+++ Hannover Re generates another record result +++ Very good results in non-life and life/health reinsurance +++ Operating profit (EBIT) +14.6% +++ Group net income +42.6% +++ Earnings per share +42.6% +++ Book value per share +15.6% +++ Return on equity 23.5% +++ Proposed dividend EUR 1.80 + EUR 0.50 bonus per share +++ Return on equity target for 2008 >15% +++ hannover re R
Consolidated statement of changes in shareholders' equity . . . . . . . . 81
We accomplished a good deal in 2007: a central event was the sale of Praetorian Financial Group, Inc., our US primary insurance subsidiary operating in specialty business.
What other steps have we undertaken? As you are aware, we attach high priority to the issue of risk management and our activities in this regard are therefore many and diverse. We continually analyse and assess potential threats so as to be able to take appropriate action as and when necessary. In the year under review, for example, we further reduced our peak exposures under catastrophe covers. We also made further moves to ensure that our equity base is not burdened by exceptionally large losses: in the year under review we topped up our 2006 "K5" transaction – through which we transfer worldwide insurance risks to the capital market – and thereby made our portfolio even more weather-proof. What is more, with the "Kepler Re" securitisation put in place in March 2007 we have succeeded in innovatively protecting our retention in this highly volatile business segment against extraordinarily large catastrophe losses. In addition, the "Merlin" risk securitisation immunises us against a potential credit risk associated with reinsurance recoverables due from other reinsurers. We received an award for this transaction, the first of its type in the insurance industry worldwide.
Dr. Paul Wieandt 2) Liquidator of Königstein i. T. Resba GmbH i. L. Deputy Chairman (until 20 March 2007)
1) Member of the Standing Committee 2) Member of the Balance Sheet Committee 3) Member of the Nomination Committee 4) Staff representative
• making flexible use of capital in those business groups, regions and lines that offer the highest returns.
The gross written premium booked by the entire Hannover Re Group contracted as anticipated by 11.1% to EUR 8.3 billion (EUR 9.3 billion). This was attributable to the sale of Praetorian and the associated withdrawal by Clarendon from active specialty business. Even the
We use retrocession, i. e. the passing on of portions of our covered risks to other reinsurers, as a means of risk reduction. In the course of the year the reinsurance recoverables on unpaid claims – i.e. receivables due to us from our retrocessionaires – decreased to EUR 2.5 billion (EUR 3.0 billion). We nevertheless continue to attach considerable importance to the quality of our retrocessionaires: more than 95% of the companies with which we maintain such business relations have an investment grade rating of "BBB" or better from Standard & Poor's. Furthermore, we normally insist on the furnishing of additional collateral. Structured products are also gaining in importance on the capital market.
Net investment income fell by 5.8% in the year under review to EUR 783.3 million (EUR 831.7 million). The operating profit (EBIT) in non-life reinsurance was on a par with the previous year at EUR 667.6 million (EUR
In casualty business Hannover Re profited from its very good rating. Rates were largely stable, with only a few segments seeing modest reductions. These declines were, however, somewhat more marked in professional indemnity and directors' and officers' (D&O) covers – as a consequence of which we significantly scaled back our involvement. In accordance with our marketing strategy we wrote new business with niche providers, for example in the travel personal accident line.
Hannover Re pursues an opportunistic underwriting policy in these markets; we accept primarily non-proportional business that meets our profitability standards. This is especially true of China, where the market is dom-
Management report non-life reinsurance inated by proportional treaties; in our assessment, however, the rates for these programmes are inadequate, and we are therefore growing more slowly than the market as a whole. In casualty lines, on the other hand, we have extended our involvement; this is also applicable to China, where demand in the year under review was particularly brisk.
On the Australian continent, too, the overriding principle guiding our business strategy is adherence to our profitability targets: we concentrate primarily on non-proportional business and accept only a very small number of proportional treaties – in other words, we write business in this region predominantly on an opportunistic basis. We make exceptions, however, for customer relationships that have already existed for some years – provided they generate sustained profits. What is more, we are looking to expand niche business in an effort to further diversify our portfolio.
For its part, Hannover Life Re International is responsible inter alia for our acceptances in Asia. In this region we made considerable progress towards strengthening the
Enhanced annuities for persons with a reduced life expectancy, which we have written directly from Hannover for more than ten years in cooperation with a small group of UK specialty insurers, make up a rapidly growing business segment. In the area of disability covers, on the other hand, we have virtually no involvement.
