Equity attributable to shareholders of Hannover Rück SE 7,550.8 +28.2% 5,888.4 6,032.5 4,970.6 4,509.0
Earnings per share (basic and diluted) in EUR 8.17 +10.1% 7.43 7.04 5.02 6.21
Book value per share in EUR 62.61 +28.2% 48.83 50.02 41.22 37.39
Combined ratio (property and casualty reinsurance) 4 94.7% 94.9% 95.8% 104.3% 98.2%
Large losses as percentage of net premium earned (property and casualty reinsurance) 5 6.1% 8.4% 7.0% 16.5% 12.3%
A complete list of our shareholdings is provided on page 163 et seq. of the notes. The addresses of the Hannover Re Group’s branch offices and subsidiaries abroad are to be found in the section “Further information” on page 244 et seq.
Hannover Re, with gross premium of more than EUR 14 billion, is the third-largest reinsurer in the world.
We transact all lines of property & casualty and life & health reinsurance and are present on all continents with roughly 2,500 staff. The German business of the Hannover Re Group is transacted by our subsidiary E+S Rück.
The rating agencies most relevant to the insurance industry have awarded both Hannover Re and E+S Rück very good financial strength ratings: Standard & Poor’s “AA-” (Very Strong) and A.M. Best “A+” (Superior).
When we published our results for the first nine months of 2013 in November of that year we provided a first preview of our expectations for your company’s performance in the 2014 financial year. At the same time, we had explained in considerable detail why we anticipated good results for 2014 despite a challenging climate characterised by significantly increased competition in property and casualty reinsurance and a protracted period of low interest rates. It is with great pleasure that I can now inform you that our performance in 2014 did indeed live up to these expectations – and in many areas actually surpassed them. Net income in life and health reinsurance improved, for example, by EUR 41 million or 25 percent. Despite the rather soft market, we also further boosted the underwriting profit in property and casualty reinsurance and not only recorded stable investment income, but even appreciably increased it in absolute terms. All this means that we surpassed the record result of 2013 by another 10 percent to deliver net income of EUR 986 million. Hannover Re’s financial strength also developed favourably in the year under review. Shareholders’ equity excluding non-controlling interests rose by 28 percent from EUR 5.9 billion to EUR 7.6 billion. The key factors here were a substantial increase in retained earnings due to the good result as well as a rise of more than EUR 1 billion in the valuation reserves. Despite this substantial surge in shareholders’ equity, the return on equity remained virtually on a par with the previous year at 14.7 percent. The book value per share climbed to EUR 62.61, the first time it has exceeded the EUR 60 level.
The state of the market in property and casualty reinsurance continues to be fiercely competitive. With the supply of reinsurance capacity significantly exceeding demand, we are faced with what can only be described as a buyer’s market. This is due not least to the very good results enjoyed by reinsurers in recent years and, furthermore, to the inflow of capital from so-called alternative markets. What is more, the healthy capital resources of most primary insurers have prompted a tendency for them to raise their retentions. As a consequence of these factors, covers to protect against losses from natural catastrophes – in particular – could only be placed at appreciable price mark-downs. Rate reductions were observed in many other reinsurance sectors too. In view of this general climate, we can be satisfied with the development of property and casualty reinsurance business at Hannover Re. Through disciplined underwriting and a concentration first and foremost on our renewal business, we succeeded in preserving the quality of our portfolio on a good level. We were further helped by the fact that we were able to purchase our reinsurance protection at more reasonable prices. Despite our quality-driven, prudent underwriting policy, we thus modestly increased the premium volume in property and casualty reinsurance to around EUR 8 billion.
The underwriting result additionally benefited from another decline year-on-year in the major loss incidence for 2014. This was due above all to the absence of large natural disasters, supported in particular by another benign hurricane season. An exceptional accumulation of major losses was, however, incurred in the aviation line. Despite this, expenditure on major losses – at EUR 426 million – was substantially lower than the figure of EUR 670 million that we had budgeted. On the one hand this gave us the latitude to maintain the very high confidence level of our loss reserves, while at the same time positively affecting the underwriting result. The combined ratio consequently improved to 94.7 percent after 94.9 percent in the comparable period. Combined with higher investment income in property and casualty reinsurance and improved other income, this caused the operating profit in property and casualty reinsurance to surge by an appreciable 12 percent to EUR 1.2 billion.
The operating profit (EBIT) in life and health reinsurance soared by 75 percent to EUR 264 million. The surge in the result compared to the previous year, which had been impacted by losses in Australian disability business and to some extent also in US mortality business, shows that the steps taken to improve profitability were effective. In addition, we booked a particularly pleasing profit contribution from our underwriting of financially oriented reinsurance covers in the United States.
Particularly bearing in mind that the general environment was by no means straightforward, we are thoroughly satisfied with the development of our investments. Our portfolio of assets under own manage ment grew by an appreciable EUR 4 billion to EUR 36 billion. This was attributable to a continued very positive operating cash flow, a substantial rise in hidden reserves – especially for our fixed-income securities – and exchange rate effects. Despite falling interest rates around the world, we boosted net investment income by almost 4 percent to EUR 1.1 billion. It was highly gratifying to note that the operating investment result also increased by around 3 percent. Particularly important positive factors here were our increased exposure to real estate and income from private equity investments, thereby offsetting the declines in interest rates. The net return on our investments stood at 3.3 percent and thus beat the anticipated planned figure despite the considerably higher portfolio values. We consider the net investment income including interest on funds withheld and contract deposits of EUR 1.5 billion – equivalent to an increase of more than 4 percent – to be highly satisfactory.
Permit me, if I may, to close by taking a forward glance at the current financial year.
In property and casualty reinsurance it is our expectation that we can maintain the combined ratio – depending on the burden of major losses – on the level of recent years. In this regard, we should benefit from our good market position as a broadly diversified reinsurer as well as our low administrative expenses compared to our competitors. This was borne out by the treaty renewals as at 1 January 2015. Despite the soft market and associated rate erosion, we were able to preserve the good quality of our portfolio. In so doing, we were helped by the fact that we concentrated primarily on our renewal business; for the most part, our clients here recognise us as an enduring and reliable partner. In addition, we wrote new business selectively, most notably in North America and Asia, thereby enabling us to moderately enlarge our premium volume. Just as it was at the turn of the year, the market environ ment is expected to remain intensely competitive over the months ahead. It is nevertheless our expectation that we can keep our premium volume stable at unchanged exchange rates.
In life and health reinsurance we anticipate a further rise in profitability for the current year. Among other things, the substantial rate increases in Australian group business should leave a clearly positive mark on our results. Similarly, our US portfolio and the business written by our branch in Paris are expected to generate higher profits. Furthermore, we continue to identify healthy potential for growth, especially at our newly established branch in Canada. In Asia we are seeing promising signs, not only in China but also in Japan. For the coming year, therefore, we are looking to book slightly higher gross premium – adjusted for exchange rate effects – in life and health reinsurance.
In view of the substantially enlarged asset portfolio, we expect to be able to hold net income from investments under own management broadly stable. This will, however, mean a decrease in the net return on investment to an anticipated 3 percent.
I would like to thank you, our valued shareholders, most sincerely for your trust – also on behalf of my colleagues on the Executive Board. I would also like to express my appreciation to our employees for their very good and reliable work in the year just ended. Going forward, as in the past, you can rest assured that we shall do everything in our power to safeguard Hannover Re’s successful development. It is and will remain our goal to increase the value of your company on a sustainable basis.
From left to right: Claude Chèvre, Dr. Klaus Miller, Ulrich Wallin, Roland Vogel, Dr. Michael Pickel, Sven Althoff, Jürgen Gräber
Dr. Michael Pickel Group Legal Services Run-Off Solutions Target Markets in Property & Casualty Reinsurance: • North America
The Hannover Re share • Share price reaches new record high of EUR 75.92 • Proposed dividend of EUR 3.00 per share plus special dividend of EUR 1.25 per share surpasses strategic payout ratio • Inclusion in FTSE4Good sustainability index achieved
After the record year of 2013 investors had to settle for a more modest performance in 2014, especially on the German stock market. The international financial landscape remained under strain in the year just ended. Geopolitical crises, such as the clashes in the Russia-Ukraine conflict, as well as flashpoints in the Middle East, the sustained drop in the price of oil, poor economic data from Europe and the termination of the US Federal Reserve’s bond-buying programme all served to trigger recurring uncertainty on markets throughout the year. At the same time, though, positive economic data from the US and an expansionary monetary policy on the part of the European Central Bank led to growing optimism in some areas. This was reflected in the volatility of movements on equity markets.
The German DAX stock index entered 2014 at a level of 9,552. On 9 June, after some initial ups and downs, the index passed the magic number of 10,000. Yet this new high proved impossible to sustain over the longer term. In October the index – comprised of Germany’s 30 largest stocks – slipped back below 9,000, only to close the year after a fresh price rally in the fourth quarter at 9,806, i. e. a gain of some 2.7%. The performance of the MDAX was similarly volatile, which began the year at 16,574 points and closed 12 months later – after a rollercoaster ride – with a gain of 2.2% at 16,935. Driven by encouraging economic data, the Dow Jones ended 2014 at an outstanding level of 17,823, an increase of 7.5%.
The Hannover Re share stood at EUR 62.38 as 2014 got underway. In the early weeks of the year the share moved lower, retreating to its lowest point of the year on 3 February 2014 at EUR 58.88. This slide was prompted by the challenging round of fiercely competitive renewals in property and casualty reinsurance and the associated rate erosion. The price rally that subsequently took hold was chiefly driven by a major loss experience that was significantly lower than expected overall as well as analyst expectations surrounding the sustained healthy profit outlook for Hannover Re. This latter assumption is based on the recognition that Hannover Re, thanks to its thoroughly comfortable capital resources and very conservatively calculated loss reserves, should be in a position to deliver good results even in a highly competitive market environment and despite reduced growth prospects. The company’s robust capitalisation also triggered debate among investors as to the possibility of a higher payout ratio or a share repurchase programme. Against this backdrop the share ultimately soared to its new record high of EUR 75.92 on 23 December. On the back of its price rally in the fourth quarter the Hannover Re share closed the financial year with a gain of 20.2% at EUR 74.97, thereby delivering a performance of 25.8% including reinvested dividends. Over the year the Hannover Re share thus clearly outperformed its benchmark indices, namely the DAX (+2.7%) and MDAX (+2.2%), and also beat the Global Reinsurance (Performance) Index (+24.4%).
Based on the year-end closing price of EUR 74.97, the market capitalisation of the Hannover Re Group totalled EUR 9.0 billion at the end of the 2014 financial year, an increase of EUR 1.5 billion or 20.2% compared to the previous year’s figure of EUR 7.5 billion. According to the rankings drawn up by Deutsche Börse AG, the company placed ninth in the MDAX at the end of December with a free float market capitalisation of EUR 4,396.4 million. Measured by trading volume over the past twelve months, the share came in at number 11 in the MDAX with a volume of EUR 3,311.7 million. All in all, the Hannover Re Group thus continues to rank among the 40 largest listed companies in Germany.
The Annual General Meeting of Hannover Rück SE was held on 7 May 2014 in Hannover. Numerous shareholders, shareholder and bank representatives as well as guests took up the invitation of the Executive Board and Supervisory Board to attend the meeting in the HCC (Hannover Congress Centrum). Altogether, including postal ballots a good 72.4% of the share capital was represented.
In his address to shareholders Chief Executive Officer Ulrich Wallin took the opportunity to look back once more on the very pleasing 2013 financial year, in which the company had again surpassed the profit generated in the previous year. A very good underwriting performance in property and casualty reinsurance had put in place the cornerstone for the new record result of EUR 895.5 million. Against this backdrop, the Executive Board and Supervisory Board proposed to the Annual General Meeting that a gross dividend of EUR 3.00 per share should be distributed for the 2013 financial year. This proposal, together with all the other items on the agenda, was approved by the Annual General Meeting by a large majority. The Annual General Meeting re-elected the existing shareholder representatives as members of the Supervisory Board of Hannover Rück SE. All voting results and the attendance were published on the company’s website following the Annual General Meeting. The next Annual General Meeting will be held in Hannover on 6 May 2015.
In light of the sustained competitive market environment, especially in property and casualty reinsurance, we noted further strong demand for information on the part of our investors in 2014. Our event activities were consequently stepped up to altogether 15 capital market conferences (previous year: 14) and 21 roadshows (18). Once again we concentrated on the financial centres of Frankfurt and London, which we visited at least once a quarter. Other destinations included the cities of Amsterdam, Dublin, Edinburgh, Geneva, Copenhagen, Los Angeles, Lugano, Luxembourg, Milan, Munich, Stockholm, Vienna and Zurich. In 2014 we also had the opportunity for the first time to meet interested investors in Lyon, Miami, Philadelphia, Singapore and Tokyo.
Hannover Re’s 17th Investors’ Day was held on 23 October 2014 in London. Around 40 analysts and institutional investors took up our invitation to engage in an intensive exchange of views with members of the Executive Board on the opportunities and risks associated with reinsurance business in the current market climate. On this occasion the focus was on, among other things, the 2014 review of the company’s strategy as well as discussions revolving around the opportunities and challenges presented by a protracted low interest rate environment and at the same time soft reinsurance market, the general hallmark of which is an oversupply of capacity.
The shareholding of Talanx AG in Hannover Re was unchanged at 50.2%. The breakdown of the free float similarly remained virtually unchanged year-on-year. The stake held by private investors increased marginally by 0.5 percentage points to 8.3%, while the proportion in the hands of institutional investors decreased to 41.5%.
Based on the entries in the company’s share register as at the end of the financial year, there were significant shifts within our free float away from foreign investors, particularly in the United States and Benelux countries, in favour of German shareholders: the proportionate holding in the United States fell by an appreciable 8.1 percentage points to 13.4%, while holdings in the United Kingdom and Benelux countries decreased by 1.0 percentage points and 2.5 percentage points to 15.4% and 7.5% respectively. The proportionate holdings in Switzerland, France and Asia similarly declined, albeit only marginally. The total shareholding in Germany, on the other hand, rose from 44.2% to 57.6%.
United States American Depositary Receipts (Level 1 ADR program; 2 ADR = 1 share)
Market capitalisation at year-end in EUR million 9,041.2 7,522.8 7,110.4 4,621.9 4,840.2
Return on equity (after tax) 5 14.7% 15.0% 15.4% 12.8% 18.2%
Price-to-cash flow (P / CF) ratio 9 4.7 3.4 2.7 1.8 2.9 1 Adjusted pursuant to IAS 8 2 Xetra daily closing prices from Bloomberg 3 Proposed dividend 4 Dividend of EUR 3.00 plus special dividend of EUR 1.25 for 2014 as well as EUR 2.60 plus special dividend of EUR 0.40 for 2012 5 Earnings per share / average of book value per share at start and end of year 6 Dividend per share / year-end closing price 7 Year-end closing price / book value per share 8 Year-end closing price / earnings per share 9 Year-end closing price / cash flow (from operating activities) per share
• Ensure conformity with all legal requirements • Encourage sustainable actions with respect to all stakeholders • Support considered and pragmatic principles of corporate governance and recognise their central role in guiding our activities
• Ensure the rigorous derivation of strategic objectives across all areas of the company
Making natural disasters insurable The increasing accumulation of values in high-risk areas, growing affluence, greater insurance densities and climate changes are leading to a rise in insured losses from natural perils all around the world. In order to ensure that such losses and damage can continue to be insured in the future, our scientists, actuaries and underwriters work hand-in-hand on the risk-appropriate assessment of natural hazards.
Our long-standing experience and excellent risk management enable us to strike a fair balance between risk acceptance and premium – to the benefit of our clients, the impacted regions and our company. In this way, coverage can continue to be provided going forward for losses caused by hurricanes, typhoons, earthquakes and other natural disasters.
Through the acceptance of largely uncorrelated reinsurance risks by our Property & Casualty and Life & Health business groups in all lines of business and based on our global presence, we are able to achieve efficient risk diversification. In conjunction with our capital management, this is the key to our comparatively low cost of capital.
With a view to securing our financial strength on a lasting basis, we steer our business with an eye to preserving a capital base that is commensurate with the long-term nature of our business opportunities. This goal is achieved through rigorous risk management aligned with our clearly defined risk appetite.
As a reinsurance specialist, we transact primary insurance in selected market niches as a complement to our reinsurance activities. In this context, we always work together with partners from the primary insurance sector.
In property and casualty reinsurance we consider ourselves to be a reliable, flexible and innovative market player that ranks among the best in any given market. Cost leadership, effective cycle management and superlative risk management are the key elements of our competitive position.
Our integrated system of enterprise management is central to the accomplishment of our strategic objectives. Located at its core are, first and foremost, our profit and growth targets, which are summarised for the Group and its business groups in the so-called target matrix. In addition to traditional performance indicators geared to the IFRS balance sheet, our system of strategic targets also includes economic targets derived from our internal capital model. The targets are regularly analysed and adjusted as necessary, for example in the context of the strategy review for the 2015 – 2017 cycle. Our focus is on longterm strategic target attainment.
EBIT margin 8, 11 Financial Solutions / Longevity ≥ 2% 5.0% 5.2% 5.0% 5.1%
Planning process The planning process spans the three levels of Results, Risks and Resources, which are closely interrelated. These three levels are planned by the responsible officers with central support and are reviewed and approved by the Executive Board. On the basis of the corporate strategy and the corresponding strategy contributions of all treaty / regional departments and service units, the planning is adopted by the Executive Board and subsequently communicated within the Group.
When it comes to the definition of objectives, the participants take into account not only standardised financial indicators but also non-financial variables derived from the strategic parameters.
Planning year 1 The Global Management Forum (GMF) brings together senior managers of the Hannover Re Group from around the world for the purpose of defining strategic orientations.
Capital allocation The basis of value-based management is the risk-appropriate allocation of capital to the individual business activities. This enables us to evaluate the acceptance of underwriting risks and investment risks both in light of individual risk / return aspects and against the backdrop of our overall risk appetite. Our economic capital model supplies the key parameters for this purpose. In addition, along with considerations of business policy, outside influencing factors such as the requirements of regulatory authorities and rating agencies also play a major role in the allocation of capital. Allowance is therefore made for them in the form of collateral conditions on the various allocation levels. Starting out from the Group’s overall risk situation, capital is first allocated to the functional areas of underwriting and investments. We then further divide the capital within the underwriting sector, first between the business segments of property / casualty reinsurance and life / health reinsurance and then between the various reinsurance products and according to risk categories / treaty types and lines. In this way, we ensure that our profit targets including risk, cost and return considerations are consistently factored into the evaluation and pricing of our various reinsurance products.
IVC – the decisive management ratio In order to fine-tune the portfolios and individual treaties we apply underwriting-year-oriented measurement principles based on expected cash flows that appropriately accommodate the specific characteristics of property / casualty and life / health reinsurance. The accomplishment of targets in a particular financial year is also of interest – especially from the standpoint of shareholders. Based on our economic capital model, the foundation of our enterprise management, we strive to generate a profit in excess of the cost of capital. This return – which is the decisive ratio for the management of our business activities – is referred to as Intrinsic Value Creation (IVC).
• measure strategy contributions with an eye to our demanding profit and growth targets.
