Equity attributable to shareholders of Hannover Rück SE 5,888.4 -2.4% 6,032.5 4,970.6 4,509.0 3,714.4
Dividend per share in EUR 3.00 2 2.60 + 0.40 3 2.10 2.30 2.10
Share price at year-end in EUR 62.38 +5.8% 58.96 38.325 40.135 32.71
A complete list of our shareholdings is provided on page 155 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 234 et seq.
Hannover Re, with a gross premium of around EUR 14 billion, is the third-largest reinsurer in the world.
After having generated average premium growth in the double-digit percentages since 2009, the pace slowed appreciably in the year under review. Gross written premium increased by just 1.4 percent in our reporting currency (euro) to EUR 14 billion. Adjusted for exchange rate effects, too, the growth of 4 percent fell somewhat short of our expectations. It is pleasing to note, however, that this is not because we have fewer opportunities to write new business, but rather is a reflection solely of our profit-oriented underwriting policy. This is based on our conviction that over the long term a prudent underwriting policy will help to strengthen your company’s competitiveness. This is all the more the case in a market environment that is notable for increasingly fierce levels of competition, particularly in non-life reinsurance.
In view of the gratifying development of Hannover Re’s business I am delighted to inform you, our valued shareholders, that we intend to distribute another attractive dividend. The Supervisory Board and Executive Board will propose to the Annual General Meeting that you should be paid a dividend of EUR 3.00 per share.
In non-life reinsurance we were able to maintain the operating profit (EBIT) virtually unchanged on a level in excess of EUR 1 billion, despite a 17 percent decline in investment income. This was made possible above all by the fact that the increase in the underwriting profit comfortably outweighed the contraction in ordinary investment income. The appreciable deterioration in extraordinary investment income, which in the year under review reached a level in line with normalised expectations, was to some extent offset by an improvement in other income. Net income in the non-life reinsurance business group climbed by 18 percent to EUR 808 million, thereby benefiting from the positive tax effect already described above in connection with provisions for deferred taxes.
The pace of our growth temporarily slowed somewhat in 2013 on account of the complete or partial discontinuation of a number of large-volume treaties in UK longevity business and in US health reinsurance. Despite this, the currency-adjusted growth of 5 percent was in the region of our expectations.
The transformation of Hannover Rück AG into a European Company, Societas Europaea (SE), was completed as planned in the year under review. With the entry in the commercial register of Hannover County Court the conversion to the new legal form took effect on 19 March 2013. As already reported, this step reflects the increasingly international dimension of your company and our workforce. It will not give rise to any changes for you.
In view of the sustained low interest rate environment the net return on investments under own manage ment is likely to retreat slightly to 3.2 percent. The further stepping up of our investments in real estate should have particularly positive implications for investment income.
Jürgen Gräber Coordination of worldwide Non-Life Reinsurance Quotations Non-Life Reinsurance Retrocessions Specialty Lines worldwide
In 2013 the effects of the Euro debt crisis on capital markets could still be clearly felt. Against the backdrop of a continued expansionary monetary policy on the part of central banks, the stock markets most relevant to our company soared in some cases to all-time highs. The German DAX share index started 2013 at 7,612 points and – aside from taking a few minor breathers – climbed steadily higher. It closed the year with a gain of 25.5% at 9,552 points. The MDAX performed even more strongly, rallying from 11,914 points at the beginning of the year to 16,574 points after twelve months – a gain of 39.1%. Driven by good economic data, the Dow Jones also closed 2013 at a record level of 16,504, equivalent to an increase of 27.6%. The strongest gains, however, were delivered by the Japanese Nikkei, which put on 56.7% to reach 16,291 points – its highest level in six years.
Following on the heels of a stellar performance in the previous year, the share thus fared considerably more poorly over the year than its benchmark indices – the DAX (+25.5%), MDAX (+39.1%) and Global Reinsurance Index (+26.4%).
In a three-year comparison (see chart on the following page) the Hannover Re share delivered a performance (including reinvested dividends) of 81.3%, thereby again clearly beating the DAX (38.2%), MDAX (64.6%) and Global Reinsurance Index (55.7%).
The Executive Board and Supervisory Board intend to propose to the Annual General Meeting on 7 May 2014 that a dividend of EUR 3.00 per share be distributed. The proposed distribution is thus at the upper end of the strategically planned payout ratio of 35% to 40% of Group net income after tax. Based on the year-end closing price of EUR 62.38, this produces a dividend yield of 4.8%.
Investor relations activities stepped up in response to greater need for information
The shareholding structure of Hannover Re was stable in the year under review. The interest held by Talanx AG remained unchanged at 50.2%. The stake held by private investors grew by 0.9 percentage points to 7.8%, while the proportion in the hands of institutional investors decreased to 42.0%.
In the course of the year under review there were significant shifts within our free float away from the Benelux countries in favour of Germany and the United States. The proportionate holdings in the Benelux countries thus fell by 7.9 percentage points to 10.0%, while the holdings in Germany and the United States expanded by 5.3 percentage points and 2.1 percentage points respectively, rising from 38.9% to 44.2% and from 19.4% to 21.5%. While the percentage shares attributable to Switzerland and France showed slight increases at 3.8% and 1.6% respectively, the proportionate holding in the United Kingdom decreased to 16.4%. The total shareholding in Asia remained stable year-on-year at around 1%.
Shareholding structure as at 31 December 2013 7.8% Private investors 42.0% Institutional investors 50.2% Talanx AG
Equity attributable to shareholders of Hannover Rück SE in EUR million 5,888.4 6,032.5 4,970.6 4,509.0 3,714.4
Earnings per share (basic and diluted) 7.43 7.04 5.02 6.21 6.08
Price-to-cash flow (P / CF) ratio 9 3.4 2.7 1.8 2.9 2.3 1 Adjusted pursuant to IAS 8 (cf. Section 3.1 of the notes) 2 Xetra daily closing prices from Bloomberg 3 Proposed dividend 4 Dividend of EUR 2.60 plus EUR 0.40 bonus 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
Since the Second World War the average life expectancy in the Western world has risen almost continuously for all age groups. The steady increase over recent decades in the average remaining life expectancy – especially among pensioners – has been due in particular to the decline in smoking and advances in treating cardio vascular disorders. This trend, to which there is still no end in sight, is further supported inter alia by improvements in cancer screening and treatment as well as a progressively better understanding of chronic ailments. Going forward, then, we expect the increase in life expectancy to be sustained.
Sources: Figures based on own calculations. The underlying data comes from the UK Office for National Statistics (ONS) and the HMD (Human Mortality Database).
• Generate an exceptionally high return on equity by reducing the required capital
For many years now we have reviewed our corporate strategy in a three-year cycle. The present strategy is the product of the review conducted in 2011.
• Information and communication systems assure optimal support for business processes in light of cost / benefit considerations
• Ensure rigorous derivation of strategic objectives across all areas of the company
• Support considered and pragmatic principles of corporate governance and recognise their central role in guiding our activities
Our strategy encompasses ten strategic principles for ensuring the accomplishment of our mission “Growing Hannover Re profitably” across business units. The orientation of the business groups is guided by these principles, hence enabling them to contribute directly to attainment of the overarching objectives. Implementation takes the form of each organi sational unit defining its contribution to goal attainment and aligning its activities and measures accordingly.
The model enables us to ensure rigorous derivation of the strategic objectives.
For more details of our strategy see our website at: www.hannover-re.com / about / strategy
Cloudy with sunny periods The prevailing growth trend in passenger and cargo business is likely to be sustained on the global aviation market. Similarly, the insurance and reinsurance capacities available on the market have also increased. This development, combined with the absence of significant major losses, is putting the premium level under considerable strain. Our long-standing experience, careful risk selection and partnership-based client relationships enable us to maintain our good position even in this market environment.
The increase in passenger volume is boosting demand for aircraft. Over the coming 20 years the worldwide airline fleet is expected to double in size.
Report on economic position 29 Macroeconomic climate and industry-specific environment 29
Business model • As the third-largest reinsurer in the world, we transact all lines of non-life and life and health reinsurance with the goal of achieving the most balanced possible regional and product-specific diversification
• Centralised risk management and risk steering ensure consistent underwriting decisions • Effective capital management through the efficient use of hybrid capital, securitisations and retrocessions • Lean structures enable us to maintain one of the lowest administrative expense ratios in our industry
With a gross premium volume of around EUR 14.0 billion, Hannover Re is the third-largest reinsurer in the world. We transact reinsurance in our business groups of non-life and life and health reinsurance. Through our worldwide presence (see section “Branch offices and subsidiaries of the Hannover Re Group abroad”, page 234 et seq.) and our activities in all lines of reinsurance we achieve optimal risk diversification while maintaining a balanced opportunity / risk profile. Most significantly, diversification into both the non-life and life and health reinsurance business groups enables us to effectively deploy our capital and is thus crucial to our ability to achieve an exceptionally high return on equity.
The business models in both non-life and life and health reinsurance support our higher-level Group mission of “Growing Hannover Re profitably”. This includes, among other things, our aspiration to be the best option for our business partners when they come to choose their reinsurance partner. It is for this reason that our clients and their concerns form the focus of our activities.
In the non-life reinsurance business group we consider ourselves to be an undogmatic, flexible and innovative market player that ranks amongst the best in any given market.
Central risk steering in combination with local talent is the key to our success. In markets where an on-the-spot presence opens up additional profit opportunities we write business through local branches and subsidiaries. Risk management functions are, however, always exercised centrally. These include, for example, capital allocation, resource planning, retrocessions and the use of capital market instruments. These centrally exercised risk steering functions serve the goals of maintaining consistent underwriting decisions, facilitating the maximum allocation of capacity and efficiently deploying resources, underwriting know-how and capital.
In the life and health reinsurance business group Hannover Re has established itself as one of the major professional, globally operating reinsurers that combines sophisticated solution models with a long-term, partnership-based approach.
