Hannover Rueck SE · XETR:HNR1
Hannover Rueck — Hannover Re — Investor Day (July 2005)
24 slides from Hannover Rueck's investor day presentation, Jul 1, 2005
Slide 1: The Investment Forecasting Process
The Investment Forecasting Process Elke A. König Executive Board Member & Chief Financial Officer Hannover, 1 July 2005
Slide 2: The Hannover Re investment philosophy
HR investments Funds withheld Forecasting Wrap-up & Outl. The Hannover Re investment philosophy CAPITAL MAINTENANCE & TOTAL RETURN HAVE TOP PRIORITY Optimisation of yields and risk/return Systematical implementation of by means of long-term DFA analysis/ investment processes to achieve short-term ta
Slide 3: Investments = our "fifth business group"
HR investments Funds withheld Forecasting Wrap-up & Outl. INVESTMENTS = OUR "FIFTH BUSINESS GROUP" What makes us different? Æ Tactical asset allocation – always a step ahead: • ALM is established practice, not just lip service • Neutral equity ratio • Short-duration and high-quality bond portfolio t
Slide 4: Asset allocation - strategic vs. tactical
HR investments Funds withheld Forecasting Wrap-up & Outl. Investment management ASSET ALLOCATION - STRATEGIC VS. TACTICAL Strategic Tactical Asset Allocation Asset Class Allocation 2001 2002 2003 2004 31 Mar 2005 Bonds ≥50 % 72% 94% 81% 81% 81% • Government * 32% 26% 25% 25% 24% • Semi government 20
Slide 5: Our fixed income portfolio
HR investments Funds withheld Forecasting Wrap-up & Outl. OUR FIXED INCOME PORTFOLIO Duration as well as credits actively managed EUR USD Other Total in % Rating in bn. € Governments 1,2 2,1 0,5 3,9 29% AA+ Semi governments 0,9 1,6 1,1 3,6 27% AA+ ABS/MBS 1,2 0,4 0,1 1,7 13% AA Corporates 2,0 1,3 0,
Slide 6: Invested assets - a growth story
HR investments Funds withheld Forecasting Wrap-up & Outl. INVESTED ASSETS - A GROWTH STORY 30,000 24,736 25,000 +12.3% 22,031 +8.5% +5.3% 20,306 20,000 19,278 8,965 +35.8% 7,665 +17.0% 7,597 +0.9% 14,196 7,151 +6.2% 15,000 3,996 +79.0% 10,000 +9.8% 15,770 +13.0% 14,366 12,127 12,709 5,000 10,201 +18
Slide 7: Investment income - a growth story, too
HR investments Funds withheld Forecasting Wrap-up & Outl. INVESTMENT INCOME - A GROWTH STORY, TOO Despite low interest rates 1200 +4.2% 1,117 1,071 +15.4% 1000 +8.9% 946 -1.8% 928 867 432 800 511 -15.3% 215 389 +81.0% +3.5% +26.9% 493 600 400 654 684 557 561 +22.0% 200 -14.8% -21.9% 435 +28.9% 0 200
Slide 8: Investments under own management vs. funds withheld
HR investments Funds withheld Forecasting Wrap-up & Outl. INVESTMENTS UNDER OWN MANAGEMENT VS. FUNDS WITHHELD Funds withheld arise mainly from Life/Health and Financial R/I business Invested assets 2004 Investment income 2004 Funds Funds withheld withheld 36% 39% Own investments Own 64% investments
Slide 9: Funds withheld: a typical life reinsurance transaction
HR investments Funds withheld Forecasting Wrap-up & Outl. Example 1 INVESTMENTS UNDER OWN MANAGEMENT VS. FUNDS WITHHELD A typical life reinsurance transaction Æ 50% quota share of a life primary portfolio • Premium = 100 • Initial policy benefit reserve = 80 Æ Reinsurer's view Single premium 50 Fund
Slide 10: Funds withheld: financial reinsurance example
HR investments Funds withheld Forecasting Wrap-up & Outl. Example 2 INVESTMENTS UNDER OWN MANAGEMENT VS. FUNDS WITHHELD Financial reinsurance Æ An example from Hannover Re Ireland* Æ Interest on funds withheld is mainly a transitory item on the P&L • Interest income received… • . . . equals roughly
Slide 11: How to forecast next year's invested assets and investment income?