2 Income above risk-free after deduction of risk-appropriate cost of capital
The allocated capital consists of three components: the IFRS shareholders’ equity including non-controlling interests, the balancing items for differences between economic valuations and amounts stated in the IFRS balance sheet and the hybrid capital. In this context, capital that is not at risk (excess capital) is disregarded, i. e. it is not broken down into business activities. Capital is allocated to the profit centres as described above according to the risk content of the business in question. A systematic distinction is made here between the assumption of underwriting risks, on the one hand, and investment risks, on the other. Under the IVC calculation, therefore, only risk-free interest income on the generated cash flows is allocated to the business segments of property / casualty and life / health reinsurance. The investment income above and beyond risk-free is allocated in its entirety to the functional area of investments and included in the IVC after deduction of the risk-appropriate cost of capital and the administrative expenses.
In calculating the cost of capital, our assumption – based on a Capital Asset Pricing Model (CAPM) approach – is that the investor ’s opportunity costs are 450 basis points above the risk-free interest rate, meaning that value is created above this threshold. Our new strategic return on equity target of 900 basis points above risk-free – which comes into effect from 2015 onwards – thus already contains a substantial target value creation. We allocate equity sparingly and use equity substitutes to optimise our average cost of capital. At 5.6%, our average cost of capital is comparatively low.
As a reinsurer, Hannover Re does not have its own R & D department but it does develop products and solutions for its own benefit and that of its clients as part of day-to-day business operations. By way of example, our move to give capital market players direct access to insurance risks as far back as the mid-1990s through our “K” transactions puts us among the industry pioneers. The intervening years have seen the evolution of a market for so-called insurance-linked securities, which is one of the fastest growing markets in the insurance sector. Another example of Hannover Re’s development activities is the creation of its own internal model for risk management under Solvency II that caters to the requirements of various stakeholders (regulators, rating agencies, capital providers). Not only that, through our active involvement and the provision of financial assistance we support scientific initiatives geared to developing products, solutions or markets that will be crucial success factors going forward in the viability of any reinsurance undertaking.
Reinsurance business is founded on the comprehensive understanding and active management of risks. Our specialists therefore continuously analyse known risks with an eye to changes in their structure and probability of occurrence, while at the same time focusing on the early detection of newly emerging risks and working to provide our clients with appropriate solutions tailored to their needs (cf. here also the Opportunity report on page 98 et seq.).
Above and beyond this, Hannover Re makes systematic efforts to identify new business opportunities in order to achieve sustainable growth and strengthen the profitable development of the company. The goal is to generate new business and thereby support Hannover Re’s profitable growth on a lasting basis. For further details please see the Opportunity report on page 98 et seq.
In advanced economies and economic regions the cyclical trend also varied rather widely: positive signals came out of the United States and United Kingdom. Thanks to the considerably brighter state of their labour markets, the expansionary trend in both countries gathered appreciable momentum. In the Eurozone, on the other hand, business activity picked up only marginally – after the economic recovery had actually ground to a complete halt in the spring – because there was no significant improvement in the basic framework conditions. Japan even slipped back into recession, although this is likely to be merely temporary.
Europe While the Eurozone economy recovered in 2014, it remained weak overall. After the decline of the previous year (-0.4%), modest growth of 0.8% was recorded in 2014. Two key factors in the persistently unsatisfactory development of the economy were the protracted sluggish growth in Italy (-0.4%) and the fact that Germany’s uptick came very late in the year. In France, too, economic output climbed only marginally (+0.4%). In crisis -ridden Greece the recovery was sustained (+1.0%) and in Spain, too, the economy began to rally (+1.3%). The European labour market continued to stabilise, although unemployment was still high at 11.6% and the disparities between individual countries were in some cases considerable. The rise in consumer prices was again smaller than in the previous year at just 0.5%.
In Japan the hike in value-added tax in the spring prompted a steep drop in demand among consumers, which dissipated only hesitantly as the year progressed. Business activity was also noticeably depressed, slumping particularly sharply in the second quarter of 2014. This prompted the central bank to resort once more to monetary policy measures. By year-end the signs were again pointing towards recovery. All in all, growth came in at 0.2% for 2014.
Capital markets The lingering effects of the Euro debt crisis on capital markets were merely indirect in 2014. Markets were considerably more influenced, especially towards year-end in the Eurozone, by concerns among market players that deflation might take hold. The expansionary monetary policy pursued by central banks in our main currency areas (euro and US dollar) was therefore maintained. The European Central Bank (ECB) trimmed the main interest rate for Euroland twice in the course of the year from 0.25% to the current level of 0.05%, while the US Federal Reserve left key interest rates unchanged in the low range of 0.00% to 0.25% – where they have been since 2008. It should, however, be noted that the Federal Reserve discontinued its supportive purchases on the US bond market in the fourth quarter, whereas the ECB put just such a bond-buying programme on the table at year-end for the Euro government bond market. Over the year as a whole German and UK government bonds saw sometimes marked declines in yields across all maturities. The yield on ten-year German government bonds, for example, retreated from 1.9% to 0.5% in the course of the year. These declines were facilitated by the anticipation of impending active market intervention by the ECB as well as by considerable liquidity in the markets and the search for safe investment opportunities. In the case of US Treasuries, isolated modest yield rises could be observed only in the short- to medium-term maturity segments; here too, however, longer maturities saw yields drop. The return on ten-year US Treasuries, for example, fell from 3.0% to 2.2% over the course of the year. This decline can be attributed primarily to muted inflation expectations. As for the European nations with higher risk premiums that have been the focus of so much attention in recent years, the picture was largely one of recovery. Greek government bonds reflected emerging uncertainties at the end of the year about the country’s future economic policy with rising yields. Risk premiums on investment grade corporate bonds in our main currency areas decreased somewhat as the year progressed. The picture in the sub-Investment grade segment was a mixed one. The declines in yields that ultimately ensued were fuelled principally by the interest rate component.
The tense economic climate and the associated economic policy measures still in place in some areas again shaped the landscape for the international insurance industry in 2014: faced with protracted low interest rates, particularly great importance attaches to preserving the value of investments and the stability of returns.
The interest rate situation continued to be reflected in the technical pricing of premiums on primary and reinsurance markets. Discipline was once again the order of the day in 2014 so as to offset further declines in investment income.
With investors searching for higher-return investments, the market for insurance-linked securities (ILS) once again attracted very substantial (re)insurance capacity: additional alternative capital here came up against an unchanged level of demand. Pressure on prices and conditions consequently intensified still further, especially in natural catastrophe business.
Business development • Highest Group net income in Hannover Re’s history • Very good result in property and casualty reinsurance • Major loss expenditure well below the expected level • Pleasing development in life and health reinsurance • Very good investment income despite challenging conditions • Further strengthening of capital base • Return on equity surpasses target at 14.7%
Please find below a brief summary of the development of our two business groups – Property & Casualty and Life & Health reinsurance – and our investments. More detailed information is to be found on pages 35 to 53.
We are highly satisfied overall with the development of our business in property and casualty reinsurance, even though competition was even more intense than in the previous year. Despite our selective underwriting policy, we were able to modestly grow our premium income. Gross premium increased by 1.1% as at 31 December 2014 to EUR 7.9 billion (previous year: EUR 7.8 billion). At constant exchange rates the increase would have been 1.2%.
Investment income improved slightly by 0.4% to EUR 614.2 million (EUR 611.5 million). Of this, EUR 258.5 million (EUR 269.1 million) was attributable to assets under own management; the remaining EUR 355.7 million (EUR 342.4 million ) derived from securities deposited with ceding companies.
The normalised and generally positive business development in life and health reinsurance caused Group net income for this business group to improve substantially on the previous year’s performance: it came in at EUR 205.0 million (EUR 164.2 million ) for the financial year just ended, thereby boosting the relative contribution made to overall Group net income.
Bearing in mind the protracted low interest rate environment, we are thoroughly satisfied with the development of our total investments as at 31 December 2014. The portfolio of investments under own management stood at EUR 36.2 billion, a level comfortably higher than at the end of the previous year (31 December 2013: EUR 31.9 billion). The increase derived in large measure from the currency revaluation of our holdings in US dollars and pound sterling. Additional factors were the positive operating cash flow as well as a further increase in the hidden reserves for our fixed-income securities due to declining yields on government bonds in our main currency areas.
Net realised gains on investments as at 31 December 2014 rose sharply to EUR 182.5 million (EUR 144.2 million), contrasting with negative fair value changes of -EUR 33.3 million (-EUR 27.1 million) in our financial assets measured at fair value through profit or loss. Write-downs were again taken in only a minimal volume in the year under review, the vast bulk of them being due to scheduled depreciation on real estate. Although conditions on financial markets remained challenging, income from assets under own management surpassed the previous year’s level to reach a pleasing EUR 1,095.8 million (EUR 1,054.5 million). The resulting annual return (excluding ModCo derivatives and inflation swaps) amounted to 3.3% (3.4%). It thus came in slightly higher than our anticipated figure of 3.2%; this was due to higher net realised gains in connection with the change in reporting currency at our Bermuda subsidiaries and the redemption of a bond issued in 2004. Steps taken to act on opportunities for realising gains in the real estate sector were also a positive factor here. Investment income including interest on funds withheld and contract deposits consequently increased to EUR 1,471.8 million (EUR 1,411.8 million), a gain of 4.3%.
We are absolutely satisfied with the development of our results for the 2014 financial year. The operating profit (EBIT) improved by a further substantial 19.3% on the very good previous year to reach EUR 1,466.4 million (EUR 1,229.1 million). Despite the broadly challenging environment, both in reinsurance business and on capital markets, we generated the highest Group net income in our company’s history at EUR 985.6 million (EUR 895.5 million). Along with the healthy investment income, this was driven by a very good result in property and casualty reinsurance and the considerably improved performance of life and health reinsurance. Earnings per share for the Hannover Re Group amounted to EUR 8.17 (EUR 7.43).
The equity attributable to shareholders of Hannover Re also developed favourably in the year under review: in view of the increase in retained earnings, sharply higher valuation reserves and positive movements in exchange rates, shareholders’ equity grew by a substantial 28.2% relative to the position at year-end 2013 to reach EUR 7.6 billion (EUR 5.9 billion). Despite this vigorous increase, we generated another very good return on equity of 14.7% (15.0%). This figure is clearly in excess of our minimum target of 9.2%. The book value per share also rose substantially: it reached EUR 62.61 for 2014 compared to EUR 48.83 at the end of the previous year; this is the highest book value per share in the company’s history.
+2.8% at constant exchange rates +2.9% not adjusted for currency effects
Gross premium growth for Life & Health reinsurance growth in the low to mid-single-digit percentage range 1, 2
The Executive Board of the Hannover Re Group is satisfied with the development of business in 2014. Not only did the company achieve its targets for important key indicators such as the operating profit (EBIT) and Group net income, return on equity and combined ratio, in some cases it also clearly surpassed them. The investment income and the generated return on investment developed successfully bearing in mind the continued low level of interest rates. Group net income reached the highest level ever recorded in the company’s history. The company’s shareholders’ equity also showed a very pleasing increase, as a consequence of which the total policyholders ’ surplus now stands at a new record high. At the time of preparing the management report, the business position of the Hannover Re Group remains highly favourable and its financial strength has been further strengthened.
Accounting for 55% of our premium volume, Property & Casualty reinsurance is Hannover Re’s largest business group. Effective 1 September 2014 we reorganised the responsibilities in property and casualty reinsurance owing to a change on the
Breakdown into business written through brokers M 10 and direct business in % and in EUR million business written through brokers direct business
Gross written premium in P&C reinsurance M 07 in EUR million
In many property and casualty reinsurance markets competition intensified still further in the year under review. This was driven by the renewed absence of market-changing major losses as well as the tendency among ceding companies to carry more risks in their retention thanks to their healthy capital resources. As a further factor, additional capacities from the market for catastrophe bonds (ILS) and alternative capacities, especially in US natural catastrophe business, led to appreciable price erosion.
We are broadly satisfied with the outcome of the various rounds of treaty renewals during the year under review. The largest business volume was renewed on 1 January 2014, the date when almost two-thirds of our treaties in traditional reinsurance were renegotiated. Thanks to our underwriting discipline we were for the most part able to achieve adequate margins. Rate increases were booked above all under loss-impacted programmes: this was especially true of catastrophe covers in Germany and Canada as well as marine business, which had incurred significant losses in 2012 and 2013. We acted on opportunities for further growth in the markets of Asia, Latin America as well as Central and Eastern Europe. On the other hand, rate reductions had to be accepted for property catastrophe business in the United States and in the aviation line owing to very good underwriting results from the previous year. Although property and casualty reinsurance as a whole was overshadowed by soft market conditions and rate erosion, we nevertheless also discerned some positive signals in the second half of the year.
The total gross premium volume for our Property & Casualty reinsurance business group climbed in the year under review – not least thanks to new business opportunities – by a modest 1.1% to EUR 7.9 billion (previous year: EUR 7.8 billion); at constant exchange rates growth would have reached 1.2%. We had anticipated a broadly stable currency-adjusted premium volume. The level of retained premium rose to 90.6% (89.9%). Net premium earned increased by 2.1% to EUR 7.0 billion (EUR 6.9 billion); growth would have also been 2.1% at constant exchange rates.
As in the previous year, the burden of major losses that we incurred in 2014 remained moderate. The year under review was, however, one of heavy losses for the aviation line. A number of crashes involving passenger aircraft cost hundreds of lives. In addition, several planes were destroyed on the ground at Tripoli airport.
Property & Casualty reinsurance: Major loss trend 1 M 11 in EUR million
Target markets We classify North America and Continental Europe as target markets. The premium volume remained virtually unchanged at EUR 2,619.4 million (EUR 2,634.2 million). This puts us in line with our planning. The combined ratio improved to 92.5% (100.4%), as a consequence of which the operating profit (EBIT) rose very substantially to EUR 507.6 million (EUR 277.2 million).
After pausing for breath in the first half of 2014, the US economy picked up the pace of growth again as the year progressed, hence also pushing up the premium volume in the original market. Given the continued absence of significant natural catastrophe events in the United States, the combined ratio for the reinsurance market was once again better than that of the primary market.
Intense competition was the hallmark of the US property reinsurance market in the year under review. An absence of market -changing major losses coupled with reduced reinsurance cessions on the part of primary insurers led to further rate cuts, sometimes running into double-digit percentages. Only for loss-impacted programmes were modestly positive price adjustments recorded. Some softening in conditions could also be observed, for example in the form of longer hours clauses or poorer reinstatement conditions.
Rates in the US catastrophe XL market came under additional pressure due to the inflow of capital from alternative markets and the sustained decline in prices – a reflection of the favourable loss experience for US hurricanes.
Hannover Re is very well positioned in the North American market and thanks to its excellent rating, its financial standing and its experience the company is a valued partner for its clients. This is especially important in long-tail liability business. Access to the entire market spectrum enables us to optimally diversify our portfolio: we write business in the United States and Canada with some 600 clients.
On the claims side North America experienced a number of smaller natural catastrophe events, which resulted in merely moderate losses for reinsurers. This was particularly the case with the hurricane season, which again passed off thoroughly benignly in the year under review. We incurred a loss from only one event. In addition, Hannover Re booked a major loss of EUR 15.8 million for net account from a fire loss.
Despite the competitive climate and our margin-oriented underwriting policy, the gross premium for our business in North America rose slightly to EUR 1,213.4 million (EUR 1,177.3 million ). The combined ratio improved in the year under review to 91.8% (93.1%). The operating profit (EBIT) climbed to EUR 258.2 million (EUR 236.4 million), a performance with which we are highly satisfied.
The state of property and casualty insurance in Germany revealed a clear dichotomy in the year under review: whereas the premium quality in retail lines improved, especially in motor and homeowners business, industrial lines – above all fire insurance – were fiercely competitive. A further factor is that loss ratios here have been rising steadily since 2010, yet underwriting profits have not been generated market-wide since 2011. Despite slight premium increases in industrial fire business in 2013 and 2014, it remained the case that in the year under review – with a combined ratio well in excess of 100% – the market showed no effects of the efforts made to restore business to profitability. Against this backdrop, we are adhering to a highly selective underwriting approach.
Despite a slow economic recovery in Spain and Portugal, the insurance industry is still suffering from a contraction in premium volume. With this in mind, the margins that can be generated are limited.
Unlike in other lines, alternative capital – originating for example from hedge funds – does not directly influence the price trend in the marine and offshore energy market. This is because the medium- to long-term nature of many products as well as the fact that loss amounts sometimes takes years to finalise diminish the appeal of this business for investors. To this extent, the additional capacity in the marine market derives from reinsurers who are looking for, among other things, greater diversification effects relative to their other property and casualty lines. Prices came under further pressure because large insurance groups are increasingly purchasing their reinsurance on a centralised basis, as a result of which the total ceded premium volume has contracted.
Hannover Re’s underwriting policy remains unswerving in its focus on selective diversification of the portfolio, both regionally and in terms of individual lines. We continue to take a restrictive approach to writing offshore energy risks in the Gulf of Mexico on account of the considerable potential for natural hazards exposure.
Gross premium for our marine portfolio contracted by 4.1% to EUR 280.6 million (EUR 292.7 million).
The underwriting result for our marine business was a clear improvement on the previous year. The combined ratio decreased to 67.2% (78.3%). The operating profit (EBIT) reached a satisfactory level of EUR 85.7 million (EUR 66.0 million).
Aviation Compared to previous years, the year under review was a very costly one for the international aviation (re)insurance industry. Several hundred people perished in crashes involving two passenger aircraft operated by Malaysia Airlines as well as two other passenger planes in Mali and Indonesia. Not only that, armed clashes in Libya caused considerable damage to Tripoli airport in the reporting period.
With the global economy showing tepid growth and faced with continued difficult economic conditions, the level of insolvencies remained consistently high. Only in a few countries, including Germany, did numbers come down. Despite this challenging overall situation, a disciplined underwriting policy made it possible to hold claims rates in credit insurance on a good level. This led into a growing risk appetite and hence reduced reinsurance cessions on the primary insurance side. All in all, moderate erosion in reinsurance rates could be observed.
Despite greater risk awareness, the claims burden in the area of political risks remained minimal. Prices in this line consequently moved moderately lower.
Total gross premium income contracted by 10.3% in 2014 to EUR 531.4 million (EUR 592.5 million).
Our results in the area of credit, surety and political risks were satisfactory. We did not incur any major losses in 2014 and basic losses were also lower overall. The crisis in Ukraine only gave rise to relatively minor loss events in the year under review. The combined ratio improved to 92.2% (94.5%). The operating profit (EBIT) was boosted to EUR 87.2 million (EUR 64.6 million).
United Kingdom, London market and direct business Traditional reinsurance We are largely satisfied with the reinsurance business that we write in the United Kingdom and on the London market. While fierce competition raged in the primary sector with rate reductions running into double-digit percentages, especially in motor insurance, conditions on the reinsurance side were more favourable. In non-proportional motor business it was possible to push through further rate hikes in 2014 – building on appreciable increases in the previous year −, although these levelled off towards year-end. Rates in the other property lines broadly remained stable or slipped slightly lower. As planned, we expanded our portfolio in the United Kingdom.
In facultative reinsurance, too, the story was one of excess capacity and hence lively competition. This state of affairs was exacerbated by the fact that many reinsurance customers raised their retentions. Thanks to our very good rating, however, we were frequently able to stand up to this price war because many primary insurers and brokers prefer to cooperate with reinsurers who have proven their long-term reliability.
In the year under review we stepped up our involvement in Latin American markets and in Turkey. Driven also in part by increased acceptances in very new segments such as renewables, our premium volume consequently remained stable overall. Particularly long and solid partnerships proved advantageous in that we were able to preserve a large portion of the portfolio at viable prices.