At the core of our activities is a customer orientation that stresses the cultivation of mutually beneficial profit and growth opportunities. This includes the provision of reinsurance solutions for risk management as well as those featuring financing and / or capital management components together with the associated services – by which we mean, inter alia, the optimisation of processes, access to global expertise and the acceleration of new business growth, always individually tailored to the needs of our customers.
In life and health business we are represented on every continent by 23 units in 19 countries around the world and we offer reinsurance protection in all lines of life and health reinsurance. Our portfolio covers all traditional risks such as mortality, morbidity and longevity. Within the business group we strive for a balance between these risks so as to ensure diversification among them.
This local approach furthers our aspiration to be the preferred business partner for our customers. In view of the long duration of contracts, we consider close and trusting cooperation with our clients to be a fundamental element of a successful business relationship.
Planning year 1 All managers of the Hannover Re Group worldwide come together once a year at the Global Management Forum (GMF) to define strategic orientations. The parameters developed here serve as the basis for the subsequent planning process 2 Verification and elaboration of contributions to the Group strategy
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 assumption 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 non-life reinsurance and life and health reinsurance and then between the various reinsurance products according to risk categories / treaty types and lines. In this way, we ensure that when evaluating and pricing our various reinsurance products our profit targets are taken into consideration consistently and in light of risk / return aspects.
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 non-life and life and 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).
The adjusted operating profit (EBIT) is comprised of two factors: the IFRS Group net income recognised after tax and the change in the balancing items for differences between economic valuations and amounts stated in the IFRS balance sheet. By way of the latter we make allowance for changes in the fair values of assets not recognised in income under IFRS, discount effects of the loss reserves and the Embedded Value Not Recognised (EVNR) in life and health reinsurance. In addition, interest on hybrid capital already recognised in the IFRS Group net income and the non-controlling interest in profit and loss are included back in the calculation.
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 strategic return on equity target of 750 basis points above risk-free thus already contains a not insignificant target value creation. We allocate equity sparingly and use equity substitutes to optimise our average cost of capital. At 6.4%, our average cost of capital is comparatively low.
A number of IFRS-based financial performance indicators are embedded in our strategic system of targets and coordinated with our parameters for value creation derived from the economic capital model. We use these indicators for operational management within the year, in part because they are available promptly and also because they already provide initial pointers as to whether we are likely to achieve our higher-order strategic objectives. These are for both business groups the growth in gross premium, for non-life reinsurance the combined ratio, for life and health reinsurance the EBIT margin and for the Group as a whole the return on investment. We do not use non-financial performance indicators for operational management within the year.
When it comes to research into natural perils, Hannover Re sponsors a number of different initiatives. Particularly noteworthy here is the OECD’s “Global Earthquake Model” (GEM) initiative. Since 2009 we have been a sponsor and active supporter of the GEM Foundation (www.globalquakemodel.org), which works to develop models for earthquake risks around the world. The goal of this public / private partnership is to develop freely accessible worldwide earthquake risk models that will help to raise risk awareness and motivate preventive actions, e.g. by improving the earthquake safety of buildings. For Hannover Re, participation in this work not only facilitates expansion of the available risk assessment models but also opens up direct contacts with the scientific community.
After several delays the implementation of Solvency II, the new prudential regime for insurance undertakings, is now imminent and continues to preoccupy clients of Hannover Re with regard to the possible implications for their capital requirements. Within its structured reinsurance line (Advanced Solutions ) Hannover Re designs bespoke solutions that are tailored to the individual needs of its clients. A simplified QIS 5 tool was developed, for example, to facilitate analysis of the effect of reinsurance solutions on the Solvency II capital requirements of insurers according to the standard formula.
Macroeconomic climate and industry-specific environment • Economic activity still muted despite increased stability on capital markets • Protracted low interest rate environment a challenge for life (re)insurers • Progress in the implementation of Solvency II framework directive • Unusually heavy losses from weather-related disasters in Europe
USA The US economy continued to fare well despite application of the fiscal brake and the temporary government shutdown: according to figures from the Kiel Institute for the World Econo my (IfW), gross domestic product (GDP) rose by 1.6% in 2013 (2.8%). Although the automatic spending cuts that took effect in March curtailed growth in the year just ended, consumer demand nevertheless remained relatively robust as gradual improvement in the financial position of private households supported investment in residential construction and private consumption. This trend was fostered by favourable financial framework conditions. Private-sector capital investments rose and exports also grew. The expansionary fiscal policy pursued by individual states and municipalities more than offset the lower spending on the federal level. Even though consumer confidence indicators retreated in the final quarter and the business climate was softer in some areas, the trend at the end of 2013 was clearly towards growth.
Yet the single-currency economy remains in a poor state: the situation continues to vary greatly among the individual Member States. High levels of private and public debt have left many national economies vulnerable to upheavals of crisis-like dimensions. Greece, Italy, Portugal and Spain, above all, have still failed to regain their competitiveness, even though the risk situation here with respect to troubled loans has improved appreciably. According to IfW calculations, GDP in the Eurozone contracted by 0.4% in 2013 (-0.7%).
Germany In Germany the expansion in total economic output – which had been temporarily interrupted by the heightened Eurozone debt crisis – continued. Yet the anticipated economic upswing failed to materialise. Growth for 2013 was put at 0.4% (0.7%) by the IfW. The forces at work here are, however, changing: while momentum in the recovery phase after the financial and economic crisis predominantly came from exports, the spotlight moved to the domestic economy in the year just ended. Low unemployment, higher earnings and a low interest rate level encouraged private consumption and drove home construction.
In Japan the economy regained momentum in 2013. Thanks to powerful stimuli provided by monetary and fiscal policy as well as the markedly improved price competitiveness of Japanese producers on the back of massive currency devaluation, GDP moved sharply higher in the first half of the year. It did, however, soften again towards year-end – as had been the case in the previous year too.
Capital markets The effects of the Euro debt crisis on capital markets could still be clearly felt in 2013 and central banks continued to pursue an expansionary monetary policy in our main currency areas. The ECB, for example, cut its main rate for the Eurozone twice during the year from a starting point of 0.75% to the current 0.25%; the US Federal Reserve left key interest rates unchanged in the low range of zero to 0.25%, the level on which rates have been since 2008. Over the full year US, German and UK government bonds recorded sometimes marked yield increases in virtually all maturity segments. The yield on ten-year German government bonds, for example, climbed from 1.3% to 1.9% in the course of the year; tenyear US treasury bonds saw an even sharper rise from 1.7% to 3.0%. These increases were supported not only by market expectations concerning the Fed’s gradual pullback from its active market interventions but also by improved or at least stabilised macroeconomic prospects for the US and Europe. As regards those European countries with higher risk premiums which had become the focus of so much attention, the picture was almost uniformly one of recovery. On the other hand, credit spreads on corporate bonds in our main currency areas decreased somewhat as the year progressed, although greater volatility could be observed here in the spring of 2013 as discussions got underway about Federal Reserve policy going forward. The yield increases that ultimately ensued were, in the final analysis, fed primarily by the interest rate component.
The interest rate situation was also reflected overall in the technical pricing of premiums on the primary and reinsurance markets. Considerable discipline was needed in order to be able to offset further declines in investment income. In this regard new (re)insurance capacity has also entered the insurance-linked securities (ILS) market, with the result that additional alternative capital met with unchanged demand. The pressure on prices and conditions, especially in natural catastrophe business, consequently intensified further.
Europe suffered exceptionally heavy damage from weather events in 2013. The June flooding was the most expensive natural disaster for the (re)insurance industry measured in terms of total economic losses. The most costly insurance loss worldwide in 2013 – and at the same time the most expensive ever hail event in German history – was the series of hailstorms that impacted some areas of northern and south-western Germany at the end of July. While the hurricane season in North America once again passed off very quietly, typhoon Haiyan triggered a major humanitarian catastrophe in the Philippines. The losses for the insurance industry in this case were, however, relatively slight owing to the very low insurance density.
Business development • New record profit of EUR 895.5 million generated • Performance assisted by additional positive tax effects • Best result ever posted in non-life reinsurance • Major loss incidence slightly below the expected level • Capital base remains robust • Return on equity 15.0%
We were highly satisfied with the development of our business in non-life reinsurance, even though competition continued to intensify relative to the previous year. Despite our selective underwriting policy we were able to further enlarge our premium volume. Gross premium increased by 1.3% as at 31 December 2013 to EUR 7.8 billion (previous year: EUR 7.7 billion). At constant exchange rates growth would have amounted to 3.5%. We thus came in within our forecast target of 3% to 5% for the full financial year.
The operating profit (EBIT) of EUR 150.5 million (EUR 279.0 million ) lagged well behind the level of the previous year. It should be borne in mind here that the previous year’s result had been influenced by positive special effects that were not repeated in the year under review. In addition, we strengthened reserves for our Australian disability business in the reporting period. The fact that we nevertheless delivered a solid performance for 2013 shows that even in challenging conditions our written portfolio generates profitable results.
Our Financial Solutions and Longevity business fared exceptionally well, generating an EBIT margin of 5.2% and thus comfortably beating the 2% target. The EBIT margin for Mortality and Morbidity business fell well short of the targeted 6% mark at 1.2%. This was influenced by the unfavourable performance of Morbidity business; considered separately, Mortality business would have actually surpassed the target. The elevated risk experiences market-wide in Australian disability business and the deterioration in their run-off were the key factors in the unsatisfactory development of the EBIT margin. The Australian market has since initiated intensive efforts to positively counteract this trend.
We are satisfied with the development of our total investments. Thanks to what was still a highly positive operating cash flow, the portfolio of investments under own management amounted to EUR 31.9 billion and thus remained on a par with the previous year (EUR 31.9 billion) despite the decrease in valuation reserves. Bearing in mind the continued low level of interest rates, it is very pleasing to note that ordinary investment income excluding income from funds withheld and contract deposits remained virtually unchanged at EUR 1,041.3 million (EUR 1,088.4 million).
