Combined ratio (non-life reinsurance) 3) 95.4% 99.7% 100.8% 112.8% 97.2% 22/109
Burgwedel 1) Member of the Standing Committee 2) Member of the Balance Sheet Committee 3) Member of the Nomination Committee 4) Staff representative
A network of individual elements: they are all interlinked and every one has its own very par ticular place. This is how it might look – the principle of solidarity on which insurance is based. Each premium protects the individual. All premiums combined form a protective shield for all those behind it. A well structured system – as is clearly evident.
All in all, though, the implications of the financial market crisis for the reinsurance industry are positive: the heavy loss of capital at primary insurers is prompting growing demand for reinsurance and hence rising rates. Early indications were already apparent in the year under review. The round of treaty renewals completed on 1 January 2009 impressively lived up to expectations. Detailed information in this regard is provided in the forecast.
October. This was attributable to the loss of confidence on financial markets triggered by the meltdown on the US real estate market as well as the liquidity and capital crunch affecting the banks. While interest rate markets soared, especially towards the end of the year, risk premiums on corporate bonds widened enormously. It is gratifying to note that our portfolio of assets under own management nevertheless grew to EUR 20.1 billion thanks to a positive cash flow from the technical account and the rise of the US dollar towards year-end. This corresponds to an increase of 1.6% compared to the level as at 31 December 2007 (EUR 19.8 billion). Ordinary investment income excluding deposit interest fell short of the previous year at EUR 829.8 million (EUR 859.0 million ) owing to portfolio regrouping into low-interest government bonds.
The Latin American insurance market is also developing steadily: following the abolition of the reinsurance monop-
Total net expenditure on catastrophe losses and major claims in 2008 amounted to EUR 457.8 million (EUR 285.4 million). This figure corresponds to 10.7% of net premium in non-life reinsurance and was thus only
Fierce competition continued to be the hallmark of the primary sector – both in industrial lines and private customer insurance. In the latter case this was especially true of motor business, an important line for our company. Compared to the original market, however, the climate on the reinsurance side was more favourable, i.e. rates and conditions continued to be broadly adequate. Although softening tendencies made themselves felt here too, we were able to act on attractive business opportunities in the year under review.
In motor liability insurance the premium erosion – at around 2% – took a more favourable turn than had been initially anticipated. With the claims frequency also falling, profitability proved to be more than adequate. Results in motor own damage insurance, on the other hand, were adversely impacted by the hailstorm events "Hilal" and "Naruporn". Our losses from these two events amounted to EUR 55.2 million and EUR 12.0 million respectively. Winter storm "Emma" also caused severe damage in Germany; the net strain from this event totalled EUR 13.3 million.
Our long-established, tried and trusted anticyclical business policy lends itself to consolidating our profitability in the North American market across various cyclical phases. Consequently, we did not seek to enlarge our market shares in 2008. Instead, for example, we scaled
Given the cyclical nature of the North American market, it is absolutely essential to play such an active role even in softer market phases so as to safeguard our capability for renewed expansion of the portfolio in the coming hard market years. In this respect market surveys confirm that we continue to be ranked first in qualitative terms on the broker market.
The meltdown on the US mortgage market did not have any repercussions for our credit and surety portfolio. Our underwriting guidelines preclude the writing of credit derivatives, i.e. including mortgage guarantee business.
Latin America The most important Latin American markets for our company are Mexico, Columbia, Venezuela, Ecuador and Argentina. Both Mexico and Central America are regions with a marked natural catastrophe exposure. Hannover Re is highly active in this segment. In these markets too – with the exception of the Caribbean – we stepped up our involvement.
In Africa, too, Hannover Re is distinguished by the very high quality of its management team: within the scope of the Group-wide Performance Excellence assessment conducted in accordance with the model of the European Foundation for Quality Management, our South African subsidiary delivered an outstanding performance and thus demonstrated the particularly impressive quality of its enterprise management and supervision – something from which our clients profit.
Asia Japan, where we support our clients through a local service company in Tokyo, is by far our largest Asian market. Hannover Re transacts business here across all segments – although natural catastrophe covers, which we write predominantly on a non-proportional basis, constitute the most important single line in Japan.
Surveys of primary insurers again confirmed the success of this orientation in the year under review: the vast majority of our existing loyal customers in Europe and Asia attribute to Hannover Life Re the role of best or secondbest life reinsurer.
Gross premium incl. premium deposits 5,315.6 +35.0% 3,937.4 3,959.8 2,733.2 2,487.9
Earnings per share in EUR 0.65 -58.3% 1.57 0.85 0.49 0.32
Following the exceptionally high operating profit (EBIT) of the previous year (EUR 45.0 million), which had been heavily shaped by positive special effects, net income after tax amounted to EUR 0.7 million in the year under review.
