Share price at year-end in EUR 58.96 +53.8% 38.325 40.135 32.71 22.50
Return on investment (excl. funds withheld by ceding companies) 4.3% 3.9% 3.9% 4.0% 0.4%
The state of the market in our largest business group, non-life reinsurance, was favourable for our company. Not least owing to the losses incurred from the natural disasters of 2011, reinsurers were able to push through price increases in most segments. As a result, we enjoyed a level of rates in 2012 that was considerably better than in the previous year. Along with the major losses of 2011, the adjustments made to natural catastrophe models – raising the assessment of risks in North America and Europe, in particular – helped to drive these rate increases. In the case of long-tail liability lines, another decisive factor is that the requirements placed on underwriting profitability – allowing for the cost of capital and administrative expenses – have risen sharply on account of the low level of interest rates.
The Executive Board and Supervisory Board intend to propose to the Annual General Meeting on 7 May 2013 that a dividend of EUR 2.60 and a bonus of EUR 0.40 per share be distributed. For the second year in succession the proposed distribution of 42% therefore exceeds the strategically planned payout ratio of 35% to 40% of Group net income after tax. Based on the year-end closing price of EUR 58.96, this produces a dividend yield of 5.1%.
• Ensure the greatest possible delegation of tasks, responsibilities and authority
We are satisfied with the development of our non-life reinsurance business. Demand for reinsurance covers remained brisk in the year under review, driven in part by the increased importance of risk-based models and the requirements placed on the capital resources of primary insurers. Given the heavy loss expenditures from natural catastrophes in the previous year, premium increases – particularly for property catastrophe business – were as expected appreciable. Yet the outcome of the treaty renewals in our domestic market was also gratifying. In US property business it was broadly possible to push through rate increases, while the rate erosion in casualty business was halted. Developments in our specialty lines, under which we include inter alia marine and aviation reinsurance as well as credit and surety business, were satisfactory. The picture in our global reinsurance segment was a mixed one: while the portfolio remained largely stable in developed markets, further substantial growth was recorded in Asia. Total gross premium volume in non-life reinsurance grew by 13.1% (9.3% at constant exchange rates) to EUR 7.7 billion, thereby exceeding our forecast target of 5% to 7%.
In addition, we decided to convert our subsidiary Hannover Life Re UK Ltd. into a branch with effect from 1 January 2013. This step was designed to make more efficient use of the underlying capital as well as to profit from synergistic benefits over the long term.
The underwriting result improved sharply from -EUR 268.7 million to EUR 272.2 million. Investment income posted thoroughly gratifying growth of 11.7% to reach EUR 944.5 million (EUR 845.4 million). The operating profit (EBIT) for non-life reinsurance surged from EUR 599.3 million in the previous year to EUR 1,091.9 million as at 31 December 2012, while Group net income increased sharply to EUR 685.9 million (EUR 455.6 million ). Earnings per share stood at EUR 5.69 (EUR 3.78).
The industrial property insurance lines were again the scene of fierce competition in the year under review. In addition, sizeable major losses were incurred in the chemical industry, which appreciably impacted industrial fire and fire loss of profits insurance. A number of mid-sized fire losses were also reported.
The strategy behind our underwriting policy in the 2012 financial year was once again to further improve the regional diversification of our portfolio. We gained market shares inter alia in Asia and Brazil. On the other hand, we continue to write offshore risks in the Gulf of Mexico conservatively in view of the considerable natural hazards potential.
Primary insurers further raised their retentions on the back of improved capital resources. Although the year under review was notable for a series of basic losses, these did not have any major implications for reinsurers since for the most part they remained within the retentions carried by insurers. For this reason, and on account of further expansion in reinsurance capacities, the pressure on prices intensified in the course of the year under review. With this in mind, our goal was to largely preserve the existing market shares and prices as well as to further diversify our portfolio. We successfully achieved these aims.
Credit and surety In worldwide credit and surety reinsurance Hannover Re ranks among the market leaders. As in previous years, we concentrated exclusively on the traditional core business of the credit and surety lines.
Worldwide treaty reinsurance Western and Southern Europe In France there has been no easing in the intensity of competition. Faced with this challenging market climate, our strategy is to preserve the profitability of our portfolio through a selective underwriting policy. We were largely successful in accomplishing this goal in the year under review.
Longevity In the Longevity segment the United Kingdom was once again our largest and most important market in the year under review. A pioneer in the field of enhanced annuities and large-volume pensions business, we continue to rank among the market’s sought-after business partners. Although the initially brisk pace of growth in the UK market has slowed, further demand still exists – especially in the area of enhanced annuities. This means, among other things, that competition is becoming increasingly fierce as other market players recognise the business potential and force their way into the market.
