We manage risks actively • Ensure protection of capital through quantitative risk management • Ensure protection of capital through qualitative risk management
Lifestyle concepts The South African life insurance market remains an abundant source of innovative, consumer-centric benefit and process developments. At Hannover Re, we enjoy being at the forefront of such evolution through our long-term partnerships, which have seen us implement a number of lifestyle-orientated initiatives tailored to today’s health-conscious and technology-savvy policyholders. These have included a first-to-market fully automated, non-intermediated underwriting process; partnerships in the health and wellness rewards space, providing health-improvement incentives to policyholders via premium discounts and rewards; and more recently, enabling social impact through life insurance purchases. These projects share the theme of catering to the millennial policyholders – digital natives who are health conscious and vested in addressing society’s challenges. At Hannover Re, we actively seek to address evolving policyholder requirements, which serve to drive our cedant-specific solutions.
With a gross premium volume of around EUR 14.0 billion, Hannover Re is the third-largest reinsurer in the world. We transact reinsurance in our Property & Casualty and Life & Health business groups.
Our subsidiary E+S Rückversicherung AG, as the “dedicated reinsurer for the German market”, offers a range of products and services tailored to the specific features of the German market. Of special importance here are the mutual insurers with whom we have established a particularly trusting cooperation that is underscored through their participation in E+S Rück.
For more detailed remarks on the development of Hannover Re’s investments please see the “Investments” section on page 52 et seq.
As anticipated, our life and health reinsurance business showed a pleasing development in the financial year just ended. Despite the fresh challenges faced by life and health reinsurance as a consequence of the appreciable increase in international competition and the strained state of capital and financial markets, we boosted our gross premium volume by 5.1% to EUR 6.5 billion (EUR 6.1 billion). Adjusted for exchange rate effects, the growth of 4.9% was within the bounds of our expectations for 2014. The planned target of more than EUR 180 million for the Value of New Business was clearly surpassed in the year under review at EUR 448.4 million. For more detailed information in this regard and on the Market Consistent Embedded Value (MCEV) please see the MCEV Report published separately on our website.
Breakdown of proportional and non-proportional M 09 treaties by volume in % and in EUR million proportional non-proportional
Property & Casualty reinsurance: Breakdown of gross M 16 written premium in worldwide specialty lines in EUR million
Australia and New Zealand looked set to close with a very good result as the year progressed, only for the Greater Brisbane area to be hit by a severe hailstorm in November. With primary insurers carrying higher retentions, however, this event led to a merely moderate strain for our company as a reinsurer. Other than that, the year passed off relatively benignly as far as natural catastrophes were concerned. In common with other market players, we were nevertheless compelled in the year under review to strengthen our IBNR reserve for the New Zealand earthquakes of 2010 and 2011. Based on our good market position, we were able to assert our status as the third-largest property and casualty reinsurer in Australia. Despite this, our premium volume declined slightly in the year under review – a reflection of the ongoing market consolidation, sustained pressure on conditions and our selective underwriting policy.
In the European market the appeal of traditional, fixed-income risk-oriented products such as life insurance has further diminished owing to the low interest rate environment. Particularly for the German reinsurance market, growth in the area of mortality -exposed risk solutions remains limited. The development in Southern Europe, where mortality business has remained on a consistently high level despite the generally strained economic situation, should therefore be viewed in a correspondingly favourable light. The high quality of bancassurance and credit life business in Italy goes hand in hand with the prudent approach to lending adopted by banks since the outbreak of the financial crisis. Sharia-compliant retakaful reinsurance, an area in which we have further expanded our portfolio and our market leadership, also continued to fare well. Similarly, in Eastern Europe and Asia we achieved a pleasing enlargement of our mortality business in the reporting period just ended. Particularly in certain Latin American countries, the basic conditions for writing reinsurance business have become more challenging due to the exertion of political influence. Nevertheless, we succeeded in boosting our business to a gratifying extent and maintained our leading position in most countries. We were thus able to increase the gross premium for our worldwide mortality business to EUR 2,949.5 million (EUR 2,833.5 million ). At 45.7%, the mortality portfolio consequently contributes the lion’s share of our total gross premium income from life and health reinsurance (EUR 6.5 billion).
