well as in §§ 71 et seq. Stock Corporation Act. In this connection the Annual General Meeting authorised the Executive Board on 12 May 2006 pursuant to § 71 Para. 1 No. 8 Stock Corporation Act to acquire treasury shares on certain conditions.
Furthermore, as the core business result within the scope of our holistic management system Performance Excellence, IVC measures the extent to which we are able to implement our strategy.
Overall, we were highly satisfied with the performance of our investments: the sustained strong inflow of cash more than offset price effects associated with the rise in yields on international bond markets, causing the portfolio of assets under own management to grow by EUR 0.1 billion year-on-year to EUR 19.2 billion. Ordinary investment income excluding deposit interest climbed by 19.9% to EUR 784.8 million (EUR 654.6 million). As part of our active portfolio management the balance of profits and losses on disposals came in at EUR 217.4 million (EUR 162.2 million). Total net investment income climbed – despite a further fall in deposit interest – by 5.9% to EUR 1,181.2 million (EUR
The rate decline as well as the tense claims situation in industrial fire and fire loss of profits business produced an overall unsatisfactory result for our account. In contrast, the performance of motor liability insurance, our largest line, and liability insurance was highly positive; prices remained stable. As far as major losses were concerned, we principally incurred two fire claims in Germany with a net strain of some EUR 29 million.
The market climate in marine reinsurance in the year under review was heavily influenced by the substantial losses from the 2005 hurricanes, which not only prompted rate hikes and increased retentions at ceding companies but also ushered in extensive restructuring of the reinsurance programmes; risks relating to the Gulf of Mexico, for example, were removed entirely and separately reinsured. Many programmes now distinguish between catastrophe-exposed regions (Gulf of Mexico) and risks that have no correlation with natural catastrophe events. The market hardened appreciably in catastrophe-exposed business, on both the insurance and reinsurance sides. Conditions for other reinsurance business were stable.
All in all, we were very satisfied with the results of our marine business written on the London Market; this was also true of the business development in other European countries. Although premium erosion was observed here in the primary sector, especially in cargo insurance, the rate level in reinsurance remained stable. Unlike on the London Market, marine business in these regional segments is focused mainly on freight and hull exposures. Our market share in other European markets is relatively low compared to our involvement in the London Market, since improvements in conditions were few and far between here – not least due to the favourable loss experience of recent years. The countries of Eastern and Central Europe were an exception in this regard.
The primary market in credit insurance continues to enjoy double-digit growth and very good results. Surety business is stable, although conditions came under pressure due to a low claims frequency and the absence of major losses. On the reinsurance side too business again developed very favourably; the rate level in the surety line – the dominant business for Hannover Re – was particularly attractive. We maintained – and in some instances even extended – our influential market position, while recording aboveaverage profitability. Our volume in the area of political risks was significantly enlarged.
Argentina are the most important Latin American markets for our company. The very low inflation rate in all these countries in 2006 was also of indirect benefit to the insurance industry. Consumption was boosted by the opportunity to obtain low-interest loans, thereby generating stronger demand for insurance products – especially motor, mortgage protection and life insurance. Yet in overall terms, too, the premium volume on the aforementioned markets grew.
We closed the "L2" financing transaction – placed in 1999 – early with effect from 31 December 2006 and withdrew it from the retrocessionaires. This gave rise to one-off expenditure running into the mid-double-digit million euros.
In the year under review, with the aim of optimising the product mix, we expanded our cessions to North American retrocessionaires. Allowing for the new "L6" transaction placed at the end of 2005, the level of retained premiums fell 7.4 percentage points year-on-year to 85.4%. Net premium earned consequently totalled EUR 2.4 billion, a gain of 5.1% on the previous year (EUR 2.3 billion).
Overall, the risk experience for mortality and critical illness was thoroughly satisfactory. Our annuity portfolio, which is dominated by the run-off of a previously acquired portfolio of enhanced annuities from the years 2000 – 2003, is developing according to plan.