Events have taken a new turn in Brazil: following the long-awaited opening up of the reinsurance market, Hannover Re has now secured the status of an "admitted reinsurer" and established a representative office in Rio de Janeiro for life and non-life business. We intend to be more of a pacesetter in this key market going forward.
This inflow from operating activities enabled us to further enlarge our portfolio of high-quality fixed-income securities. Overall, the allocation of funds in connection with investing activities grew by EUR 463.5 million to EUR 1,034.1 million. The funds were for the most part invested with durations that matched the technical liabilities. Against the backdrop of the illiquidity prevailing in some parts of the capital markets, liquidity management assumed greater importance, also prompting restructuring measures in the existing asset portfolio. In this context please see our remarks in Section 6.6 "Liquidity risks" in the notes.
Overriding goals and organisation of our risk management tween opportunities and risks. Operational realisation of these objectives is ensured inter alia through standard and ad hoc reports tailored to the risks, systematic and comprehensive recording of all material risks and our review – based on a closed loop system – of the efficiency of all relevant systems in risk management. Appropriate rules establish a separation between units that enter into or manage risks, on the one hand, and those that monitor risks, on the other. Process-integrated monitoring is performed by the Risk Committee, the Chief Risk Officer and the supporting organisational units. Process-independent monitoring is the responsibility of Internal Auditing.
Risk Committee • Monitoring and coordinating body with respect to operational risk management • Decision-making power is within the bounds of the risk strategy defined by the Executive
The net income or loss generated by the Hannover Re Group is fundamentally determined by two components, namely the "underwriting result" and the "investment income". The asset portfolios derive in substantial measure from insurance premiums that must be set aside for future loss payments. The risks in the investment sector encompass primarily market risks (share price, interest rate, real estate and currency risks as well as the spread risk). Credit risks are also relevant.
The credit risk consists primarily of the complete or partial failure of the counterparty and the associated default on payment. Also significant, however, is the so-called migration risk, which results from a rating downgrade of the counterparty and is reflected in a change in fair value.
Under the heading of "Other risks" we primarily consider emerging risks, strategic risks, reputational risks and liquidity risks.
Along with our treaty business, we shall extend our involvement in the facultative segment – i.e. in the (re)insurance of individual risks, particularly in engineering business. Numerous infrastructure-related construction activities are funded by Islamic financial institutions, which for their part obtain insurance from takaful companies. We expect the premium volume in the current financial year to come in substantially higher.
Although the recession continues to spread, it will scarcely affect us as a reinsurer since its primary impact is on the income statement of companies and less on the fixed assets to be insured. Conditions for a financially strong reinsurer such as Hannover Re are good. The increased demand among insurers – triggered by diminished capital resources and greater risk awareness – is coming up against a reduced supply, hence prompting higher prices. A further positive factor is that the capital market's interest in reinsurance products has faded. In view of this environment and our very healthy diversification, and thanks to our excellent rating, we are able to generate attractive business. In non-life reinsurance we continue to have a close eye on profitable niche business, as a consequence of which we are looking forward to a very positive development in the current financial year.
Pursuant to EU Regulation (EC) No. 1606/2002, the present consolidated financial statement and group management report of Hannover Re have been drawn up in accordance with the International Financial Reporting Standards (IFRS) that are to be used within the European Union. We have also made allowance for the supplementary regulations applicable pursuant to § 315a Para. 1 German Commercial Code (HGB) and the supplementary provisions of the parent company's Articles of Association as amended on 3 August 2007.
The IASB has issued the following standards, interpretations and amendments to existing standards with possible implications for the consolidated financial statement of Hannover Re, application of which is not yet mandatory for the year under review and which are not being applied early by Hannover Re: In November 2006 the IASB issued IFRS 8 "Operating Segments", which replaces the previous IAS 14 "Segment Reporting ". IFRS 8 requires adoption of the "management approach" for reporting on the economic position of segments. Under this approach, the segmentation and the disclosures for the segments are based on the information used internally by management for evaluating segment performance and deciding on the allocation of resources. IFRS 8 applies to financial years beginning on or after 1 January 2009. Hannover Re does not currently expect the standard to have any influence on the presentation of segments in the consolidated financial statement.
In January 2008 the IASB published the revised versions of IFRS 3 "Business Combinations" and IAS 27 "Consolidated and Separate Financial Statements". The new provisions primarily cover the recognition of minority interests, measurement issues in connection with successive acquisition, changes in a participating interest with or without a loss of control and adjustments to acquisition costs depending upon future events and their effects on goodwill. The revised IFRS 3 still does not apply to combinations of entities under common control. The amendments are mandatory for financial years beginning on or after 1 July 2009. As at the balance sheet date neither of these revised versions had been ratified by the European Union.