Our investment income (including interest on funds withheld and contract deposits) came in at EUR 1,471.8 million, a slightly higher level than in the previous year (EUR 1,411.8 million ). This can be attributed principally to the stable ordinary income combined with higher realised gains. Of this amount, income from assets under own management accounted for EUR 1,095.8 million (EUR 1,054.5 million). This produces an average return (excluding effects from inflation swaps and ModCo derivatives) of 3.3%; that this figure is somewhat higher than our forecast of 3.2% reflects among other things increased realised gains on fixed-income securities as well as the fact that we acted on opportunities to realise gains in the real estate sector. Parallel to the rising investment income, the valuation reserves in the investment portfolio for our available-for-sale asset holdings rose by EUR 971.2 million to EUR 1,724.0 million.
Capital structure as at 31 December 2014 M 30 3.8% Loans and subordinated capital 13.7% Equity 4.9% Other liabilities 77.6% Technical provisions and liabilities
Hannover Finance (Luxembourg) S.A., subordinated debt, EUR 750 million; 2004 / 2024 26.2.2004 5.75 – 749.6
Since 2012 we have offered a state-of-the-art form of in-house specialist skills enhancement for Home Office and for our colleagues around the world with our blended learning programmes – i. e. the combination of electronic learning methods with tutorial support. With a view to satisfying the increasingly demanding requirements that will be placed on our internal training going forward as well as on the reliable controlling of instructional activities, we launched a project in the year under review aimed at rolling out our own learning management system. The goal is to give our employees worldwide a readily available overview of training opportunities, facilitate rapid access to the existing tuition programmes and training documents and enhance administrative processes by means of appropriate workflows. The first step during the initial phase of the project, which was carried out in 2014, was to record and revise our internal training processes. Building on this foundation, we selected a learning management system that met our requirements and ensured – by way of an elaborate proof of concept – that it was tailored to our needs. Following successful completion of this project phase, the selected programme is now being launched.
As one of the world’s leading reinsurers, we essentially bear responsibility for two specialist areas when it comes to our core business: in the first place for our reinsurance business, and secondly for the management of our investments.
Responsibility for holistic risk monitoring across the Group as a whole and the business groups of all material risks from the Group perspective supported by local risk management functions
In the following section we compare the available economic capital with the required risk capital. Hannover Re calculates the economic equity as the difference between the market-consistent value of the assets and the market-consistent value of the liabilities. The corresponding measurement principles also largely apply to the Intrinsic Value Creation (IVC) (see the section “Management system” on page 24 et seq.). While fair values are available for most investments, the market-consistent valuation of reinsurance treaties necessitates a specific valuation model. We establish the market-consistent value of technical items as the present value of projected payments using actuarial methods. This is adjusted by a risk loading that factors in the fluctuation in future payments. Such fluctuations result from risks that cannot be hedged by means of capital market products, such as underwriting risks. We use risk-free interest rates derived from yields on the highest-quality government bonds for discounting of our future cash flows. Market prices for options and guarantees embedded in insurance contracts are determined or approximated using option valuation models from the field of financial mathematics. The methods used are the same as those adopted in the calculation of our Market Consistent Embedded Value (MCEV) (for further remarks on the Market Consistent Embedded Value please see our comments in the section “Underwriting risks in life and health reinsurance ” on page 89 et seq.). The significance of these options and guarantees in our portfolio is, however, minimal. The valuation reserves for investments shown in the following table indicate the difference between fair value and book value of those investments recognised under IFRS at book values. Other valuation adjustments encompass above all deferred tax assets and liabilities that arise in connection with valuation adjustments. The available economic capital, which is available as liable capital for policyholders, is composed of the economic equity and the hybrid capital.
Underwriting risk in life and health reinsurance 3,327.2 1,906.9 2,607.3 1,434.3
Required risk capital of the Hannover Re Group 7,786.6 4,353.1 6,896.9 3,375.2
The short-term loss probability measured as the “Value at Risk” (VaR) is another vital tool used for monitoring and managing market price risks. It is calculated on the basis of historical data, e. g. the volatility of the securities positions under own management and the correlation between these risks. As part of these calculations the decline in the fair value of our portfolio is simulated with a certain probability and within a certain period. The VaR of the Hannover Re Group determined in accordance with these principles specifies the decrease in the fair value of our securities portfolio under own management that with a probability of 95% will not be exceeded within ten trading days. A multi-factor model is used to calculate the VaR indicators for the Hannover Re Group. It is based on time series of selected representative market parameters (equity prices, yield curves, spread curves, exchange rates, commodity prices and macro-economic variables). All asset positions are mapped on the level of individual positions within the multifactor model; residual risks (e. g. market price risks that are not directly explained by the multi-factor model) can be determined through back-calculation and are incorporated into the overall calculation. The model takes into account interest rate risks, credit and spread risks, systematic and specific equity risks, commodity risks and option-specific risks. Against the backdrop of what was still a difficult capital market environment, the volatilities of fixed-income assets, in particular, and hence the market price risks increased in the year under review relative to the previous year. Based on continued broad risk diversification and the orientation of our investment portfolio, our Value at Risk was nevertheless clearly below the Value at Risk upper limit defined in our investment guidelines. It amounted to 0.8% (1.1%) as at the end of the reporting period.
