Hannover Rueck SE · XETR:HNR1
Hannover Rueck — Hannover Re — Investor Day (June 2006)
56 slides from Hannover Rueck's investor day presentation, Jun 23, 2006
Slide 1: Risk Management, Risk Modelling and Reserving Policy
Risk Management - Risk Management, Risk Modelling and Reserving Policy Eberhard Müller Chief Risk Officer 9th International Investors' Day ® London, 23 June 2006 hannover re
Slide 2: Risk Management and Capital Requirements
Risk Risk mgmt. mgmt. Modelling Nat cat. Reserving RISK MANAGEMENT AND CAPITAL REQUIREMENTS We are embedded in many worldwide activities Æ EU: Solvency II (Pillars I – III) Æ Local European developments • UK: FSA´s Extended Cap. Requiremt. (ECR) + Internal Cap. Assessmt. (ICAS) • Switzerland: Swiss
Slide 3: Group Risk Management at Hannover Re
Risk Risk mgmt. mgmt. Modelling Nat cat. Reserving GROUP RISK MANAGEMENT AT HANNOVER RE Position further improved Æ For years centralised approach for • reserve monitoring • risk modelling (especially natural catastrophes) • aggregate control • Dynamic Financial Analysis Æ Since 1 June 2006 combined
Slide 4: Keystone of HR Risk Management: Capital Protection
Risk Risk mgmt. mgmt. Modelling Nat cat. Reserving KEYSTONE OF HR RISK MANAGEMENT: CAPITAL PROTECTION Æ Our risk management is meant to Approaches to • protect our capital risk management • stabilise and optimise results • allow us to profit fully from hard markets (e.g. after a major loss in the R/
Slide 5: "Risk Machine" Hannover Re: Do We Know the Risk?
Risk Risk mgmt. mgmt. Modelling Nat cat. Reserving "RISK MACHINE" HANNOVER RE: "DO WE KNOW THE RISK?" Capital markets perceive reinsurers to be riskier now than in the past HR decision triangle: New …probably 9 Risk Æ Lean capital base is known still Æ Good returns are known Æ Do we know the risk. .
Slide 6: S&P's Eight Rating Categories Guide the Rating Process
Risk Risk mgmt. mgmt. Modelling Nat cat. Reserving Rating agencies S&P'S EIGHT RATING CATEGORIES GUIDE THE RATING PROCESS New: Enterprise Risk Management (ERM) Category Rating drivers (examples) Management/ Strategic positioning, operational controls and skills, 1. corporate strategy tolerance for r
Slide 7: Standard & Poor's Establishes New Rating Category
Risk Risk mgmt. mgmt. Modelling Nat cat. Reserving Rating agencies STANDARD & POOR'S ESTABLISHES NEW RATING CATEGORY "ERM" to become the 8th item to be reviewed Strategic risk management Management Risk and Processes of financial of risk extreme capital controlling events models Risk management Æ Po
Slide 8: Risk Committee Monitors Risk Situation
Risk Risk mgmt. mgmt. Modelling Nat cat. Reserving Clear risk hierarchy RISK COMMITTEE MONITORS RISK SITUATION Board decides on risk appetite Æ New risk committee • CEO, CFO, CEO Life, COO Non-Life, Chief Controller, CRO • Quarterly meetings Æ Transparency of risk situation • Quantifiable risks • Le
Slide 9: History of DFA at Hannover Re
Risk mgmt. Modelling Modelling Nat cat. Reserving HISTORY OF DFA AT HANNOVER RE Æ Project started in early 90's. First presentation to the Executive Board in mid 90's Æ In 1999 various checks of commercial DFA models. Final decision to „make“ not to „buy“ (VBA based, later C++) Æ Implementation of o