Financial assets classified as available for sale are carried at fair value; accrued interest is recognised in this context. We allocate to this category those financial instruments that do not satisfy the criteria for classification as held to maturity, loans and receivables, at fair value through profit or loss, or trading. Unrealised gains and losses arising out of changes in the fair value of securities held as available for sale are recognised – with the exception of currency valuation differences on monetary items – directly in shareholder's equity after deduction of deferred taxes.
Hannover Services (UK) Ltd., Virginia Water/United Kingdom 1) 100.0 GBP 650 GBP (99)
Only subsidiaries of minor importance for the assets, financial position and net income of the Hannover Re Group are exempted from consolidation. For this reason thirteen service companies and representative offices abroad, the business object of which is primarily the rendering of services for reinsurance companies within the Group, were not consolidated in the year under review.
The capital consolidation is based on the revaluation method. In the context of the "purchase accounting" method the acquisition costs of the parent company are netted with the proportionate shareholders' equity of the subsidiary at the time when it is first included in the consolidated financial statement after the revaluation of all assets and liabilities. After recognition of all acquired intangible assets that in accordance with IFRS 3 "Business Combinations" are to be accounted for separately from goodwill, the difference between the revalued shareholders' equity of the subsidiary and
Minority interests in shareholders' equity are reported separately within Group shareholders' equity in accordance with IAS 1 "Presentation of Financial Statements". The minority interest in profit or loss, which forms part of net income and is shown separately after net income as a "thereof" note, amounted to -EUR 8.0 million (EUR 116.4 million) as at 31 December 2008.
In determining our capital requirement we proceed on the assumption that an AA rating is equivalent to a default probability of 0.03%. The breakdown of the risk capital is as follows: Figures in EUR million 2008 2007
Rise in the overall interest rate curve, from 200 basis points for the three-month interest rate to 100 basis points for the 10-year interest rate (with a linear interpolation between the two) (480.3) (485.8)
Figures in EUR million Effect on forecast net income 100-year loss California earthquake (260.2) (222.9)
The model takes into account the following market risk factors: • Interest rate risk • Credit spread risk • Systematic equity risk • Specific equity risk • Commodity risk • Option-specific risk
Against the backdrop of the US real estate crisis and credit crunch, it should be noted that our investment portfolio does not contain any directly written credit derivatives. We did not write any off-balance sheet risks through structured transactions with special purpose entities. Of our total portfolio of asset-backed securities, more than 88% were attributable to mortgage bonds, municipal bonds and collateralised debt obligations as at the balance sheet date, 5% were comprised of commercial mortgage-backed securities and 4% consisted of residential mortgage-backed securities.
Debt securities issued by semi-governmental entities 432,412 21,532 886 8,797 461,855
At fair value through profit or loss 1) Including income from associated companies, for reconciliation with the consolidated statement of income 2) Excluding other investment expenses
Net book value at 31 December of the year under review 128,680 170,839
Gross book value after currency translation at 1 January of the year under review 41,801 41,258
Gross book value of accounts receivable at 31 December of the year under review 2,927,335 2,653,604
Fair value of plan assets at the end of the year under review 7,051 9,372
Net provisions for pensions at 31 December of the previous year 67,101 64,559
IAS 1 requires separate disclosure of treasury shares in shareholders' equity. By a resolution of the Annual General Meeting of Hannover Rückversicherung AG adopted on 6 May 2008, the company was authorised until 31 October 2009 to acquire treasury shares of up to 10% of the share capital existing on the date of the resolution. As part of this year's employee share option plan Hannover Re acquired altogether 13,984 treasury shares in the course of the fourth quarter of 2008 and delivered them to eligible employees at preferential conditions. These shares are blocked until 30 November 2012. The company was no longer in possession of treasury shares as at the balance sheet date.
Waiting period 2 years 2 years 2 years 2 years 2 years 2 years
Number of options at 31.12.2003 – – – – 686,664 986,835
The calculations were based on the price of the Hannover Re share of EUR 21.91 as at 19 December 2008, expected volatility of 34.54% (historical volatility on a five-year basis), a dividend yield of 0.00% and risk-free interest rates of 1.96% for the 2000 allocation year, 2.37% for the 2002 allocation year, 2.56% for the 2003 allocation year, 2.74% for the 2004 allocation year, 3.06% for the 2006 allocation year and 3.20% for the 2007 allocation year.
In our opinion, based on the findings of our audit, the consolidated financial statements comply with IFRS, as adopted by the EU, the additional requirements of German commercial law pursuant to § 315a Abs. 1 HGB and supplementary provisions of the articles of incorporation and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. The group management report is consistent with the consolidated financial statements and as a whole provides a suitable view of the Group’s position and suitably presents the opportunities and risks of future development.
Hannover Re (Bermuda) Ltd. Victoria Place, 2nd Floor, 31 Victoria Street Hamilton, HM 11 Tel. +1 441 2943110/11