HR investments Funds withheld Forecasting Wrap-up & Outl. Investment forecasting process HOW TO FORECAST NEXT YEAR'S INV. ASSETS & INV. INCOME? Some thoughts based on our internal approach Invested assets Investment income 30,000 1400 ? +?% ? 25,000 +12.3% 24,736 1200 +4.2% 1,117 +?% 1,071 22,031 -
Slide 12: Hannover Re's goal and approach
HR investments Funds withheld Forecasting Wrap-up & Outl. Investment forecasting process (cont'd) HANNOVER RE'S GOAL AND APPROACH Æ Focus on forecasting (income from) investments under own management (Forecasting of funds withheld transaction based) Æ Approach: Basis: Step 1: Step 2: Relevant techni
Slide 13: Step 1: Forecasting the investment volume
HR investments Funds withheld Forecasting Wrap-up & Outl. STEP 1: FORECASTING THE INVESTMENT VOLUME Driven by four main constituents Investments and funds withheld Beginning = Investment portfolio at the beginning of period investments Investment cash flow = Investment proceeds from the existing inv
Slide 14: Ordinary investment income less investment expenses
HR investments Funds withheld Forecasting Wrap-up & Outl. Investment cash flow forecast ORDINARY INVESTMENT INCOME LESS INVESTMENT EXPENSES Coupon forecast Investment (forecast interests on deposits) portfolio and Dividends forecast funds withheld Investment cash flow Redemption Reinvestment forecas
Slide 15: Ordinary investment income less investment expenses (cont'd)
HR investments Funds withheld Forecasting Wrap-up & Outl. Investment cash flow forecast ORDINARY INVESTMENT INCOME LESS INVESTMENT EXPENSES (Cont'd) Æ Ordinary investment income, less net investment expenses* Æ Cash flow from beginning inv. portfolio and funds withheld: € 1,037 m. - € 45 m. - € 20 m
Slide 16: Step 1: Forecasting the investment volume
HR investments Funds withheld Forecasting Wrap-up & Outl. STEP 1: FORECASTING THE INVESTMENT VOLUME Driven by four main constituents Investments and funds withheld Beginning = Investment portfolio at the beginning of period investments Investment cash flow = Investment proceeds from the existing inv
Slide 17: Operating cash flow, adjusted for investment income/expenses
HR investments Funds withheld Forecasting Wrap-up & Outl. Reinsurance cash flow forecast OPERATING CASH FLOW, ADJUSTED FOR INVESTMENT INC./EXP. Reinsurance Premium forecast contracts Reinsurance Payout pattern forecast cash flow forecast Claims paid/cost forecast How to replicate from cash Input flo
Slide 18: Can be approximated by operating cash flow
HR investments Funds withheld Forecasting Wrap-up & Outl. Reinsurance cash flow forecast CAN BE APPROXIMATED BY OPERATING CASH FLOW . . . Figures in TEUR 2004 2003 1.1.–31.12. 1.1.–31.12. I. Cash flow from operating activities Consolidated net income (after tax) 309 140 354 779 Appreciation/deprecia
Slide 19: Less ordinary investment income plus investment expenses
HR investments Funds withheld Forecasting Wrap-up & Outl. Reinsurance cash flow forecast . . . LESS ORDINARY INV. INCOME PLUS INVESTMENT EXPENSES Æ Cash flow from reinsurance, ex ante estimate: € 1,643 m. (from prev. slide) – € 1,037 m. + € 45 m. + € 20 m. = € 671 m * Source: Hannover Re 2004 annual
Slide 20: The change in invested assets
HR investments Funds withheld Forecasting Wrap-up & Outl. Example for 2004 THE CHANGE IN INVESTED ASSETS Putting it all together 16,500 972 16,000 15,870 15,770 -115 -100 15,500 647 15,000 14,500 14,366 14,000 = operating cash flow 13,500 Beginning Cash flow Cash flow Dividend Ending Difference Endi
Slide 21: "Forecast" vs. actual figures
HR investments Funds withheld Forecasting Wrap-up & Outl. Reality check for the past five years "FORECAST" VS. ACTUAL FIGURES Major uncertainty are forex effects etc. Ex post: Ex post: Ex post: Mainly decline € 530 m. capital increase, € 350 m. hybrid increase, in equities but sharp decline of USD b
Slide 22: Step 2: Apply yield estimates to forecast investment income
HR investments Funds withheld Forecasting Wrap-up & Outl. Investment income forecast STEP 2: APPLY YIELD ESTIMATES TO FORECAST INV. INCOME The more difficult part Accrued yield forecast Dividend forecast Investments and funds withheld Market expectation of P&L Investment P&L forecast Beginning Ordin
Slide 23: More than a stabilising factor in the business model
HR investments Funds withheld Forecasting Wrap-up & Outl. Invested assets MORE THAN A STABILISING FACTOR IN THE BUSINESS MODEL Going one step further Æ Part of invested asset growth is fueled by the invested assets themselves (= interest income on invested assets) ¬ Therefore, invested assets should
Slide 24: Investments on track for further good performance
HR investments Funds withheld Forecasting Wrap-up & Outl. Outlook 2005 * INVESTMENTS ON TRACK FOR FURTHER GOOD PERFORMANCE Æ Investments under own management grow by mid to high single-digit percentage (in orig. curr.) • Still strong operating cash flows due to hard market above € 1 bn. • Replacemen