Design and production : Design and production - 5392 1, rue Euler - 75008 Paris - France Tel. : + 33 1 40 70 50 50 - Fax : + 33 1 40 70 50 17 www.eulerhermes.com 20 REFERENCE05 DOCUMENT Contents Report of the Group Management Board Contents Chairman’s Report Consolidated Financial Statements Parent Company Financial Statements General Information 001 Profile 002 Key Figures 2005 004 Report of the Group Management Board 045 Chairman’s Report pursuant to Article L. 225-68 of the French Commercial Code 057 Consolidated Financial Statements 31 december 2005 151 Parent Company Financial Statements at 31 december 2005 168 Euler Hermes shares on the stock exchange market 172 General Information 203 Resolutions submitted to the vote of the General Meeting of 22 May 2006 211 Share buyback programme submitted to the vote of the General Meeting of 22 May 2006 213 Cross references to the reference document Contents Report of the Group Management Board Profile Chairman’s Report Consolidated Financial Statements Parent Company Financial Statements General Information 001 Helping companies to secure their business growth Euler Hermes for responsible management Euler Hermes is the global leader in credit insurance. It provides products and services, including protection from customer non-payment, debt collection and loss indemnification, to companies of all sizes. Unparalleled risk experience acquired through its coverage of 40 million businesses worldwide enables Euler Hermes to help businesses grow in their home market and in export markets throughout the world. A subsidiary of AGF and a member of the Allianz Group, Euler Hermes has the necessary financial strength to provide long-term support to its clients. Rated 2,008 AA- 700 by Standard & Poor’s billion euros of business million euros of turnover. (May 2005). transactions protected. Contents Report of the Group Management Board Key Figures 2005 Chairman’s Report Consolidated Financial Statements Parent Company Financial Statements General Information 002 CONSOLIDATED TURNOVER (€MILLION) IFRS 2, 008 1, 864 1, 906 1, 879 94 86 1, 536 1, 770 1, 820 1,263 116 1, 420 132 2,008M€ 1,131 CONSOLIDATED TURNOVER IN 2005 2001 2002 2003 2004 2004 2005 ■ Factoring ■ Credit Insurance Turnover increased by 6.9% (6.8% pro forma at constant exchange rates) despite weak economic growth in Europe. This growth reflects the group’s efforts to develop new business and increase the loyalty of its existing clients. Turnover in new markets grew on 67.6% average by 33.2% (31.1% pro forma). NET COMBINED RATIO IN 2005 NET INCOME, GROUP SHARE (€MILLION) IFRS 286.1 243.0 25.7 206.4 217.3 146.1 90.4 5,399 51.2 EMPLOYEES WORLDWIDE 2001 2002 2003 2004 2004 2005 ■ Net result of discontinued activities ■ Results excluding discontinued activities A strict underwriting policy and rigorous cost control combined with a broader offer and improved service quality made a significant contribution to the 18% increase in net income, group share. Excluding the factoring activity sold in 2004, net income increased by 31.7%. 1893 1917 1918 1927 1929 1989 1992 1996 Creation Creation Creation of Creation Creation Formation of the First AGF acquires majority of ACI of Hermes Trade Indemnity of SFAC of COBAC holding. Cie financière co-operation shareholding of SFAC, in the USA Kreditversicherung in the United in France in Belgium SFAC. Creation of the agreement then re-named Euler. in Germany Kingdom and SIAC Royal Nederlansche between SFAC Allianz acquires in Italy Kredietverzekering and Hermes majority shareholding in the Netherlands of Hermes Contents Report of the Group Management Board Key Figures 2005 Chairman’s Report Consolidated Financial Statements Parent Company Financial Statements General Information 003 OPERATING INCOME NET COMBINED RATIO (€MILLION) (AS A % OF EARNED PREMIUMS, NET OF REINSURANCE) IFRS 446.6 IFRS 101.1 321.4 95.8 347.2 67.1 65.3 78.0 258.8 70.0 69.5 44.1 67.6 39.8 45.9 47.5 ■ Operating income 34 33.9 before financial income 125.2 30.5 30.2 ■ Net financial income 88.4 23.6 20.1 2004 2005 2001 2002* 2003 2004 2004 2005 ■ ■ Following the adoption of IFRS, the distinction between Loss ratio Cost ratio underwriting results and non-underwriting results is no longer made The 1.9 point improvement in the net combined ratio was and the concept of “Underwriting result” has been replaced by achieved thanks to a fall in the expense ratio brought about by “Operating income”. Operating income increased by 28.6% thanks tighter cost control and better reinsurance conditions. The net to growth in turnover, a contained claims experience and tight loss ratio rose slightly however, due to a reduction in outwards control of overheads. The growth in financial income also reinsurance and run-off. contributed to this increase, which was achieved against a difficult * Pro forma including companies from the ex-Hermes group for the full year. macroeconomic background. SHAREHOLDERS’ EQUITY NUMBER OF EMPLOYEES* (€MILLION) AT 31 DECEMBER IFRS 1, 745 6, 054 6, 071 5, 372 5, 399 1, 403 1, 233 1, 049 3, 739 942 821 2001 2002 2003 2004 2004 2005 2001 2002 2003 2004 2005 Thanks mainly to the increase in the group’s share of net income, The number of employees was up slightly at 31 December 2005. return on equity rose to 18.4%, up by 1.1 point compared with 2004 IFRS, excluding the factoring activity sold in 2004. * Employees of associated companies (at equity) included at 100%. 