capital base, and this is a critical factor in the rating agencies’ assessment of our financial strength. And an above-average rating – something which we possess from both Standard & Poor's and A.M. Best – is now more than ever a prerequisite for being able to write attractive business. Consequently, I very much hope that you will understand and support our dividend proposal in the interests of ensuring a strong future for your company.
I am highly satisfied with our investment performance. Thanks to the sustained strong underwriting cash flow the asset portfolios under our own management grew sharply and more than offset the weaker yields. In view of the favourable development of equity markets we also realised increased gains in the year under review, causing net investment income to come in slightly higher than in the previous year.
Price gains were the hallmark of the 2005 stock market year …
The Hannover Re share cast in light of the record burden of catastrophe losses as well as by the possibility of a dividend omission. Thanks to our risk management and the above-average diversification of our portfolio, however, Hannover Re still did not suffer any capital depletion and was able to preserve its very good ratings. By year-end these factors prompted a significant rally in the price of our share, which at times moved above the EUR 30 mark.
Hurricanes cause hitherto unprecedented burden of catastrophe losses in EUR million
The year under review saw exceptionally severe losses in marine insurance; in addition to a major claim involving an oil platform in the Indian Ocean, we incurred extremely heavy loss expenditure from hurricanes "Katrina" and "Rita". As had been the case last year with "Ivan", the hurricanes swept across the Gulf of Mexico and caused severe damage to the drilling rigs located there. What is more, we suffered a substantial loss burden as a consequence of the subsequent business interruption covers. In this line too, however, the hurricanes also had a positive side: they prompted significant price rises in marine reinsurance, and we therefore expect to quickly recoup the strains incurred in the year under review.
Hannover Re is the third-largest provider of reinsurance coverage in France. The bulk of our business is written with small and mid-sized insurers. We have consistently enlarged our portfolio in all lines, including in personal accident insurance – where we rank as market leader. Our involvement in builder's risk insurance has also been expanded. Unlike in Germany, insurance for structural defects is mandatory in France for a period of ten years. Good results are anticipated in this line. Both here and in personal accident business we are by and large satisfied with the rate level.
Denmark is our largest market in Northern Europe. Our strategy here was to continue expanding business with our target clients – the Danish mutual insurers – and consolidate our market leadership. We achieved this objective.
North America is by far Hannover Re's largest and most important market. Following the events of 2001 we had substantially expanded our market share and by 2003 we were already the largest US reinsurer transacting its business through brokers. In the previous year we slightly scaled back our business volume on account of softening in the market. With almost all our clients we nevertheless rank among the group of leading reinsurers that are in a position to influence coverage terms and conditions.
In the year under review our clients once again gave us top marks in major market surveys. A study conducted by the highly respected Flaspöhler Group in the United States puts Hannover Re among the three best reinsurers on the North American market. This result is all the more remarkable because – unlike its competitors – Hannover Re writes its US non-life business from
Natural catastrophe reinsurance, our most important single line, is written primarily on a nonproportional basis. Following the heavy windstorm losses of 2004 it was possible to obtain appreciable rate increases for non-proportional covers
The hallmark of business in Taiwan was rate erosion in the primary sector, which also had implications for the results posted by reinsurers. We continued to optimise our portfolio structure in the year under review and concentrated more heavily on the personal accident and general liability lines – with a preference for excess of loss covers. A sizeable fire loss produced a strain in the low single-digit millions for our account. No significant natural disasters were recorded.
In general terms, reinsurers with very good ratings continued to be highly sought-after in Australia in the year under review, and Hannover Re was able to profit accordingly. We attach
The portfolio mix remained virtually unchanged; the proportion of total premium income generated by our preferred lines of life and annuity stood at an attractive 82%.
Key figures for life and health reinsurance 1) On a US GAAP basis 2) Operating profit/net premium earned
Within the Hannover Life Re organisation the German life and health insurance market is handled by E+S Rück. We extended our market penetration here and currently maintain reinsurance relationships with 34 German cedants. Premium income from the German market climbed to EUR 428.7 million in the year under review; the underwriting result was again highly favourable thanks to a good claims experience and satisfactory persistency of the in-force reinsured portfolios.
