Hannover Rueck SE · XETR:HNR1
Hannover Rueck — Hannover Re — Corporate Update (July 2005)
32 slides from Hannover Rueck's corporate update, Jul 1, 2005
Slide 1: Status Quo of Investigations & Outlook for 2005/2006
Status Quo of Investigations & Outlook for 2005/2006 Jürgen Gräber Executive Board Member & Chief Operating Officer Non-Life R/I Silke Sehm Associate Director Hannover Re Advanced Solutions Germany Hannover, 1 July 2005
Slide 2: Advanced Solutions in Different Terms
Introd./History Products Accounting Transparency Outlook/Concl. ADVANCED SOLUTIONS IN DIFFERENT TERMS Æ Alternative distribution channels • Captives, single/multi-purpose vehicles, . . . Æ Alternative (re)insurance products • Derivatives, swaps, securitizations, multi-year/multi-line, stabilizing tr
Slide 3: History
Introd./History Products Accounting Transparency Outlook/Concl. HISTORY T+D contracts more than 30 treaties premium ~ 300 m.; High demand on mostly IAS 39 contracts surplus relief Q/S Aggregate covers in the US due to recognize WTC volume ~ € 400 m. investment income Spread loss cover 1980 1985 1990
Slide 4: Advanced Solutions operates through entities
Introd./History Products Accounting Transparency Outlook/Concl. Operations ADVANCED SOLUTIONS OPERATES THROUGH 4 + (1) ENTITIES HDI 100.0 HR Dublin Talanx AG Free Float 100.0 51.2 48.8 100.0 HR Ir ASI hannover re ® ASG 100.0 55.8 >100 Subsidiaries, HR Guernsey 8 German 42.7 Branch/Rep. Offices PCC M
Slide 5: Recent years driven by loss-sensitive premiums
Introd./History Products Accounting Transparency Outlook/Concl. Premiums RECENT YEARS DRIVEN BY LOSS-SENSITIVE PREMIUMS 2.000 1.800 in m. € 1,741 1,633 1,563 1.600 1.400 1,280 1,211 1,243 1,205 1,182 1.200 1.000 870 801 800 600 509 463 400 351 368 246 198 200 0 2) 19961) 1998 2) 1999 2) 2000 2) 2001
Slide 6: US business losing its dominance
Introd./History Products Accounting Transparency Outlook/Concl. Geographic split US BUSINESS LOSING ITS DOMINANCE Other 2004 European Countries Asia Latin America 2% Asia 1% 1% Other 2% European Countries 21% Germany 32% Germany North 17% America North 59% America 65% € 1.2 bn. € 1.6 bn. without dep
Slide 7: Efficiency per capita impressive
Introd./History Products Accounting Transparency Outlook/Concl. Net income EFFICIENCY PER CAPITA IMPRESSIVE Net income Underwriters Per capita in m. € 2004 FinRe 89 13 6.8 P/C 259 199 1.3 L/H 50 100 0.5 6
Slide 8: Trad. or non-trad. provides off-balance sheet capital
Introd./History Products Accounting Transparency Outlook/Concl. Reinsurance TRAD. OR NON-TRAD. PROVIDES OFF-BALANCE SHEET CAPITAL Risk comparison to financial instruments Financial equivalent Cat.-exposed treaties High-yield bond (… bond), equity (CCC) Non-proportional R/I Surplus debentures, equity
Slide 9: ...but the costs are different
Introd./History Products Accounting Transparency Outlook/Concl. Reinsurance . . . BUT THE COSTS ARE DIFFERENT Profit Cat.-exposed treaties (250% capital) 25.0% Non-proportional R/I (100% capital) 10.0% Mixed proportional and non-proportional portfolio (50% capital) 5.0% Stable Q/S treaty (25% capita
Slide 10: Financial reinsurance reduces the cost of capital
Introd./History Products Accounting Transparency Outlook/Concl. Distribution curve FINANCIAL REINSURANCE REDUCES THE COST OF CAPITAL 0.4 0.35 0.3 0.25 Mean 0.2 External financing 0.15 (mezzanine External Premiums and Equity tranche) financing 0.1 interest (AAA- Tranche) 0.05 0 110 115 105 120 125 10
Slide 11: Our terms