In the year under review we substantially extended our market position in Scandinavia and Israel. The Turkish market, which offers considerable potential especially in the bancassurance sector, has increasingly become a focus of our marketing activities.
We are scarcely active in the conventional individual risk reinsurance market, where business typically consists of large-volume quota share cessions on an original premium basis, since in our assessment the level of prices and conditions prevailing on the market is still not adequate.
In December 2006 we announced that we had reached agreement with the leading Australian insurer on the sale of Praetorian. The purchase price of around USD 800 million was equivalent to 2.1 times Praetorian's expected shareholders' equity excluding goodwill as at the end of the year under review. The transaction is still subject to regulatory approval in the USA; we expect to receive this approval and hence close the transaction in the second quarter of 2007. Hannover Re intends to systematically invest the released risk capital of roughly EUR 600 million in the expansion of its property/casualty and life/health reinsurance business.
In 2004 we had launched the Group Performance Bonus, a performance-based compensation system for staff at our Hannover Home Office. This tool was geared to the earnings per share and hence directly linked to the company's performance; it replaced salary components that were previously guaranteed.
• The essential components of risk management are documented in binding instructions that are applicable to the entire Hannover Re Group.
• We have at our disposal various indicators geared to individual risks that immediately flag any potential imbalances.
• The interest guarantee risk, on the other hand, is of only minimal risk relevance due to contractual exclusions.
Specialty insurance Our specialty insurance business group concentrates on niche and non-standard business involving small customer groups and special needs (e.g. unusual occupational risks and fine art collections). In contrast to our other business groups, traditional insurance functions – such as new business acquisition, underwriting and claims settlement – are handled by external specialised managing general agents (MGAs) and other third-party service providers. This very extensive outsourcing of functions gives rise to special risks. The corresponding control mechanisms include: • regular checks to ensure that managing general agents and outside service providers are in compliance with our restrictive standards,
In the year under review all specialty business written by Clarendon Insurance Group, Inc. was concentrated in the hands of the newly established Praetorian Financial Group, Inc. Henceforth, Clarendon will focus on the management of terminated programs as well as the remaining commodity business. In December 2006 we sold Praetorian so as to be able to concentrate on our core business of reinsurance going forward. The transaction is still subject to the approval of regulators, which we expect to receive in the second quarter of 2007.
Prices and conditions in property and casualty reinsurance largely commensurate with the risks
The German non-life insurance market is seeing considerably fiercer competition and hence substantial rate cuts coupled with increased pressure on conditions. This was particularly noticeable in the industrial fire and motor lines. Although prices on the reinsurance side have not come under the same degree of pressure that they have on the original market, premium erosion has been observed across all lines. Rates also declined in German catastrophe business in view of the absence of severe windstorm events. We were not entirely able to cushion the effects of price erosion on the original market through adjustments in pricing for excess of loss covers. All in all, though, business in Germany developed highly satisfactorily: thanks to new accounts and increased shares under existing customer relationships we were able to further boost our already large market share and extend our position as one of the leading reinsurers in the profitable German market.
The treaty renewals in East Asian markets take place predominantly as at 1 April. In Taiwan, on the other hand, most treaties are renewed as at 1 January. The Japanese market – where treaties are renewed almost exclusively as at 1 April – appears to be broadly stable, with rate increases expected for windstorm and hurricane covers. In Japan we shall enlarge our business with small mutual aid societies (known as the Kyosai market). Given the absence of catastrophe losses, Asian markets are likely to see progressive softening.
Despite the softening tendency on the markets, we consider conditions in non-life reinsurance to be broadly favourable: in view of our focus on profitable, non-proportional business, our opportunistic underwriting policy and our excellent ratings, we are in a position to generate attractive business. We continue to have our sights set firmly on profitable niche segments in non-life reinsurance, and we therefore expect our business to develop favourably in the current financial year and beyond.