1998 1999 2000 2002 2003 2004 2005 Allianz acquires International Flotation Euler acquires The group Sales of the 49.09% New presence The majority co-operation of Euler Hermes and all its stake in Eurofactor in Russia, shareholding agreement on the Paris subsidiaries to Crédit Agricole. the Baltic States, in AGF between stock exchange adopt the name Further expansion India and Turkey Euler and Hermes Euler Hermes of operations worldwide (Finland, Greece, Portugal, Morocco) Contents Report of the Group Management Board Report of the Chairman’s Report Consolidated Financial Statements Group Management Parent Company Financial Statements Board General Information 004 Contents ■ Review of 2005 05 Euler Hermes’ strategy 07 Key events of the period 08 Business activity 09 Consolidated net income 11 Performance of group’s main geographic segments 18 Consolidated shareholders’ equity and adjusted capital 22 Creation of shareholder value 24 Development of the activity of Euler Hermes SA 26 Outlook 28 Sustainable development 29 Directors’ remuneration 35 List of posts and offices held by directors 38 Observations of the Supervisory Board on the report from the Group Management Board 44 Contents Report of the Group Management Board Review of 2005 Chairman’s Report Consolidated Financial Statements Parent Company Financial Statements General Information 005 The global economy in 2005 ■ in Germany, growth was erratic throughout 2005. The spurt in the first quarter (up 0.6%) was followed by a virtual stagnation in The year ended 31 December 2005 was marked by a the second quarter (up 0.3%), a rebound of 0.6% in the third deceleration in activity worldwide (growth of only 3.4% compared quarter and a further deceleration in the fourth quarter. This with 3.9% in 2004), although the slowdown engendered by the performance was achieved on a limited base, with GDP growth surge in the price of oil and many other commodities remained being sustained essentially by external demand; modest in the end. The US remained the engine of the world economy, leading the slowdown in 2005, just as it had led the ■ in France, the economy decelerated sharply in 2005, reflecting upturn in 2003-2004. Asia continued to benefit from US demand, an external contribution that remained highly negative and the with China gaining market share in global manufacturing. By reduced contribution from stocks. Consumption remained relatively contrast, the euro zone, other than a few exceptions (Spain, strong (up 2,1%) and constituted the main economic support; Ireland and Denmark), saw a further decline in the first half of 2005, and the rebound in the second half, boosted by the euro’s ■ Italy emerged from the recession, but posted growth of only depreciation, remained limited. The pace of world growth 0.2%. The improvement in activity was evidenced primarily by gradually slowed throughout 2005, suggesting that the slowdown higher external demand, with an upturn in European activity and will continue into 2006. the weaker euro. The driver of world trade, the United States, decelerated ■ With growth of 3.4% in 2005, Spain experienced an (growth of 3.5%) following the peak reached in 2004 (growth of acceleration and significantly outperformed its euro zone 4.2%). Even so, it put up better-than-expected resistance to the partners once again. However, there was an increase in the rise in oil prices and interest rates as a result of four factors: the imbalance between internal demand that remained highly decline in long interest rates and inflation; relatively weak dynamic, fuelled by consumption and construction, and the imports; the continued application of a very accommodating deterioration in external accounts. budgetary policy in response to the damage caused by the hurricanes; and the decrease in the household savings rate to Trends in corporate failures around 0%. The slowdown in world growth prompted a reversal of the trend in In Japan, after fears of a recession surfaced in late 2004, 2005 corporate failures. Following a decline of 5% in 2004, our Global confirmed the return of strong and balanced growth that reached Index of business failures fell by just 2% in 2005. This perform- 2.7% over the year as a whole. The yen’s depreciation boosted ance was primarily determined by events in the US, which the competitiveness of the country’s exports and curbed remained the heavyweight of the world economy.