Introd./History Products Accounting Transparency Outlook/Concl. Non-traditional reinsurance OUR TERMS Æ Non-traditional reinsurance agreements are reinsurance concepts with a profit and loss potential predictable for both sides Æ which primarily spread the risk over time Æ and hence have a stabilisi
Slide 12: Our products
Introd./History Products Accounting Transparency Outlook/Concl. Non-traditional reinsurance OUR PRODUCTS Aggregate XoL Spread loss 115% 110% 105% 100% 95% 90% 2005 2006 2007 Year 1 Year 2 Year 3 Year 4 Year 5 Loss ratio after cover Loss ratio before cover Solvency Surplus relief Cession = 40% margin
Slide 13: Reasons to buy: aggregate excess of loss
Introd./History Products Accounting Transparency Outlook/Concl. Aggregate excess of loss REASONS TO BUY Æ Aggregate excess of loss • Multi-year stop loss cover • Interest earnings may be taken into account Æ Reasons to buy • Stabilises desired ratio (loss ratio, combined ratio, RoE, . . .) • Whole a
Slide 14: Reasons to buy: spread loss cover
Introd./History Products Accounting Transparency Outlook/Concl. Spread loss REASONS TO BUY Æ Spread loss cover • Multi-year excess of loss cover with substantial profit commission and/or risk sharing features • Interest earnings might be taken into account Æ Reasons to buy • Spread the financial imp
Slide 15: Reasons to buy: surplus relief quota share
Introd./History Products Accounting Transparency Outlook/Concl. Surplus relief Q/S REASONS TO BUY Æ Surplus relief quota share • Quota share arrangement with a tailor made (broad) sliding scale commission Æ Reasons to buy • Support solvency margin ratio • Increase underwriting capacity 14
Slide 16: US GAAP: FAS 113 (1993)
Introd./History Products Accounting Transparency Outlook/Concl. US GAAP FAS 113 (1993) Æ To determine the substance of the transaction it is necessary to assess whether there has been a significant transfer of insurance risk between the ceding insurer and the assuming insurer. Æ Insurance risk may c
Slide 17: Reasonably possible and significant: 10/10 rule
Introd./History Products Accounting Transparency Outlook/Concl. US GAAP "REASONABLY POSSIBLE" AND "SIGNIFICANT" 10/10-RULE Æ It is reasonably possible that the assuming insurer may realize a significant loss from the contract, and Æ It is reasonably possible to have a significant range of outcomes u
Slide 18: Risk transfer calculation
Introd./History Products Accounting Transparency Outlook/Concl. US GAAP RISK TRANSFER CALCULATION 1,000 loss ratios Normal distribution 2003 net loss PV premium PV result Run Mean 111.00% 148.3% 117,384 5,690 1 Std. dev. 25.00% 110.1% 2 106.2% 3 Random number 0,09330 68.7% 114,502 5,725 4 L/R 77.98%
Slide 19: New accounting environment: IFRS
Introd./History Products Accounting Transparency Outlook/Concl. IFRS NEW ACCOUNTING ENVIRONMENT Æ Term "significant risk transfer" comparable to SFAS 113 • Absence of significant reinsurance risk leads to classification as financial instrument under IAS 39 • Underwriting or timing risk has to be tra
Slide 20: German GAAP
Introd./History Products Accounting Transparency Outlook/Concl. HGB GERMAN GAAP Æ "Significant risk transfer" interpreted less strict than 10/10 rule Æ HGB is dominated by the principle of cautiousness • Accrual of known future obligations but non-accrual of potential future profits as rule of thumb
Slide 21: What you may have heard recently about financial R/I
Introd./History Products Accounting Transparency Outlook/Concl. Negative press (Spitzer) WHAT YOU MAY HAVE HEARD RECENTLY ABOUT FINANCIAL R/I Æ "Pump up financial results through arcane transactions known as finite risk reinsurance" Æ "Accounting window-dressing" Æ "Potentially fraudulent efforts to
Slide 22: Why still financial R/I after all?