Ireland only that, it was also possible to write back a provision constituted in the previous year for the longevity risk associated with UK term life policies in an amount of EUR 14.7 million in the first half of 2007, hence boosting profitability.
Overall, the operating profit (EBIT) thus amounted to EUR 45.0 million (EUR 72.8 million). The EBIT margin stood at 8.9% of net premium earned, while net income totalled EUR 39.4 million (EUR 63.7 million).
The gross premium volume grew by 3.9% in the year under review to EUR 86.9 million (EUR 83.6 million), while profitability continued to be highly favourable.
The company's gross written premium climbed by 12.8% measured in ZAR; after conversion to EUR it was on a par with the previous year at EUR 105.2 million (EUR 105.4 million). Despite a number of sizeable claims in life business due to road traffic accidents, results were satisfactory overall.
Hannover Re's overriding strategic objective is to be one of the three most profitable reinsurers in the world. In this context we strive to finance growth with self-generated profits and to avoid imbalances that would necessitate contributions by shareholders. We therefore operate on a purely profit-oriented basis and concentrate on attractive segments of reinsurance business. The sustainable value creation of our company is steered and documented using a system of key ratios, and we ground our strategy and our daily actions alike on high ethical and legal standards. We recognise that the public image of the Hannover Re Group is crucially shaped by the manners, actions and conduct of every member of staff.
Profitability in turn enables the company to live up to its social responsibility. Our successful business management establishes the basis for playing a positive role in society, consistently fostering and advancing staff and supporting projects that are in the public interest. The responsible underwriting of risks and diligent risk management are vital preconditions for safeguarding the quality of our business over the long term and for preserving and multiplying the value of our company. Thanks to this orientation towards sustainability, Hannover Re has never had to report a deficit since its establishment in 1966, i.e. it has never lost capital. Our goal is to continue to act with this level of responsibility.
Our non-life reinsurance portfolio had been impacted by one catastrophe loss up until the end of February: we anticipate a net strain in the order of EUR 10 million from snowstorms in China.
Our successful marketing and product concept of "five pillars", which offers our clients a broad range of financingand risk-oriented solutions and implements them in close cooperation with ceding companies on a tailored basis, remains in force and is continuously extended and refined.
In non-life reinsurance we are so well placed as a MultiSpecialist that we can continue to operate profitably even as the market progressively softens. In view of the excellent situation in life and health reinsurance and our positioning based on our "Five Pillar Model", we can anticipate sustained double-digit growth and rising profits in this business group.
In July 2006 the IFRIC published IFRIC 10 "Interim Financial Reporting and Impairment", which addresses the conflict between the requirements governing recognition of impairment losses contained in IAS 36 and IAS 39 and those set out in IAS 34 "Interim Financial Reporting." The interpretation concludes that where an entity has recognised an impairment loss in an interim period for which a reversal is prohibited according to IAS 36 or IAS 39, that impairment should not be reversed in subsequent interim financial statements or in annual or consolidated financial statements – despite the stipulation in IAS 34 that the preparation of interim financial statements may not influence the annual result. IFRIC 10 shall be applied to reporting periods beginning on or after 1 November 2006. The interpretation had no implications for the consolidated financial statement since our current practice already reflects the principles set out therein.
Real estate used by third parties (investment property) is valued at cost less scheduled depreciation and impairment. Straight-line depreciation is taken over the expected useful life – at most 50 years. Under the impairment test the market value of real estate for third-party use (recoverable amount) is determined using acknowledged valuation methods and compared with the carrying value; unscheduled depreciation is taken where necessary. Maintenance costs and repairs are expensed. Value-enhancing expenditures are capitalised if they extend the useful life.