• The average default rate over the past four years was 0.3%.
Required risk capital 1 for operational risks M 76 in EUR million 2014 2013
The liquidity risk refers to the risk of being unable to meet our financial obligations when they become due. The liquidity risk consists of the refinancing risk, i. e. the necessary cash cannot be obtained or can only be raised at increased costs, and the market liquidity risk, meaning that financial market transactions can only be completed at a poorer price than expected due to a lack of market liquidity. Core elements of the liquidity management of our investments are, in the first place, management of the maturity structure of our investments on the basis of the planned payment profiles arising out of our technical liabilities and, secondly, regular liquidity planning as well as the asset structure of the investments. Above and beyond the foreseeable payments, unexpected and exceptionally large payments may pose a threat to liquidity. In reinsurance business, however, significant events (major losses) are normally paid out after a lead time that can be reliably planned. As part of our liquidity management we have nevertheless defined asset holdings that have proven to be highly liquid – even in times of financial stress such as the 2008 financial crisis. Our holdings of unrestricted German, UK and US government bonds as well as cash during the year under review were larger than possible disbursements for assumed extreme events, which means that our liquidity is assured even in the unlikely case of financial crises coinciding with an extreme event that needs to be paid out quickly. The liquid asset reserve stood at EUR 3.9 billion as at the balance sheet date. In addition, we manage the liquidity of the portfolio by checking on each trading day the liquidity of the instruments contained therein; their underlying parameters are verified on a regular and ad hoc basis. These measures serve to effectively reduce the liquidity risk.
Code Item 5.2 Para. 2; Chair of the Audit Committee Pursuant to Code Item 5.2 Para. 2, the Chair of the Supervisory Board shall not chair the Audit Committee.
In addition to the present Declaration on Corporate Governance, the Corporate Governance Report and the reports of the last 10 years are published on our website pursuant to Item 3.10 of the German Corporate Governance Code (www.hannover-re.com/about/ corporate/declaration/index.html).
Attainment of three-year targets (basis for 2013 and 2014: divisional performance from 2013 onwards)
As at 31 December 2014 active members of the Executive Board had at their disposal a total of 228,957 (288,797) granted, but not yet exercised stock appreciation rights with a fair value of EUR 2.1 million (EUR 2.4 million).
(allocation) 4 1 As at the balance sheet date no Board resolution was available regarding the performance-based remuneration for 2014. The variable remuneration is recognised on the basis of estimates and the provisions constituted accordingly.
Hannover Re Group All 160 Group senior executives worldwide receive a cash bonus upon corresponding goal attainment. 159 of them participate in the Share Award Plan.
We expect to write further profitable business for our retakaful portfolio in the current financial year. Rising prices are anticipated above all under loss-impacted programmes.
In November 2013 the IASB issued “Defined Benefit Plans: Employee Contributions (Amendments to IAS 19)” and thereby clarified the requirements that relate to how contributions from employees or third parties that are linked to service should be attributed to periods of service. The amendments are intended to provide relief in that entities are allowed to deduct contributions from service cost in the period in which the service is rendered. The amendments are effective for annual periods beginning on or after 1 July 2014 and were endorsed by the EU in December 2014.
Netting of financial instruments: financial assets and liabilities are only netted and recognised in the appropriate net amount if a corresponding legal claim (reciprocity; similarity and maturity) exists or is expressly agreed by contract, in other words if the intention exists to offset such items on a net basis or to effect this offsetting simultaneously.
Companies over which Hannover Re is able to exercise a significant influence are consolidated as associated companies using the equity method of accounting. We therefore measure investments in associated companies with the proportion of the shareholders ’ equity attributable to the Group. According to the proportionate interest method required by IAS 28 “Investments in Associates”, the goodwill attributable to associated companies is recognised together with the investments in associated companies. The share of an associated company’s year-end profit or loss relating to the Group is included in the income from investments and shown separately in the consolidated statement of income. Shareholders’ equity and profit or loss are taken from the associated company’s latest available financial statement. A significant influence is presumed to exist if a company belonging to the Hannover Re Group directly or indirectly holds at least 20% – but no more than 50% – of the voting rights. We also derive evidence of significant influence over an associated company from representation on a governing body of such company, participation in its policy-making processes – e. g. with respect to dividends or other distributions –, the existence of material inter-company transactions, the possibility of interchanging managerial personnel or the provision of key technical information for the company. Further particulars on companies consolidated using the equity method of accounting are provided in Section 6.1 “Investments under own management” under “Associated companies”.