We are exceptionally satisfied with the development of our results. Although the operating profit (EBIT) retreated by 11.8% following the elimination of positive effects from fair value changes in the ModCo derivatives and inflation swaps, it still reached a very good level at EUR 1,229.1 million (EUR 1,393.9 million). Despite a generally challenging environment in the reinsurance sector and faced with stubbornly low interest rates, we generated the highest Group net income in the history of Hannover Re at EUR 895.5 million. The crucial factors here were a thoroughly pleasing result in non-life reinsurance and the aforementioned special tax effects. Earnings per share amounted to EUR 7.43 (EUR 7.04).
The equity attributable to shareholders of Hannover Re also developed favourably in the year under review: while erosion of the valuation reserves due to rises in yields – especially on high-quality government bonds – and payment of an increased dividend in the second quarter led to a slight reduction in shareholders’ equity, the return on equity of 15.0% (15.4%) nevertheless comfortably surpassed our minimum target of 9.8% (750 basis points above the risk-free interest rate). The shareholders’ equity as at 31 December 2013 amounted to EUR 5.9 billion (EUR 6.0 billion). The book value per share was also positive at EUR 48.83 (EUR 50.02). The total policyholders ’ surplus, consisting of shareholders equity, non-controlling interests and hybrid capital, amounted to EUR 8.8 billion (EUR 8.9 billion).
In the following sections we discuss the development of the financial year in our two strategic business groups, namely non-life reinsurance and life and health reinsurance, as well as the performance of our investments and the financial position and assets of our Group. Supplementary to the information provided here, the segment reporting in Section 5 of the notes to this Annual Report shows the key balance sheet items and profit components broken down into the two business groups.
The treaty renewals in non-life reinsurance as at 1 January 2013 – the date on which almost two-thirds of our treaties in traditional reinsurance were renegotiated – got off to a thoroughly promising start. The heavy losses incurred by the (re) insurance industry from hurricane “Sandy” had exerted a stabilising effect on rates. Over the year, however, the rate level softened more appreciably than had been initially expected. This was especially true of US natural catastrophe business. Substantial price erosion was observed here, driven in part by additional capacities from alternative markets (catastrophe bonds, collateralised reinsurance). Given that Hannover Re’s exposure to US natural catastrophe business is disproportionately small relative to its market share, the repercussions were nevertheless limited.
Thanks to our selective underwriting approach we were able to achieve a price level in the non-life reinsurance that was at least equivalent in quality to the good 2012 financial year. Against this backdrop, we slightly enlarged our portfolio.
The gross premium volume for our non-life reinsurance business group climbed by 1.3% in the year under review to EUR 7.8 billion (previous year: EUR 7.7 billion). At constant exchange rates, growth would have come in at 3.5%. This means that the growth in our currency-adjusted gross premium was within the expected range of 3% to 5%. The retention decreased slightly to 89.9% (90.2%) on account of an increased volume of fronting business. Net premium earned consequently nudged only slightly higher by 0.2% to EUR 6.9 billion (EUR 6.9 billion). Growth would have been 2.3% at constant exchange rates.
Geographical breakdown of gross written premium in 2013 2.5% Australia 3.7% Africa 25.1% North America 21.8% Rest of Europe 14.9% United Kingdom 11.3% Asia 8.1% Latin America
Breakdown into business written through brokers and direct business in EUR million business written through brokers direct business
After a very tranquil first quarter we were faced with numerous major losses in the course of 2013. Germany and Canada were impacted especially heavily by losses from natural disasters. The hurricane season in North America and the Caribbean, on the other hand, again passed off unremarkably. For the first time since 1968 no storm exceeded category 1, the weakest of the five categories.
Gross Net Net expectancy for major losses 1 1 Natural catastrophes and other major losses in excess of EUR 10 million gross (until 31 December 2011: in excess of EUR 5 million gross)
Non-life reinsurance: Key figures for individual markets and lines in 2013
UK, London market & direct business 657.7 -9.7% (0.8) 107.7% 96.7%
Earnings per share in EUR 6.70 +17.8% 5.68 3.78 4.82 3.92 1 Adjusted pursuant to IAS 8 (cf. Section 3.1 of the notes) 2 Operating result (EBIT) / net premium earned 3 Including expenses on funds withheld and contract deposits conservative initial reserves constituted for recent underwriting years. The confidence level of the loss reserves was nevertheless further increased. The underwriting result improved again markedly to EUR 335.5 million (EUR 272.2 million).
Target markets We classify Germany and North America as target markets. The premium volume grew by 5.9% to EUR 2,257.6 million (EUR 2,131.1 million) and was thus within our planned range for 2013. The combined ratio inched slightly higher to 101.8% (101.3 %). The operating profit (EBIT) in the year under review amounted to EUR 204.9 million (EUR 270.4 million).
Non-life reinsurance: Breakdown of gross written premium in target markets in EUR million
retail property insurance lines also posted gains. The insurance density in the area of extended coverage for natural perils increased as a consequence of greater risk awareness with respect to natural catastrophe events.
In homeowners insurance, which was heavily impacted by these natural catastrophe events, further action was still needed after the unsatisfactory results of prior years and the latest red figures. Industrial property insurance lines remained fiercely competitive; there were no indications of a broad-based improvement in premium levels.
Personal accident business once again fared very well for our company. Along with reinsurance covers, we offer our clients in this line a broad range of services. In the year under review, for example, we completed the project that we had undertaken with other partners to overhaul a product that provides functional disability insurance for adults. A comparable product for children is scheduled to be ready by the beginning of 2014.
Although we had anticipated a modest reduction, our premium volume for German business increased by 7.4% to EUR 1,080.8 million (EUR 1,006.7 million). Reflecting the high loss intensity in the year under review, the combined ratio climbed sharply to 111.2% (99.9%). The operating result (EBIT) consequently fell short of expectations at -EUR 30.6 million.
The economic climate picked up slightly in the year under review, and with economic growth insured values also rose – hence further boosting the premium volume in the original market. The reinsurance volume also continued to increase in 2013. Given that the US was largely spared significant natural catastrophe losses, the combined ratio for the reinsurance market was considerably better than it was for the primary market. Against this backdrop, our business in the United States developed favourably. Only in our Canadian business were results adversely impacted by record one-off losses due to two major flood events in Calgary and Toronto.
Rate movements on the North American primary insurance market gave grounds for satisfaction. With the exception of a few minor lines such as medical malpractice, rate increases of 5% to 10% were achieved. Overall, the pressure on the rate level was sustained on account of reduced investment income. Hardly any new players entered the US market in 2013, and the reinsurance market – despite a slight increase in equity resources – can therefore still be described as disciplined. However, rates in the catastrophe XL market – which accounts for less than 10% of our total portfolio – came under pressure due to the inflow of capital from alternative markets (ILS).
Specialty lines The development of our specialty lines was satisfactory. We include in this segment marine and aviation, credit and surety, structured reinsurance products, insurance-linked securities (ILS), the London market and direct business.
Marine Our marine business fared very well in the year under review. Hannover Re ranks among the market leaders here in a number of regions. The strategy guiding our underwriting policy continues to be geared towards further selective diversification of the portfolio. Thus, for example, we gained additional market shares in Asia, most notably in India and China, as well as in Brazil. In some European countries, on the other hand, we scaled back our involvement in the face of a more pronounced competitive environment. We continue to take a restrictive approach to writing offshore risks in the Gulf of Mexico owing to the considerable potential for natural hazards exposure.
Gross premium for our marine portfolio decreased by 5.8% to EUR 290.8 million (EUR 308.6 million).
Non-life reinsurance: Breakdown of gross written premium in North America by line of business 0.4% Other 49.5% Property 8.8% Motor 41.2% Liability
In the year under review we incurred a major loss for which we set aside reserves of EUR 20.7 million. The claims situation in marine business was, however, also notable for a deterioration in the run-off of losses from prior years. In particular, the doubling of the salvage costs for the “Costa Concordia” left a mark. This state of affairs had no substantial effect on our net loss expenditure, however, owing to corresponding protection covers that we had purchased.
In airline fleet business the (re)insurance industry benefited from both the rising insured values of aircraft and higher passenger numbers. General aviation business, on the other hand, was flat in many regions with fewer private aircraft being purchased as economic uncertainties persist.
The loss experience in the aviation market remains very favourable relative to the multi-year historical average. This trend can be attributed above all to technical advances in aviation safety systems.
With the global economy showing tepid growth and in the face of generally difficult economic conditions, the number of insolvencies remained high. Nevertheless, credit insurance largely resisted this trend thanks to a disciplined underwriting policy. Expenditure on basic losses therefore remained on a moderate level; only in terms of the absolute loss amounts was a slight increase recorded. Rates in credit reinsurance remained broadly stable.
Despite greater risk awareness, the claims burden in the area of political risks remained low. Prices in this line consequently showed a moderate decrease.
Gross premium income increased by 2.2% in 2013 to EUR 630.5 million (EUR 616.7 million). On the whole, we are satisfied with the development of our credit and surety business in the year under review. The increased frequency of mid-sized losses was largely offset by a positive run-off of prior underwriting years. The combined ratio amounted to 94.2% (90.4%). The operating profit (EBIT) came in at EUR 70.0 million (EUR 107.8 million).
Structured reinsurance Hannover Re is one of the largest providers in the world of structured reinsurance solutions. These products are designed, among other things, to optimise the cost of capital for our ceding companies.
As forecast, demand for bespoke alternative reinsurance solutions continued to grow in the year under review. This trend also includes aggregate excess of loss covers, which protect the net retention of our clients against significant loss scenarios with a low probability of occurrence.
In keeping with our objective we pressed ahead with the enlargement of our customer base and further improved the regional diversification of our portfolio in the year under review. We also stepped up our involvement in the area of aggregate excess of loss covers. Quota share arrangements in motor business designed to deliver solvency relief continued to enjoy brisk demand.
