Management report risk re

Management report risk report – Currency risks are of considerable importance to an internationally operating reinsurance enterprise that writes a significant proportion of its business in foreign currencies. These risks are, however, largely neutralised since we systematically adhere to the principle of matching currency coverage. • Credit risks may arise out of a failure to pay (interest and/or capital repayment) or change in the credit status (rating downgrade) of issuers of securities. We attach vital importance to credit assessment conducted on the basis of the quality criteria set out in the investment guidelines. • The liquidity risk refers to the risk that it may not be possible to sell holdings or close open positions due to the illiquidity of the markets – or to do so only with delays or price markdowns – as well as the risk that the traded volumes influence the markets in question. Regular liquidity planning and a liquid asset structure ensure that Hannover Re is able to make the necessary payments at all times. We manage the liquidity risk inter alia by allocating a liquidity code to every security. The spread of investments across the various liquidity classes is specified in the monthly investment reports and controlled by limits. The following tables illustrate the possible effects of price, default and liquidity risks as well as risks from fluctuations in payment flows to which the company – subject to the assumptions set out below – was exposed as at the balance sheet date. Scenarios for changes in the fair value of our securities a at the balance sheet date Portfolio Scenario Portfolio change based on fair value in EUR Equities Stock prices - 10% (69.6) Stock prices - 20% (139.3) Stock prices +10% 69.6 Fair value as at 31.12.2005 696.5 Fixed-income securities Yield increase +50 basis points (133.5) Yield increase +100 basis points (261.2) Yield decrease - 50 basis points 138.5 Fair value as at 31.12.2005 6 091.8 Rating structure of our fixed-income securities* Rating Registered debt securities, Bearer debt securities Bond funds Sundry loans debentures and loans in % in EUR million in % in EUR million in % in EUR million in % in EUR million AAA 73.4 3 965.6 34.6 64.0 0.2 0.8 – – AA 12.3 667.1 32.9 61.0 97.3 355.7 – – A 12.6 681.5 14.2 26.2 – – 7.1 5.1 BBB 1.0 53.9 18.1 33.5 – – 69.4 50.0

Management report forecast Operational risks In our understanding, the category of operational risks encompasses the risk of losses occurring directly or indirectly because of • inadequacy or failure of internal procedures, • human error or system failure, • organisational shortcomings, • external events (e.g. legal risks). The failure of our data processing infrastructure and associated disruptions in the availability of applications pose a major risk for our company. We invest systematically in the security and availability of our information technology in order to minimise these risks. High availability of mission-critical IT applications is ensured. Contingency plans are in place to facilitate systematic and rapid restoration of the data-processing infrastructure in crisis situations. Controlling these risks consequently constitutes a key competitive factor. The existing risk management measures were therefore expanded in the year under review. Assessment of the risk situation As an internationally exposed reinsurance group we face many potential risks that could have a not inconsiderable impact on our assets, finances and earnings. Based on the information currently available, however, we cannot discern any risks that could jeopardise the continued existence of our company in the short or medium term or have a significant, lasting effect on our assets, financial position or earnings. Forecast The cyclical momentum of the world economy is likely to be sustained in the current year, despite continuing high oil prices. Estimates suggest growth of four percent in global output. Monetary policy, which still shows expansionary tendencies throughout the world, should also have a positive effect on the global economic situation in 2006. The state of the US economy will depend not least on how quickly it is able to stem the headline-grabbing disruptions in oil production that followed the severe hurricane damage. To a far greater extent than this effect, however, the tightening of monetary policy is likely to bring about a modest cooldown in the US economy. The upturn in the world economy has also been supported by economic expansion in Japan and Western Europe. The emerging markets of East Asia – with their consistently vigorous manufacturing growth – will also contribute to the upswing, even though a slight slowdown is likely to take hold in China during the current year. In Euroland the moderating impacts of high oil prices are gradually receding. Despite meagre growth in disposable incomes, the way is therefore open for stronger domestic demand. Capital spending is also expected to pick up again as corporate profits rise. The trend will be fostered by continued very low interest rates. In general terms, the economy should also gain impetus from rising export prices and enjoy a revival as 2006 progresses. In Germany a modest economic recovery can be anticipated. Given the favourable worldwide environment, exports are likely to reinvigorate the economy. Much will depend, however, on whether domestic demand increases. As a further factor, the consolidation of corporate finance will also support the resurgence of the German economy. Yet the stubbornly depressed level of consumption among private households – influenced by rising energy costs, the uncertain state of the labour market and slow growth in employment income – has still not been alleviated. On the other hand, the latter factor promotes the competitive position of the German economy in the international arena. All in all, the economic picture in Germany too should improve significantly in 2006. 22