Rate movements – while generally trending lower – varied from market to market. The spectrum ranged from moderate reductions of 5% to 10% to as much as 50% or more.
Property & Casualty reinsurance: Breakdown of gross M 17 written premium in facultative reinsurance 14.6% Other 43.4% Property 31.5% Liability 10.5% Motor
Despite the soft market, we are broadly satisfied with the development of our total facultative portfolio in the year under review: we grew and continued to diversify our business. Our premium volume increased to EUR 957.6 million (EUR 868.7 million). Virtually no major losses were recorded, but there was an accumulation of mid-sized losses – which also impacted our portfolio. As a result, the combined ratio climbed to 103.9% (94.7%). The operating profit (EBIT) fell well short of the previous year’s figure at EUR 11.8 million (EUR 101.1 million).
Worldwide treaty reinsurance We were satisfied with the development of our worldwide treaty reinsurance portfolio. The gross premium volume nudged higher in line with our expectations to reach EUR 1,480.7 million (EUR 1,477.6 million). The combined ratio deteriorated from 95.0% to 98.5%. The operating profit (EBIT) increased to EUR 225.6 million (EUR 217.9 million).
Aside from one snowstorm, catastrophe covers – an important area of business for Japan – did not suffer any notable loss events in the year under review. We did, however, set aside an appreciable reserve for a pharmaceutical claim in the casualty line, which had been spared losses for many years. Against this backdrop we were satisfied with the performance of our Japanese portfolio.
Our portfolio in many parts of this region consists predominantly of property, motor and accident business. We further scaled back the proportion of catastrophe-exposed business in the year under review because, in our assessment, the considerable capacity surplus on the reinsurance side had resulted in conditions that were no longer commensurate with the risks.
The service company established in India last year, which concentrates its efforts exclusively on the growing segment of microinsurance, has gained a good footing in the market. This segment already recorded growth in the year under review and will play an even greater role for us going forward.
Most Latin American markets have enjoyed very vigorous growth in recent years and are still showing solid gains. The strong demand for reinsurance covers remains undiminished owing to the considerable exposure to natural catastrophe risks. Nevertheless, premium growth has been somewhat curbed in certain countries due to a number of different factors, including local market regulation, adverse exchange rate effects and higher retentions carried by primary insurers.
The losses and damage caused by natural disasters in the year under review were largely attributable to the earthquake in Chile and hurricane Odile, which swept across Mexico. The resulting strains for the (re)insurance industry were nevertheless moderate. Hannover Re recorded a net loss of EUR 18.8 million from the hurricane.
Agricultural risks Lower prices for corn, soya, wheat and other products in the year under review led to reduced sums insured and hence to a moderate premium decline for agricultural risks. Driven by rising demand for food and with extremes of weather becoming increasingly common, we nevertheless continue to see this area as a growth market. Index-linked products are taking on greater importance relative to traditional multi-risk insurance policies.
Rates and conditions remained broadly stable on the primary insurance side. Prices in reinsurance business came under pressure due to new market players; still, the influence of alternative capital on the US market fortunately remained limited.
We are satisfied with the development of our agricultural risks business. The losses incurred by Hannover Re were moderate overall: sizeable hail events occurred inter alia in Southeast Europe and the United States. In Turkey much of the apricot and hazelnut crop was destroyed by frost. In each case the resulting strains were in the low single-digit million euros. We did not incur any major losses.
The member states of the Gulf Cooperation Council (GCC) – namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates – posted further robust growth in the year under review. Investments in infrastructure projects are delivering substantial economic stimuli. These major construction projects are reliant primarily on government funding.
Bearing in mind that takaful and retakaful markets have become intensely competitive, brisker premium growth is offset by lower rates. New international providers on the reinsurance markets served to keep up the pressure on rates. On the other hand, the influence of alternative capital (ILS) in the region continues to be negligible.
Hannover Re has been present in Bahrain with its subsidiary since 2006 and is strongly positioned in retakaful business. The largest single market for our company is still Saudi Arabia, where we enjoyed further growth in the year under review. Our branch established in 2014 in Labuan, Malaysia, delivered additional growth impetus. Industrial fire business, where we similarly succeeded in expanding our portfolio, is the largest single line.
Catastrophe XL (Cat XL) We write the bulk of our catastrophe business out of Bermuda, which has established itself as a worldwide centre of competence. In the interest of diversifying the portfolio our subsidiary Hannover Re (Bermuda) Ltd. has also written some of the specialty lines since 2013.
As expected, catastrophe business became even more competitive in the year under review in most markets, and especially in the United States. The principal drivers here were the continued absence of major losses, additional capacities from the capital markets and reduced reinsurance cessions from ceding companies enjoying a healthy level of capitalisation. Overall, rates declined in almost all markets in the financial year just ended, albeit not always as sharply as they did in the United States. In markets where alternative capital is not a factor – such as Latin America – rates also slipped back, but on a more moderate scale. In regions that had been impacted by major losses, such as Europe and Canada, the price level was in large measure maintained in the treaty renewals as at 1 January 2014; indeed, improved rates were actually obtained under some programmes.
Bearing in mind the enormous competition over property catastrophe covers, our subsidiary in Bermuda wrote business extremely selectively and reduced its premium volume. On the other hand, we booked growth in the liability and specialty lines, where more adequate prices could be obtained.
As forecast, demand for bespoke alternative reinsurance solutions continued to grow in the year under review. This trend also extends to aggregate excess of loss covers, which protect the net retention of our clients against a large number of basic losses in lower layers.
Structured reinsurance is benefiting from growth impetus associated in particular with preparations for the adoption of Solvency II in the European Union as well as with the implementation of risk-based capital requirements in various other countries.
The premium volume for the area of Advanced Solutions / structured reinsurance increased in the year under review. Results were good and lived up to our expectations.
Yet in addition to using the capital market to protect our own property catastrophe risks, we also transfer risks to it in a structured and packaged form on behalf of our cedants. Not only that, we take the role of investor ourselves by investing in catastrophe bonds.
Hannover Re’s product range encompasses the entire spectrum of activities typically associated with the ILS market. We thereby offer investors optimised and customised access to the capital market. In the year under review, for example, we successfully transferred windstorm risks with a volume of USD 400 million to the capital market for the Texas Windstorm Insurance Association (TWIA) in the form of a catastrophe bond.
• Growth expectations for currency-adjusted gross premium achieved at 4.9% • First transaction for longevity risks in France successfully completed • Results from Australian disability business on the expected level • Profit targets accomplished
In the following section we discuss in detail developments in life and health reinsurance. Our business is split into the reporting categories of financial solutions and risk solutions. Reflecting the differentiation by biometric risks, risk solutions is further divided into longevity, mortality and morbidity and hence corresponds to the breakdown used within our internal risk management system.
Key figures for Life & Health reinsurance M 20 in EUR million 2014 + / – previous year
Financial solutions We categorise reinsurance solutions that focus on our clients’ capital and liquidity management and thereby assist them with – among other things – new business financing and / or help to optimise their capital or solvency structure as financial solutions. There is less emphasis on the transfer of biometric risks with this form of reinsurance, although it is always present.
All in all, against the backdrop of the developments described above, gross premium contracted by 16.7% owing to a strictly profit-oriented underwriting policy. We deliberately relinquished premium volume in cases where we were unable to fully satisfy our margin requirements. The gross premium for the year under review amounted to EUR 1,295.2 million (EUR 1,554.3 million), equivalent to 20.1% of the total gross premium income booked in life and health reinsurance. The operating result (EBIT) of EUR 74.6 million fell well short of the previous year’s figure (EUR 128.5 million).
Longevity Our longevity reporting category encompasses all annuity and pension reinsurance business, insofar as the material risks here are longevity risks. With few exceptions we predominantly cover policies in the pay-out phase.
Our portfolio consists principally of enhanced annuities on a single premium basis as well as large-volume annuity blocks with regular premium payments, in return for which we take over the annuity payments that will become due in the future. In the United Kingdom, which continues to be our largest longevity market by premium volume, demand has become more selective and competition more intense. Thanks to our market leadership, our decades of experience and our extensive database, we are well positioned and were able to act on profitable business opportunities despite growing competition. In the financial year just ended, reflecting the global demographic trend, we received an increased number of specific inquiries concerning the transfer of longevity portfolios outside the United Kingdom. Our international know-how was evidenced by our closing of the first reinsurance treaty for longevity risks
C om bi ne d m an ag em en t re po rt in France. Under this transaction we assumed pension liabilities in the order of EUR 750 million from a leading French insurer. In the European market Solvency II-oriented covers are a particular focus of interest. In the US market new, far more conservative assumptions relating to mortality improvement have been published, adding impetus to the local longevity market. Notwithstanding the general demand for longevity products in various regions of the world, we have observed increased demand for reinsurance solutions in which the cash flows are geared to the performance of a contractually defined index. In view of this broad range of favourable developments, we were able to boost our gross premium for international longevity business to a pleasing EUR 1,012.0 million (EUR 884.7 million ). This increase was carried over in a corresponding profit contribution (EBIT) of EUR 23.7 million (-EUR 17.2 million).
Morbidity Morbidity business refers to the risk of deterioration in a person ’s state of health due to disease, injury or infirmity. This reporting category is notable for extensive product diversity, ranging from strict (any occupation) disability and occupational disability to long-term care insurance.
Taken together, we generated significant growth in the operating result for the reporting categories of mortality and morbidity: EBIT rose to EUR 165.5 million (EUR 39.2 million).
Quite aside from the development of business in the various reporting categories of our Life & Health reinsurance business group, there were further pleasing developments to note: the service component – as in many other sectors too – is taking on ever greater importance. We are actively responding to this trend and successfully supported our customers in the year under review with, among other things, our expertise in the field of automated underwriting. When it comes to medical underwriting, our newly launched newsletter “ReCent” puts the spotlight on current and relevant topics in health and medicine. In addition, our customers are benefiting from a revision of our underwriting manual, which assists primary insurers with risk assessment. We have also made promising progress in the development of alternative, Web-based sales channels in life insurance, the first positive effects of which on our business should be felt in the next few years. Issues such as “big data”, the use of information and technological advances continue to be of growing interest to the (re)insurance industry.
Investment income M 25 in EUR million 2014 + / – previous year
Change in fair value of financial instruments 3 (33.3) (27.1) 89.3 (38.8) (39.9)
Impairments and depreciation totalling just EUR 27.7 million (EUR 19.4 million) were taken. Scheduled depreciation on directly held real estate amounted to EUR 18.5 million (EUR 14.0 million), a reflection of how we have stepped up our involvement in this sector. The vast bulk of impairments – totalling EUR 5.8 million – were attributable to alternative investments (EUR 3.5 million). These write-downs contrasted with write-ups of altogether EUR 0.1 million (EUR 0.3 million).
Financial position and net assets • Risk-appropriate investment policy • High-quality diversified investment portfolio to be maintained • Broadly stable asset allocation • Shareholders’ equity sharply higher thanks to excellent Group net income, interest rate reductions and exchange rate effects
With these goals in mind we engage in active risk management based on balanced risk / return analyses. In this context we are guided by centrally implemented investment guidelines and the insights of dynamic financial analysis. In light of the current market situation and requirements on the liabilities side investment ranges are defined on this basis, within which operational portfolio management is carried out. These measures are intended to safeguard the generation of an appropriate level of return. In so doing, we pay strict attention to compliance with our clearly defined risk appetite, which is reflected in the risk capital allocated to the investments and establishes the foun-
The portfolio of fixed-income securities excluding short-term assets rose to EUR 32.0 billion (EUR 28.3 billion). Hidden reserves for available-for-sale fixed-income securities recognised in shareholders’ equity totalled EUR 1,246.4 million (EUR 426.4 million). This reflects the yield decreases observed in the course of the reporting period, especially in the area of government bonds in our main currency areas. As to the quality of the bonds – measured in terms of rating categories –, the proportion of securities rated “A” or better remained on a consistently high level as at year-end at 82.9% (83.0%).
The capital structure and the composition of the liabilities of Hannover Re are shaped by our activity as a reinsurer. By far the largest share is attributable to technical provisions and liabilities. Further elements are equity and equity substitutes, which help to substantially strengthen our financial base and optimise our cost of capital. The following chart shows our capital structure as at 31 December 2014, split into equity, loans and subordinated capital, technical provisions and other liabilities, in each case as a percentage of the balance sheet total.
We ensure that our business is sufficiently capitalised at all times through continuous monitoring and by taking appropriate steering actions as necessary. For further information please see the following section “Management of policyholders’ surplus”.
The policyholders’ surplus totalled EUR 10,239.5 million (EUR 8,767.9 million) as at the balance sheet date, an increase of 16.8% in the year under review due to changes in cumulative other comprehensive income and the rise in retained earnings.
The reserve for currency translation adjustment climbed significantly by EUR 436.7 million from -EUR 246.3 million to EUR 190.5 million as a consequence of exchange rate movements of foreign currencies against the euro in the financial year. The rise in the reserve for currency translation adjustment resulted principally from the marked depreciation of the euro against the US dollar.
The Group net income for 2014 attributable to the shareholders of the Hannover Re Group climbed to EUR 985.6 million (EUR 895.5 million). The non-controlling interest in the profit generated in the year under review totalled EUR 79.5 million (EUR 43.8 million).
Hannover Finance (Luxembourg) S.A., subordinated debt, EUR 500 million; 2005 / undated 1.6.2005 5.00 497.7 493.3
Hannover Rück SE, subordinated debt, EUR 500 million; 2014 / undated 15.9.2014 3.375 493.5 –
of EUR 750.0 million issued in 2004 by Hannover Finance (Luxembourg) S.A. In addition, we issued new perpetual subordinated debt with a nominal volume of EUR 500.0 million on the European capital market through Hannover Rück SE. As at the balance sheet date altogether four subordinated bonds had been placed on the European capital market through Hannover Rück SE and Hannover Finance (Luxembourg) S.A.
The table on the previous page presents an overview of the amortised cost of our subordinated bonds.
Several Group companies have also taken up long-term debt – principally in the form of mortgage loans – amounting to EUR 283.9 million (EUR 227.1 million).
For further explanatory information please see our remarks in the notes to this report, Section 6.12 “Debt and subordinated capital”, page 210 et seq., and Section 6.13 “Shareholders’ equity and treasury shares”, page 214.
Letters of credit have been furnished by various financial institutions as collateral for our technical liabilities. Both bilateral agreements and an unsecured syndicated guarantee facility existed as at the balance sheet date with a number of financial institutions for this purpose. We report in detail on existing contingent liabilities in the notes, Section 6.12 “Debt and subordinated capital” in our remarks on other financial facilities, page 213, and Section 8.7 “Contingent liabilities and commitments ”, page 234 et seq.
Consolidated cash flow statement M 34 in EUR million 2014 2013
Change in cash and cash equivalents according to cash flow statement 134.0 74.6
Cash and cash equivalents at the end of the period 772.9 642.9 1 Cf. the explanatory remarks in the “Consolidation” section of the notes
Cash flow from financing activities With dividend payments remaining roughly unchanged at EUR 403.4 million (EUR 410.3 million), the cash flow from financing activities decreased from -EUR 347.7 million to -EUR 647.6 million. The change was due to subordinated debt of EUR 493.5 million placed in the year under review as well repayment of the EUR 750 million subordinated debt issued by Hannover Finanz (Luxemburg) S.A. at the first scheduled redemption date. The taking up of long-term debt by HR GLL Central Europe GmbH & Co. KG, Munich, in an amount of EUR 77.3 million in the previous year resulted in a further change of -EUR 53.8 million in the cash inflow.
Hannover Finance (Luxembourg) S.A., subordinated debt, EUR 500 million; 2005 / undated A a
There are no shares with special rights granting their holders powers of control, nor is there any specially structured voting control for employees who have capital participations and do not directly exercise their rights of control.
Hannover Rück SE transacts reinsurance business in the business groups of Property & Casualty and Life & Health reinsurance. Through its global presence and activities in all lines of reinsurance the company achieves optimal risk diversification.
Major loss expenditure in the year under review was lower than in 2013. Although the hurricane season once again passed off unremarkably, a number of natural catastrophe events were recorded. In Western Europe, for example, the low pressure area Ela caused extensive damage. The resulting net strain for Hannover Re’s account was EUR 15.9 million. For the aviation line the year under review was a particularly costly one. The largest single loss derived from attacks on Tripoli airport, for which we have set aside net reserves of EUR 47.9 million. The total net expenditure incurred by Hannover Rück SE from major losses was EUR 257.0 million (EUR 283.2 million).
Ordinary investment income including deposit interest comfortably exceeded the previous year’s level to reach EUR 1,589.6 million (EUR 1,304.8 million). This was due principally to increased income from the similarly enlarged volume of deposits with ceding companies and higher distributions from our investment holding companies. Net gains of EUR 104.0 million (EUR 43.5 million) were realised on disposals. Write-downs of EUR 92.9 million (EUR 186.7 million ) were taken on investments. The decrease is for the most part attributable to extraordinary income booked in the previous year on shares in affiliated companies and fixed-income securities. The write-downs contrasted with write-ups of EUR 30.5 million (EUR 14.4 million) that were made on assets written down in previous periods in order to reflect increased fair values. Provisions for contingent losses of EUR 19.9 million (EUR 21.7 million) were established due to lower fair values of some of our inflation swaps. They were opposed by reversals of provisions for contingent losses constituted for technical derivatives in an amount of EUR 1.9 million (EUR 6.1 million).
All in all, our net investment result improved to EUR 1,580.8 million (EUR 1,116.6 million).
Condensed profit and loss account of Hannover Rück SE M 39 in EUR thousand 2014 2013
Allocated investment return transferred from the non-technical account, net of retrocession 442,194 194,599
The following section describes the development of the various lines of business. We would like to point out that with effect from the beginning of the year under review the exchange of business under joint underwriting arrangements between Hannover Rück SE and E+S Rückversicherung AG was discontinued. In property and casualty reinsurance, however, a retrocession from Hannover Rück SE to E+S Rückversicherung AG has been maintained. The proportion of Hannover Rück SE’s gross written premium attributable to business accepted from E+S Rückversicherung AG stood at -0.1% (3.7%) in the year under review and relates to the run-off of the 2013 and prior underwriting years.
Aviation Gross premium volume contracted by 10.6% in 2014 from EUR 384.5 million to EUR 343.6 million. Losses incurred in the year under review – in contrast to previous years – were exceptionally heavy. Against this backdrop the loss ratio deteriorated from 50.9% to 102.1%. The underwriting result came in at -EUR 60.7 million (EUR 66.1 million). Following an allocation of EUR 34.0 million in the previous year, an amount of EUR 34.4 million was withdrawn from the equalisation reserve and similar provisions in the year under review.
Marine Gross written premium climbed by 4.7% to EUR 433.8 million (EUR 414.4 million). The net loss ratio deteriorated from 49.4% to 62.2%. The underwriting result consequently retreated from EUR 75.5 million to EUR 39.4 million. Among the key factors here the most notable was the increased market loss associated with the wreck of the “Costa Concordia” owing to the costly salvage operation. With this in mind we set aside additional reserves. The originally estimated loss expenditure in connection with a wrecked container vessel had also risen. An amount of EUR 91.3 million (EUR 123.3 million) was allocated to the equalisation reserve and similar provisions.