Insurance-Linked Securities (ILS) Demand for ILS products not only on the capital market but also among investors from the traditional reinsurance and primary insurance market showed no signs of easing. Thus, for example, we were able to renew our “K” quota share – a modelled quota share cession consisting of non-proportional reinsurance treaties in the property, catastrophe, aviation and marine (including offshore) lines that we have placed inter alia on the ILS market for almost 20 years – on a virtually unchanged level of around USD 320 million for 2013.
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 we further expanded our cooperation with selected managers of investor funds in the area of collateralised reinsurance business and were able to generate attractive margins. When it comes to investing in catastrophe bonds, on the other hand, we showed restraint on account of the sharp decline in prices.
The South African non-life reinsurance market reached the lowest point of the soft market in 2013. In common with most insurers in South Africa, Compass Insurance Company Limited, our second company writing specialty lines, failed to achieve its profit targets on account of heavy losses. The market losses did, however, put a stop to rate reductions and virtually all market players have announced or in some cases already implemented significant increases for 2014. Compass Insurance Company Limited and the local partner underwriting managers belonging to the Hannover Re Group are ideally placed to profit from these rate improvements.
Global reinsurance We combine all markets worldwide under global reinsurance with the exception of our target markets of Germany and North America and the specialty lines. This segment also encompasses global catastrophe business, facultative reinsurance, the reinsurance of agricultural risks and Sharia-compliant retakaful business.
Worldwide treaty reinsurance We were satisfied with the development of our worldwide treaty reinsurance portfolio. The gross premium volume grew by 7.4% to EUR 1,691.6 million and was thus in line with our expectations. The combined ratio improved from 96.3% to 94.3%. The operating profit (EBIT) came in as planned, rising to EUR 268.2 million.
Latin America Hannover Re is well positioned in Latin America and a market leader in some countries. The most important markets for our company are Brazil – where a survey found us to be one of the three most highly regarded reinsurers –, Mexico, Argentina, Colombia and Ecuador.
In Brazil, a market in which we operate as an “admitted reinsurer ”, we ensure close business ties with our clients through a representative office. Although competition here is intensifying, we are very well positioned in the market and a valued partner thanks to our excellent financial standing.
In Argentina we succeeded in slightly expanding our portfolio despite the restrictions placed on foreign reinsurers. In Chile, Peru and Panama we boosted our market share while staying firmly focused on the profitability of the business written. Losses were incurred from several hurricanes in Mexico, although these did not result in a major loss for Hannover Re. These events did, however, have a favourable effect on reinsurance prices. Double-digit percentage increases in rates were pushed through for treaties that had been impacted by losses.
In Japan, a key market for our company, we were able to slightly expand our premium volume as planned. After the heavy losses incurred in 2011 conditions remained stable on a good level. Our broadly diversified product range and proven long-standing loyalty to our Japanese cedants enabled us to successfully set ourselves apart from our competitors. At the same time, though, the market consolidation and associated synergistic effects at our clients as well as adverse movements in the exchange rate presented a challenge.
Catastrophe covers, an important area of business in Japan, did not suffer any notable loss events in the year under review. Nor were there any appreciable losses in property, casualty and accident insurance – lines in which we often take the role of lead reinsurer –, as a consequence of which we were highly satisfied with the results of our Japanese portfolio.
The aforementioned semiconductor fire also had repercussions on the Korean market, since the operator of the Chinese factory was a Korean company. In what is in any case a highly competitive market – we write exclusively non-proportional covers in the property and casualty insurance segment – this led to a sharply poorer result.
In South and Southeast Asia we were again able to substantially improve our market position. Driven first and foremost by rising insurance densities, almost all insurance markets in this region posted disproportionately strong growth. Yet the tragic effects of typhoon “Haiyan”, which devastated parts of the Philippines and claimed thousands of lives, showed just how far many countries in this region still are from an areawide and sustainable insurance density. Against this backdrop, the losses for the insurance industry were rather moderate; the cost of this event for our company, at EUR 18.5 million, was also comparatively slight.
On the whole, the development of our portfolio in Australia and New Zealand was satisfactory. As expected, our premium volume increased slightly in the year under review.
The economy in this region continues to develop satisfactorily. Growth is driven in particular by government spending on infrastructure as well as oil and gas projects. The primary insurance market remains highly competitive, thereby adding to the pressure on rates. On the reinsurance side new providers with additional capacities forced their way into the markets.
Agricultural risks Demand for the insurance of agricultural land and livestock continued to grow, driven by a steadily rising need for food and increasing extremes of weather as a consequence of climate change. This was especially true of developing countries.
In view of the growing premium volume written by primary insurers, the volume for reinsurance covers also increased worldwide. Hannover Re, one of the largest reinsurers of agricultural risks, expanded its portfolio as planned in the year under review.
In cooperation with an external partner we developed and launched on the market an energy-saving insurance solution for industrial enterprises. Not only that, we also stepped up our underwriting of construction all risk (CAR) / advance loss of profits (ALOP) business in our domestic German market.
Non-life reinsurance: Breakdown of gross written premium in facultative reinsurance 14.7% Other 48.4% Property 6.6% Motor 30.3% Liability
We are broadly satisfied with the development of our total facultative portfolio in the year under review: we further diversified our business and generated profitable growth, while at the same time suffering a sizeable accumulation of mid-sized losses in 2013. Our premium volume increased by 4.2% to EUR 841.5 million and thus lived up to the forecast growth. The combined ratio was slightly below the level of the previous year at 91.6%. The operating profit (EBIT) remained stable as expected at EUR 131.9 million (EUR 130.5 million).
• Challenging market conditions influence the business • Currency-adjusted growth target reached with increase of 5.1% in gross premium • Operating result falls short of expectations owing to various factors
The life and health reinsurance business group now accounts for 44% of our total premium volume. Reflecting the new reporting structure implemented in 2012, we subdivide our broadly diversified portfolio into the categories of Financial Solutions and Risk Solutions.
The operating result (EBIT) of EUR 150.5 million (EUR 279.0 million) fell short of the previous year’s figure owing to a number of different influencing factors, but it was still solid. The key factors in the decline were the elimination of positive non-recurring effects from 2012 as well as losses in Australian disability business. Group net income reached EUR 164.2 million (EUR 222.5 million); earnings per share amounted to EUR 1.36 (EUR 1.84).
Key figures for life and health reinsurance in EUR million 2013 + / – previous year
Earnings per share in EUR 1.36 -26.2% 1.84 1.51 1.82 2.47 1 Adjusted pursuant to IAS 8 (cf. Section 3.1 of the notes) 2 Operating result (EBIT) / net premium earned
The Mortality sector encompasses our business with exposure to the mortality risk. For our company, as a reinsurer, the main danger is that the actual mortality in a portfolio may diverge negatively from our expectations. Mortality business is traditionally a core component of life and health reinsurance. This is reflected in the gross premium volume of EUR 2,833.5 million (EUR 2,824.6 million) generated in 2013. At 46.1%, it contributes the lion’s share of total premium income. In the US risk-oriented life reinsurance market we further expanded our share to more than 10%. This is all the more gratifying given that the market itself contracted again – as it had already in 2012. Irrespective of this, our focus was on further optimising our portfolio management, which we shall continue to do in the coming years.
Developments and trends in society around the world are exerting a growing influence on the insurance sector. In 2013, for example, we observed a sharp increase in lifestyle products – an area where traditional insurance is often combined with perks for sports and leisure activities. The idea is to motivate insureds to lead a more health-conscious lifestyle and hence also positively influence the policy experience.
The US health market is facing considerable changes as the healthcare reform programme popularly known as “Obamacare ” begins to take effect in 2014. One of the core elements of the new reform is curbing price increases in the medical sector.
The Longevity reporting category encompasses annuity and pension insurance products as well as all reinsurance solutions connected with the longevity risk. This business frequently involves the transfer of sizeable portfolios, for which we – in our role as reinsurer – take over the annuity payments that will actually be incurred in the future. The greatest risk is associated with the longevity of the insureds in the portfolios and the resulting potentially incorrect estimations of the duration of recurring pension payments. In the year under review we wrote a gross premium volume of EUR 884.7 million (EUR 883.6 million ). The worldwide demographic trend has led to consistent growth in the elderly proportion of the population, hence bringing a significant increase in longevity exposure and boosting demand for such products. We already enjoyed concrete benefits from this trend in the year under review in the form of a rise in inquiries regarding the assumption of longevity portfolios. The United Kingdom continues to be the largest market, where we supported life insurers with – among other things – the risk assessment of annuity insurance policies in the financial year just ended. Yet we also received our first specific inquiries from other European countries too and submitted quotations. This expanding market is, however, also encouraging an ever-increasing number of new providers to move into the business, causing competition to intensify sharply. As an established business partner with a decades-long track record, we were able to renew existing contracts and reinsure our first longevity portfolios outside the United Kingdom despite the more competitive climate.
Irrespective of the various reporting categories, we are seeing a clearly emerging trend towards automated underwriting. We offer our customers this additional service in the form of pointof -sale systems. These are designed to relieve the strain on underwriters associated with the application process while at the same time enhancing underwriting efficiency. Furthermore, particularly as a consequence of the challenging low interest
• Return on investment at 3.4% as forecast • Ordinary investment income relatively stable despite low interest rate level • Strains from derivatives and lower realised gains than in the previous year
In view of the sustained low level of interest rates, ordinary investment income excluding income from funds withheld and contract deposits developed in line with our expectations at EUR 1,041.3 million (previous year: EUR 1,088.4 million). Income from funds withheld and contract deposits, on the other hand, came in slightly higher than in the previous year at EUR 357.3 million (EUR 355.5 million). The net realised gains on disposals amounted to a very pleasing EUR 144.2 million (EUR 227.5 million) and derived principally from regrouping moves as part of regular portfolio management as well as from the change in reporting currency at our subsidiary in Bermuda. This figure was, however, lower than in the previous year, when we had acted to a greater extent on opportunities in the real estate sector.
