Annual Report 2003 - Hannover Re

Notes
other notes
Outstanding capital commitments with respect to special investments exist in the amount of
EUR 62.8 million for E+S Rückversicherungs-AG and EUR 115.4 million for Hannover Re. These involve
primarily private equity funds and venture capital firms in the form of private limited companies.
Within the scope of a novation agreement regarding a life insurance contract we assumed contingent
reinsurance commitments with respect to due date and amount estimated at EUR 25.7 million
as at the balance sheet date.
7.3 Long-term commitments
Several Group companies are members of the German aviation pool, the association for the reinsurance
of pharmaceutical risks and the association for the insurance of German nuclear reactors. In the
event of one of the other pool members failing to meet its liabilities, an obligation exists to take over
such other member’s share within the framework of the quota participation.
7.4 Derivative financial instruments
The accounting of the "Modco" and "CFW" reinsurance treaties, under which security deposits are
held by the ceding companies and payments rendered on the basis of the income from certain securities
of the ceding company, must comply with the standards of SFAS 133 DIG B 36. The derivatives embedded
in such host contracts are to be reported separately from the underlying reinsurance arrangements
at fair value (cf. section 1 "General accounting principles").
A small number of treaties in life and health reinsurance meet criteria which require the application
of SFAS 133 DIG B 36. Under these treaties the interest-rate risk elements are clearly and closely
linked with the underlying reinsurance arrangements. Embedded derivatives consequently result solely
from the credit risk of the underlying securities portfolio.
Hannover Re calculates the fair value of the embedded derivatives using the market information
available on the valuation date on the basis of a "credit spread" method. Under this method the derivative
is valued at zero on the date when the contract is concluded and its value then fluctuates over
time according to changes in the credit spread of the securities.
The application of DIG B 36 had no significant impact on the consolidated financial statement in
the financial year. The fair values of the embedded derivatives were recognised in the investments as
at the balance sheet date and to this extent increased the investment income. The pre-tax effect on the
investment income amounted to altogether EUR 3.3 million as at the balance sheet date. Of this
amount, EUR 2.8 million before tax was attributable to the cumulative adjustment based on first-time
application of the standard as at 1 October 2003 with tax expenditure of EUR 0.5 million, and the investment
income after tax was therefore increased by EUR 2.3 million under the first-time application.
In the course of the fourth quarter the fair value of the embedded derivatives further increased by a total
of EUR 0.5 million before tax.
Since Hannover Re concludes reinsurance transactions worldwide in numerous international currencies,
the Group is exposed to currency fluctuations.
Hannover Re uses derivative financial instruments to control these currency exposures as well as
interest rate risks and market price risks arising out of the use of financial instruments (e.g. investments
in variable-yield and fixed-income securities). Derivative financial instruments are used within the Hannover
Re Group solely for hedging purposes.
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