Asia Asia represents a promising market for our company going forward, not only due to its size and cultural diversity but also because of the population densities of individual countries and strong economic growth. We serve what is the world’s largest continent by area through our local units in Hong Kong, Kuala Lumpur, Mumbai, Seoul, Shanghai, Taipei and Tokyo. Our Hannover -based “Asia” Business Center concentrates and coordinates all activities within this market. This centralised responsibility combines the structured and holistic cultivation of the market with the advantages of our local network.
We realised a portion of the considerable increases in value within our US real estate portfolio in the third quarter.
The reserve for currency translation adjustment decreased by EUR 27.8 million from EUR 11.6 million to -EUR 16.2 million as a consequence of exchange rate fluctuations of foreign currencies against the euro in the year under review. The fall in the reserve for currency translation adjustment resulted principally from translation of the shareholders’ equity of subsidiaries with a foreign functional currency; the depreciation of the US dollar and South African rand and, as an opposite effect, the appreciation of the pound sterling, were particularly significant here.
Cash and cash equivalents at the end of the period 572.2 507.0 1 Thereof cash and cash equivalents of EUR 27.5 million attributable to disposal groups
For several years now Hannover Re has been an active partner in numerous initiatives to protect the climate and the environment, such as the “Ecological Project for Integrated Environmental Technology” (Ecoprofit) and the Climate Alliance Hannover 2020. The latter initiative, which enjoys the support of businesses, organisations, the City of Hannover and the public utility company Stadtwerke Hannover AG, has set itself the goal for 2020 of emitting 40% less harmful greenhouse gases than in 1990 across the municipal area. Under this partnership Hannover Re took part in, among other things, the “multimobilTag ” day of action held in the year under review, which was intended to raise awareness among both city residents and throughout the Greater Hannover region of environmentally friendly mobility methods.
In 2012, as in previous years, we also offset our absolute CO2 footprint of 4,743 tonnes caused by airline and train travel by making voluntary offsetting payments to the international organisation “atmosfair” and to Deutsche Bahn AG.
Waste (in kg) 205,790 257,400 297,000 327,000 no data 1 Karl-Wiechert-Allee 50 and Roderbruchstrasse 26, Hannover 2 Karl-Wiechert-Allee 50, Roderbruchstrasse 26 and infant daycare centre, Hannover 3 Karl-Wiechert-Allee 50, Roderbruchstrasse 21 and 26 as well as infant daycare centre, Hannover 4 Karl-Wiechert-Allee 50, Roderbruchstrasse 21 and 26 as well as infant daycare centre, Karl-Wiechert-Allee 57 (pro rata) Hannover 5 Radiative Forcing Index: 2.7
Central guidelines: investments, exposure management, central underwriting guidelines (non-life and life / health reinsurance) …
Supervisory Board • Advising and supervising the Executive Board in its management of the company, inter alia with respect to risk management, on the basis of the Supervisory Board’s Rules of Procedure
Since the business that we accept is not always fully retained, but instead portions are retroceded as necessary, the credit risk is also material for our company in reinsurance transactions. Our retrocession partners are carefully selected and monitored in light of credit considerations in order to keep the risk as small as possible. This is also true of our broker relationships, which entail a risk inter alia through the potential loss of the premium paid by the cedant to the broker. We minimise these risks, inter alia, by reviewing all broker relationships once a year with an eye to criteria such as the existence of professional indemnity insurance, payment performance and proper contract implementation. The credit status of retrocessionaires is continuously monitored. On the basis of this ongoing monitoring a Security Committee decides on measures where necessary to secure receivables that appear to be at risk of default. This process is supported by a Web-based risk management application, which specifies cession limits for the individual retrocessionaires participating in protection cover programmes and determines the capacities still available for short-, medium- and long-term business. Depending on the type and expected run-off duration of the reinsured business, the selection of reinsurers takes into account not only the minimum ratings of the rating agencies Standard & Poor’s and A. M. Best but also internal and external expert assessments (e. g. market information from brokers). Overall, retrocessions conserve our capital, stabilise and optimise our results and enable us to act on opportunities across a broader front, e. g. following a catastrophe loss event. Regular visits to our retrocessionaires give us a reliable overview of the market and put us in a position to respond quickly to capacity changes. The table above shows how the proportion of assumed risks that we do not retrocede (i. e. that we run in our retention) has changed in recent years.