Change in fair value of financial instruments 3 (27.1) -130.4% 89.3 (38.8) (39.9) 100.6
Hannover Re | Annual Report 2013 to IAS 39. Over the entire term we assume for the most part an economically neutral development for these two items for Hannover Re, and hence the volatility that can occur in specific periods has no bearing on the actual business performance.
Principally due to reduced realised gains and a lower result from investments measured at fair value through profit or loss, our investment income fell short of the previous year’s level. It stood at EUR 1,411.8 million (EUR 1,655.7 million ) in the reporting period, of which EUR 1,054.5 million (EUR 1,300.2 million) was attributable to assets under own management. This produces an average return (excluding effects from inflation swaps and ModCo derivatives) of 3.4%, a figure in line with our forecast.
Although our portfolio of assets under own management failed to grow as expected in the course of 2013, it was still on the level of the previous year at EUR 31.9 billion (EUR 31.9 billion). This was based on a continued very pleasing cash flow from operating activities, which offset the decline in the valuation reserves connected with the yield increases observed in our main currency areas as well as depreciation in key currencies against the euro.
The portfolio of fixed-income securities excluding short-term assets thus retreated slightly to EUR 28.3 billion (EUR 29.0 billion). Hidden reserves for available-for-sale fixed-income securities recognised in shareholders’ equity totalled EUR 426.4 million (EUR 1,144.6 million). This reflects the yield increases observed since the end of the second quarter, especially in the area of high-quality government bonds. As to the quality of the bonds – measured in terms of rating categories –, the higher proportion of corporate bonds was marginally evident in a decrease under the “AAA” category; nevertheless, the proportion of securities rated “A” or better remained stable on a high level as at year-end at 83.0% (84.2%).
At the end of the year under review we held a total amount of EUR 1.2 billion (EUR 1.1 billion) in short-term investments and cash. Funds withheld amounted to EUR 14.3 billion (EUR 14.8 billion).
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 capi tal structure as at 31 December 2013, split into equity, loans and subordinated capital, technical provisions and other liabilities, in each case as a percentage of the balance sheet total.
The preservation of its capital is a key strategic objective for Hannover Re. In the 2013 financial year and in recent years hybrid capital was issued as an equity substitute in order to keep the cost of capital on a low level. The policyholders’ surplus is a key management ratio in the context of Hannover Re’s comprehensive capital management. The policyholders’ surplus is defined as follows: • shareholders’ equity excluding non-controlling interests, composed of the common shares, additional paid-in capital, other comprehensive income and retained earnings,
Hannover Re uses “Intrinsic Value Creation” (IVC) as its central value-based management tool. With the aid of this tool we apply the principles of economic allocation of equity and efficient use of debt as an equity substitute in order to achieve the lowest possible weighted cost of capital. This concept as well as the objectives and principles in accordance with which we conduct our enterprise management and capital management are described in greater detail in our remarks on value-based management on page 24 et seq. of this report.
Hannover Re is guided in its capital management by the requirements and expectations of the rating agencies that assess the Group with an eye to its targeted rating. Furthermore, while making appropriate allowance for business policy considerations and factors that influence market presence, the allocation of capital to the Group’s operational companies is based upon the economic risk content of the business group in question. The Group companies are also subject to national capital and solvency requirements. All Group companies met the applicable local minimum capital requirements in the year under review. Adherence to these capital requirements is continuously monitored by the responsible organisational units on the basis of the latest actual figures as well as the corresponding planned and forecast figures. If, despite the capital allocation mechanisms described above, a scenario occurs in which there is a danger of minimum capital requirements being undershot, suitable options are immediately discussed and measures set in motion to counteract such an eventuality. From the Group perspective we manage Hannover Re’s solvency using our internal capital model, which is described in greater detail on page 78 et seq. of the opportunity and risk report.
In view of the favourable result, the development of the shareholders ’ equity of the Hannover Re Group was broadly stable despite opposing effects from currency translation and the interest rate environment. Compared to the position as at 31 December 2012, it decreased slightly by EUR 184.1 million – or 2.7% – in the year under review to EUR 6,530.0 million. After adjustment for non-controlling interests, it contracted by EUR 144.0 million to EUR 5,888.4 million. The book value
The reserve for currency translation adjustment decreased significantly by -EUR 230.2 million from -EUR 16.2 million to -EUR 246.3 million as a consequence of exchange rate fluctuations of foreign currencies against the euro in the financial year. The fall in the reserve for currency translation adjustment resulted principally from the depreciation of the Australian dollar, South African rand and US dollar in the year under review.
In addition to the financing effect of the changes in shareholders ’ equity described above, debt financing on the capital market is a key component of Hannover Re’s financing. It was essentially composed of subordinated bonds issued to ensure lasting protection of our capital base – in part also in observance of rating requirements. The total volume of debt and subordinated capital stood at EUR 2,465.0 million (EUR 2,400.8 million) as at the balance sheet date.
Our subordinated bonds supplement our equity with the aim of reducing the cost of capital and also help to ensure liquidity at all times. In the previous year we issued further subordinated debt with a nominal volume of EUR 500.0 million and a maturity of approximately 30 years. As at the balance sheet date four subordinated bonds had been placed on the European capital market through Hannover Finance (Luxembourg) S.A.
The table above presents an overview of the amortised cost of our subordinated bonds.
Amortised cost of our subordinated bonds in EUR million Issue date Coupon in %
Several Group companies have also taken up long-term debt – principally in the form of mortgage loans – amounting to EUR 227.1 million (EUR 167.8 million).
Cash and cash equivalents at the beginning of the period 572.2 507.0
Cash flow from investing activities The net cash outflows from investing activities amounted to altogether EUR 1,761.5 million in 2013 and were thus considerably lower than in the previous year. While the allocation to individual issuer classes remained broadly stable relative to the previous year, the proportion of corporate bonds was boosted and holdings of covered and semi-government bonds were reduced slightly. The further expansion of the real estate portfolio gave rise to cash outflows of EUR 507.0 million. In contrast, cash inflows from disposals in the 2013 financial year amounted to +EUR 54.6 million.
Regarding the development of the investment portfolio please see also our remarks at the beginning of this section.
The following company holds direct or indirect capital participations that exceed 10% of the voting rights: Talanx AG, Riethorst 2, 30659 Hannover, holds 50.2% (rounded) of the company’s voting rights. 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.
The powers of the Executive Board with respect to the issue and repurchase of shares are defined in the Articles of Association of Hannover Rück SE as well as in §§ 71 et seq. Stock Corporation Act. In this connection the Annual General Meeting authorised the Executive Board on 4 May 2010 pursuant to § 71 Para. 1 No. 8 Stock Corporation Act to acquire treasury shares on certain conditions for a period of five years, ending on 3 May 2015.
The following paragraphs explain major agreements concluded by the company that are subject to reservation in the event of a change of control, inter alia following a takeover bid, and describe the resulting effects. The letter of credit lines extended to Hannover Rück SE contain standard market change-of-control clauses that entitle the banks to require early repayment if Talanx AG loses its majority interest or drops below the threshold of a 25 percent participation or if a third party acquires the majority interest in Hannover Rück SE. For details of the letter of credit lines please see our explanatory remarks on other financial facilities in the notes, Section 6.12 “Debt and subordinated capital”, page 202.
In the year under review Hannover Re for the first time availed itself of the option to present a combined Group and company management report pursuant to § 315 Para. 3 of the Commercial Code (HGB) in conjunction with § 298 Para. 3 of the Commercial Code (HGB). Supplementary to the reporting on the Hannover Re Group, we therefore discuss below the development of Hannover Rück SE.
Hannover Rück SE transacts reinsurance business in the business groups of non-life and life and health reinsurance. Through its global presence and activities in all lines of reinsurance the company achieves optimal risk diversification.
Since 1 January 1997 Hannover Rück SE has written active reinsurance for the Group – with few exceptions – solely in foreign markets. Responsibility within the Hannover Re Group for German business rests with the subsidiary E+S Rückversicherung AG. Geographical risk spreading between the two companies is ensured by means of reciprocal retrocessions.
The underwriting result for total business (before changes in the equalisation reserve) declined in the year under review from EUR 93.2 million to -EUR 4.7 million. An amount of EUR 267.7 million (EUR 340.7 million) was allocated to the equalisation reserve and similar provisions.
Hannover Re | Annual Report 2013 to shares in affiliated companies and fixed-income securities. The write-downs contrasted with write-ups of EUR 14.4 million (EUR 29.6 million) that were made on assets written down in previous periods in order to reflect increased fair values. Provisions for contingent losses of EUR 21.7 million were established in the reporting period due to lower fair values of some of our inflation swaps. These new provisions were opposed by reversals of provisions for contingent losses constituted for technical derivatives in an amount of just EUR 6.1 million.
The profit on ordinary activities decreased to EUR 380.1 million (EUR 546.0 million). The year under review closed with a profit for the year of EUR 367.2 million (EUR 410.3 million).
Fire Total gross premium for the fire line again grew by an appreciable 8.1% in the 2013 financial year to EUR 1,375.7 million (EUR 1,272.1 million). The net loss ratio deteriorated in the year under review from 59.4% to 64.0%. After an underwriting result of EUR 157.6 million in the previous year, the fire line closed with a profit of EUR 105.3 million in 2013. An amount of EUR 148.4 million (EUR 201.3 million) was allocated to the equalisation reserve and similar provisions.
Allocated investment return transferred from the non-technical account, net of retrocession 194,599 214,966
Accident Gross premium climbed sharply as anticipated by 25.9% to EUR 362.2 million (EUR 287.8 million). Profitability was gratifying: the very good loss ratio of 51.1% in the previous year was almost maintained in the year under review at 52.8%. The underwriting result came in at a very pleasing EUR 31.9 million, after EUR 41.0 million in the previous year. An amount of EUR 2.5 million was allocated to the equalisation reserve and similar provisions, following an allocation of EUR 8.1 million in the previous year.