Hannover Finance (UK) Limited, Virginia Water/United Kingdom 100.0 GBP 131,129 GBP (10)
Hannover Life Re of Australasia Ltd., Sydney/Australia 100.0 AUD 168,515 AUD 28,040
1) Provisional (unaudited) figures 2) Company was established in 2007 – business operations to commence on 1 January 2008 3) Financial year as at 30 September 2007 4) Inactive company 5) IFRS figures 6) Consolidated figures 7) US GAAP figures 8) Financial year as at 31 December 2006 9) Company is in liquidation 10) Figures as at 31 August 2006 11) Financial year as at 31 July 2006 12) Figures as at 31 December 2005
Hannover Life Reassurance Bermuda Ltd., based in Hamilton, Bermuda, was established on 10 August 2007. Zweite Hannover Rück Beteiligung Verwaltungs-GmbH holds the shares in the company, which commenced its business operations with effect from 4 October 2007. The object of the company, which was included in the consolidated financial statement for the first time in the fourth quarter of 2007, is the writing of life, health, annuity and personal accident reinsurance business as well as the acceptance of blocks of in-force life reinsurance business.
The key management ratios of our bad debt risk are as follows: • 95.8% of our retrocessionaires have an investment grade rating (AAA to BBB), and 92.4% thereof are rated "A" or better. • Since 2002 we have reduced the level of recoverables by altogether 60.0%. • 30.9% of our recoverables from reinsurance business are secured by deposits or letters of credit. What is more, for the majority of our retrocessionaires we also function as reinsurer, meaning that in principle recoverables can potentially be set off against our own liabilities.
1) More extensive information is provided in the EEV reports for 2005 and 2006 published on our website. The presentation is based on the principles for publication of the EEV which were published for the first time in May 2004 and subsequently further expanded in September 2005 by the CFO Forum, an international organisation of Chief Financial Officers from major insurance and reinsurance enterprises.
Pursuant to IAS 39.9 the "Eurus" transaction gives rise to a derivative, the fair value of which as at 31 December 2007 was -EUR 2.9 million (EUR 0.1 million) and which we recognised under other liabilities as at the balance sheet date. Measurement resulted in a charge to investment income of EUR 3.0 million in the year under review. We would refer the reader to the explanatory remarks in Section 4 "Consolidated companies and consolidation principles" regarding the securitisation of reinsurance risks.
Net book value at 31 December of the previous year 1,980,102 2,228,501
Cumulative value adjustments at 31 December of the year under review 127,733
In the year under review specific value adjustments on retrocessions, i.e. on the reinsurance recoverables on unpaid claims, were reversed in an amount of EUR 27.1 million. Consequently, cumulative specific value adjustments of EUR 26.4 million (EUR 53.5 million) were recognised in these reinsurance recoverables as at the balance sheet date.
Due after five through ten years 2,145,340 333,473 1,811,867 300,334 5,638 294,696
Goodwill As at the balance sheet date this item principally includes the goodwill from the acquisition of E+S Rückversicherung AG. For further information on the method used to test impairment the reader is referred to our explanatory remarks in Section 3.2 "Summary of major accounting policies".
Notes notes on the individual items as % of plan assets 2007 2006
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 750.0 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.
The chart below illustrates the development of the policyholders' surplus over the last five reporting years.
Hannover Re uses "Intrinsic Value Creation" (IVC) as its central value-based management tool. For more information on this concept as well as the objectives and principles in accordance with which we conduct our enterprise management and capital management the reader is referred to our remarks on value-based management on pages 53 et seq. of this report.
Fair value at 31.12.2007 (in EUR) 6.00 10.49 7.44 7.81 5.49
The stock appreciation rights of Hannover Re have developed as follows since 2001: The existing stock appreciation rights are valued on the basis of the Black/Scholes option pricing model.
The average fair value of each stock appreciation right was EUR 5.49 for the 2000 allocation year, EUR 7.81 for the 2002 allocation year, EUR 7.44 for the 2003 allocation year, EUR 10.49 for the 2004 allocation year and EUR 6.00 for the 2006 allocation year.
USA Clarendon Insurance Group, Inc. 19th Floor 466 Lexington Avenue New York, NY 10017
Dread disease (also: critical illness) coverages: personal riders on the basis of which parts of the sum insured which would otherwise only become payable on occurrence of death are paid out in the event of previously defined severe illnesses.
Specialty insurance: a specialty form of non-life primary insurance that focuses on narrowly defined, homogenous portfolios of niche or other non-standard risks (specialty business), whereby the typical insurer functions (acquisition, underwriting, policy issuing, premium collection, policy administration, claims settlement, etc.) can be outsourced to specialized managing general agents (MGAs) or third-party administrators (TPAs).
Glossary folio 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.