• The average default rate over the past three years was 0.1%.
1 Adjustment based on amended allocation of economic effects (non-life reinsurance / investments) and final MCEV calculation (life and health reinsurance) 2 Income above risk-free after deduction of risk-appropriate cost of capital
In the year under review the Supervisory Board carried out another regularly scheduled audit of the effectiveness of its work. An extensive questionnaire addressed, among other aspects, issues such as the organisation of the Supervisory Board and the conduct of meetings, the cooperation between the Executive Board and the Supervisory Board and the supply
For the duration of the appointment to the Executive Board a passenger car is made available for business and personal use. The member of the Executive Board is responsible for paying tax on the pecuniary advantage associated with private use of the company car.
If the contractual relationship ends normally prior to the end of the vesting period for the bonus bank and HR-SAs, and if a contract extension is not offered, the member of the Executive Board retains his entitlements to payment from the bonus bank – making allowance for a defined forward projection of the bonus bank – and for already awarded HR-SAs.
8 In order to calculate the number of share awards for 2012 reference was made to the Xetra closing price of the Hannover Re share on 28 December 2012 (EUR 58.96). The number to be actually awarded is established from the arithmetic mean of the Xetra closing prices of the Hannover Re share in a period from five trading days before to five trading days after the meeting of the Supervisory Board that approves the consolidated financial statement in March 2013. The applicable market price of the Hannover Re share had increased from EUR 38.325 (30 December 2011) to EUR 42.09 by the allocation date (13 March 2012) of the share awards for 2011; the share awards actually allocated for 2011 are shown here, not those estimated in the 2011 Annual Report.
3 In 2012 altogether EUR 3,200 more in variable remuneration was paid to the members of the Executive Board for 2011 than had been reserved.
Frauke Heitmüller 3 Member of the Supervisory Board (from 3 May 2012)
The group of participants and the total number of eligible participants in the variable remuneration systems of Hannover Re are set out in the table on the following page.
Irene Arrago (mother of André Arrago) Purchase Share DE0008402215 28.8.2012 750 48.00 36,000.00
Attainment of the agreed IVC results in goal attainment of 100%. Outperformance of the business group targets, i. e. a degree of goal attainment in excess of 100%, requires at least the agreement and attainment of a positive IVC. Furthermore, a degree of goal attainment in excess of 100% should be geared to a real comparison of planned IVC with actual IVC. A maximum degree of goal attainment of 150% is conditional upon attainment of an excellent positive IVC and implies that the actual IVC of the business group is significantly in excess of the planned IVC.
The cash bonus will be paid for the first time in June 2013 for the 2012 financial year. In view of the fact that the share awards will also be allocated for the first time in June 2013 for the 2012 financial year, they will be paid out for the first time in the spring of 2017 including dividends paid for the 2012, 2013, 2014 and 2015 financial years.
Europe Within the Eurozone the situation will doubtless vary from country to country. Private consumption and public spending will remain muted on account of the restrictive fiscal policy. Domestic demand is therefore likely to decline, as a consequence of which corporate investment will probably also contract further – at least in the first half of the year. Positive stimuli are expected to come from the export sector, for which orders from foreign markets outside Europe are particularly important. In view of the weak state of the economy, further increases in jobless rates are to be expected; allowing for considerable regional differences, the Ifo Institute estimates the average unemployment rate in 2013 could be as high as 12.2%. Private consumption will probably also continue to fall, at least for the time being, although it may stabilise towards the end of 2013. All in all, the Ifo Institute forecasts a contraction of -0.2% in GDP for 2013.
Primary insurance business is becoming increasingly internationalised around the world. This trend will likely continue in the coming years, even if the business written by primary insurers remains essentially national by nature. The move towards uniform competitive standards within the European insurance market has met with delays: preparations for implementation of the European Solvency II Directive are still ongoing. Solvency II will bring about fundamental Europe-wide reform of insurance supervision and solvency requirements.
Our business with structured reinsurance products, in which we offer our clients tailored and innovative reinsurance solutions, is expected to enjoy stable or rising demand again in the current financial year. This is especially true in light of the more exacting requirements placed on companies’ capital resources. More and more emerging markets are adopting risk-based solvency systems, which should prompt further demand for surplus relief treaties – which ease the strain on a ceding company’s surplus and assist with fulfilment of solvency requirements imposed by regulators. Overall, the premium volume should increase slightly.
In non-life reinsurance we anticipate growth in premium volume averaging around 3% to 5%. We are looking to generate an EBIT margin of at least 10%.