Marine Gross written premium declined by 4.8% to EUR 414.4 million (EUR 435.2 million). The net loss ratio improved from 81.3% to a pleasing 49.4%. The underwriting result consequently climbed from -EUR 11.7 million to EUR 75.5 million.
Life Gross premium income in the life line remained on the level of the previous year at EUR 3.9 billion. The flat premium volume is attributable primarily to the saturated insurance market in European countries, where premium growth rates have been on the retreat for years, as well as to termination of a large treaty from the United States. Nevertheless, we succeeded in boosting our market share of new business in the United States despite a declining market overall. Furthermore, the sluggish effects were offset by a positive business development in China, France and some parts of Eastern Europe.
A strengthening of the reserves for Australian disability business, which was made necessary by elevated risk experiences market-wide, caused the underwriting result to deteriorate sharply from EUR 67.2 million to -EUR 53.6 million.
Our capital and reserves – excluding the disposable profit – stood at EUR 1,381.7 million (EUR 1,381.7 million). The total capital, reserves and technical provisions – comprised of the capital and reserves excluding disposable profit, the subordinated liabilities, the equalisation reserve and similar provisions as well as the net technical provisions – grew during the year under review to EUR 30,866.0 million (EUR 28,458.3 million). Based on the increase in the total capital, reserves and technical provisions, the balance sheet total of Hannover Rück SE grew to EUR 35.9 billion (EUR 33.1 billion).
A dividend of EUR 2.60 and a bonus of EUR 0.40 per share, equivalent to EUR 361.8 million (previous year: EUR 253.3 million ), was paid in the year under review for the 2012 financial year.
The business development of Hannover Rück SE is essentially subject to the same risks and opportunities as that of the Hannover Re Group. As a general principle, Hannover Rück SE shares in the risks of participating interests and subsidiaries according to the amount of its respective holding. The risks are set out in the risk report. The relations with participating interests of Hannover Rück SE may also give rise to losses from legal or contractual contingent liabilities (particularly novation clauses and guarantees). Please see our explanatory remarks in the notes to this report.
The Hannover Re Group employed 2,419 (previous year: 2,312) staff as at 31 December 2013. The turnover ratio at Home Office in Hannover of 2.8% was unchanged from the previous year (2.8%). The rate of absenteeism – at 3.4% – was slightly below the previous year (3.5%). The turnover ratio and rate of absenteeism continued to be below the average expected across the industry as a whole.
As an overall statement, it is very pleasing to note that the vast majority of our employees are highly satisfied with their tasks and general conditions. For example, 93% of our workforce finds our company to be a particularly good place to work. The responses to questions such as whether our employees enjoy coming to work or whether they would choose to work for our company again are similarly positive. Job activities are for the most part also rated as interesting, varied and challenging for one’s own individual skill set.
Part of our diversity management intended to boost the proportion of women in our company’s management ranks, our mentoring programme got off to a very successful start. Five tandems of female employees and seasoned managers met regularly for a productive exchange to discuss the individual issues faced by our mentees. On the part of the company we assist these discussions by means of process support. In addition, the mentees were given the opportunity to share their experiences with one another at an event held halfway through the year. This occasion was enriched by a practically oriented workshop on the theme of “Image as a success factor”.
We devoted considerable effort in the financial year just ended to the establishment of further personnel (development) tools that we had newly created or revised in recent years. Mention should be made first and foremost here of “blended learning” and the implementation of management feedback.
Blended learning, i. e. the interlinking of electronic study programmes with tutoring support and traditional face-to-face classes, has now become established as our standard form of basic reinsurance instruction. In the financial year just ended we again carried out four modularly structured training events spanning several weeks on the basis of blended learning. Thanks to its universal structure and multilingual design our employees abroad were also able to profit from this training opportunity. With a view to making our training processes even more professional, we also initiated a project to explore the structure of a state-of-the-art learning management system tailored to meet our requirements.
As an internationally operating company, Hannover Re bears responsibility in various senses. This is true of its compliance with relevant laws and regulations, but also applies to its relationship with staff, shareholders, the public at large and the cultures within which the company operates. As a company based in Germany, the formal framework that shapes our corporate governance is determined by German law. With few exceptions Hannover Re fulfils all the recommendations of the German Corporate Governance Code (DCKG), cf. page 95. What is more, our Code of Conduct serves as a further guide for our day-to-day actions.
Building on the active and open dialogue that we initiated with key stakeholder groups in 2010, we conducted a second stakeholder survey in the year just ended. In this context we again engaged in a dialogue with some 30 representatives of the capital market, clients, employees, non-governmental organisations and the public sector, thereby gaining not only recognition for our reporting but also valuable suggestions in relation to future topics.
Our range of reinsurance products and services is geared to the needs of the market and our clients. 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, shortage of resources, climate change and its impacts on global development (natural disasters, environmental damage) as well as pandemics. We use all internally and externally acquired insights in order to be able to offer better insurance solutions. In so doing, we devote special attention to protecting against risks that result from climate change and providing insurance coverage for socially vulnerable groups. This is especially relevant in developing countries, where a constantly growing demand for food makes it important to have coverage for livestock and crop failures.
In 2013, as in previous years, we also offset our absolute CO2 footprint of 6,859 (4,743) tonnes caused by airline and train travel by making voluntary offsetting payments to the international organisation “atmosfair” and to Deutsche Bahn AG.
Increasing numbers of patients with common diseases Diabetes mellitus manifests itself in an elevated blood glucose level. If not a dequately controlled, diabetes normally leads to significantly higher morbidity and mortality rates among sufferers. The worldwide prevalence of diabetes mellitus climbed from 150 million people in 1980 to almost 350 million in 2008. The total number is expected to rise steadily in the coming decades. The increase is due first and foremost to the growth and ageing of the population as well as to the rise in age-specific prevalences. One of the primary factors for the increase in the most widespread form, diabetes mellitus type 2, is the worldwide rise in a person’s average body weight.
As part of its business operations the Hannover Re Group enters into a broad variety of risks. These risks are deliberately accepted and controlled in order to be able to act on the associated opportunities. For the purpose of systematising and managing these risks we split them into: • technical risks in non-life and life and health reinsurance which originate from our business activities and manifest themselves inter alia in fluctuations in loss estimates as well as in unexpected catastrophes and changes in biometric factors such as mortality,
• default and credit risks resulting from our diverse business relationships and payment obligations inter alia with clients and retrocessionaires,
At the present time our most significant risks are the reserving and catastrophe risks within the technical risks of non-life reinsurance, the credit and spread risks within the market risks and the risk of changes in mortality within the technical risks of life and health reinsurance.
• Catastrophe risks can give rise to loss payments for natural disasters, such as storms or earthquakes, and man-made disasters, such as terrorist attacks or accidents in the air or at sea, the amount of which exceeds the losses anticipated over the multi-year average.
• Credit and spread risks result from fair value changes or defaults in connection with our investments in fixedincome securities issued by companies or sovereigns or in asset-backed securities.
Our risk profile remained stable over the financial year just ended. The risks essentially increased in step with the growth of our business. Particularly notable aspects are described in the following sections.
By expanding our portfolio of life and health reinsurance we reduce the volatility of results within the Group and maintain stable dividend payments. Along with our principal business operations as a reinsurer of non-life and life and health business, we also transact primary insurance business in selected niche markets as a complement to our core reinsurance business. With this approach we are well positioned for further profitable growth. Crucial importance attaches to our risk management in order to ensure, among other things, that risks to the reinsurance portfolio remain calculable and also that exceptional major losses do not have an unduly adverse impact on the result.
The risk strategy specifies more concretely the goals derived from our corporate strategy with respect to risk management and documents our understanding of risk. With a view to achieving these goals, we have defined ten overriding principles that are set out in our risk strategy: 1. We keep to the risk appetite defined by the Executive Board.
6. We use appropriate quantitative methods. 7. We apply suitable qualitative methods. 8. We practise risk-based allocation of our capital. 9. We ensure the necessary separation of functions in our organisational structure.
10. We evaluate the risk content of new business areas and new products.
The risk strategy is specified with an increasing degree of detail on the various levels of the company, for example down to the adoption and testing of contingency plans in the event of an emergency or the underwriting guidelines of our treaty and regional departments. The risk strategy and the guidelines derived from it, such as the Framework Guideline on Risk Management and the central system of limits and thresholds, are reviewed at least once a year. In this way, we ensure that our risk management system is kept up-to-date.
Central guidelines: investments, exposure management, central underwriting guidelines (non-life and life and health reinsurance) …
Further major external influencing factors are the protracted low level of interest rates and the Euro debt crisis. For further information on these topics please see the “Investments” section of the management report on page 50 et seq.
The internal capital model of the Hannover Re Group is a stochastic enterprise model. It covers all subsidiaries and business areas 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 business valuation likely to be adopted in future under Solvency II.
Hannover Re’s internal capital model reflects all risks that influence the development of the economic capital. They are split into technical risks, market risks affecting investments, credit 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 specific to each currency area, 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 insurance portfolio 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 historic and publically available data as well as on the internal (re)insurance data stock of the Hannover Re Group. The process is further supplemented by the knowhow of internal and external experts. The suitability 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 at Risk (VaR) of the economic change in value over a period of one year with a confidence level of 99.97%. This reflects the goal of not exceeding a one-year ruin probability of 0.03%. The internal target capitalisation of the Hannover Re Group is therefore significantly higher than the confidence level of 99.5% which will be required in future under Solvency II. It goes without saying that Hannover Rück SE also meets the current capital requirements set by regulators. The capital coverage ratio under Solvency I stood at 147% as at 31 December 2013. Since the corresponding calculation is neither marketconsistent nor risk-based a relevant comparison with the coverage ratio under the internal capital model is not possible.
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 “A+” (Superior, stable outlook) by A.M. Best.
Hannover Re has set up risk management functions and bodies Group-wide to safeguard an efficient risk management system.