Gross premium income grew to EUR 270.9 million, compared to EUR 240.7 million in the previous year. The claims experience was better than expected: the operating profit (EBIT) climbed from EUR 13.8 million to EUR 19.6 million. Net income after tax reached EUR 11.1 million.
The following elements are the hallmarks of our risk management organisation: • Central coordination, yet local responsibility in the various areas.
• Annual risk inventory, in which all risks or risk groups that could potentially jeopardise the company's survival are thoroughly analysed and quantified.
The reserves in life and health reinsurance are based principally upon information provided by our clients. Hannover Re reviews the plausibility of the data using secure biometric actuarial bases. 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 lapse and credit risks are of crucial importance in the prefinancing of our clients' acquisition costs. The interest rate risk, on the other hand, is of only minimal risk relevance due to contractual exclusions.
The favourable overall market conditions in property and casualty reinsurance should continue to improve in this year's remaining renewal phases (1 April, 1 June/July and 1 October). It is likely that further adjustment of pricing models will not be restricted solely to windstorm aggregates in the USA. Competitors who still have to incorporate the latest insights into their quotations will doubtless follow suit in the course of the year, which should cause prices for catastrophe covers to rise across the board. In view of the more exacting capital adequacy requirements imposed by the rating agencies, which also have to be factored into the pricing calculations, and given the fact that risks will have to be remodelled across a broad front, it is our assumption that property and casualty reinsurance promises a positive business trend for the long term. We therefore expect premium volume on a par with the previous year and a reduced level of risk. Provided the major loss expenditure remains in line with the multi-year average of 8% of net premium, a very good profit contribution can be anticipated.
Positive result significantly above the cost of capital should be possible in the specialty insurance business group
Cash flow from investing activities (1 798 907) (1 744 883)
Funds held under reinsurance contracts 472 497 557 880 297 910 153 395
In conformity with US GAAP, IAS 39.69 prohibits the reversal of impairment losses on equities to the statement of income once an impairment has been taken. In contrast to US GAAP, adjustment of the cost basis is not an option for impaired securities. Impairment is tested in each reporting period using the criteria defined by Hannover Re. If a security is considered to be impaired on the basis of these criteria, IAS 39.68 requires that a value adjustment be recognised in the amount of the fair value less historical cost and less prior value adjustments.
As at year-end 2004 a charge of EUR 121.6 million after tax was booked to retained earnings on account of this change.
Comparison of the cash flow statements drawn up in accordance with IAS 7 and SFAS 95 merely revealed changes due to different allocations in cash and cash equivalents as well as reclassifications between individual items of the balance sheet. That aside, the adoption of IFRS did not have any effects on the cash flow from operating, investing or financing activities.
Notes summary tingent claims and liabilities as at the balance sheet date and the disclosure of income and expenses during the reporting period. Key facts and circumstances subject to such assumptions and estimates include, for example, the recoverability of contingent reinsurance liabilities, the recoverability of investments in associated companies, the valuation of derivative financial instruments as well as assets and liabilities relating to employee benefits. The actual amounts may diverge from the estimated amounts.
Penates A, Ltd., Tortola/British Virgin Islands 5) 88.1 USD 82 814 5 960
Technical risks can be essentially divided into risks of random fluctuation, error and change.
Our management of technical risks is therefore particularly concerned with the core areas discussed below.
Financial assets at fair value through profit or loss due after one through two years 4 310 4 489 1 650 1 650 due after two through three years 828 939 4 713 5 088 due after three through four years – – 1 118 1 195 due after four through five years – – – 18 467 due after five through ten years – – – –
Debt securities of semi-governmental entities 2 644 163 31 251 16 230 32 454 2 691 638
Total fixed-income securities incl. derivatives 6 587 298 3 256 190 2 208 264 630 195 48 368 201 347 7 483 25 334 12 964 479
Fixed-income securities – available-for-sale 675 469 376 014 4 082 874 1 070 078 70 160 7 742 241 108 968 257 372 14 383 176
Net book value at 31 December of the year under review 2 228 501 1 994 273
Net book value at 31 December of the previous year 18 247 706 4 163 138 14 084 568 18 616 897 4 396 565 14 220 332
As percentage of original loss reserve 17.5 30.9 24.8 18.0 11.3 0.3 (1.0) (3.6) 3.6 3.0
The PVFP, the period of amortisation of which varies between 5.5 and 15 years, is recognised under other assets. For further information please refer to our explanatory notes on intangible assets in section 4 "Summary of major accounting policies".