Notes to the consolidated financial statements 2012 1. Company information 120 2. Accounting principles 120 3. Accounting policies 123 3.1 Changes in accounting policies 123 3.2 Summary of major accounting policies 123 3.3 Major discretionary decisions and estimates 130 4.1 Consolidation principles 131 4.2 Consolidated companies and complete list of shareholdings 132 4.3 Major acquisitions and new formations 139 4.4 Major disposals and retirements 140 4.5 Further corporate changes 140 5. Segment reporting 141 6. Notes on the individual items of the balance sheet 146 6.1 Investments under own management 146 6.2 Funds withheld (assets) 160 6.3 Contract deposits (assets) 160 6.4 Technical assets 160 6.6 Other assets 163 6.7 Technical provisions 165 6.8 Funds withheld (liabilities) 170 6.9 Contract deposits (liabilities) 170 6.10 Provisions for pensions and other post-employment benefit obligations 170 6.11 Other liabilities 174 6.12 Debt and subordinated capital 174 6.13 Shareholders’ equity, non-controlling interests and treasury shares 178 7. Notes on the individual items of the statement of income 179 7.1 Gross written premium 179 7.2 Investment result 180 7.3 Reinsurance result 182 7.4 Other income and expenses 183 7.5 Taxes on income 184 8. Other notes 187 8.1 Derivative financial instruments and financial guarantees 187 8.2 Related party disclosures 189 8.3 Share-based remuneration 191 8.4 Staff and expenditures on personnel 197 8.5 Earnings per share and dividend proposal 198 8.7 Contingent liabilities and commitments 199 8.8 Long-term commitments 200 8.9 Rents and leasing 200 8.10 Fee paid to the auditor 201 8.11 Events after the balance sheet date 201
In June 2011 the IASB published amendments to IAS 1 “Presentation of Financial Statements” and IAS 19 “Employee Benefits ”. IAS 1 requires entities to group items presented in OCI based on whether they are potentially reclassifiable to profit or loss subsequently, i.e. those that might be reclassified and those that will not be reclassified. Subtotals are to be shown accordingly for the two groups. Tax associated with items presented before tax is to be shown separately for each of the groups of OCI items. In future the revised IAS 19 eliminates the use of the so-called “corridor approach” to defer remeasurement impacts in connection with defined benefit obligations.
Reinsurance contracts: in March 2004 the IASB published IFRS 4 “Insurance Contracts”. The first standard governing the accounting of insurance contracts, it divides the “Insurance Contracts” project into two phases. IFRS 4 “Insurance Contracts ” represents the outcome of Phase I and serves as a transitional arrangement until the IASB defines the measurement of insurance contracts after completion of Phase II. Underwriting business is to be subdivided into insurance and investment contracts. Contracts with a significant insurance risk are considered to be insurance contracts, while contracts without significant insurance risk are to be classified as investment contracts. The standard is also applicable to reinsurance contracts. IFRS 4 contains fundamental rules governing specific circumstances, such as the separation of embedded derivatives and unbundling of deposit components. In conformity with these basic rules of IFRS 4 and the IFRS Framework, Hannover Re is availing itself of the option of retaining the previously used accounting policies for underwriting items (US GAAP).
With respect to impairments on securities with the character of equity, IAS 39 “Financial Instruments: Recognition and Measurement ” states, in addition to the aforementioned principles, that a significant or prolonged decrease in fair value below acquisition cost constitutes objective evidence of impairment. Hannover Re considers securities to be impaired under IAS 39 if their fair value falls significantly, i.e. by at least 20%, or for a prolonged period, i.e. at least nine months, below acquisition cost. In accordance with IAS 39 the reversal of impairment losses on equities to the statement of income once impairment has been taken is prohibited, as is adjustment of the cost basis. Impairment is tested in each reporting period using the criteria defined by Hannover Re. If a security is considered to be impaired on the basis of these criteria, IAS 39 requires that a value adjustment be recognised in the amount of the fair value less historical cost and less prior value adjustments, meaning that impairment is taken on the fair value as at the closing date – if available, on the publicly quoted stock exchange price. We also apply this method to participations in funds that invest in private equity. In order to reflect the specific character of these funds (in this case initially negative yield and liquidity flows from the so-called “J curve” effect during the investment period of the funds), we take an impairment to net asset value as an approximation of the fair value for the first time after a two-year waiting period if there is a significant or prolonged decrease in value.