The individual elements of risk management are closely interlinked in this system and the roles, tasks and reporting channels are clearly defined and documented in guidelines. This makes possible a shared understanding of Group-wide and holistic monitoring of all material risks. Regular meetings of the Group-wide risk management functions are held in order to promote risk communication and establish an open risk culture. The organisation and interplay of the individual risk management functions are fundamental to our internal risk management and control system. The following chart provides an overview of the central functions and bodies within the overall system as well as of their major tasks and powers.
Systematic risk identification, analysis, measurement, steering and monitoring as well as risk reporting are crucial to the effectiveness of risk management as a whole. Only by giving prompt consideration to risks can the continued existence of our Group be assured. The system that is in place – in common with the corporate and risk strategy – is subject to a constant cycle of planning, action, control and improvement.
Subsidiaries, branches, service companies, representative offices as well as treaty / regional and service divisions within the business groups of non-life reinsurance, life and health reinsurance and investments Risk steering and original risk responsibility for risk identification and assessment on the divisional and company level
Risk steering The steering of all material risks is the task of the operational business units on the divisional and company level. In this context, risk steering encompasses the process of developing and implementing strategies and concepts that are designed to consciously accept, avoid or minimise identified and analysed risks. The risk / reward ratio and the required capital are factored into the division’s decision. Risk steering is operationally assisted by, among other things, the parameters of the local underwriting guidelines, the system of limits and thresholds and the internal control system.
Risk reporting The aim of our risk reporting is to provide systematic and timely information about risks and their potential implications and to safeguard adequate internal communication within the company about all material risks. The central risk reporting system consists primarily of regular risk reports, e.g. on the overall risk situation, adherence to the parameters defined in the risk strategy or on the capacity utilisation of natural catastrophe scenarios. Complementary to the regular risk reporting, immediate internal reporting on material risks that emerge at short notice takes place as necessary.
Process-integrated / -independent monitoring and quality assurance The Executive Board is responsible for the orderly organisation of the company’s business irrespective of internally assigned competencies. This also encompasses monitoring of the internal risk steering and control system. Process-independent moni toring and quality assurance of risk management is carried out by the internal audit function and external instances (independent auditors, regulators). Most notably, the independent auditors review the trigger mechanism and the internal monitoring system. The entire system is rounded off with process-integrated procedures and rules, such as those of the internal control system.
We organise our business activities in such a way that they are always in conformity with all legal requirements. The internal control system (ICS) is an important subsystem that serves, among other things, to secure and protect existing assets, prevent and reveal errors and irregularities and comply with laws and regulations.
The core elements of Hannover Re’s ICS are documented in a Framework Guideline that establishes a common understanding of the differentiated execution of the necessary controls. In the final analysis, it is designed to systematically steer and monitor the implementation of our corporate strategy.
The proper functioning of the ICS necessitates the involvement of management, executive staff and employees on all levels. Yet even with an optimally designed ICS it is not possible to avoid all errors. The system comes up against its limits, most notably with respect to fraud risks and imprecise or incomplete rules and responsibilities.
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 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.
In the following section we compare the available economic capital with the required risk capital.
The methods used are the same as those adopted in the calculation of our Market Consistent Embedded Value (for further remarks on the Market Consistent Embedded Value please see our comments in the section “Technical risks in life and health reinsurance” on page 83). The significance of these options and guarantees in our portfolio is, however, minimal.
The valuation reserves for investments indicate the difference between fair value and book value of those investments recognised under IFRS at book values. Other valuation adjustments encompass above all deferred tax assets and liabilities that arise in connection with valuation adjustments.
The available economic capital increased in the period under review from EUR 10,693.7 million to EUR 11,143.9 million. This was due to the positive effects from economic value adjustments for non-life and life and health reinsurance. In view of the positive business result the shareholders’ equity remained broadly stable despite opposing effects from currency translation and the interest rate environment. The higher interest rates on good-quality government bonds as well as the strengthening euro led to a reduction in the valuation reserves for investments. Conversely, the discounting effect for the loss reserves in non-life reinsurance increased owing to the higher interest rates. The higher value adjustments for life and health reinsurance are attributable above all to lower effects – in comparison with IFRS – from changes in interest rates and exchange rates. The rise in other value adjustments resulted from deferred taxes as a consequence of the higher valuation reserves.
2 Adjusted pursuant to IAS 8 (cf. Section 3.1 of the notes)
The required risk capital of the Hannover Re Group relative to the target confidence level of 99.97% grew in the year under review from EUR 6,292.1 million to EUR 6,896.9 million. The increase in underwriting risks in non-life reinsurance results largely from the rise in the risk budget for natural catastrophes and from model improvements. By factoring in the increased risk budget we are taking a rather conservative view, since the committed capacities are not fully utilised at all times of the year. The increase in risk capital for market risks is attributable above all to changes in the modelling of credit and spread risks and to an enlarged volume of real estate. The underwriting risks in life and health reinsurance, the credit risks and the operational risks changed in accordance with the underlying business volumes.
Underwriting risk in life and health reinsurance 2,607.3 1,434.3 2,592.8 1,336.6
When it comes to aggregating the individual risks, we make allowance for dependencies between risk factors. Dependencies arise, for example, as a consequence of market shocks, such as the financial crisis, which simultaneously impact multiple market segments. What is more, several observation periods may be interrelated on account of market phenomena such as price cycles. In dealing with these dependencies, however, it is our assumption that not all extreme events occur at the same time. The absence of complete dependency is referred to as diversification.
Risk management in non-life reinsurance has defined various overall guidelines for efficient risk steering. These include, among other things, the limited use of retrocessions to reduce volatility and conserve capital. It is also crucially important to consistently maximise the available risk capacities on the basis of the risk management parameters of the Hannover Re Group and to steer the acceptance of risks systematically through the existing underwriting guidelines. Given that the establishment of inadequate reserves constitutes the greatest risk in non-life reinsurance, the conservative level of our reserves is crucial to our risk management.
Diversification within the non-life reinsurance business group is actively managed through allocation of the cost of capital according to the contribution made to diversification. A high diversification effect arises out of the underwriting of business in different lines and different regions with different business partners. In addition, the active limitation of individual risks – such as natural catastrophes – enhances the diversification effect.
Diversification effect within the non-life reinsurance business group Risk capital 1 per line of business for the 99.5% VaR
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 reserving risk please see our comments in Section 6.7 “Technical provisions” on page 189 et seq.
Hannover Re has taken out inflation swaps (USD and EUR zero coupon swaps) to partially hedge inflation risks. These serve to protect parts of the loss reserves against inflation risks. An inflation risk exists particularly inasmuch as the liabilities (e.g. loss reserves) could develop differently than assumed at the time when the reserve was constituted because of inflation. Inflation protection was purchased for the first time in the second quarter of 2010 with terms of 4 and 5 years; it was increased in the first quarter of 2011 (term of 8 years). We also secure parts of the inflation protection for our loss reserves by purchasing bonds with inflation-linked coupon payments.
Asbestos-related claims / pollution damage 28.8 170.8 32.1 27.8 182.2 29.1
Stress tests for natural catastrophes after retrocessions in EUR million 2013 2012
Earthquake Japan 1 100-year loss -263.4 -335.4 250-year loss -490.8 -478.0
Earthquake Australia 100-year loss -166.5 -176.2 250-year loss -369.1 -393.0 1 Previous year’s scenario limited to Tokyo
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 annual loss as well as utilisation thereof in EUR million Limit 2013
Our company incurred the following catastrophe losses and major claims in the 2013 financial year: Catastrophe losses and major claims 1 in 2013 in EUR million Date gross net
Tornadoes in the United States 19 – 20 May 15.5 11.0 1 Natural catastrophes and other major claims in excess of EUR 10 million gross
Combined ratio (non-life reinsurance) 94.9 95.8 104.3 98.2 96.6 95.4 99.7 100.8 112.8 97.2 1 Including financial reinsurance and specialty insurance 2 Net share of the Hannover Re Group for natural catastrophes and other major claims in excess of EUR 10 million gross as a percentage of net premium earned (until 31 December 2011: in excess of EUR 5 million gross)
All risks directly connected with the life of an insured person are referred to as biometric risks (especially the miscalculation of mortality, life expectancy, morbidity and occupational disability ); they constitute material risks for our company in the area of life and health reinsurance. Our goal is to find a balance between biometric risks. Counterparty, lapse and catastrophe risks are also material since we additionally prefinance our cedants’ new business acquisition costs. The reserves are determined on the basis of secure biometric actuarial bases in light of the information provided by our clients. The biometric actuarial bases used and the lapse assumptions are continuously reviewed with an eye to their adequacy and if necessary adjusted. This is done using the company’s own empirical data as well as market-specific insights.
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.
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 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 Market Consistent Embedded Value (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).
Faced with a challenging capital market climate, particularly high importance attaches to preserving the value of assets under own management and the stability of the return. Hannover Re’s portfolio is therefore guided by the principles of a balanced risk / return profile and broad diversification. Based on a risk-averse asset mix, the investments reflect both the currencies and durations of our liabilities. Market price risks include equity risks, interest rate risks, currency risks, real estate risks, spread risks and credit risks.
Our portfolio currently consists in large part of fixed-income securities, and hence interest rate, credit and spread risks account for the bulk of the market risk. We minimise interest rate and currency risks through the greatest possible matching of payments from fixed-income securities with the projected future payment obligations from our insurance contracts.
Required risk capital 1 for market risks in EUR million 2013
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.
Our conservatively oriented investment portfolio was unable to escape the effects of increases in interest rates for government bonds triggered in particular in May and June of 2013 by the so-called tapering debate in the United States; from May 2013 onwards it consequently gave back some of the fair value gains made in previous years. The escalation levels of the trigger mechanism were activated in this context (cf. chart below). Our longer-duration fixed-income securities, which we hold to cover corresponding liabilities in accordance with our strict asset / liability management approach, were a key contributory factor in this development.