Introd./History Products Accounting Transparency Outlook/Concl. WHY STILL FINANCIAL R/I AFTER ALL? Æ Who is talking about perhaps 20,000 legitimate finite risk contracts that have been written around the world? Æ FinRe allows companies to maximize their bottom-line returns by reducing their costs of
Slide 23: Problematic cases were based on improper accounting
Introd./History Products Accounting Transparency Outlook/Concl. PROBLEMATIC CASES WERE BASED ON IMPROPER ACCOUNTING Æ HIH Æ Enron Æ AIG Æ "Spitzer"-cases A IG Æ. . . Æ Improper accounting in an aggressive accounting environment Æ Vagueness of the current accounting rules leaves the door open for tho
Slide 24: Problem lies in the rule
Introd./History Products Accounting Transparency Outlook/Concl. Alternative risk transfer measure PROBLEM LIES IN THE RULE Æ Definitions under FAS 113 too soft Æ 10/10 rule does not make sense for every case (e.g. catastrophe R/I) One alternative Æ Measure for risk transfer could be the product of l
Slide 25: Problem lies in the rule (Cont'd)
Introd./History Products Accounting Transparency Outlook/Concl. Alternative risk transfer measure PROBLEM LIES IN THE RULE (Cont'd) Æ Further the 10/10 rule disregards any downside potential for the reinsurer beyond the 10% quantile Adjusted 10/10 rule Æ Measure the reinsurer's average downside amon
Slide 26: Adjusted 10/10 rule
Introd./History Products Accounting Transparency Outlook/Concl. 10/10 rule ADJUSTED 10/10 RULE Example: ABC company, LogNormal, mean 60%, std. dev. 17.5% Quota share transaction A1) Quota share transaction B2) Distribution Result in % Distribution Result in % Result PV Result PV quantile of premium
Slide 27: Reactions of the industry
Introd./History Products Accounting Transparency Outlook/Concl. REACTIONS OF THE INDUSTRY 2005 and 2006 transitional years Æ Clients • US clients: Decreased demand mainly due to market cycle • Non-US clients: Mainly see it as an US-homemade problem Æ Brokers: Scrutiny increased Æ Reinsurers: Higher
Slide 28: Subpoenas
Introd./History Products Accounting Transparency Outlook/Concl. SUBPOENAS We fully cooperate with the authorities Matter and extend Status and Authority of regulatory action further procedure Irish Financial Services Status: settled "Informal" letter of enquiry dd 14 Apr 2005 Regulatory Authority (I
Slide 29: The art market will hardly be hit
Introd./History Products Accounting Transparency Outlook/Concl. World art/Financial reinsurance market THE ART MARKET WILL HARDLY BE HIT Finite risk market volume 2001 Hannover Re‘s Finite risk market share was ~16% at around 10% Run-off solutions ~7% CBO's/CDO's Other solutions ~62% ~11% Weather de
Slide 30: Advanced Solutions benefits from its long experience
Introd./History Products Accounting Transparency Outlook/Concl. Hannover Re ADVANCED SOLUTIONS BENEFITS FROM ITS LONG EXPERIENCE Æ Financial R/I business since 1978 Æ Senior management in charge of Financial R/I business for "ages" Æ Precise and stringent underwriting guidelines (constantly updated)
Slide 31: Some of our competitors are undecided
Introd./History Products Accounting Transparency Outlook/Concl. SOME OF OUR COMPETITORS ARE UNDECIDED Æ Berkshire Hathaway: Large transactions, retrospective coverages Æ Swiss Re: Stringent underwriting process Æ Munich Re: No visibility Æ Partner Re: Not too dissimilar to Hannover Re Æ Converium: D
Slide 32: What do we expect in 2007?
Introd./History Products Accounting Transparency Outlook/Concl. WHAT DO WE EXPECT IN 2007? Æ Hannover Re to have less business (percentage) from US (say 50%) Æ 50% of margins earned from non-US contracts Æ Hardly any transaction close to the 10/10-rule border • More clearly defined deposit accountin