Slide 10: Our Quantitative Tool for Risk Management
Risk mgmt. Modelling Modelling Nat cat. Reserving OUR QUANTITATIVE TOOL FOR RISK MANAGEMENT We analyse the major risks within one integrated tool Economic scenario generator Interest Credit Credit Equities rates FX spreads defaults Probability distributions for Current balance sheet future balance s
Slide 11: Strategic Asset Allocation
Risk mgmt. Modelling Modelling Nat cat. Reserving Investment management STRATEGIC ASSET ALLOCATION Risk-return analysis and evaluation of current (tactical) strategy Each point represents an asset allocation High Efficient frontier Current allocation Risk-minimal allocation Return Low Low Risk High
Slide 12: Capital as Percentage of Net Premium
Risk mgmt. Modelling Modelling Nat cat. Reserving CAPITAL AS PERCENTAGE OF NET PREMIUM HR´s assumption for AA Rating (0.03% VaR) vs. S&P Total including P/C R/I L/H R/I Fin R/I Speciality Total diversification Risk tolerance 0 0.03% VaR 91.8% 25.8% 35.4% 63.2% 63.4% 43.8% S&P AA 95.0% 30.8% 45.3% 79
Slide 13: Quite Different Capital Requirements
Risk mgmt. Modelling Modelling Nat cat. Reserving QUITE DIFFERENT CAPITAL REQUIREMENTS But substantial diversification effect 5,775 1,006 529 278 Diversification 570 effect: 49% 3,392 2,946 P/C R/I L/H R/I Fin R/I Speciality Assets HRG Æ Figures for 0.03% VaR level (AA) Æ Diversification effect: 49%
Slide 14: P/C Capital: More Than One Third for Nat Cat
Risk mgmt. Modelling Modelling Nat cat. Reserving P/C CAPITAL: MORE THAN ONE THIRD FOR NAT CAT . . .where diversification matters most 5,775 1,006 529 278 Diversification 570 effect: 49% 3,392 2,946 >1/3 Nat. cat.! P/C R/I L/H R/I Fin R/I Speciality Assets HRG Æ Figures for 0.03% VaR level (AA) Æ Di
Slide 15: New PML Approach Puts Capital Ratios Under Pressure
Risk mgmt. Modelling Nat cat. Reserving NEW PML APPROACH PUTS CAPITAL RATIOS UNDER PRESSURE Standard & Poor's Æ Standard & Poor's moved from 100-year single event PML* to 250-year aggregate PML* to charge catastrophe business Old methodology Adjusted capital = CAR 100y RBC PML New methodology Adjust
Slide 16: New PML Approach: A.M. Best
Risk mgmt. Modelling Nat cat. Reserving NEW PML APPROACH PUTS CAPITAL RATIOS UNDER PRESSURE A.M. Best Æ Methodology did not change (100-year event wind or 250-year event earthquake), but A.M. Best introduced charges for second event stress test: First Deduct event Adjusted capital 1st PML* = BCAR RB
Slide 17: Net PMLs Put Pressure on Capital Adequacy Ratios
Risk mgmt. Modelling Nat cat. Reserving S&P NET PMLS PUT PRESSURE ON CAPITAL ADEQUACY RATIOS Same capacity, but higher PML surcharges Old system: New method: 100-year single event 250-year aggregate event cession Retro- premiums 70% of cession Retro- Gross PML Gross PML premiums 100% of Net PML Net
Slide 18: Integrated Modelling Approach
Risk mgmt. Modelling Nat cat. Reserving INTEGRATED MODELLING APPROACH Results: Probability curves for various purposes Æ Hannover Re's aggregate control system is based on • vendor models (AIR: Catrader, Clasic/2; RMS: RiskLink) • internal aggregate control systems (Anker) Æ Output of aggregate cont
Slide 19: Full Probabilistic Curves