Irrespective of the business development, the gross premium volume and the underwriting result were also influenced by, among other things, the discontinuation of the reciprocal exchange of business between Hannover Rück SE and E+S Rückversicherung AG effective 1 January 2014.
The total premium volume in the other lines fell by 16.8% to EUR 2.3 billion (EUR 2.7 billion). The loss ratio improved slightly to 74.1% (76.0%). The underwriting result closed at -EUR 8.9 million, after EUR 1.0 million in the previous year. An amount of EUR 50.6 million (EUR 31.0 million) was allocated to the equalisation reserve and similar provisions.
Our portfolio of assets under own management grew in the year under review to EUR 23.0 billion (EUR 20.8 billion). This corresponds to an increase of 10.6% and can be attributed above all to the very positive operating cash flow and the appreciation of key foreign currencies against the euro, although the increase in the fair values of fixed-income securities in connection with the observed yield declines on government bonds in our main currency areas also played a role. The balance of unrealised gains on fixed-income securities and bond funds increased to EUR 891.3 million (EUR 414.7 million).
Deposits with ceding companies, which are shown under the investments, totalled EUR 18.9 billion (EUR 12.4 billion) in the year under review.
It will be proposed to the Annual General Meeting on 6 May 2015 that a dividend of EUR 3.00 plus a special dividend of EUR 1.25 per share should be paid for the 2014 financial year. This corresponds to a total distribution of EUR 512.5 million. The dividend proposal does not form part of this consolidated financial statement.
We received an adequate consideration for all transactions with affiliated companies according to the circumstances of which we were aware at the time when the transactions were effected. We incurred no losses requiring compensation as defined by § 311 Para. 1 Stock Corporation Act (AktG).
The Hannover Re Group employed 2,534 staff as at 31 December 2014 (previous year: 2,419). The turnover ratio at Home Office in Hannover of 1.5% (2.8%) was well below the level of the previous year. The rate of absenteeism – at 3.6% – was slightly higher than in the previous year (3.4%). The turnover ratio and rate of absenteeism continue to be below the average expected across the industry as a whole.
In the year under review, as in prior years, we continued to step up our activities in relation to diversity management and especially the advancement of women. In the period from March 2013 to March 2014 we held a mentoring programme for women as part of a pilot scheme. Five mentee / mentor tandems worked on specific issues facing each of the mentees at regular meetings. Following its conclusion we evaluated the programme and its results. It was pleasing to see the thoroughly positive evaluation both as regards the scheme’s implementation and in relation to the cooperation between mentee and mentor; the clearly evident personal growth of the mentees was similarly highly gratifying. This mentoring programme was also perceived – as had been intended – as a special sign of appreciation and an intensive personnel development measure in the context of the advancement of women. The Executive Board therefore decided to continue with this programme. Preparations were made for the next round in September 2014 with two company-wide information events aimed at the target group. The application and selection phase took place in the fourth quarter of 2014, and another five mentee / mentor tandems are set to enter the mentoring programme at the beginning of 2015.
In January 2014 the advancement of women was also a topical focus of our regularly held Executive Meeting. The centrepiece here was a keynote presentation, supported by outside speakers, on the themes of “glass ceilings” and “gender-specific communication”. These topics, and the resulting implications
for the advancement of women, were explored in practical terms for our senior managers. We tapped into this momentum by launching our new in-house executive training session on the subject of “gender-specific communication”. The aim of these two days of training, which are highly practically oriented, is to make our senior managers more aware of the differences in communication behaviour between women and men. The two seminar events held in the year under review were well received and it is envisaged that they will again form part of our internal training programme in 2015.
The advancement of women was also the subject of a number of decentralised events. For example, various parts of the company used their retreats to explore the opportunities, consequences and limits of this topic by way of presentations and discussions.
In conclusion, it can be stated that the general perception of the advancement of women within the company has changed for the better.
As part of the systematic expansion of our personnel development measures, we also made the further training of our professionally seasoned staff a particular point of emphasis. In this respect, the most recent employee survey had highlighted specific requirements to which we responded with the newly designed seminars “Primary insurance know-how for reinsurers ” and “Confident decision-making in complex situations”. These targeted learning incentives put our experts in an even stronger position as they strive to keep pace with changing (market) requirements and continue to act with assurance in the face of growing complexity. Not only that, by means of these offerings we foster the important inclination towards lifelong learning.
We have been heartened by the favourable response to all these measures and feel strengthened in our desire to continue along this path.
As a leading player in the reinsurance industry, the commercial success of Hannover Re is crucially dependent on the correct assessment of present and emerging risks. In the process of evaluating risks we are faced today with growing complexity as a consequence of the increasing importance attached to various aspects of sustainability. In some instances these also have direct strategic and operational relevance to our reinsurance products and our investments. Our goal, therefore, is to achieve economic success on the basis of a profit-oriented business model – while at the same time acting in accordance with the needs of our staff and the company and giving due consideration to conservation of the environment and natural resources.
For details of Hannover Re’s new Sustainability Strategy please see www.hannover-re.com/sustainability/index.html.
Hannover Rück SE are also subject to regular review and fulfil the recommendations of the currently valid version of the German Corporate Governance Code. Furthermore, given that the trust of our stakeholder groups and an immaculate reputation are vital to the success of our company, we make every effort to cultivate an active dialogue with representatives of the capital market and society as a whole as well as with our clients and staff.
Our range of reinsurance products and services is geared to the needs of the market and our clients. Hannover Re is active in virtually all lines of reinsurance business. Our products range from traditional reinsurance to complex individual solutions for risk transfer and the optimisation of our clients’ capital requirements. In response to changing social challenges, new economic, social and ecological risks – known as emerging risks – are increasingly reflected in our risk assessment. Examples of emerging risks include demographic change, the formation of megacities, shortages of resources, climate change and its impacts on global development (natural disasters, environmental damage) as well as pandemics and risks associated with technological progress (such as cyber-risks). We use all internally and externally acquired insights in order to be able to offer better or innovative (re)insurance solutions.
Given that our employees are absolutely crucial to the success of our company, we have defined strategic principles for our human resources management. In order to ensure that we are always perceived as an attractive employer by our existing staff and potential new junior recruits, we pay special attention to their skills and further growth. The health and well-being of our staff are also vital to the sustainable development of our business. The focus of our efforts is therefore on the prevention of disease, e. g. through medical check-ups by the company physician, workplace inspections, advice and treatment relating to matters of general medicine as well as a range of sporting opportunities designed to promote a healthy lifestyle.
We also stress the importance of enabling our employees to strike the right balance between their career and private life. Consequently, we offer individually customisable part-time and telecommuting models as well as flexitime working arrangements with no core hours. By offering such flexibility we want to help our employees organise their daily routine in various stages of life such as starting a family or preparing for retirement. One of the cornerstones of our successful business activities, along with skills and commitment, is the high degree of diversity in our workforce – since this is vital to safeguarding our high global quality standard.
In 2014, as in previous years, we compensated for our unavoidable CO2 emissions of 7,514 (6,859) tonnes caused by airline travel by making voluntary offsetting payments to the international organisation “atmosfair” and thereby supported selected climate protection projects in developing and emerging countries. No offsetting payments had to be made in the financial year just ended for emissions resulting from rail travel because Hannover Re participates in Deutsche Bahn’s corporate customer programme under which every kilometre of train travel within Germany is powered by 100% green energy.
Resources consumed at Hannover Home Office M 51 1 Karl-Wiechert-Allee 50, Roderbruchstrasse 26 and infant daycare centre, Hannover 2 Karl-Wiechert-Allee 50, Roderbruchstrasse 21 and 26 as well as infant daycare centre, Hannover 3 Karl-Wiechert-Allee 50, Roderbruchstrasse 21 and 26 as well as infant daycare centre, Karl-Wiechert-Allee 57 (pro rata), Hannover 4 Radiative Forcing Index: 2.7
Hannover Re’s commitment to society has a long tradition. The company has been active as a sponsor of culture and social projects since its founding in 1966. Today, we concentrate our non-profit activities on the areas of art and music as well as research and learning. We also support the voluntary social engagement of our members of staff. Our involvement encompasses not only projects in Germany but also activities at our international locations.
More detailed information on our social commitment can be found at www.hannover-re.com/sustainability/index.html
Investments Investments are a core component of our business model. On the one hand we seek to match our reinsurance commitments with our investments in terms of maturity and currency, but at the same time we also want to generate attractive returns. A consistently fascinating challenge in our work is the preparation of forward-looking risk / return analyses in order to identify both the immediately apparent and the less obvious implications of market events and hence act accordingly.
Elizabeth Azócar Rauceo is an Underwriter with Hannover Re in the unit “Facultative North America Property & Multinational”
A key element of the risk analysis focuses on the existing assets, usually in the form of property. These may be endangered by human or technical failure or by natural events; insurers reinsure them on an individual risk basis in order to spread the risk exposure globally. Extensive in-depth know-how, especially in the natural sciences and risk modelling, is needed in order to provide facultative reinsurance. Hannover Re has vigorously expanded its facultative business and can offer customers a more comprehensive service combined with growing reinsurance capacity.
The risk strategy is derived from our corporate strategy. It forms the core element in our handling of opportunities and risks. The risk strategy specifies more closely the goals of risk management and documents our understanding of risk. We have defined ten overriding principles within our risk strategy: 1. We adhere to the risk appetite set by the Executive Board.
Local guidelines: e. g. local underwriting guidelines, signature rules, local contingency plans, deputising arrangements
The risk strategy is similarly specified with an increasing degree of detail on the various levels of the company.
Above and beyond this, further capital requirements for large, internationally operating (re)insurance groups are to be anticipated in the future. These requirements are under development by the IAIS and the Financial Stability Board (FSB).
Capital market environment: Another major external influencing factor is the protracted low level of interest rates, especially with an eye to the return on our investments. For further information please see the “Investments” section of the management report on page 52 et seq.
In the interests of our shareholders and clients we strive to ensure that our risks remain commensurate with our capital resources. Our quantitative risk management provides a uniform framework for the evaluation and steering of all risks affecting the company as well as of our capital position. In this context, the internal capital model is our central tool. The internal capital model of the Hannover Re Group is a stochastic enterprise model. It covers all subsidiaries and business groups of the Hannover Re Group. The central variable in risk and enterprise management is the economic capital, which is calculated according to market-consistent measurement principles and in many respects corresponds to the own funds under
Solvency II. Hannover Re’s internal capital model reflects all risks that influence the development of the economic capital. They are split into underwriting risks, market risks, counterparty default risks and operational risks. For each of these risk classes we have identified a number of risk factors for which we define probability distributions. These risk factors include, for example, economic indicators such as interest rates, exchange rates and inflation indices, but also insurance-specific indicators such as the mortality of a particular age group within our portfolio of insureds in a particular country or the number of natural catastrophes in a certain region and the insured loss amount per catastrophe. The specification of the probability distributions for the risk factors draws upon historical and publically available data as well as on the internal data resources of the Hannover Re Group. The process is further supplemented by the know-how of internal and external experts. The fit of the probability distributions is regularly checked by our specialist departments, although more importantly it is also verified in the context of the regular, company-wide use of the capital model when assessing risks and allocating the cost of capital. Hannover Re calculates the required risk capital as the Value
Hannover Re will seek approval of a partial internal model. Internal and external risk quantification is therefore largely consistent.
We support our clients in their preparations for Solvency II through the flexible design of our products and by sharing experiences.
The Hannover Re Group is seeking approval of its internal model for the determination of regulatory capital under Solvency II. If approval is given and depending on the final measurement rules of Solvency II, the capitalisation with a confidence level of 99.5% constitutes an indication of the fulfilment of future regulatory requirements. Our excess capital coverage at the target confidence level of 99.97% is currently very comfortable. Hannover Re is well capitalised and our available capital comfortably exceeds the currently required capital: We hold additional capital above all to meet the requirements of the rating agencies for our target rating and to be able to act flexibly on business opportunities. We strive for a rating from the rating agencies most relevant to our industry that facilitates and secures our access to all reinsurance business worldwide. Hannover Re is analysed by the rating agencies Standard & Poor’s (S & P) and A.M. Best as part of an interactive rating process, meaning that both these rating agencies are also given access to confidential information about Hannover Re. The current financial strength ratings are assessed as “AA-” (Very Strong, stable outlook) by Standard & Poor’s and
Available capital and required risk capital M 55 in EUR million 2014 2013
Hannover Re is well capitalised and our available capital significantly exceeds the current capital requirement, as is also reflected in the following management ratios.
Hannover Re has set up risk management functions and bodies Group-wide to safeguard an efficient risk management system. The organisation and interplay of the individual functions in risk management are crucial to our internal risk steering and control system. The central functions of risk management are closely interlinked in our system and the roles, tasks and reporting channels are clearly defined and documented in terms of the so-called “3 lines of defence”. The first line of defence consists of risk steering and the original risk responsibility on the divisional or company level. The second line of defence consists of the core functions of risk management, the actuarial function and the compliance function. These units are responsible for monitoring and control. The third line of defence is the processindependent monitoring performed by the internal audit function.
The risk management functions meet regularly, e. g. in the context of the Group Risk Management Meeting (GRiMM), in order to support Group-wide risk communication and establish an open risk culture.
Executive Board Overall responsibility for Group-wide risk management and definition of the risk strategy
Risk Committee Operational risk management, monitoring and coordinating body as well as implementation and safeguarding of a consistent Group-wide risk management culture
Subsidiaries, branches, service companies, representative offices as well as treaty / regional and service divisions within the business groups of Property &
Risk-bearing capacity concept The establishment of the risk-bearing capacity involves determining the total available risk coverage potential and calculating how much of this is to be used for covering all material risks. This is done in conformity with the parameters of the risk strategy and the risk appetite defined by the Executive Board. The quantitatively measurable individual risks and the risk position as a whole are evaluated using our risk model. A central system of limits and thresholds is in place to monitor material risks. This system incorporates – along with other risk-related key figures – in particular the indicators derived and calculated from the risk-bearing capacity. Adherence to the overall risk appetite is verified using the results of the risk model. The calculation is updated half-yearly.
Risk analysis and assessment In principle, every risk that is identified and considered material is quantitatively assessed. Only risk types for which quantitative risk measurement is currently impossible or difficult are qualitatively assessed (e. g. strategic risks or reputational risks). Qualitative assessment takes the form of inter alia expert evaluations. Quantitative assessment of material risks and the overall risk position is performed by Group Risk Management using the Hannover Re risk model. The model makes allowance as far as possible for risk accumulations and concentrations.
Risk communication and risk culture Risk management is firmly integrated into our operational processes.
The proper functioning of the ICS necessitates the involvement of management, executive staff and employees on all levels. The financial reporting of the parent company and the Group must satisfy international and national financial reporting standards as well as regulatory requirements. This is safeguarded in the area of accounting and financial reporting by processes with integrated controls which ensure the completeness and accuracy of the annual and consolidated financial statements. A structure made up of differentiated criteria, control points and materiality thresholds assures our ability to identify and minimise the risk of material errors in the annual and consolidated financial statements at an early stage.
the accompanying controls are consistently documented. In order to safeguard and continuously improve the adequacy of the control system it is subject to regular review and evaluation. In this regard, the internal audit function ensures that the quality of the control system is constantly monitored. All relevant accounting principles are collated in a Group Accounting Manual that sets out uniform Group-wide rules for the recognition, measurement and reporting of items in the consolidated financial statement. The process for updating and, if necessary, adjusting these rules is clearly regulated with respect to information channels, responsibilities and period of validity. Not only that, we provide prompt Group-wide notification of significant developments and modified requirements in Group financial reporting.
Within the scope of our control system the Group companies are responsible for Group-wide adherence to the accounting policies and the internal control guidelines. The managing directors and chief financial officers of the Group companies defined as material in our control system affirm to the Executive Board of Hannover Rück SE at each closing date the completeness, correctness and reliability of the financial data that they pass on to Group Accounting. Data for the preparation of the consolidated financial statement is delivered using a Webbased IT application. The relevant data for Group financial reporting is collected in a database and processed via automatic interfaces in a consolidation system. As part of the financial reporting process we perform preventive and detective checks on the reported figures in order to minimise the probability and reduce the impacts of a potentially incorrect disclosure.
C om bi ne d m an ag em en t re po rt from a higher assessment of the valuation reserve for the loss reserves. The valuation adjustments for life and health reinsurance increased due to the favourable development of new business and positive effects from economic changes associated with interest rates and exchange rates. This is opposed by a higher risk premium – above all for the increased longevity risks – as well as negative effects from revised assumptions and model adjustments. The item “Valuation adjustments due to tax effects and other” decreased primarily owing to higher tax effects from valuation adjustment. The available capital from subordinated bonds was reduced in the period under review owing to redemption of a hybrid bond, which was only partially replaced with a new issue.
The underwriting risks in property and casualty reinsurance increased on account of the larger volume of reserves. In addition, parameters in the reserve risk model were strengthened for risks at the end of run-off. The premium risk (incl. catastrophe risk) has scarcely changed. The increase in the underwriting risks in life and health reinsurance, particularly in the area of longevity risks, was primarily due to the larger business volume. The operational risks also increased in step with the underlying business volumes.
The internal capital model is based on current methods from actuarial science and financial mathematics. In the case of underwriting risks, we are able to draw on a rich internal data history to estimate the probability distributions, e. g. for the reserve risk. For risks from natural perils we use external models, which are adjusted in the context of a detailed internal review process such that they reflect our risk profile as closely as possible. In the area of life and health reinsurance long-term payment flows are modelled under various scenarios. With respect to all the aforementioned risks we use internal data to define scenarios and probability distributions. The internal data is enhanced by way of parameters set by our internal experts. These parameters are especially significant in relation to extreme events that have not previously been observed.
Underwriting risk in property and casualty reinsurance 5,023.1 3,101.1 4,459.9 2,738.6
• operational risks which may derive, for example, from deficient processes or systems and
The reserve risk, i. e. the risk of under-reserving losses and the resulting strain on the underwriting result, is the overriding priority in our risk management. We attach the utmost importance to a conservative reserving level and therefore traditionally have a high confidence level (> 50%). In order to counter the risk of under-reserving we calculate our loss reserves based on our own actuarial estimations and establish, where necessary, additional reserves supplementary to those posted by our cedants as well as the segment reserve for losses that have already occurred but have not yet been reported to us. Liability claims have a major influence on the segment reserve. The segment reserve is calculated on a differentiated basis according to risk categories and regions. The segment reserve established by the Hannover Re Group amounted to EUR 6,107.4 million in the year under review.
Our own actuarial calculations regarding the adequacy of the reserves are also subject to annual quality assurance reviews conducted by external firms of actuaries and auditors. For further remarks on the reserve risk please see our comments in the section “Technical provisions” on page 200 et seq.
Licensed scientific simulation models, supplemented by the expertise of our own specialist departments, are used to assess our material catastrophe risks from natural hazards (especially earthquake, windstorm and flood). Furthermore, we establish the risk to our portfolio from various scenarios in the form of probability distributions. The monitoring of the risks resulting from natural hazards is rounded out by realistic extreme loss scenarios.