Tax expense not attributable to the reporting period 9 990 21 505
Number of employees (excluding board members) 1 965 1 977 1 976 1 989 1 972 1 945
Funded status of plan (present value of earned benefit entitlements less fund assets) 74 460 56 172
On 31 March 1999 Hannover Finance, Inc., Wilmington/USA, issued subordinated debt in the form of a floating-rate loan in the amount of USD 400.0 million with a term of 30 years. The due date of the loan is 31 March 2029. It may be redeemed by the issuer no earlier than 31 March 2009. In order to hedge against the risk of interest rate changes associated with this loan, the company purchased interest rate swaps in 1999 in the same amount which expire on 31 March 2009. In this way, 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 and May 2005 Hannover Re bought back portions of the debt in the amount of USD 370.0 million and USD 10.0 million respectively.
In December 2005 the Praetorian Financial Group, Inc. issued "Trust Preferred Securities" in an amount of USD 80.0 million with a term of 30 years and a yield of quarterly LIBOR + 310 basis points. The "Trust Preferred Securities" were placed with institutional investors. Redemption prior to March 2011 is possible only under special circumstances and at a price of 107.5% of the nominal amount, but they may be redeemed at any time thereafter.
Present value of future profits on acquired life reinsurance portfolios 7 472 9 767
Change in provision for contingent commissions (gross) (5 219) (34 243)
Expenses for the company as a whole 51 590 36 266
E+S Rück returned the receivables assumed in the 2004 financial year from HDI Industrie Versicherung AG in the amount of EUR 100.0 million due from reinsurance companies – including an amount of EUR 87.3 million due from Hannover Re – and charged HDI Industrie Versicherung AG pro-rata interest for the 2005 financial year at six-month EURIBOR in an amount totalling EUR 0.2 million.
Hannover Re has placed three subordinated debts on the European capital markets through its subsidiary Hannover Finance (Luxembourg) S.A. Hannover Re has secured by subordinated guarantee both the debt issued in 2001, the volume of which now stands at EUR 138.1 million, and the debts from financial years 2004 and 2005 in amounts of EUR 750.0 million and EUR 500.0 million respectively. For further details please see section 8.8 "Loans and long-term liabilities".
Operating leasing contracts produced expenditures of EUR 6.3 million (EUR 8.1 million) in the 2005 financial year.
As part of its discussion of important individual projects the Supervisory Board considered, inter alia, the issue of subordinated debt by the subsidiary Hannover Finance (Luxembourg) S.A. in the amount of EUR 500 million. Issued in a highly favourable financing climate, the loan served to replace as far as possible a subordinated debt of EUR 350 million issued in 2001 with a term of 30 years and to further reinforce the Group's strong capital base. The reorganisation of the Group's primary insurance activities in the USA was also discussed at considerable length. The strategic shift at the Clarendon Insurance Group envisages the run-off of existing program business and a focus on profitable specialty business. The Supervisory Board expressly welcomes this realignment of business policy and the resulting restructuring activities.
In its reporting on the current year the Executive Board intends to respond to a desire expressed by the Supervisory Board at its last meeting of 2005 for a comprehensive description of reserving and retrocession practice.
23 March 2006 Annual Results Press Conference Hannover Re Karl-Wiechert-Allee 50 30625 Hannover, Germany 24 March 2006 DVFA Analysts' meeting, Frankfurt 24 March 2006 Analysts' meeting, London 12 May 2006 Annual General Meeting Beginning 10:30 a.m.