Hannover Life Reassurance Company of America (Bermuda) Ltd., Hamilton / Bermuda 1 100.00 USD 5,826 117
Atlantic Capital Corporation, Wilmington / USA 8, 10, 11 100.00 USD (111,867) –
Akvamarín Beta s.r.o., Prague / Czech Republic 1 87.67 CZK 109,499 27,806
Lireas Holdings (Pty) Ltd., Johannesburg / South Africa 51.00 ZAR 191,451 21,623
Thatch Risk Acceptances (Pty) Ltd., Johannesburg / South Africa 33.14 ZAR 1,433 1,752
We additionally use an internal rating method to back up this analysis. Our internal rating system is based on the corresponding credit ratings of securities assigned by the agencies Standard & Poor’s and Moody’s and in each case reflects the lowest of the available ratings.
Fixed-income securities – loans and receivables – 6,217 2,349,152 42,221 – 707,590 – 103,920 3,209,100
Cumulative depreciation at 31 December of the year under review 44,979 25,741
The additions to this item are due to the increased investment activities of the real estate companies belonging to the Hannover Re Group. They are attributable entirely to investments in Europe.
Net book value at 31 December of the year under review 5,179 8 247,400 952,451 68,827
The retrocessionaires’ portions of the technical provisions are based on the contractual agreements of the underlying reinsurance treaties. For further details please refer to our comments on the technical provisions in Section 6.7 “Technical provisions” on page 200 et seq. as well as the remarks in the risk report on page 86 et seq.
Present value of future profits on acquired life reinsurance portfolios 82,390 85,270
Net book value at 31 December of the previous year 85,270 92,100
Loss and loss adjustment expense reserve 24,112,056 1,376,432 22,735,624 21,666,932 1,403,804 20,263,128
Position at 1 January of the financial year 129,602 141,105 13,510 14,979 75 30
Impact of minimum funding requirement / asset ceiling at 31 December of the financial year – 75
The subordinated debt issued in 2004 by Hannover Finance (Luxembourg) S.A. with a volume of EUR 750.0 million was cancelled by the issuer in the full nominal amount at the first scheduled call date and repaid on 26 February 2014.
Other income / expenses N 75 in EUR thousand 2014 2013
and a uniform trade earnings tax rate of 16.1%. The deferred taxes at the companies abroad were calculated using the applicable country-specific tax rates.
In view of the unrealised gains on investments and on currency translation recognised directly in equity in the financial year, actual and deferred tax expenditure – including amounts attributable to non-controlling interests – of EUR 258.2 million (EUR 217.8 million) was also recognised directly in equity.
A number of transactions concluded in the life and health reinsurance business group in the previous year, under which
The maximum period of the stock appreciation rights is ten years, commencing at the end of the year in which they are awarded. Stock appreciation rights which are not exercised by the end of the 10-year period lapse. Stock appreciation rights may only be exercised after a waiting period and then only within four exercise periods each year. Upon expiry of a four-year waiting period a maximum 60% of the stock appreciation rights awarded for an allocation year may be exercised. The waiting period for each additional 20% of the stock appreciation rights awarded for this allocation year to a member of the managerial staff is one further year. Each exercise period lasts for ten trading days, in each case commencing on the sixth trading day after the date of publication of the quarterly report of Hannover Rück SE.
Amounts paid out in the 2014 financial year (in EUR million) – – 2.55 0.25 0.04 –
Hannover Rück SE Shanghai Branch Suite 3307, China Fortune Tower 1568 Century Boulevard Pudong 200122 Shanghai
Alternative risk financing: use of the capacity available on the capital markets to cover insurance risks, e. g. through the securitisation of natural catastrophe risks.
Mortality risk: in general terms, the actuarial risk that a person upon whose death a benefit is payable lives shorter than expected. From a (re)insurer’s perspective, this is the risk that the observed mortality experience in an underlying portfolio deviates from what had previously been calculated on the basis of actuarial assumptions.
N 01 Consolidated balance sheet as at 31 December 2014 138 N 02 Consolidated statement of income 2014 140 N 03 Consolidated statement of comprehensive