Shareholders’ equity: the items “common shares” and “additional paid-in capital” are comprised of the amounts paid in by the parent company’s shareholders on its shares. In addition to the statutory reserves of the parent company and the allocations from net income, the retained earnings consist of reinvested profits generated by the Hannover Re Group companies in previous periods. What is more, in the event of a retrospective change of accounting policies, the adjustment for previous periods is recognised in the opening balance sheet value of the retained earnings and comparable items of the earliest reported period. Unrealised gains and losses from the fair value measurement of financial instruments held as available for sale are carried in cumulative other comprehensive income under unrealised gains and losses on investments. Translation differences resulting from the currency translation of separate financial statements of foreign subsidiaries are recognised under gains and losses from currency translation.
Hannover Life Re AG, Hannover / Germany 1, 2 100.00 EUR 1,582,596 –
Hannover Euro Private Equity Partners IV GmbH & Co. KG, Cologne / Germany 3 60.17 EUR 86,192 3,542
Hannover Re (Guernsey) PCC Limited, St Peter Port / Guernsey 1 100.00 EUR 254 2
Compass Insurance Company Limited, Johannesburg / South Africa 100.00 ZAR 109,595 229
Commercial & Industrial Acceptances (Pty) Ltd., Johannesburg / South Africa 20.40 ZAR 14,460 23,236
HANNOVER Finanz GmbH, Hannover / Germany 4 25.00 EUR 70,674 7,194
XS Direct Insurance Brokers Limited, Dublin / Ireland 4 25.00 EUR 36 208
Based on the “management approach” of IFRS 8, which requires segment information to be presented as it is reported internally to management and normally used by the chief operating decision maker to decide upon the allocation of resources to a segment and evaluate its performance, Hannover Re has identified the reportable segments of non-life reinsurance and life / health reinsurance. With regard to the object of business operations within the two segments please see the corresponding remarks in the management report.
Fixed-income securities – at fair value through profit or loss – – 23,720 – – 95,454 28,239 – 147,413
Total financial assets measured at fair value 8,191,565 14,358,380 1,089,290 23,639,235
Net book value at 31 December of the year under review 27,329 8 1,061,953 54,812
The total amount of the net reserve before specific value adjustments, to which the following remarks apply, was EUR 20,071.6 million (EUR 19,213.2 million) as at the balance sheet date.
The components of the net periodic pension cost for benefit plans were as follows: Net periodic pension cost in EUR thousand 2012 2011
As in the previous year, Hannover Re does not expect any contribution payments under the pension plans set out above in the 2012 financial year.
On 20 November 2012 Hannover Re placed a EUR 500.0 million subordinated bond in the European capital market via its subsidiary Hannover Finance (Luxembourg) S.A. The bond has a maturity of approximately 30 years, with a first scheduled call option on 30 June 2023. It carries a fixed coupon of 5.00% p.a. until this date, after which the interest basis changes to a floating rate of 3-month EURIBOR +430 basis points.
At fair value through profit or loss 1 Including income from associated companies, for reconciliation with the consolidated statement of income 2 Excluding other investment expenses
The administrative expenses amounted to altogether 2.5% (2.7%) of net premium earned.
IAS 24 “Related Party Disclosures” defines related parties as group entities of a common parent, associated entities, legal entities under the influence of key management personnel and the key management personnel of the entity itself. Transactions between Hannover Re and its subsidiaries, which are to be regarded as related parties, were eliminated through consolidation and are therefore not discussed in the notes to the consolidated financial statement. In the year under review the following significant business relations existed with related parties.
The total number of share awards granted is based on the value per share of Hannover Re. The value per share is established according to the unweighted arithmetic mean of the Xetra closing prices of the Hannover Re share. In the conditions applicable to members of the Executive Board a period of five trading days before to five trading days after the meeting of the Supervisory Board that approves the consolidated financial statement for the financial year just-ended is envisaged for the calculation. For managers a period of twenty trading days before to ten trading days after the meeting of the Supervisory Board that approves the consolidated financial statement for the financial year just-ended has been agreed. The total number of share awards granted is established by dividing the amount available for the granting of share awards to the respective eligible recipients by the value per share, rounded up to the next full share. For members of the Executive Board 20% and for managers 40% or 35% – according to management levels – of the defined variable remuneration shall be granted in the form of share awards.
The very good result generated by Hannover Re for 2012 was made possible by the exceptional performance of the company ’s Executive Board and members of staff. The Supervisory
Hannover Rückversicherung AG Tyskland filial Hantverkargatan 25 P. O. Box 22085 10422 Stockholm
Direct business: business focused on narrowly defined portfolios of niche or other non-standard risks.