Risk mgmt. Modelling Nat cat. Reserving FULL PROBABILISTIC CURVES Gross and net curve for USA hurricane property losses (loaded) 100 0.4% = 250 years 99 Relief from Relief from cat. protections, aggregate Gross and net curve 98 swaps, K5 reductions USA hurricane, loaded property segment: Katrina as
Slide 20: Climate Cycle: Indication for Increase of Frequency and Intensity
Risk mgmt. Modelling Nat cat. Reserving 1. Climate cycle INDICATION FOR INCREASE OF FREQUENCY AND INTENSITY Æ Research indicates • Seasonal increase of sea surface temperature (SST) • Correlation between SST and hurricane intensity • Increase of hurricanes per season • Increase of category 3 – 5 hur
Slide 21: Katrina Conclusions Not Fully Applicable U.S.-Wide
Risk mgmt. Modelling Nat cat. Reserving 2. Insufficient modelled loss components KATRINA CONCLUSIONS NOT FULLY APPLICABLE U.S.-WIDE Æ Katrina conclusions for flood/storm surge cannot simply be applied to other U.S. storm events because of the specific geographic location of New Orleans Æ It is extre
Slide 22: "Super Cat" Demand Surge Higher Than Thought
Risk mgmt. Modelling Nat cat. Reserving 2. Insufficiently modelled loss components "SUPER CAT." DEMAND SURGE HIGHER THAN THOUGHT Æ Demand surge used to be a function of the absolute loss size in the models of RMS and AIR Æ Before Katrina AIR suggested a demand surge factor of 12% for this type of ev
Slide 23: "Super Cat" Impact of Side Aspects Higher
Risk mgmt. Modelling Nat cat. Reserving 3. Not modelled risks/branches "SUPER CAT." IMPACT OF SIDE ASPECTS HIGHER Æ Indirect business interruption Æ Additional costs of living Æ Costs of demolition/debris removal Æ Costs of adjustments of claims Æ Etc. . . Not modelled and considered by implementati
Slide 24: Overview of Calculation Procedure
Risk mgmt. Modelling Nat cat. Reserving Price calculation/actions OVERVIEW OF CALCULATION PROCEDURE Price calculation Modelled net loss cost (= technical rate from model) Technical + Hurricane frequency and severity surcharge (cycle surcharge)* surcharges + Surcharge for not modelled risks (e. g. fl
Slide 25: +40% to +300% Depends on ROL
Risk mgmt. Modelling Nat cat. Reserving Price calculation/actions +40% TO + 300% DEPENDS ON ROL Net RoL Gross RoL Gross RoL New over old modelled old margins new margins and in % loadings 40.00 50.00 71.96 143.92 30.00 37.50 55.46 147.90 25.00 31.25 47.11 150.74 20.00 25.00 38.65 154.60 15.00 20.00
Slide 26: HR Loading Good Predictor of 2006 Model Output
Risk mgmt. Modelling Nat cat. Reserving HR LOADING GOOD PREDICTOR OF 2006 MODEL OUTPUT Comparison for several large U.S. cat. XL treaties; RoL 16% 14% 12% 10% 8% 6% 4% 2% 0% CED 1 CED 2 CED 3 CED 4 CED 5 CED 6 CED 7 1) Before upgrade. . .1) . . .incl HR loading After upgrade 2) 1) Catradar 7.5 ® 2)
Slide 27: HR Loading Good Predictor of 2006 Model Output
Risk mgmt. Modelling Nat cat. Reserving HR LOADING GOOD PREDICTOR OF 2006 MODEL OUTPUT Comparison for several large U.S. cat. XL treaties; RoL 25% Cat. XL biz remains profitable! 20% 15% 10% 5% 0% CED 1 CED 2 CED 3 CED 4 CED 5 CED 6 CED 7 Before upgrade. . .1) . . .incl HR loading 1) After upgrade2)
Slide 28: Confirmed Expectations