For the purposes of risk limitation, maximum amounts are also stipulated for various extreme loss scenarios and return periods in light of profitability criteria. Adherence to these limits is continuously verified by Group Risk Management. The Risk Committee, Executive Board and Non-Life Executive Committee are kept regularly updated on the degree of capacity utilisation. The limits and thresholds for the 200-year aggregate loss as well as the utilisation thereof are set out in the following table: Limit and threshold for the 200-year aggregate M 64 annual loss as well as utilisation thereof in EUR million
All natural catastrophe risks1 1 200-year aggregate annual loss 1,480 1,332 1,147 1 Loss relative to the underwriting result
Asbestos-related claims / pollution damage 33.8 189.3 28.2 28.8 170.8 32.1
Net expenditure on major losses in the year under review amounted to EUR 425.7 million (EUR 577.6 million). Our company incurred the following catastrophe losses and major claims in the 2014 financial year: The price / premium risk lies primarily in the possibility of a random claims realisation that diverges from the claims expectancy on which the premium calculation was based. Regular and independent reviews of the models used for treaty quotation as well as central and local underwriting guidelines are vital management components. We have put in place a multistep quotation process to ensure the quality of our portfolios: Catastrophe losses and major claims 1 in 2014 M 65 in EUR million Date gross net
Cyclone Hudhud in India 12 and 13 October 2014 17.5 17.5
Typhoon Rammasun in the Philippines and China 14 July 2014 10.3 10.3 1 Natural catastrophes and other major claims in excess of EUR 10 million gross
In addition, Hannover Re’s regional and treaty departments prepare regular reports on the progress of their respective renewals. The reporting in this regard makes reference inter alia to significant changes in conditions, risks (such as inadequate premiums) as well as to emerging market opportunities and the strategy pursued in order to accomplish targets. The development of the combined ratio in property and casualty reinsurance in 2014 and prior years is shown in the table below: For further information on the run-off of the loss reserves please see our explanatory remarks in the section “Run-off of the net loss reserve in the property and casualty reinsurance segment” on page 201 et seq.
Underwriting risk in life and health reinsurance 1,906.9 1,434.3 1 Required risk capital with a confidence level of 99.5%
Through our quality assurance measures we ensure that the reserves established by ceding companies in accordance with local accounting principles satisfy all requirements with respect to the calculation methods used and assumptions made (e. g. use of mortality and morbidity tables, assumptions regarding the lapse rate). New business is written in all regions in compliance with underwriting guidelines applicable worldwide, which set out detailed rules governing the type, quality, level and origin of risks. These global guidelines are revised annually and approved by the Executive Board. Special underwriting guidelines give due consideration to the particular features of individual markets. By monitoring compliance with these
underwriting guidelines we minimise the risk of an inability to pay or of deterioration in the financial status of cedants. Regular reviews and holistic analyses (e. g. with an eye to lapse risks) are carried out with respect to new business activities and the assumption of international portfolios. The actuarial reports and documentation required by local regulators ensure that regular scrutiny also takes place on the level of the subsidiaries. The interest rate risk, which in the primary sector is important in life business owing to the guarantees that are given, is of only minimal relevance to our company thanks to the design of our reinsurance treaties. We have confidence in the entrepreneurial abilities of our underwriters and grant them the most extensive possible powers. In our decentralised organisation we manage risks where they arise using a consistent Groupwide approach in order to obtain an overall view of the risks in life and health reinsurance. Our global underwriting guidelines provide underwriters with an appropriate framework for this purpose. Another major element of risk management in life and health reinsurance is the Market Consistent Embedded Value (MCEV). The MCEV is a ratio used for the valuation of life insurance and reinsurance business; it is calculated as the present value of the future shareholders’ earnings from the worldwide life and health reinsurance portfolio plus the allocated capital. The calculation makes allowance as far as possible for all risks included in this business. The MCEV is established on the basis of the principles of the CFO Forum published in October 2009 (the CFO Forum is an international organisation of Chief Financial Officers from major insurance and reinsurance enterprises). For detailed information please see the MCEV report for 2013 published on our website. The MCEV report for the 2014 financial year will be published on our website close to publication of this report.
Required risk capital 1 for market risks M 69 in EUR million 2014 2013
With a view to preserving the value of our assets under own management, we constantly monitor adherence to a trigger mechanism based on a clearly defined traffic light system that is applied across all portfolios. This system defines clear thresholds and escalation channels for the cumulative fluctuations in fair value and realised gains / losses on investments since the beginning of the year. These are unambiguously defined in conformity with our risk appetite and trigger specified information and escalation channels if a corresponding fair value development is overstepped. Despite the conservative orientation of our investment portfolio, it profited substantially from movements in interest rates and spreads over the course of the year and consistently boosted its fair value reserves. The escalation levels of the trigger mechanism were not activated at any point in time.
The portfolio of fixed-income securities is exposed to the interest rate risk. Declining market yields lead to increases and rising market yields to decreases in the fair value of the fixedincome securities portfolio. The credit spread risk should also be mentioned. The credit spread refers to the interest rate differential between a risk-entailing bond and risk-free bond with the same maturity. Changes in these risk premiums, which are observable on the market, result – analogously to changes in pure market yields – in changes in the fair values of the corresponding securities.
Currency risks are especially relevant if there is a currency imbalance between the technical liabilities and the assets. Through extensive matching of currency distributions on the assets and liabilities side, we reduce this risk on the basis of the individual balance sheets within the Group. The shortterm Value at Risk therefore does not include quantification of the currency risk. We regularly compare the liabilities per currency with the covering assets and optimise the currency coverage in light of various collateral conditions such as different accounting requirements by regrouping assets. Remaining currency surpluses are systematically quantified and monitored within the scope of economic modelling. A detailed presentation of the currency spread of our investments is provided in the section entitled “Investments under own management” on page 186 et seq.
Scenarios for changes in the fair value of material asset classes M 72 in EUR million Scenario Portfolio change on a fair value basis Change in equity before tax
Real estate risks result from the possibility of unfavourable changes in the value of real estate held either directly or through fund units. They may be caused by a deterioration in particular qualities of a property or by a general downslide in market values. Real estate risks continued to grow in importance for our portfolio owing to our ongoing involvement in this sector. We spread these risks through broadly diversified investments in high-quality markets of Germany, Europe as a whole and the United States; each investment is preceded by detailed analyses of the property, manager and market concerned.
We use derivative financial instruments only to the extent needed to hedge risks. The primary purpose of such financial instruments is to hedge against potentially adverse developments on capital markets. In the year under review we took out inflation swaps to hedge part of the inflation risks associated with the loss reserves in our technical account. Some of these inflation swaps reached their maturity date during the year and were not renewed. In addition, as in the previous year, a modest portion of our cash flows from the insurance business as well as currency risks were hedged using forward exchange transactions because currency matching could not be efficiently achieved. Hannover Re holds further derivative financial instruments to hedge interest rate risks from loans taken out to finance real estate. In addition, Hannover Re has taken out hedges in the form of equity swaps to hedge price risks in connection with the stock appreciation rights granted in the first quarter of 2014 under the Share Award Plan. These are intended to neutralise changes in the fair values of the awarded stock appreciation rights. Contracts are concluded with reliable counterparties and for the most part collateralised on a daily basis so as to avoid credit risks associated with the use of such transactions. The remaining exposures are controlled according to the restrictive parameters set out in the investment guidelines. Our investments entail credit risks that arise out of the risk of a failure to pay (interest and / or capital repayment) or a change in the credit status (rating downgrade) of issuers of securities. We attach equally vital importance to exceptionally broad diversification as we do to credit assessment conducted on the basis of the quality criteria set out in the investment guidelines. We measure credit risks in the first place using the standard market credit risk components, especially the probability of default and the potential amount of loss – making allowance for any collateral and the ranking of the individual instruments depending on their effect in each case.
On a fair value basis EUR 4,266.9 million of the corporate bonds held by our company were issued by entities in the financial sector. Of this amount, EUR 3,574.0 million was attributable to banks. The vast majority of these bank bonds (76.5%) are rated “A” or better. Our investment portfolio under own management does not contain any written or issued credit default swaps.
Retrocession gives rise to claims that we hold against our retrocessionaires. These reinsurance recoverables – i. e. the reinsurance recoverables on unpaid claims – amounted to EUR 1,376.4 million (EUR 1,403.8 million) as at the balance sheet date.
Operational risks refer to the risk of losses occurring because of the inadequacy or failure of internal processes or as a result of events triggered by employee-related, system-induced or external factors. In contrast to underwriting risks (e. g. the reserve risk), which we enter into in a deliberate and controlled manner in the context of our business activities, operational risks are an indivisible part of our business activities. The focus is therefore on risk avoidance and risk minimisation. As a derivation from our strategic principle “We manage risks actively”, we act according to the following principles in relation to operational risks: 1. We integrate operational risk management into the company and its culture.
3. We consider events and scenarios that cover the entire spectrum of operational risks.
With the aid of the Self-Assessment for Operational Risks we determine the maturity level of our operational risk management system and define action fields for improvements. The assessment is carried out, for example, by assessing the maturity level of the respective risk management function or of the risk monitoring and reporting. The system enables us, among other things, to prioritise operational risks and is used inter alia to calculate the capital commitment in our internal model.
Business process risks are associated with the risk of deficient or flawed internal processes, which can arise as a consequence of an inadequate process organisation. We have defined criteria to evaluate the maturity level of the material processes, e. g. for the reserving process. This enables us to ensure that process risks are monitored. In cooperation with the process participants, the process owner evaluates the risks of the metaprocess and develops measures for known, existing risks. Data quality is also a highly critical success factor, especially in risk management, because – among other things – the validity of the results delivered by the internal model depends primarily on the data provided. The overriding goal of our data quality management is the sustainable improvement and safeguarding of data quality within the Hannover Re Group.
Compliance risks are associated with the risk of breaches of standards and requirements, non-compliance with which may entail lawsuits or official proceedings with not inconsiderable detrimental implications for the business activities of the Hannover Re Group. Regulatory compliance, compliance with the company’s Code of Conduct, data privacy and compliance with anti-trust and competition laws have been defined as issues of particular relevance to compliance. The compliance risk also extends to tax and legal risks. Responsibilities within the compliance organisation are regulated and documented Groupwide and interfaces with risk management have been put in place. The set of tools is rounded off with regular compliance training programmes. For further information on compliancerelated topics, including for example lawsuits, contingent liabilities and commitments, please see Section 8.6 “Lawsuits” and Section 8.7 “Contingent liabilities and commitments” on page 234 et seq.
Reputational risks refer to the risk that the trust put in our company by clients, shareholders, employees or the public at large may be damaged. This risk has the potential to jeopardise the business foundation of the Hannover Re Group. A good corporate reputation is therefore an indispensable prerequisite for our core business as a reinsurer. Reputational risks may arise out of all business activities conducted by the Hannover Re Group. Reputational damage may be caused, inter alia, by a data mishap that becomes public knowledge or financial difficulties on account of an underwriting risk. In addition to the risk identification methods already described, we use a number of different techniques for risk minimisation, such as our defined communication channels (e. g. Crisis Communication Guideline), a professional approach to corporate communications, tried and tested processes for specific crisis scenarios as well as our established Code of Conduct.
Key elements in Hannover Re’s opportunity management include its various market-specific innovations in the Life & Health and Property & Casualty reinsurance business groups (see the Forecast on page 132 et seq.). What is more, innovative and creative ideas are generated by our employees. If they can be successfully translated into additional profitable premium volume, such ideas are financially rewarded. Further elements are the working group on “Emerging Risks and Scientific Affairs” and the “Future Radar” initiative. Not only that, Hannover Re has set up a stand-alone organisational unit for “Opportunity Management”. This service unit deals exclusively and systematically with ideas and opportunities and it concentrates its activities on generating additional premium volume with profit potential. To this end, ideas are translated into business opportunities and business models with the backing of project teams, and these are then acted upon in cooperation with primary insurance partners. Such business approaches are subsequently evaluated and fleshed out more concretely by the “Opportunity Management” service unit. This unit also supports selected projects from the conceptual design of holistic business models right through to operational implementation or handover to line responsibility. The goal is to generate new business and thereby sustainably promote Hannover Re’s profitable growth. Several initiatives and projects have grown out of some 100 ideas contributed by the global network since the unit was set up. As part of an attractive employee incentive scheme, a number of projects have been financially rewarded – including the opportunity management projects “Weather” and “Energy Savings Protect”: Opportunity management project “Weather” The goal was to offer a heavily weather-dependent clientele industry-specific solutions to protect against fluctuations in the weather. The interest shown by businesses in this product has grown sharply of late on account of greater variability in weather conditions and the higher profile of the product. It has taken on special relevance for wind farms due to the turnaround in German energy policy.
Opportunity management project “Energy Savings Protect” This project was tasked with developing covers for so-called energy-savings warranties in Germany. This insurance solution enables providers of energy efficiency solutions to take out protection in the event that the promised energy savings fail to materialise. In this case the company in question receives a compensatory payment from the primary insurer. For its part, Hannover Re covers the energy saving warranties of its primary insurance clients. By building trust, the greater planning reliability created by the product makes it possible for many activities needed as part of Germany ’s turnaround in energy policy to be undertaken in the first place. Based on its considerable success, reflected not only in the rewarding of those behind the product but also in its singling out for an innovation award, this product is now available Europe-wide and is being modified for other fields of application.
As part of our holistic risk and opportunity management activities, we are also tackling the question of what new insurance products can be developed in order to protect against the relevant threats. We have been present in this market since 2007 and have already developed corresponding products.
As an internationally operating reinsurance group, we move in a highly complex environment. Nevertheless, thanks to our business activities in all lines of reinsurance we are able to achieve optimal risk spreading through geographical and risk-specific diversification while at the same time maintaining a balanced opportunity / risk profile. We consider the risks described in the above sections to be manageable, particularly because our steering and monitoring measures are effectively and closely interlinked. Despite these diverse mechanisms, individual and especially accumulation risks can decisively affect our assets, financial position and net income. In accordance with our understanding of risk, however, we consider not only risks but also at the same time opportunities. We therefore only enter into those risks that go hand-in-hand with opportunities. Our steering and monitoring tools as well as our organisational and operational structure ensure that we identify risks at an early stage and are able to act on our opportunities. Our central monitoring tool is the system of risk management that we have installed Group-wide, which brings together both qualitative and quantitative information for the purpose of effective risk monitoring. Most notably, the interplay between domestic and foreign risk management functions affords us a holistic and Group-wide overview.
Our own evaluation of the manageability of existing risks is confirmed by various financial indicators and external assessments. Key monitoring indicators, reporting limits and potential escalation steps are defined on a mandatory basis in our central system of limits and thresholds for the material risks of the Hannover Re Group. As a result, the system provides us with a precise overview of potentially undesirable developments in the defined risk tolerances and enables us to react in a timely manner. One testament to our financial stability, for example, is the growth of our shareholders’ equity. Since 2010 we have been able to increase our total policyholders’ surplus (hybrid capital, non-controlling interests and shareholders ’ equity) by 150%. In this context, the necessary equity resources are determined by the requirements of our economic capital model, solvency regulations, the assumptions of rating agencies with respect to our target rating and the expectations of our clients and shareholders. This increase gives us a sufficient capital cushion to be able both to absorb risks and act on business opportunities that may arise. Similarly, our very good ratings (see page 59) also testify to our financial stability.
Declaration on Corporate Governance pursuant to § 289 a Commercial Code (HGB) The objective of Hannover Rück SE continues to be to consolidate and further expand its position as one of the leading, globally operating reinsurance groups of above-average profitability. In aspiring towards this goal, it is particularly important to observe and fulfil the principles of good and sustainable enterprise management. In so doing, we not only comply with the German Corporate Governance Code (DCGK, hereinafter also referred to as the Code), but have also developed our own model for responsible enterprise management which we consistently pursue and adjust to the latest requirements in accordance with our best practice standards.
The Executive Board and Supervisory Board of Hannover Rück SE expressly support the suggestions and recommendations of the German Corporate Governance Code that are practicable for the reinsurance industry and recognise their central importance in guiding our activities. The principles of responsible and good enterprise management therefore constitute the core of our internal Corporate Governance principles (www.hannoverre. com/resources/cc/generic/CGprinciples-e.pdf). We cultivate integrity at all times in our dealings with business partners, staff, shareholders and other stakeholder groups and support the principles of value-based and transparent enterprise management and supervision defined in the German Corporate Governance Code. The Supervisory Board, Executive Board and employees of Hannover Rück SE identify with these principles, which thus form part of our corporate self-image. The Executive Board ensures that the principles are observed Group-wide.
the total dividends per share distributed during the vesting period. The share awards consequently follow the economic fortunes of the Hannover Re share.
For formal purposes and as a highly precautionary measure, Hannover Rück SE is therefore declaring a divergence from Code Item 4.2.3 Para. 2.
Premature termination of a service contract may only take the form of cancellation by mutual consent. Even if the Supervisory Board insists upon setting a severance cap when concluding or renewing an Executive Board contract, this does not preclude the possibility of negotiations also extending to the severance cap in the event of a member leaving the Executive Board. In addition, the scope for negotiation over a member leaving the Executive Board would be restricted if a severance cap were agreed, which could be particularly disadvantageous in cases where there is ambiguity surrounding the existence of serious cause for termination. In the opinion of Hannover Rück SE, it is therefore in the interest of the company to diverge from this recommendation.
It prepares the Supervisory Board’s examination of the annual financial statement, management report and proposal for the appropriation of profit as well as of the consolidated financial statement and Group management report. In this context, the Finance and Audit Committee receives detailed information on the auditor’s view of the net assets, financial position and results of operations as well as explanations of the effects of any modified recognition and measurement principles on the net assets, financial position and results of operations together with available alternatives. In addition, the committee prepares the Supervisory Board’s decision on the commissioning of the independent auditor for the financial statements. It considers matters associated with the necessary independence of the auditor, the awarding of the audit mandate to the independent auditor, the determination of the audit concentrations and the fee agreement. The minutes of the meetings of the Finance and Audit Committee are also made available to the members of the Supervisory Board who do not sit on the committee.
Hannover Rück SE considers a properly functioning compliance structure to be an essential tool for ensuring compliance with external rules and regulations as well as requirements imposed internally by the company. Our compliance structure, which consists of compliance modules precisely tailored to the specific features of our Property & Casualty and Life & Health reinsurance business groups, facilitates optimal application. The compliance committees are comprised of members from the respective business groups as well as from the areas of Legal, Finance, Accounting and Investments. The chairs report directly to the Executive Board. This structure safeguards adherence to the standards that have been set.
The remuneration report summarises the principles used to determine the remuneration of the Executive Board of Hannover Rück SE and explains the structure, composition and amount of the components of the remuneration received by the Executive Board in the 2014 financial year on the basis of the work performed by the Board members for Hannover Rück SE and companies belonging to the Group.
Basic remuneration; Non-cash compensation, fringe benefits: Accident, liability and luggage insurance, company car for business and personal use (tax on the non-cash benefit payable by the Board member), reimbursement of travel expenses and other expenditures incurred in the interest of the company
Measurement bases / conditions of payment for variable remuneration M 80
The IFRS Group net income (excluding non-controlling interests) and the arithmetic mean of the IFRS Group shareholders’ equity (excluding non-controlling interests) at the beginning and end of the financial year are used to calculate the RoE.
The risk-free interest rate is the average market rate for 10-year German government bonds over the past 5 years and is set at an agreed level of 2.8%. The arrangements governing the profit bonus may be adjusted if the risk-free interest rate of 2.8% changes to such an extent that an (absolute) deviation of at least one percentage point arises.
1 An instrument of value-based management used to measure the attainment of long-term goals on the level of the Group, business groups and operational units (see also p. 24).
The remuneration (excluding pension payments) received by former members of the Executive Board totalled EUR 0.2 million (EUR 0.4 million).