Life reinsurance vate healthcare for seniors (referred to as Medicare Part D coverage). Our market prominence in South Africa is steadily growing, and we shall extend our positioning as the leading reinsurer for the new generation of risk products.
Hannover Rückversicherung AG is the parent company of the Group. The consolidated financial statement includes eleven German and eighteen foreign companies, as well as three foreign subgroups. Four German and three foreign associated companies were consolidated using the equity method.
Parallel downward shift in the interest rate curve by 100 basis points 337 396
Net book value at 31 December of the year under review 166,646 170,414
As percentage of original loss reserve 32.1 25.7 19.2 12.5 2.0 0.2 (1.6) 4.2 5.9 3.6 1) Figures based on German accounting principles 2) Since 1998 US GAAP data source
Reserve at 1 January of the year under review 5,662,924 91,121 5,571,803 5,529,801 105,446 5,424,355
In accordance with IFRS 3 "Business Combinations" scheduled amortisation was not taken on goodwill. Goodwill was subject to an impairment test.
In addition, tax credits of EUR 14.0 million were available and recognised in the full amount as deferred tax assets.
Staff The average number of staff at the companies included in the consolidated financial statement of the Hannover Re Group was 1,988 (1,972). Of this number, 877 (857) were employed in Germany in the year under review. The majority of staff were employed at the consolidated Group companies abroad. The discontinued operation accounted for 237 members of staff.
Pension commitments are given in accordance with the relevant version of the pension plan as amended. The 1968 pension plan provides for retirement, disability, widows' and orphans' benefits. The pension entitlement is dependent on length of service; entitlements under the statutory pension insurance scheme are taken into account. The pension plan was closed to new participants with effect from
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 following table presents a reconciliation of the funded status – calculated from the difference between the defined benefit obligations and the plan assets – with the provision for pensions recognised as at the balance sheet date: Figures in EUR thousand 2006 2005
Defined contribution plans In addition to the defined benefit plans, some Group companies have defined contribution plans that are based on length of service and the employee's income or level of contributions. The expense recognised for these obligations in the year under review in accordance with IAS 19.46 amounted to EUR 3.1 million (EUR 5.3 million), of which EUR 0.1 million (EUR 0.1 million) was due to obligations to members of staff in key positions.
The following amounts were recognised for the current and previous reporting periods under the accounting of defined benefit plans:
In order to safeguard the sustained financial strength of the Hannover Re Group, Hannover Re issued additional subordinated debt. In February 2004 subordinated debt in the amount of EUR 750 million was placed through Hannover Finance (Luxembourg) S.A., a wholly owned subsidiary of Hannover Re, on the European capital markets. The bond was placed predominantly with institutional investors. The bond was priced at a spread of 163 basis points over the 10-year mid-swap rate and has a final maturity of 20 years. It may be redeemed by Hannover Re after 10 years at the earliest and at each coupon date thereafter. If the bond is not called at the end of the tenth year, the coupon will step up to a floating-rate yield of quarterly EURIBOR + 263 basis points.
Gross book value at 31 December of the previous year 129,566 115,234
Within the scope of a novation agreement regarding a life insurance contract we assumed contingent reinsurance commitments with respect to due date and amount. The financing phase was terminated effective 31 December 2004 as per the agreement. The level of Hannover Re’s liability as at the date of novation (31 December 2011) in relation to future balance sheet dates may change due to fluctuations in the EURIBOR and discrepancies between the actual settlements and the projections. The estimated amount of the reinsurance commitments as at the balance sheet date was EUR 33.4 million (EUR 27.7 million). The increase of EUR 5.7 million in the reinsurance commitment compared to the previous year resulted from the sharp rise in the EURIBOR in 2006.
Coinsurance Funds Withheld- (CFW) Treaty: type of coinsurance contract where the ceding company retains a portion of the original premium at least equal to the ceded reserves. Similar to a ➞ Modco contract the interest payment to the reinsurer reflects the investment return on an underlying asset portfolio.