Risk mgmt. Modelling Nat cat. Reserving CONFIRMED EXPECTATIONS Risk/return relation significantly improved Æ TOP 15 cat. treaties: Renewals 1 Jan 2006 – sorted by limits 2006 January 2006 January 2005 Rel. profit Rel. profit Abs. profit after CoC Abs. profit after CoC Limits Premium after CoC in % L
Slide 29: Individual Aspects: Year-End 2005 Reserves
Risk mgmt. Modelling Nat cat. Reserving Reserving INDIVIDUAL ASPECTS General remarks on year-end 2005 reserves Æ On balance, no run-off problems Æ U.S. casualty: U/W years 1986 - 96 show positive development, U/W years 1997 - 01 have further deteriorated, U/W years 2002 - 04 show strong positive sin
Slide 30: Individual Aspects: Special Topic A&E
Risk mgmt. Modelling Nat cat. Reserving Reserving INDIVIDUAL ASPECTS Special topic A&E Æ Asbestos & Environmental reserves: Moderate increase in paid losses, overall well reserved, relatively small absolute amounts in TEUR HR additional Survival IBNR-factor: Case reserves reserves for Total reserve
Slide 31: Bulk IBNR System by Line of Business
Risk mgmt. Modelling Nat cat. Reserving Reserving Increase by 50% BULK IBNR SYSTEM* IBNR split 2005 per line of business HR/E+S Rück: Property/Casualty IBNR EUR 2,746 m. (EUR 1,821 m. in 2004) Other Property 268 100 4% 10% Motor 786 29% Liability 1,592 57% ® * HR/E+S, IFRS, gross consolidated hannov
Slide 32: Bulk IBNR Systems by Business Centre
Risk mgmt. Modelling Nat cat. Reserving Reserving BULK IBNR SYSTEMS* IBNR split 2005 per business centre HR/E+S Rück: Property/Casualty IBNR EUR 2,746 m. (EUR 1,821 m. in 2004) RD8/9 (Fac./C&S) 171 6% MB5 (German Speaking) 368 13% TD1 (North America) 1,277 47% TD2 (UK, Marine, Aviation) 456 17% TD3
Slide 33: Our Reserving Process
Risk mgmt. Modelling Nat cat. Reserving Reserving Hannover based P/C business OUR RESERVING PROCESS Towards a more prospective work Æ As in past: Internal actuarial calculation and external review by Tillinghast Æ New: Tillinghast to provide recommendations for ULRs for selected business segments be
Slide 34: Reserve Sources
Risk mgmt. Modelling Nat cat. Reserving Reserving RESERVE SOURCES More than 60% of HR U.S. casualty reserves* are "home made" 2,458 in m. USD 2,010 2,000 1,124 1,532 888 1,057 727 950 457 1,000 375 758 465 425 275 371 143 188 877 109 747 530 278 382 404 ,0 2000 2001 2002 2003 2004 2005 Cedent reserv
Slide 35: HR U.S. Casualty Reserves
Risk mgmt. Modelling Nat cat. Reserving Reserving HR U.S. CASUALTY RESERVES* Actuarial calculations using all meaningful data, made up from 3,629 treaties USD 457 m. 233 treaties 3,586 treaties USD 1,124 m. = Additional IBNR per treaty = Actuarially based segment IBNR system, IFRS ® * Traditional bu
Slide 36: 2002-2004 Are Looking Very Promising
Risk mgmt. Modelling Nat cat. Reserving Reserving HR U.S. casualty*: Riding the cycle 2002 - 2004 ARE LOOKING VERY PROMISING Hard market premiums far above 1997 - 2001 levels, ULRs significantly below in m. USD 802 ~ 800* 783 608 532 408 262% 245 170 134144 112117 92 94 77 84 82 87 91 90 100 99 23 2
Slide 37: Our Actuarial Loss Ratio Picks Are Realistic
Risk mgmt. Modelling Nat cat. Reserving Reserving All U/W years OUR ACTUARIAL LOSS RATIO PICKS* ARE REALISTIC Slight positive development in 2005: USD 1.5 m. U/Y 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1980 103.9 101.5 100.9 100.4 99.4 99.4 100.5 103.3 102.5 105.9 107.2 113.