Total remuneration of the active members of the Executive Board pursuant to DRS 17 (amended 2010) M 82
7 Mr. Althoff was appointed to the Executive Board on 1 August 2014. The amounts stated include his remuneration as a senior executive of Hannover Re for the period from 1 January to 31 July 2014.
Total expense for share-based remuneration of the Executive Board M 83
Total 1 The change in the reserve for share awards from previous years derives from the increased market price of the Hannover Re share, the dividend approved for 2013 and the spreading of the expense for share awards across the remaining period of the individual service contracts.
3 Mr. Althoff was appointed to the Executive Board on 1 August 2014. The exercised stock appreciation rights, the share awards from previous years and a portion of the expense for share awards in the current financial year relate to his prior work as a senior executive at Hannover Re.
Dividend on share awards for 2012 26.6 0.0 0.0 0.0 0.0 0.0 0.0 14.0 0.0 0.0 0.0 7.3 0.0 0.0 0.0
Dividend on share awards for 2013 4 0.0 36.6 36.6 36.6 6.2 6.2 6.2 0.0 19.9 19.9 19.9 0.0 12.9 12.9 12.9
Dividend on share awards for 2012 19.4 0.0 0.0 0.0 14.7 0.0 0.0 0.0 14.6 0.0 0.0 0.0 16.8 0.0 0.0 0.0
German Corporate Governance Code, Item 4.2.5 Para. 3 – Table 1 M 84 (target / minimum / maximum remuneration as nominal amounts)
Dividend on share awards for 2013 4 0.0 26.8 26.8 26.8 0.0 20.3 20.3 20.3 0.0 20.6 20.6 20.6 0.0 22.8 22.8 22.8 1 The remuneration of Mr. Althoff and Mr. Arrago is shown as annual remuneration (not pro rata). 2 Year of payment. 3 Maximum value when awarded, amount paid out dependent upon the share price in the year of payment and the dividends paid until such time
German Corporate Governance Code, Item 4.2.5 Para. 3 – Table 2 (cash allocations in 2013 and 2014) M 85
André Arrago Board member with divisional responsibility Date left: 31 August 2014
Roland Vogel Chief Financial Officer 1 The stated values include the remuneration of Mr. Althoff as a senior executive of Hannover Re for the period from 1 January to 31 July 2014. 2 This refers in each case to payment of the variable remuneration for the previous year. Remuneration for seats with Group bodies that is counted towards the variable remuneration accrues in the year of occurrence. The company’s Supervisory Board does not decide on the final amount paid out for the 2014 financial year until after the preparation of the remuneration report.
Allocation Jürgen Gräber Board member with divisional responsibility Coordinator of worldwide property & casualty reinsurance
3 Stock appreciation rights were awarded in 2006, exercise option at the discretion of the Executive Board until 31 December 2016 in the following tranches: 40% from 2009, 60% from 2010, 80% from 2011, 100% from 2012 onwards.
5 Stock appreciation rights were awarded in 2009, exercise option at the discretion of the Executive Board until 31 December 2019 in the following tranches: 40% from 2012, 60% from 2013, 80% from 2014, 100% from 2015 onwards.
In both contract variants (i. e. defined benefit and defined contribution ) other income received while drawing the retirement pension is taken into account pro rata or in its entirety under certain circumstances (e. g. in the event of incapacity for work or termination of the service contract before reaching the age of 65).
Provision for surviving dependants If the Board member dies during the period of the service contract, the surviving spouse – or alternatively the eligible children – shall be entitled to continued payment of the fixed monthly salary for the month in which the Board member dies and the six months thereafter, at most until termination of the service contract. If the member of the Executive Board dies after pension payments begin, the surviving spouse and alternatively the dependent children shall receive continued payment of the retirement pension for the month of death and the following six months. The widow’s pension amounts to 60% of the retirement pay that the Board member received or would have received if he had been incapacitated for work at the time of his death.
2 An annual premium of EUR 13,600 was paid for Mr. Althoff for 2014. The first increased contribution based on his appointment to the Executive Board is due on 1 July 2015. The guaranteed interest rate of his commitment is 3.25%. The values shown refer to his entitlements based on the remuneration prior to appointment to the Executive Board (1 August 2014).
Claude Chèvre 2 2014 25% to October 2014 39.5% from November 2014 1 Percentage of pensionable income (fixed annual remuneration as at the contractually specified reference date) 2 Guaranteed interest rate 2.25%
Dr. Klaus Sturany Deputy Chairman of the Super visory Board Member of the Standing Committee
Maike Sielaff 3 Member of the Supervisory Board Fixed remuneration 30.0 24.6
In 2014 no loan relationships existed with members of the Executive Board or Supervisory Board of Hannover Rück SE, nor did the company enter into any contingent liabilities for members of the management boards.
The Group net income is measured by the three-year average return on equity (ROE) of the Hannover Re Group above the risk-free interest rate. Goal attainment is calculated as follows: for each individual financial year of the last three financial years it is calculated by how many percentage points the RoE of the Hannover Re Group exceeds the risk-free interest rate. The average of these three differences determines the three-year average RoE above the risk-free interest rate. The risk-free interest rate is the average market interest rate over the past five years for 10-year German government bonds.
In the case of the allocation and payment of share awards to participants in the Share Award Plan who are located abroad, the rate of exchange used to convert the average share price is the average of the relevant exchange rate in a period from 20 trading days before to 10 trading days after the meeting of the Supervisory Board that approves the consolidated financial statement. For payment of the dividend to participants in the Share Award Plan who are located abroad, the rate of exchange used to convert the dividend per share is the average of the relevant exchange rate in a period from 20 trading days before to 10 trading days after the Annual General Meeting that approves the dividend payment for the financial year just ended.
The cash bonus for the 2013 financial year was paid out in June 2014. The share awards for the 2013 financial year were also allocated in June 2014; they will be paid out in the spring of 2018 including dividends paid for the 2013, 2014, 2015 and 2016 financial years.
Group of participants and total number of eligible participants in variable remuneration systems M 90 Valid: 31 December 2014
Managing Director Management level 2 Cash bonus and Share Award Plan
Dr. Dina Dziuba works as a Manager at Hannover Re in the area of
Financial solutions in China Our products serve as efficient and flexible tools of business financing and solvency management for life insurers. In addition to more traditional cash financing, we offer our customers solutions designed to ease the strain of reserving and provide solvency relief. They are based on reinsurance transactions with an appropriate transfer of underwriting risks in accordance with the regulatory requirements applicable locally and elsewhere. We have an extensive network and considerable international experience when it comes to rapidly implementing efficient financial solutions models. In the context of China’s adoption of a new solvency regime (C-ROSS), the capital requirements placed on life insurers will change and demand for innovative financial solutions models is set to grow. This is a challenge that we believe we are well equipped to meet.
Global economy The framework conditions for the global economy improved to such an extent in the second half of 2014 that the forecasting institutes anticipate a gradual pick-up in economic impetus for 2015. The Kiel Institute for the World Economy expects the global economy to post slightly higher growth year-on-year of 3.7% by the close of 2015.
Monetary policy, which for the most part continued to be highly expansionary, and the positive stimuli from the current low price of oil are supporting progressive deleveraging processes in the private sector and boosting business activity. This will likely lead to stronger growth rates, especially in the mature national economies. As a further factor, the restraining effects of fiscal policy will probably diminish overall. Emerging economies should profit from rising demand in industrial nations, although structural problems will hamper a rapid return to the heady growth rates of past years.
The susceptibility of the economy to distortions that has been witnessed in recent years will continue. Emerging upheavals on financial markets, the exacerbation of geopolitical tensions or changes of government in Europe’s crisis-ridden nations could at times severely undermine the expansion of the world economy.
Germany Economic activity looks to be trending higher again in Germany after a period of stagnation: the experts at the Kiel Institute for the World Economy anticipate a growth rate of 1.7% and a medium-term positive tendency. In the early months of the current year the economy will be driven primarily by private consumption. Subsequently, cyclical upward forces will increasingly kick in, and output should therefore surge sharply in the second half of the year. The favourable financing climate should serve to consistently stimulate investment activity. As the global economy revives, export impetus should also rise.
The economic upturn will not be felt on the labour market until the middle of the year because the first six months will still be under the sluggish influence of the previous year. Overall, the number of persons in gainful employment will likely continue to grow and the jobless rate should fall slightly to 6.6%.
China, India, Japan The room for manoeuvre in fiscal policy has contracted in many emerging markets because their monetary policy was geared more towards stabilising the exchange rate than stimulating the economy. Although the upturn in economic activity in these countries will therefore again be more vigorous, it will be on a lower level. Growth of 7.0% is anticipated for China in 2015, with an ongoing slowing tendency. In India, where the economy last year came in slightly ahead of expectations, the previous year’s growth rate of 6.5% will probably be repeated. Japan is forecast to deliver growth of around 0.8%.
Preparations for implementation of the European Solvency II Framework Directive are progressing apace. To this end, the European Commission has recently set in motion further decisions (“delegated acts”), as has the federal government on the German level. The new stipulations provide companies with a guiding framework for the application of Solvency II from 2016 onwards.
These factors also shaped the treaty renewals as at 1 January 2015, the date when some 65% of our property and casualty reinsurance portfolio (excluding facultative business and structured reinsurance) was renegotiated. Despite sometimes appreciable price erosion and deteriorations in conditions in certain areas, we were broadly satisfied with the outcome of the renewals – even though the rate quality of the renewed portfolio was somewhat lower than in the previous year. Rate increases were obtained under programmes that had suffered losses in 2014. This was especially true of our German business. The significant losses incurred in the aviation line, on the other hand, did little to boost prices.
The latest round of renewals showed that financially robust reinsurers such as Hannover Re are more highly sought-after by cedants. Based on our excellent ratings, our long-standing customer relationships and our profit-oriented underwriting policy, we are in a good position to adapt to the soft market conditions. Hannover Re continues to practise its systematic cycle management combined with rigorous underwriting discipline and trusts in a broadly diversified portfolio of high-quality existing business, complemented by opportunities that may arise in niche and specialty lines.
All in all, our North American portfolio is expected to show modest growth in the current financial year.
In the other markets of Continental Europe the picture was a mixed one: the expansion of existing customer accounts in France enabled us to offset the pressure on prices in loss-free programmes and the effect of discontinued treaties. In Northern European countries we maintained our market-leading position. The markets of Southern and Eastern Europe became considerably more competitive. Broadly speaking, though, we consider reinsurance prices here to be commensurate with the risks. Demand for non-proportional treaties surged sharply with an eye to Solvency II requirements.
Specialty lines worldwide Marine In marine reinsurance we expect to see further softening of insurance and reinsurance rates for the 2015 financial year. The deterioration in reserves for removal of the wrecks of the “Costa Concordia” and “Rena” have nevertheless prevented a substantial price decline. Given the absence of major losses, rates for the reinsurance of offshore energy risks are moving slightly lower despite higher sums insured in the original market. Overall, the trend towards reduced reinsurance cessions driven by large insurance groups is likely to be sustained. This may be offset, at least to some extent, by ceding companies that make the most of the soft market to buy more reinsurance capacity. When it comes to our own portfolio, we anticipate a slightly reduced premium volume in 2015.
United Kingdom, London market and direct business In the face of more intense competition we expect to see declining rates for our reinsurance business in the United Kingdom this year. We were essentially able to preserve our portfolio in the renewals as at 1 January 2015 thanks to our established customer relationships. In addition, we succeeded in expanding our short-tail business. On the back of the solid rate increases booked in non-proportional motor business over the past three years, prices again moved slightly higher or remained unchanged. In direct business our subsidiary Inter Hannover continues to focus on risk selection in order to further enhance the quality of its portfolio.
Facultative reinsurance The soft market phase prevailing in facultative reinsurance is likely to continue and hence rates will remain stubbornly low. Nevertheless, by taking a selective approach we also see attractive business opportunities. For example, we anticipate stronger demand in areas such as covers for renewables and cyber-risks. Thanks to our very good rating, we should also be able to profit from the pooling of reinsurance cessions at large primary insurance groups. Our portfolio of facultative risks is expected to deliver a stable premium volume in the current financial year.
Global reinsurance Worldwide treaty reinsurance Premium income is expected to increase again for the AsiaPacific markets. Along with sustained rising demand for insurance products in the expanding middle class of many emerging markets, regulatory changes – above all in China and India – are also having favourable implications for Hannover Re’s positioning. We expect our Chinese reinsurance portfolio to post another appreciable surge in premium volume. Nevertheless, tendencies towards a contraction in the outflow of reinsurance premiums into foreign markets can be anticipated in certain Asian markets.
In Spain and Portugal conditions for proportional treaties were mostly unchanged at the main renewal date – i. e. 1 January 2015 –, while they deteriorated somewhat for non-proportional programmes. Broadly speaking, we are satisfied with the development of our business despite the ongoing economic challenges faced by both countries. We improved our market share in Spain and booked modest premium growth in Portugal.
As a globally operating reinsurer, our focus in the prevailing highly competitive climate is on sustainable success. In the current financial year our business will be influenced above all by developments on capital markets and the complex regulatory requirements in individual regions.
In Germany it is our expectation that the low level of interest rates will be sustained in 2015 and that the pressure on returns facing primary insurers will remain correspondingly high.
These anticipated developments will therefore also affect our business. Particularly in the case of traditional life insurance policies, for example, the reduction of the guaranteed interest rate from 1.75% to 1.25% as at 1 January 2015 will likely mean a further contraction in the business volume. The order of the day for both insurers and reinsurers alike is to explore alternatives and attractive provision products that can generate demand.
In Continental European and international longevity markets we expect to see further growth in demand. Against the backdrop of progressively shifting demographics this will increasingly extend also to emerging markets, including China and Hong Kong, thereby generating additional business potential.
Bearing in mind the as yet unresolved European debt crisis and the associated uncertainties, we shall maintain the conservative orientation of significant parts of our investment portfolio. Nevertheless, irrespective of the sovereign debt issue, the improved economic outlook will be reflected in selective risktaking. Our emphasis on broad diversification will be retained unchanged. By way of a neutral modified duration we shall continue to ensure that the interest rate risk is tightly managed.
In the current year, despite a challenging environment on the capital market and in reinsurance business, we anticipate a good overall result for the Hannover Re Group. Bearing in mind developments both in property and casualty and in life and health reinsurance, we expect to book stable or slightly higher gross premium volume – based on constant exchange rates – for our total portfolio in the current financial year.
In life and health reinsurance we shall continue to concentrate on enlarging our range of services in the current year so as to offer our customers an optimal combination of traditional risk transfer and comprehensive reinsurance service. Adjusted for exchange rate effects, we expect to book slightly higher gross premium overall and an increased profit. The Value of New Business (VNB) for 2015 should again be in excess of EUR 180 million. We continue to aim for EBIT margins of 2% for financial solutions and longevity business and 6% for mortality and morbidity business.
The expected positive cash flow that we generate from the technical account and our investments should – based on stable exchange rates – lead to further growth in our asset portfolio. We anticipate a return on investment of 3.0%.
Events after the reporting date No matters of special significance occured after the closing date for the consolidated financial statements.
Fixed-income securities – at fair value through profit or loss 6.1 64,494 36,061
Profit / loss from investments in associated companies 7.2 1,042 12,536
Income / expense on funds withheld and contract deposits 7.2 376,056 357,348
Commission and brokerage, change in deferred acquisition costs 7.3 2,579,368 2,690,173
Income and expense recognised directly in equity that cannot be reclassified
Consolidated statement of changes N 04 in shareholders’ equity 2014 in EUR thousand
Changes in the consolidated group – – – – – – – – (14,265) (14,265)
Capital repayments – – – – – – – – (2,043) (2,043)
Other financial assets – at fair value through profit or loss
Cash and cash equivalents at the beginning of the period 642,936 572,188
Change in cash and cash equivalents (I. + II. + III. + IV.) 134,000 74,581
Hannover Rück SE and its subsidiaries (collectively referred to as the “Hannover Re Group” or “Hannover Re”) transact all lines of property & casualty and life & health reinsurance. With gross premium of approximately EUR 14.4 billion, Hannover Re is the third-largest reinsurance group in the world. The company’s network consists of more than 120 subsidiaries, affiliates, branches and representative offices worldwide with a total workforce of roughly 2,500. The Group’s German business is conducted by the subsidiary E+S Rückversicherung AG. Hannover Rück SE is a European Company, Societas Europaea (SE), and its registered office is located at Karl-Wiechert-Allee 50, 30625 Hannover, Germany. In total, 50.2% (rounded) of the shares of Hannover Rück SE are directly and indirectly held by Talanx AG, which in turn is majority-owned – with an interest of 79% – by HDI Haftpflichtverband der Deutschen Industrie V.a.G. (HDI).
Since 2002 the standards adopted by the International Accounting Standards Board (IASB) have been referred to as “International Financial Reporting Standards (IFRS)”; the standards dating from earlier years still bear the name “International
Accounting Standards (IAS)”. Standards are cited in our notes accordingly; in cases where the notes do not make explicit reference to a particular standard, the term IFRS is used. In view of the fact that reinsurance contracts, in conformity with IFRS 4 “Insurance Contracts”, are recognised according to the pertinent provisions of United States Generally Accepted Accounting Principles (US GAAP) as applicable on the date of initial application of IFRS 4 on 1 January 2005, we cite individual insurance-specific standards of US GAAP using the designation “Statement of Financial Accounting Standard (SFAS)” that was valid at that time.
The present consolidated financial statement was released for publication by a resolution of the Executive Board on 26 February 2015.
In May 2013 the IASB published IFRIC 21 “Levies”. IFRIC 21 provides guidance on the accounting of outflows imposed on entities by governments that do not constitute outflows within the scope of IAS 12 “Income Taxes”. IFRIC 21 is effective for annual periods beginning on or after 1 January 2014 and was endorsed by the EU in June 2014. The interpretation did not have any implications for the carrying amounts in the consolidated financial statement or for Group net income.
The revised version of IAS 28 “Investments in Associates and Joint Ventures” extends the content of standards governing the accounting of investments in associated companies to include rules governing the accounting of investments in joint ventures. In both instances application of the equity method is required.
In September 2014 the IASB published the “Annual Improvements to IFRSs 2012 – 2014 Cycle”. These annual improvements involve amendments and clarifications relating to the following standards: IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”, IFRS 7 “Financial Instruments: Disclosures”, IAS 19 “Employee Benefits” and IAS 34 “Interim Financial Reporting”. The amendments are effective for annual periods beginning on or after 1 July 2016 and have still to be endorsed by the EU.
In July 2014 the IASB published the final version of IFRS 9 “Financial Instruments”, which replaces all previous versions of this standard. The standard now contains requirements governing classification and measurement, impairment based on the new expected loss impairment model and general hedge accounting. The originally included model for macro hedge accounting, which considers risk management that assesses risk exposures on a continuous basis and at a portfolio level, is being treated separately from general hedge accounting by the IASB outside of IFRS 9. Initial mandatory application of the standard, which has still to be endorsed by the EU, is tentatively set for annual periods beginning on or after 1 January 2018. Hannover Re is currently reviewing the implications of this standard and anticipates significant implications for the consolidated financial statement.