Slide 38: Soft Market Loss Ratio Picks Have Developed in 2005
Risk mgmt. Modelling Nat cat. Reserving Reserving Years 1997 - 2001 SOFT MARKET LOSS RATIO PICKS* HAVE DEVELOPED IN 2005 1997, 2001 still ok; 1998, 2000 last year's concerns materialised U/Y 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1980 103.9 101.5 100.9 100.4 99.4 99.4 100.5
Slide 39: Run Off Overall Very Profitable
Risk mgmt. Modelling Nat cat. Reserving Reserving Years 1996 and prior RUN OFF OVERALL VERY PROFITABLE (USD 24.1 M.) Asbestos claims don't cloud the view U/Y 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1980 103.9 101.5 100.9 100.4 99.4 99.4 100.5 103.3 102.5 105.9 107.2 113.4 11
Slide 40: "Realistic" Loss Ratio Picks (Not Optimistic!)
Risk mgmt. Modelling Nat cat. Reserving Reserving Years 2002 - 2004 "REALISTIC" LOSS RATIO PICKS (NOT OPTIMISTIC!) Profitable run-off is most likely based on these ratios U/Y 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1980 103.9 101.5 100.9 100.4 99.4 99.4 100.5 103.3 102.5 105
Slide 41: Cumulative Over Time
Risk mgmt. Modelling Nat cat. Reserving Reserving CUMULATIVE OVER TIME Only roughly 1/3 of the premium paid out for losses so far in m. USD 6,000 5,130 5,000 4,339 4,000 3,508 3,000 2,479 2,077 2,000 1,781 1,393 1,495 1,585 1,299 1,101 1,197 841 920 1,008 1,000 710 791 0 1989 1990 1991 1992 1993 199
Slide 42: Projected vs. Realised
Risk mgmt. Modelling Nat cat. Reserving Reserving PROJECTED VS. REALISED* Still some concerns for 1998 - 2000; 2002 - 2004 very promising in m. USD 200 180 160 140 120 100 80 60 40 20 0 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Paid 12/05 projected ("realistic") Paid
Slide 43: Conclusion
Risk mgmt. Modelling Nat cat. Reserving Reserving CONCLUSION Soft market years no reason to brag about, but under control Æ Older U/W years (prior 1997) continue to run off profitably Æ 1997 - 2001 years nothing to brag about, but also no concern to us Æ New U/W years (2002 - 2004) look very promisi
Slide 44: New Years Could Have Even Further Profits in Store
Risk mgmt. Modelling Nat cat. Reserving Reserving Comparison of U/W yrs 2002 to 2004 with favourable U/W yrs 1992 to 1995 NEW YEARS COULD HAVE EVEN FURTHER PROFITS IN STORE On average ~8%p higher ULRs than mature years suggest, on large volumes 74 67,5 67,5 67,5 64 64 58 60 59 27 24 25 24 21 19 8 2
Slide 45: Appendix
alent Appendix hannover re’
Slide 46: S&P Risk Management Culture Indicators, Part I
Risk mgmt. Modelling Nat cat. Reserving Reserving S&P RISK MANAGEMENT CULTURE INDICATORS Most favourable indicators - Part I Æ Governance structure supports effective risk management through board access, authority, and management reporting relationships for risk managers Æ Company has a clearly art
Slide 47: S&P Risk Management Culture Indicators, Part II
Risk mgmt. Modelling Nat cat. Reserving Reserving S&P RISK MANAGEMENT CULTURE INDICATORS Most favourable indicators - Part II Æ Information on risk management is widely communicated internally and externally to management and stakeholders Æ Mgmt. views its risk-management capabilities as providing a
Slide 48: External and Internal Checks
Risk mgmt. Modelling Nat cat. Reserving Reserving EXTERNAL AND INTERNAL CHECKS To assure sufficient reserves Æ Specialty (Clarendon/Praetorian) • Tillinghast study Æ Subsidiaries/branches • Various external studies (Tillinghast, Watson Wyatt,. . .) • Internal peer review Æ Home Office • Internal cro
Slide 49: Application of Common Methods
Risk mgmt. Modelling Nat cat. Reserving Reserving APPLICATION OF COMMON METHODS Methods used Æ Various chain ladder calculations: • On statistical by paid triangles • On statistical by incurred triangles Æ Bornhuetter Ferguson/loss ratio method: • On new and immature U/W years • When meaningful tria
Slide 50: Total Gross Loss Reserves
Risk mgmt. Modelling Nat cat. Reserving Reserving TOTAL GROSS LOSS RESERVES* Consist of various segments Hannover Re Group: EUR 25,989 m. Specialty Business 4,052 16% Property/ Financial Re Casualty 2,790 12,086 11% 46% Life/Health 7,061 27% ® * As of 31 Dec 2005 (in m. EUR), consolidated, IFRS hann
Slide 51: Total Gross Loss Reserves: Property/Casualty
Risk mgmt. Modelling Nat cat. Reserving Reserving TOTAL GROSS LOSS RESERVES* Consist of various segments HR Group: Property/Casualty EUR 12,086 m. Branches 542 Subsidiaries 4% 1,390 12% E+S Rück 1,734 14% Hannover Re 8,420 70% ® * As of 31 Dec 2005 (in m. EUR), consolidated, IFRS hannover re VI
Slide 52: Total Gross Loss Reserves: Geographical Breakdown
Risk mgmt. Modelling Nat cat. Reserving Reserving TOTAL GROSS LOSS RESERVES* Geographical breakdown HR Group: Property/Casualty EUR 12,086 m. Germany 2,048 Rest of World 17% 2,039 17% UK 2,326 19% USA 3,709 Europe 31% 1,964 16% ® * As of 31 Dec 2005 (in m. EUR), consolidated, IFRS hannover re VII
Slide 53: Gross Loss Reserves: Liability Plays an Important Role
Risk mgmt. Modelling Nat cat. Reserving Reserving GROSS LOSS RESERVES* Liability plays an important role Hannover Re: E+S Rück: EUR 8,420 m. EUR 1,734 m. General Motor Liability Liability 1,190 General 500 14% Liability 29% 3,358 40% Motor Liability 907 52% Other 3,872 46% Other 327 19% ® * As of 31
Slide 54: Gross General Liability Reserves
Risk mgmt. Modelling Nat cat. Reserving Reserving GROSS GENERAL LIABILITY RESERVES* Germany and U.S. dominate Hannover Re: E+S Rück: EUR 3,358 m. EUR 500 m. Rest of World Rest of World USA 346 10 58 10% 2% 12% Europe Germany 27 170 5% 5% Europe 765 23% USA 2,077 62% Germany 405 81% ® * As of 31 Dec
Slide 55: "Home Made" IBNR
Risk mgmt. Modelling Nat cat. Reserving Reserving "HOME MADE" IBNR* Substantial additional reserves Hannover Re: E+S Rück: EUR 8,420 m. EUR 1,734 m. Additional Additional Cedant- IBNR IBNR advised 4,097 764 reserve 49% 44% 4,323 51% Cedant- advised reserve 970 56% ® * As of 31 Dec 2005 (in m. EUR),
Slide 56: HR U.S. Casualty Reserves
Risk mgmt. Modelling Nat cat. Reserving Reserving HR U.S. CASUALTY RESERVES* About 3/4 are IBNR Hannover Re: USD 2,458 m. Cedant: advised IBNR 230 9% HR: per treaty IBNR HR: bulk IBNR 457 1.124 19% 46% Cedant: advised O/S 647 26% ® * Traditional business excl. Fin R/I (in m. USD, IFRS) hannover re X