In May 2014 the IASB issued IFRS 15 “Revenue from Contracts with Customers”. The standard specifies when and in what amount revenue is to be recognised and which disclosures are required for this purpose. IFRS 15 provides a single five-step model to be applied to all contracts with customers. Financial instruments and other contractual rights and obligations which are to be recognised under separate standards as well as (re)insurance contracts within the scope of IFRS 4 are expressly exempted from the standard’s scope of application. The standard is to be applied to an annual reporting period beginning on or after 1 January 2017, but has still to be endorsed by the EU.
The “Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation” provide additional guidance on the methods that can be used to calculate depreciation or amortisation of property, plant and equipment and intangible assets. The new guidelines are effective for annual periods beginning on or after 1 January 2016, but have still to be endorsed by the EU.
Establishment of the fair value of financial instruments carried as assets or liabilities: we establish the fair value of financial instruments carried as assets or liabilities using the methods and models described below. The fair value of a financial instrument corresponds to the amount that Hannover Re would receive or pay if it were to sell or settle the said financial instrument on the balance sheet date. Insofar as market prices are listed on markets for financial assets, their bid price is used; financial liabilities are valued at ask price. In other cases the fair values are established on the basis of the market conditions prevailing on the balance sheet date for financial assets with similar credit rating, duration and return characteristics or using recognised models of mathematical finance.
Hannover Re uses a number of different valuation models for this purpose. The details are set out in the table on the previous page. Financial assets for which no publicly available prices or observable market data can be used as inputs (financial instruments belonging to fair value hierarchy level 3) are for the most part measured on the basis of proven valuations drawn up by knowledgeable, independent experts, e. g. audited net asset value, the plausibility of which has previously been subjected to systematic review. For further information please see our explanatory remarks on the fair value hierarchy in Section 6.1 “Investments under own management”.
Own-use real estate: The portfolio of own-use real estate is measured at cost less scheduled straight-line depreciation over useful lives of 10 to 50 years. The fair values are determined for comparative purposes using the discounted cash flow method.
Loss and loss adjustment expense reserves are constituted for payment obligations from reinsurance losses that have occurred but have not yet been settled. They are subdivided into reserves for reinsurance losses reported by the balance sheet date and reserves for reinsurance losses that have already been incurred but not yet reported (IBNR) by the balance sheet date. The loss and loss adjustment expense reserves are based on estimates that may diverge from the actual amounts payable. In reinsurance business a considerable period of time may elapse between the occurrence of an insured loss, notification by the insurer and pro-rata payment of the loss by the reinsurer. For this reason the best estimate of the future settlement amount is carried. With the aid of actuarial methods, the estimate makes allowance for past experience and assumptions relating to the future development. The interest rate-induced portion of the change in the reserve is shown in the statement of income on a consistent Group basis. With the exception of a few reserves, future payment obligations are not discounted.
Sundry non-technical provisions are established according to the best estimate of the amount required and shown under the balance sheet item “Other liabilities”. Allocation to such provisions is conditional upon the Group currently having a legal or actual obligation that results from a past event and in respect of which utilisation is probable and the amount can be reliably estimated. The carrying amount of the provisions is reviewed at each balance sheet date.
Non-current assets held for sale and discontinued operations: in accordance with IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”, non-current assets and disposal groups are classified as held for sale if the relevant book value is realised largely through sale rather than through continued use. Components of an entity that can be clearly distinguished from the rest of the entity for operational and accounting purposes and were classified as sold or for sale are recognised as discontinued operations. Measurement is at the lower of book value and fair value less costs to sell. Scheduled depreciation is not taken on non-current assets classified as held for sale. Impairment losses on fair value less costs to sell are recognised in profit or loss; a gain for any subsequent increase in fair value less costs to sell leads to the realisation of profit up to the amount of the cumulative impairment. If the impairment loss to be taken on a disposal group exceeds the book value of the corresponding non-current assets, the need to establish a provision within the meaning of IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” is reviewed.
In life business too the calculation of reserves and assets is crucially dependent on actuarial projections of the covered business. So-called model points are defined according to the type of business covered. The main distinguishing criteria are the age, sex and (non-)smoker status of the insured, tariff, policy period, period of premium payment and amount of insurance. The portfolio development is simulated for each model point, in which regard the key input parameters are either predefined by the tariff (e. g. allowance for costs, amount of premium, actuarial interest rate) or need to be estimated (e. g. mortality or disability rates, lapse rates). These assumptions are heavily dependent on country-specific parameters and on the sales channel, quality of the cedant’s underwriting and claims handling, type of reinsurance and other framework conditions of the reinsurance treaty. The superimposition of numerous model points gives rise to a projection, which incorporates inter alia assumptions concerning the portfolio composition and the commencement of covered policies within the year. Such assumptions are estimated at the inception of a reinsurance treaty and subsequently adjusted to the actual projection.
In determining the carrying amounts for certain financial assets it is sometimes necessary to make assumptions in order to calculate fair values. In this regard we would refer the reader to our remarks in Section 3.1 “Summary of major accounting policies” concerning financial assets at fair value through profit or loss and securities held as available for sale. Assumptions concerning the appropriate applicability criteria are necessary when determining the need for impairments on non-monetary financial assets held as available for sale. In this regard we would again refer the reader to our explanatory remarks in Section 3.1 “Summary of major accounting policies”.
The capital consolidation is based on the acquisition method. In the context of the acquisition method the acquisition costs, measured at the fair value of the consideration rendered by the parent company on the acquisition date, are netted with the proportionate shareholders’ equity of the subsidiary at the time when it is first included in the consolidated financial statement after the revaluation of all assets and liabilities. After recognition of all acquired intangible assets that in accordance with IFRS 3
“Business Combinations” are to be accounted for separately from goodwill, the difference between the revalued shareholders ’ equity of the subsidiary and the purchase price is recognised as goodwill. Under IFRS 3 scheduled amortisation is not taken on goodwill. Instead, impairment is taken where necessary on the basis of annual impairment tests. Immaterial and negative goodwill are recognised in the statement of income in the year of their occurrence. Costs associated with acquisition are expensed.
Consolidation of business transactions within the Group Receivables and liabilities between the companies included in the consolidated financial statement were offset against each other. Profits and expenses from business transactions within the Group were also eliminated. Transactions between a disposal group and the continuing operations of the Group were similarly eliminated in accordance with IFRS 10.
Information on the non-controlling interests in shareholders’ equity and profit or loss as well as on the major non-controlling interests is provided in Section 6.14 “Non-controlling interests”. On the balance sheet date there were no significant restrictions on access to or the use of Group assets due to protective rights in favour of non-controlling interests.
In conformity with Item 7.1.4 of the recommendations of the German Corporate Governance Code as amended on 24 June 2014, the following table also lists the percentage share in capital, the capital and reserves and the result for the last financial year for major participations in unconsolidated third companies.
Hannover Insurance-Linked Securities GmbH & Co. KG, Hannover / Germany 3 100.00 EUR 198 93
Hannover America Private Equity Partners II GmbH & Co. KG, Hannover / Germany 1 95.42 EUR 190,590 25,843
HR GLL Central Europe GmbH & Co. KG, Munich / Germany 1 87.67 EUR 204,183 (292)
HAPEP II Komplementär GmbH, Hannover / Germany 1 82.40 EUR 31 3
Hannover Euro Private Equity Partners III GmbH & Co. KG, Cologne / Germany 1 67.54 EUR 32,077 1,865
Hannover Euro Private Equity Partners IV GmbH & Co. KG, Cologne / Germany 1 60.58 EUR 50,416 12,257
Hannover Euro Private Equity Partners II GmbH & Co. KG, Cologne / Germany 1 57.89 EUR 9,893 3,096
HEPEP II Holding GmbH, Cologne / Germany 1 57.89 EUR 8,203 421
Oval Office Grundstücks GmbH, Hannover / Germany 50.00 EUR 59,842 1,930
HANNOVER Finanz GmbH, Hannover / Germany 5 27.78 EUR 69,805 6,378
Hannover Finance (Luxembourg) S.A., Luxembourg / Luxembourg 1 100.00 EUR 54,353 28,830
Hannover Finance (UK) Limited, London / United Kingdom 1 100.00 GBP 2,734 2,084
Hannover Life Re of Australasia Ltd, Sydney / Australia 1 100.00 AUD 478,191 26,770
Hannover ReTakaful B.S.C. (c), Manama / Bahrain 1 100.00 BHD 55,389 7,125
Hannover Services (UK) Limited, London / United Kingdom 1 100.00 GBP 712 109
International Insurance Company of Hannover SE, London / United Kingdom 1, 7 100.00 GBP 136,823 (6,300)
Hannover Re (Guernsey) PCC Limited, St Peter Port / Guernsey 1 100.00 EUR – –
Hannover Finance, Inc., Wilmington / USA 1, 8 100.00 USD 440,055 8,328
Hannover Reinsurance Africa Limited, Johannesburg / South Africa 100.00 ZAR 752,060 11,094
Peachtree (Pty) Ltd., Johannesburg / South Africa 10 100.00 ZAR – –
Hannover Re Real Estate Holdings, Inc., Orlando / USA 1, 8 95.25 USD 488,570 19,289
Result for the last financial year 300 California, LLC, Wilmington / USA 12 95.15 USD – –
Nashville West, LLC, Wilmington / USA 8 95.15 USD 30,457 49 1225 West Washington, LLC, Wilmington / USA 8 95.15 USD 23,647 1,067 975 Carroll Square, LLC, Wilmington / USA 8 95.15 USD 55,571 1,897
River Terrace Parking, LLC, Wilmington / USA 8 95.15 USD 21,971 54
Kaith Re Ltd., Hamilton / Bermuda 1 88.00 USD 418 (321)
HR GLL Europe Holding S.à r.l., Luxembourg / Luxembourg 1 87.67 EUR 103,462 (17)
HR GLL CDG Plaza S.r.l., Bucharest / Romania 1 87.67 RON 173,426 1,315
Integra Insurance Solutions Limited, Bradford / United Kingdom 5 74.99 GBP 3,019 2,035
MUA Insurance Company Ltd., Cape Town / South Africa 51.00 ZAR – 204
MUA Insurance Acceptances (Pty) Ltd., Cape Town / South Africa 40.80 ZAR 13,232 5,603
SUM Holdings (Pty) Ltd., Johannesburg / South Africa 36.82 ZAR 16,361 4,573
Synergy Targeted Risk Solutions (Pty) Ltd, Johannesburg / South Africa 30.60 ZAR 1,980 1,039
Hannover Life Re Consultants, Inc., Orlando / USA 1 100.00 USD 187 (18)
Hannover Rück SE Escritório de Representação no Brasil Ltda., Rio de Janeiro / Brazil 5 100.00 BRL 2,083 849
L&E Holdings Limited, London / United Kingdom 1 100.00 GBP 5 –
London & European Title Insurance Services Limited, London / United Kingdom 1 100.00 GBP 241 –
HMIA Pty Ltd, Sydney / Australia 12 55.00 AUD – –
Firedart Engineering Underwriting Managers (Pty) Ltd., Johannesburg / South Africa 14 29.78 ZAR 1,497 1,419
Clarendon Transport Underwriting Managers (Pty) Ltd., Johannesburg / South Africa 19.02 ZAR 13,204 26,023
Synergy XOL (Pty) Ltd., Johannesburg / South Africa 12 10.20 ZAR – –
Energi Insurance Services, Inc., Peabody / USA 5 28.50 USD (1,629) 859
Energi of Canada Ltd., Toronto / Canada 5 28.50 CAD (48) (11)
Energi Re, LLC, Dover / USA 5 28.50 USD 7,878 2,958
Hurst Holme Insurance Company Limited – account 2006-03 SCC, Hamilton / Bermuda 5, 10 28.50 USD 298 (415)
XS Direct Insurance Brokers Limited, Dublin / Ireland 5 25.00 EUR 113 (186)
Meribel Topco Limited, St. Helier / Jersey 15 20.11 EUR 2,403 (54)
Meribel Midco Limited, St. Helier / Jersey 15 20.11 EUR 246,851 20,628
Iconica Business Services Limited, Bradford / United Kingdom 16 18.75 GBP (462) (461)
Acte Vie S.A. Compagnie d’ Assurances sur la Vie et de Capitalisation, Strasbourg / France 5 9.38 EUR 8,742 261 1 Provisional (unaudited) figures 2 Year-end result after profit transfer 3 Financial year as at 30 September 2014 4 Company is inactive.
5 Figures as at 31 December 2013 6 Formerly WetterProtect GmbH 7 Formerly International Insurance Company of Hannover Plc / Limited 8 IFRS figures 9 Financial year as at 31 October 2014 10 Company is in liquidation.
Consolidation of structured entities Business relations with structured entities are to be examined in accordance with IFRS 10 in conjunction with IFRS 12 with an eye to their implications for consolidation. In the context of their operational activities some companies belonging to the Hannover Re Group enter into business relations with structured entities that are to be analysed and accounted for according to these new provisions.
In accordance with the consistent consolidation model, a structured entity – just like a subsidiary – must be consolidated if Hannover Re gains control over the said entity. With regard to the criteria for control please see also Section 4.1 “Consolidation principles”. Within the Hannover Re Group the requirement to consolidate structured entities is examined as part of an analysis that encompasses both transactions in which a structured entity is initiated by us with or without the involvement of third parties and those in which we enter into contractual relations with an already existing structured entity with or without the involvement of third parties. Consolidation decisions are reviewed as necessary and at least once a year. The list of all consolidated structured entities forms part of the list of shareholdings.
Hannover Re PCC (Guernsey) Ltd. was a so-called protected cell company under the “Protected Cell Companies Ordinance 1997”, the primary objective of which was to offer services in the area of direct insurance and reinsurance. The PCC has been closed to new business since 2009 and was wound up effective 31 December 2014. The liquidation of the company, which is planned for the first quarter of 2015, will merely give rise to a minimal amount of residual commitments for Hannover Re.
Pursuant to IFRS 10 we consider the general account and the segregated accounts to be separate units to which the principles of so-called “silo accounting” are applied. In accordance with this concept, Hannover Re is required to consolidate the general account of Kaith Re Ltd. and is contractually responsible for the fees due to external service providers that are to be covered from the general account’s own funds. Each individual segregated account is to be examined separately by the parties concerned (investors) with an eye to a consolidation requirement and is to be consolidated according to the particular contractual arrangements in each case.
Effective 16 October 2014, LI RE was established as a segregated account of Kaith Re Ltd., the purpose of which – as with all segregated accounts under Kaith Re Ltd. – is the securitisation of underwriting risks. In contrast to the other segregated accounts, the sole investor and hence the risk carrier of LI RE is Hannover Re.
Investment including investments in catastrophe bonds (ILS) Within the scope of its investment activities Hannover Re has participated since 1988 inter alia in numerous structured entities. These are predominantly special purpose entities in the form of funds, which for their part transact certain types of equity and debt capital investments. These investments encompass private equity funds, fixed income funds, collateralised debt obligations, real estate funds, index funds and other public funds. The volume of these transactions is derived from the book values of the respective investments and amounted to EUR 2,489.4 million as at the balance sheet date. The maximum risk of loss corresponds to the book values.
Hannover Re participates through its subsidiary Leine Investment SICAV-SIF, Luxembourg, in a number of structured entities that issue catastrophe bonds for the securitisation of catastrophe risks by investing in such bonds. Leine Investment General Partner S.à r.l. is the managing partner of the asset management company Leine Investment SICAV-SIF, the business object of which is to build, hold and manage a portfolio of insurance-linked securities (catastrophe bonds) – including for third-party investors outside the Group. The volume of these transactions is derived from the book values of the respective investments and amounted to EUR 50.3 million as at the balance sheet date. The maximum risk of loss corresponds to the book values.
By way of its “K” transactions Hannover Re has raised underwriting capacity for catastrophe risks on the capital market. The “K Cession”, which was placed with investors in North America, Europe and Asia, involves a quota share cession on worldwide natural catastrophe business as well as aviation and marine risks. The volume of the “K Cession” securitised via structured entities was equivalent to EUR 169.2 million as at the balance sheet date. The transaction has an indefinite term and can be cancelled annually by the investors. Segregated accounts of Kaith Re Ltd. are used for transformer purposes for part of this transaction. Hannover Re also uses further segregated accounts of Kaith Re Ltd. and other structured entities for various retrocessions of its traditional covers, which are passed on to institutional investors in securitised form. The volume of these transactions is measured by the ceded exposure limit of the underlying retrocession agreements and amounted to EUR 847.9 million as at the balance sheet date. The structured entities are in all cases fully funded by contractually defined investments in the form of cash and equivalent liquid assets. Given that the entire exposure limit of the structured entities is therefore wholly collateralised in each case, there is no risk of an underwriting loss for Hannover Re.
Insurance-linked securities (ILS) As part of its extended Insurance-Linked Securities (ILS) activities, Hannover Re has concluded so-called collateralised fronting arrangements under which risks assumed from ceding companies are passed on to institutional investors outside the Group using structured entities (special purpose entities). The purpose of such transactions is to directly transfer clients’ business. The volume of the transactions is derived from the ceded exposure limit of the underlying retrocession agreements and amounted to EUR 3,135.3 million as at the balance sheet date. Part of the ceded exposure limit is funded by contractually defined investments in the form of cash and equivalent liquid assets. In these cases the exposure limit is wholly collateralised and to this extent there is no risk of an underwriting loss for Hannover Re. A further part of the exposure limit of these transactions remains uncollateralised or is collateralised by less liquid assets. The maximum risk of loss from these transactions is derived from the uncollateralised exposure limit and the credit risk of the collateral and amounted to EUR 1,942.4 million as at the balance sheet date. This does not, however, correspond to the economic risk of loss, which is established using recognised actuarial methods. The expected loss on a modelled basis in a worst-case scenario of 10,000 years amounts to at most EUR 50.0 million.
Book values from business relations with unconsolidated structured entities N 10 in EUR thousand
After Secquaero ILS Fund Ltd., Georgetown, Grand Cayman, had been deconsolidated and carried as a participating interest at net asset value in the previous year, the remaining shares held by Hannover Rück SE were returned effective 31 December 2014 and the participation in the company was terminated.
Both Hannover Life Reassurance Company of America (Bermuda ) Ltd., which was consolidated for the first time with effect from the first quarter of 2014, and the financial interest in Meribel TopCo Limited are allocable to the life and health reinsurance segment. Glencar Underwriting Managers Inc., which has been included at equity in the consolidated financial statement since the first quarter of 2014 as an associated company, and the special purpose property company Mustela s.r.o., which was consolidated for the first time in the period under review, are allocable to the property and casualty reinsurance segment.
Income / expense on funds withheld and contract deposits 20,394 14,947
Commission and brokerage, change in deferred acquisition costs and other technical income / expenses 1,643,705 1,532,749
Maturities of the fixed-income and variable-yield securities N 13 in EUR thousand 2014 2013
Held to maturity due in one year 1,089,446 1,110,905 587,925 594,854 due after one through two years 539,118 561,992 1,062,548 1,114,378 due after two through three years 145,300 151,217 513,930 546,127 due after three through four years 97,896 103,592 140,576 148,806 due after four through five years 32,696 35,894 95,480 98,983 due after five through ten years 234,795 273,704 264,473 286,236 due after more than ten years 491 568 1,855 2,255
Available for sale due after one through two years 2,415,488 2,449,568 2,789,025 2,838,390 due after two through three years 2,908,199 2,972,420 1,848,794 1,899,960 due after three through four years 2,904,276 2,951,154 2,318,986 2,384,389 due after four through five years 2,655,178 2,741,708 2,700,046 2,728,465 due after five through ten years 9,181,834 9,760,031 7,765,540 7,896,895 due after more than ten years 3,122,626 3,543,151 2,657,402 2,749,944
Financial assets at fair value through profit or loss due in one year 5,306 5,306 8,339 8,339 due after one through two years 2,433 2,433 4,337 4,337 due after two through three years 12,251 12,251 2,182 2,182 due after three through four years 20,590 20,590 5,991 5,991 due after four through five years 10,790 10,790 – –
due after more than ten years 12,978 12,978 15,212 15,212 1 Including accrued interest 2 Including short-term investments, cash and cash equivalents
Amortised cost, unrealised gains and losses and accrued interest on the portfolio of investments classified N 14 as held to maturity as well as their fair value in EUR thousand 2014
Debt securities issued by semi-governmental entities 427,611 6,444 16,019 1,463 442,167
Government debt securities of EU member states 396,720 7,078 16,775 – 413,495
Debt securities issued by semi-governmental entities 526,193 8,015 23,185 – 549,378
Debt securities issued by semi- governmental entities 1,852,193 29,970 145,725 4,554 1,993,364
Debt securities issued by semi-governmental entities 4,183,118 42,250 305,078 2,954 4,485,242
Amortised cost, unrealised gains and losses and accrued interest on the portfolio of investments N 19 classified as available for sale as well as their fair value in EUR thousand 2013
Government debt securities of EU member states 1,906,099 18,075 40,708 19,518 1,927,289
Debt securities issued by semi-governmental entities 3,849,195 45,377 117,838 24,549 3,942,484
Fair value of financial assets at fair value through profit or loss before and after accrued interest N 20 as well as accrued interest on such financial assets
Participating interests and other invested assets, real estate funds 1,643,408 5,847 1,274,691 4,077
Rating structure of fixed-income securities N 22 in EUR thousand 2014
Fixed-income securities – loans and receivables 1,808,018 616,470 317,318 135,878 46,117 4,732 – 59,654 2,988,187
Fixed-income securities – loans and receivables 1,287,512 1,502,316 215,414 139,227 46,910 – 4,554 13,167 3,209,100
Breakdown of investments by currencies N 24 in EUR thousand 2014
Fixed-income securities – loans and receivables – 6,490 2,112,064 45,092 – 724,533 – 100,008 2,988,187
Fixed-income securities – available-for-sale 1,769,408 753,826 8,246,517 2,794,734 138,381 11,808,473 204,544 1,101,640 26,817,523
Equity securities – available-for-sale – – 19,409 – – 13,395 – – 32,804
Fixed-income securities – at fair value through profit or loss – – 23,455 575 – 12,031 – – 36,061
Financial information on investments in associated companies N 26 in EUR thousand 2014 2013
Net book value at 31 December of the year under review 154,822 144,489
Public price listings are not available for companies valued at equity. The net book value of associated companies includes goodwill in the amount of EUR 23.1 million (EUR 19.4 million). For further details of our major participating interests please see Section 4 “Consolidation”.
Development of investment property N 28 in EUR thousand 2014 2013
Net book value at 31 December of the previous year 847,164 491,660
Net book value at 1 January of the year under review 891,451 478,688
Net book value at 31 December of the year under review 978,302 847,164
In addition, we held indirect real estate investments measured at fair values in an amount of EUR 321.0 million (EUR 247.4 million ) in the year under review, the amortised costs of which amounted to EUR 260.1 million (EUR 204.9 million). The differences between the carrying amounts and amortised costs were recognised as unrealised gains of EUR 62.1 million (EUR 43.7 million) and unrealised losses of EUR 1.2 million (EUR 1.2 million) under cumulative other comprehensive income.
Real estate which is held for sale as defined by IFRS 5 is recognised separately in the consolidated balance sheet. Intentions to sell are substantiated by individual real estate market conditions and specific property circumstances, taking into consideration current and future opportunity / risk profiles. In the year under review no properties were reclassified to assets held for sale.
Other invested assets The other invested assets consisted largely of participating interests in partnerships measured at fair value in an amount of EUR 1,153.9 million (EUR 898.6 million), the amortised cost of which amounted to EUR 749.7 million (EUR 622.7 million). The differences between the carrying amounts and the amortised costs were recognised as unrealised gains of EUR 409.0 million (EUR 282.1 million) and unrealised losses of EUR 4.8 million (EUR 6.2 million) under cumulative other comprehensive income.
In addition, acquired life insurance policies measured at fair value through profit or loss were recognised under the other invested assets in an amount of EUR 105.0 million (EUR 90.2 million).
• Level 3: Assets or liabilities that cannot be measured or can only be partially measured using observable market inputs. The measurement of such instruments draws principally on valuation models and methods
In the year under review alternative investments with a fair value of EUR 36.3 million were no longer allocable to level 2 but rather to 3 as a consequence of model-based pricing. In the previous year fixed-income securities with a fair value of EUR 7,603.4 million, which were measured using average prices from price service agencies, were no longer allocable to level 1 but rather to level 2. For the most part they involved bonds traded on the OTC market. Reallocation was carried out in accordance with the position on accounting practice “IDW RS HFA 47 Einzelfragen zur Ermittlung des Fair Value nach IFRS 13” adopted by the Main Technical Committee of the Institute of Public Auditors in Germany (IDW) on 6 December 2013, according to which average prices from service agencies constitute level 2 inputs if the underlying data on which these average prices are based are firm bid prices or observable transaction-based prices. The previous year’s reclassification was therefore based neither on changed liquidity characteristics of these instruments nor on a modified investment strategy. No further reclassifications were made in the previous year.
Fair value hierarchy of financial assets and liabilities recognised at fair value N 29 in EUR thousand 2014
Fair value hierarchy of financial assets and liabilities recognised at fair value N 30 in EUR thousand 2013
Net book value at 31 December of the previous year 5,179 8 247,400 952,451 68,827
Net book value at 31 December of the previous year 27,329 8 156,301 905,652 54,812
Income and expenses recognised in the statement of income 1,090 – (494) (3,641) (987)
Income and expenses from level 3 financial assets and liabilities N 33 in EUR thousand 2014
Change in fair value of financial instruments 1 – (3,014) 3,604
Total depreciation, impairments and appreciation of investments – (11) (5,759) –
Income and expenses from level 3 financial assets and liabilities N 34 in EUR thousand 2013
Fair value hierarchy of financial assets and liabilities measured at amortised cost N 36 in EUR thousand 2013
The funds withheld totalling EUR 15,826.5 million (EUR 14,267.8 million) represent the cash and securities deposits furnished by our company to our cedants that do not trigger any cash flows and cannot be realised by cedants without our consent. The maturities of these deposits are matched to the corresponding provisions. In the event of default on such a deposit our reinsurance commitment is reduced to the same extent. The increase in funds withheld was attributable principally to new business and exchange rate effects.
Development of deferred acquisition costs N 37 in EUR thousand 2014 2013
Net book value at 31 December of the previous year 1,672,398 1,841,279
For further explanatory remarks please see Section 3.1 “Summary of major accounting policies”.
Gross book value of accounts receivable at 31 December of the year under review 3,156,199 2,981,675
In addition, we took specific value adjustments on reinsurance recoverables on unpaid claims in the year under review. We would refer the reader to the corresponding remarks on the loss and loss adjustment expense reserve in Section 6.7 “Technical provisions”. With regard to the credit risks resulting from technical assets we would also refer the reader to our comments on page 94 et seq. of the risk report.
Net book value at 31 December of the previous year 57,070 59,099
This item principally included the goodwill from the acquisition of E+S Rückversicherung AG as well as from the acquisition of a 75% interest in Integra Insurance Solutions Limited.
The following capitalisation rates and growth rates were recognised for the individual cash-generating units: Capitalisation rates N 41
Sensitivity analyses were performed in which the capitalisation rates as well as material and value-influencing items of the relevant planning calculations (such as premium volumes, investment income or loss ratios) were varied. In this context it was established that in the event of changes in parameters within ranges that could reasonably occur, the values in use were in each case higher than the corresponding book values. Please see also our basic remarks in Section 3.1 “Summary of major accounting policies”.
The item “Other” includes receivables of EUR 165.6 million (EUR 73.6 million) which correspond to the present value of future premium payments in connection with derivative financial instruments arising from transactions in the life and health reinsurance business group. For further explanation please see Section 8.1 “Derivative financial instruments and financial guarantees”.
Development of the present value of future profits (PVFP) on acquired life reinsurance portfolios N 43 in EUR thousand 2014 2013
Net book value at 31 December of the year under review 82,390 85,270
The period of amortisation amounts to altogether 30 years. For further information please refer to our explanatory notes on intangible assets in Section 3.1 “Summary of major accounting policies”.
Insurance for pension commitments Effective 1 July 2003 Hannover Rück SE took out insurance for pension commitments. The commitments involve deferred annuities with regular premium payment under a group insurance policy. In accordance with IAS 19 “Employee Benefits” they were carried as a separate asset at fair value as at the balance sheet date in an amount of EUR 76.6 million (EUR 71.6 million).
Fixtures, fittings and equipment N 44 in EUR thousand 2014 2013
Cumulative depreciation at 31 December of the year under review 110,621 99,608
Net book value at 31 December of the previous year 30,220 24,011
Net book value at 31 December of the year under review 33,167 30,220
Gross book value at 31 December of the previous year 196,689 184,725
Cumulative depreciation at 31 December of the year under review 182,834 165,846
Credit risks may result from other financial assets that were not overdue or adjusted as at the balance sheet date. In this regard, the reader is referred in general to our comments on the credit risk contained in the risk report on page 90 et seq.
Loss and loss adjustment expense reserve N 47 in EUR thousand 2014 2013 gross retro net gross retro net
Net loss reserve and its run-off in the property and casualty reinsurance segment N 48 in EUR million 31.12.
As percentage of original loss reserve 1.3 0.4 0.7 0.7 0.7 -0.2 0.1 0.1 -0.5 -0.8
The run-off profit of altogether EUR 275.6 million in the 2014 financial year derives, as in the previous year, above all from positive run-offs of reserves in the areas of marine / aviation and short-tail property business.
Maturities of the technical reserves IFRS 4 “Insurance Contracts” requires information which helps to clarify the amount and timing of cash flows expected from reinsurance contracts. In the following tables we have shown the future maturities of the technical provisions broken down by the expected remaining times to maturity. As part of our maturity analysis we have directly deducted the deposits put up as collateral for these reserves, since the cash inflows and outflows from these deposits are to be allocated directly to the ceding companies. For further explanation of the recognition and measurement of the reserves please see Section 3.1 “Summary of major accounting policies”.
Maturities of the technical reserves N 49 in EUR thousand 2014
Due after ten through twenty years 2,323,594 100,496 2,223,098 558,283 25,807 532,476
Maturities of the technical reserves N 50 in EUR thousand 2013
Due after five through ten years 3,181,135 174,727 3,006,408 986,066 186,716 799,350
Due after ten through twenty years 2,113,511 101,954 2,011,557 569,149 36,203 532,946
The mortality and morbidity rates used are chosen on the basis of national tables and the insurance industry standard. Empirical values for the reinsured portfolio, where available, are also taken into consideration. In this context insights into the gender, age and smoker structure are incorporated into the calculations, and allowance is also made for factors such as product type, sales channel and the frequency of premium payment by policyholders.
Net book value after currency translation 11,394,577 378,820 11,015,757 10,705,301 499,438 10,205,863
Development of the unearned premium reserve N 52 in EUR thousand 2014 2013 gross retro net gross retro net
Net book value at 31 December of the previous year 2,405,497 139,039 2,266,458 2,339,809 138,373 2,201,436
Net book value after currency translation 2,573,827 148,642 2,425,185 2,218,849 130,521 2,088,328
The contract deposits on the liabilities side increased by EUR 502.4 million in the year under review from EUR 5,569.9 million to EUR 6,072.3 million. The contract deposits item on the liabilities side essentially encompasses balances deriving from non-traditional life insurance contracts that are to be carried as liabilities. The increase was due principally to exchange rate effects.
Pension commitments are given in accordance with the relevant version of the pension plan as amended. The 1968 pension plan provides for retirement, disability, widows’ and orphans’ benefits. The pension entitlement is dependent on length of service; entitlements under the statutory pension insurance scheme are taken into account. The pension plan was closed to new participants with effect from 31 January 1981.
On 1 April 1993 (1 June 1993 in the case of managerial staff) the 1993 pension plan came into effect. This pension plan provides for retirement, disability and surviving dependants’ benefits. The scheme is based upon annual determination of the pension contributions, which are calculated according to the pensionable employment income and the company’s performance. The pension plan was closed to new participants with effect from 31 March 1999.
From 1997 onwards it has been possible to obtain pension commitments through deferred compensation. The employeefunded commitments included in the provisions for accrued pension rights are protected by an insurance contract with HDI Lebensversicherung AG, Cologne.
The calculation of the provisions for pensions is based upon the following assumptions: Measurement assumptions N 53
The movements in the net pension liability for the Group’s various defined benefit plans were as follows: Movements in net liability from defined benefit pension plans N 54
Actuarial gain (–) / loss (+) from change in biometric assumptions 11 (352) – – – –
Actuarial gain (–) / loss (+) from change in financial assumptions 52,930 (11,705) – – – –
Experience gains (–) / losses (+) (1,160) (885) – – – –
The reconciliation of the projected benefit obligations with the recognised provisions for pensions is as follows: Provisions for pensions N 55 in EUR thousand 2014 2013
Projected benefit obligations at 31 December of the financial year 187,034 129,602
Fair value of plan assets at 31 December of the financial year 15,533 13,510
Recognised pension obligations at 31 December of the financial year 171,501 116,167 thereof: Capitalised assets – 245
Sensitivity analysis An increase or decrease in the key actuarial assumptions would have the following effect on the present value of the defined benefit obligation as at the balance sheet date: Effect on the defined benefit obligation N 56 in EUR thousand Parameter increase Parameter decrease
Furthermore, a change is possible with respect to the assumed mortality rates and lifespans. The underlying mortality tables were adjusted by reducing the mortalities by 10% in order to determine the longevity risk. Extending the lifespans in this way would have produced a EUR 5.3 million higher pension commitment at the end of the financial year.
With regard to the liabilities from derivatives in an amount of EUR 240.2 million (EUR 119.0 million), please see our explanatory remarks on derivative financial instruments in Section 8.1 “Derivative financial instruments and financial guarantees”.
The maturities of the sundry non-technical provisions as at the balance sheet date are shown in the following table: Maturities of the sundry non-technical provisions N 59 in EUR thousand 2014 2013
Due after five years 3,859 4,952 6.12 Debt and subordinated capital
On 15 September 2014 Hannover Re placed another EUR 500.0 million subordinated bond on the European capital market through Hannover Rück SE, Hannover. The issue has a perpetual maturity with a first scheduled call option on 26 June 2025 and may be redeemed at each coupon date thereafter. It carries a fixed coupon of 3.375% p. a. until 26 June 2025, after which the interest rate basis changes to 3-month EURIBOR +325 basis points.
On 1 June 2005 Hannover Rück SE issued further subordinated debt in the amount of EUR 500.0 million through its subsidiary Hannover Finance (Luxembourg) S.A. The bond is perpetual and carries a fixed coupon of 5.00% in the first ten years. It may be redeemed on 1 June 2015 at the earliest and at each coupon date thereafter. If the bond is not called at the end of the tenth year, the coupon will step up to a floating-rate yield of quarterly EURIBOR +268 basis points. The interest will be serviced according to the same principles as those practised in the past.
The aggregated fair value of the extended subordinated loans is based on quoted, active market prices. If such price information was not available, fair value was determined on the basis of the recognised effective interest rate method or estimated using other financial assets with similar rating, duration and return characteristics. Under the effective interest rate method the current market interest rate levels in the relevant fixedinterest -rate periods are always taken as a basis.
Net gains and losses from dept and subordinated capital N 64
The ordinary expenses principally include interest expenses of nominally EUR 90.4 million (EUR 121.9 million) resulting from the issued subordinated debt.
A number of LoC facilities include standard market clauses that allow the banks rights of cancellation in the event of material changes in our shareholding structure or trigger a requirement on the part of Hannover Re to furnish collateral upon materialisation of major events, for example if our rating is significantly downgraded. Please see also our explanatory remarks in the “Financial position” section of the management report, page 59 et seq., on the information pursuant to § 315 Para. 4 German Commercial Code (HGB).
Treasury shares IAS 1 requires separate disclosure of treasury shares in shareholders ’ equity. As part of this year’s employee share option plan Hannover Rück SE acquired altogether 21,608 (18,750) treasury shares during the second quarter of 2014 and delivered them to eligible employees at preferential conditions. These shares are blocked until 31 May 2018. This transaction resulted in an expense of EUR 0.4 million (EUR 0.4 million), which was recognised under personnel expenditure, as well as a negligible increase in retained earnings recognised in equity. The company was no longer in possession of treasury shares as at the balance sheet date.
Net income 211,042 103,960 thereof attributable to non-controlling interests 76,341 37,752
Shareholders’ equity 1,908,328 1,711,625 thereof attributable to non-controlling interests 671,892 621,563
7. Notes on the individual items of the statement of income 7.1 Gross written premium
The impairments totalling EUR 9.2 million (EUR 5.4 million) were largely attributable in an amount of EUR 5.8 million (EUR 3.5 million) to the area of alternative investments – specifically, exclusively to private equity investments. No impairments were recognised on equities or equity funds in the year under review or the comparable period because their fair values did not fall significantly – i. e. by at least 20% – or for a prolonged period – i. e. for at least nine months – below acquisition cost.
Interest income on investments N 68 in EUR thousand 2014 2013
Financial assets – at fair value through profit or loss 1,810 958
Net gains and losses on investments N 69 in EUR thousand 2014
The administrative expenses amounted to altogether 2.9% (2.7%) of net premium earned.
Commissions and brokerage, change in deferred acquisition costs N 73 in EUR thousand 2014 2013
Commissions and brokerage, change in deferred acquisition costs (net) 2,579,368 2,690,173
Other technical expenses (net) 7,461 7,874 7.4 Other income and expenses
The reader is referred to the remarks in Section 3.1 “Summary of major accounting policies” regarding the basic approach to the recognition and measurement of deferred taxes.
The tax rate used to calculate the deferred taxes of the domestic companies was unchanged from the previous year at 31.93% (rounded to 32%). It is arrived at from the corporate income tax rate of 15.0%, the German reunification charge of 5.5%
Breakdown of taxes on income The breakdown of actual and deferred income taxes was as follows: Income tax N 76 in EUR thousand 2014 2013
Change in deferred taxes due to changes in tax rates – (6,739)
Domestic / foreign breakdown of recognised tax expenditure / income N 77 in EUR thousand 2014 2013
Deferred tax assets and deferred tax liabilities of all Group companies N 78 in EUR thousand 2014 2013
Present value of future profits on acquired life reinsurance portfolios (PVFP) 10,299 10,659
The deferred tax assets and deferred tax liabilities are shown unoffset in the above table. The deferred taxes are recognised as follows in the balance sheet after appropriate netting: Netting of deferred tax assets and deferred tax liabilities N 79 in EUR thousand 2014 2013
Reconciliation of the expected expense for income taxes with the actual expense N 80 in EUR thousand 2014 2013
Tax expense / income not attributable to the reporting period (34,269) 5,233
Availability of loss carry-forwards that have not been capitalised: Expiry of non-capitalised loss carry-forwards and temporary differences N 81 in EUR thousand One to five years Six to ten years More than ten years