Hannover Re | Annual Report 2013 fair value of our securities portfolio under own management that with a probability of 95% will not be exceeded within ten trading days. A multi-factor model is used to calculate the VaR indicators for the Hannover Re Group. It is based on time series of selected representative market parameters (equity prices, yield curves, spread curves, exchange rates, commodity prices and macro-economic variables). All asset positions are mapped on the level of individual positions within the multifactor model; residual risks (e.g. market price risks that are not directly explained by the multi-factor model) can be determined through back-calculation and are incorporated into the overall calculation. The model takes into account interest rate risks, credit and spread risks, systematic and specific equity risks, commodity risks and option-specific risks.
Scenarios for changes in the fair value of material asset classes in EUR million Scenario Portfolio change on a fair value basis Change in equity before tax
Stress tests are conducted in order to be able to map extreme scenarios as well as normal market scenarios for the purpose of calculating the Value at Risk. In this context, the loss potentials for fair values and shareholders’ equity (before tax) are simulated on the basis of already occurred or notional extreme events. Further significant risk management tools – along with various stress tests used to estimate the loss potential under extreme market conditions – include sensitivity and duration analyses and our asset / liability management (ALM).
The internal capital model provides us with quantitative support for the investment strategy as well as a broad diversity of VaR calculations. In addition, tactical duration ranges are in place, within which the portfolio can be positioned opportunistically according to market expectations. The parameters for these ranges are directly linked to our calculated risk-bearing capacity.
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 of 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 short-term 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 Section 6.1, “Investments under own management”, page 176 et seq.
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 (such as the US real estate crash). 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.
We use derivative financial instruments only to a very limited extent. The primary purpose of such financial instruments is to hedge against potentially adverse situations 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. In addition, as in the previous year, a modest portion of our cash flows from the insurance business was hedged using forward exchange transactions. Hannover Re holds further derivative financial instruments to hedge interest rate risks from loans taken out to finance real estate. The 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
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. We then assess the credit risk first on the level of individual securities (issues) and in subsequent steps on a combined basis on the issuer level.
In order to limit the risk of counterparty default we set various limits on the issuer and issue level as well as in the form of dedicated rating quotas. A comprehensive system of risk reporting ensures timely reporting to the functions entrusted with risk management.
The measurement and monitoring mechanisms that have been put in place safeguard a prudent, broadly diversified investment strategy. This is reflected inter alia in the fact that within our portfolio of assets under own management the exposures to government bonds or instruments backed by sovereign guarantees issued by the so-called GIIPS states (Greece, Ireland, Italy, Portugal, Spain) amount to altogether just EUR 126.6 million on a fair value basis. This corresponds to a proportion of 0.4%. The individual countries account for the following shares: Spain EUR 39.3 million, Portugal EUR 20.1 million, Italy EUR 67.2 million and Ireland EUR 0.0 million. No impairments had to be taken on these holdings. Our portfolio does not contain any bonds of Greek issuers.
On a fair value basis EUR 3,480.2 million of the corporate bonds held by our company were issued by entities in the financial sector. Of this amount, EUR 2,963.5 million was attributable to banks. The vast majority of these bank bonds (68.9%) are rated “A” or better. Our investment portfolio under own management does not contain any written or issued credit default swaps.
The credit risk consists primarily of the risk of complete or partial failure of the counterparty and the associated default on payment.
Overall, retrocessions conserve our capital, stabilise and optimise our results and enable us to act on opportunities across a broader front, e.g. following a major loss event. Regular visits to our retrocessionaires give us a reliable overview of the market and put us in a position to respond quickly to capacity changes. The following table shows how the proportion of assumed risks that we do not retrocede (i. e. that we run in our retention) has changed in recent years.
The key ratios for managing the credit risk are as follows: Ratios used to monitor and manage our credit risks
1 (Shareholders’ equity + hybrid capital) / net earned premium 2 Hybrid capital / shareholders’ equity 3 EBIT / interest on hybrid capital 4 Net reserves / net premium earned 5 Adjusted pursuant to IAS 8 (cf. Section 3.1 in the notes)
• 89.4% of our retrocessionaires have an investment grade rating (“AAA” to “BBB”).
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 technical risks (e.g. the premium 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.
4. We strive for adequate risk minimisation through our actions. 5. We manage within defined limits and create transparency through measurements.
When it comes to reducing business interruption risks, the paramount objective is the quickest possible return to normal operations after a crisis, for example through implementation of existing contingency plans. Guided by internationally accepted standards, we have defined the key framework conditions and – among other measures – we have assembled a crisis team to serve as a temporary body in the event of an emergency. The system is complemented by regular exercises and tests. Regular risk reporting to the Risk Committee and the Executive Board has also been put in place.
The hallmark of emerging risks is that the content of such risks cannot as yet be reliably assessed – especially on the underwriting side with respect to our treaty portfolio. Such risks evolve gradually from weak signals to unmistakable tendencies.
The liquidity risk refers to the risk of being unable to meet our financial obligations when they become due. The liquidity risk consists of the refinancing risk, i. e. the necessary cash cannot be obtained or can only be raised at increased costs, and the market liquidity risk, meaning that financial market transactions can only be completed at a poorer price than expected due to a lack of market liquidity. Core elements of the liquidity management of our investments are, in the first place, management of the maturity structure of our investments on the basis of the planned payment profiles arising out of our technical liabilities and, secondly, regular liquidity planning as well as the asset structure of the investments. Above and beyond the foreseeable payments, unexpected and exceptionally large payments may pose a threat to liquidity. Yet in reinsurance business significant events (major losses) are normally paid out after a lead time that can be reliably planned. As part of our liquidity management we have nevertheless defined asset holdings that have proven to be highly liquid – even in times of financial stress such as the 2008 financial crisis.
The “Future Radar” initiative, the members of which cut across divisions and hierarchies, picks up on a broad range of topics and arrives at initial business approaches. The working group is tasked with evaluating trends and issues of the future. This includes, for example, increasing fluctuations in the weather, obstacles to the turnaround in energy policy, greater scarcity of resources, developments in the health market or cybercrime.
Cybercrime The trend analysis carried out by the “Future Radar” initiative anticipates, among other things, a sharp increase in cybercrime. Going forward, malware is expected to become much more common on smartphones and tablet PCs. There is also a risk that in future physical targets (e.g. power plants, electricity grids or communication networks in the banking and finance sector) may be targeted more heavily via the information and communication infrastructure.
Business 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.
Since 2010 the stand-alone service unit Business Opportunity Management has been assigned to the Chief Executive Officer ’s area of responsibility – a reflection of the considerable importance that Hannover Re attaches to business opportunity management.
In view of the diverse range of potential future opportunities, close links exist with other projects, working groups and bodies, such as with the working group on “Emerging Risks und Scientific Affairs” in regard to emerging risks and opportunities (see page 91 “Other risks”). The working group carries out qualitative assessments of emerging risks. As a result, however, not only are the potential risks analysed but also any available business opportunities. In the year under review, for example, issues such as fracking and the repercussions of protracted heatwaves were explored by the working group.
Protracted heatwaves Protracted heatwaves have repercussions on many areas of daily life. While the most well-known impacts are on agriculture and health, the consequences for industry, transportation, power and water supplies and the environment – with the associated heavy financial strains – also need to be borne in mind.
If a business idea is translated into reality and a new reinsurance product results, the normal procedure – provided the criteria defined for this purpose by Risk Management are applicable – is to work through the so-called new product process. This process is supported by Risk Management at Hannover Re. The process is always worked through if a contractual commitment is to be entered into in a form previously not used by Hannover Re or if the exposure substantially exceeds the existing scope of coverage. If this is the case, all material internal and external influencing factors are examined beforehand (e.g. implications for the overall risk profile or the risk strategy). In so doing, Risk Management ensures that before it can be used or sold a new reinsurance product must be approved by the Executive Board.
The opportunity management process can be illustrated in simplified form as follows: Product launch under line responsibility
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 optimally 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 2008 we have been able to increase our total policyholders’ surplus (hybrid capital, non-controlling interests and shareholders’ equity) by more than 86%. 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 buffer to be able both to absorb risks and act on business opportunities that may arise.
The evaluation encompasses above all the areas of risk culture, risk controls, the management of emerging risks, risk models and strategic risk management. This external appraisal confirms the quality of our holistic approach to risk management. We would also refer to the explanatory remarks on the financial strength ratings of our subsidiaries in the “Financial position and net assets” section of the management report. In addition, the risk trigger mechanism and internal monitoring system are reviewed annually by the independent auditor. The Group-wide risk management system is also a regular part of the audits conducted by the internal audit function.
For additional information on the opportunities and risks associated with our business please see the Forecast on page 118 et seq. as well as Section 8.11 “Events after the balance sheet date” on page 224.
In the previous year Hannover Re was not in compliance with three recommendations of the German Corporate Governance Code (DCGK); this year, the company’s implementation of the recommendations of the Code as amended 13 May 2013 diverges from the recommendations in four respects. The recommendations in question are that a cap on severance payments should be included when concluding or renewing a management board contract (Code Item 4.2.3 Para. 4), that the Chairman of the Supervisory Board should not chair the Audit Committee (Code Item 5.2 Para. 2) and that the Chairman of the Audit Committee should be independent (Code Item 5.3.2). Purely as a precautionary measure, a divergence from the recommendation contained in Code Item 4.2.3 Para. 2 regarding caps on the amount of variable compensation elements in management board contracts has been declared. The reasons for these divergences are set out in the following Declaration of Conformity pursuant to § 161 Stock Corporation Act (AktG). The present and all previous Declarations of Conformity of the company are published on its website ( re.com / about / corporate / declaration / index.html).
Declaration of Conformity pursuant to § 161 Stock Corporation Act (AktG) regarding compliance with the German Corporate Governance Code at Hannover Rück SE: The German Corporate Governance Code sets out major statutory requirements governing the management and supervision of German listed companies. It contains both nationally and internationally recognised standards of good and responsible enterprise management. The purpose of the Code is to foster the trust of investors, clients, employees and the general public in German enterprise management. Under § 161 Stock Corporation Act (AktG) it is incumbent on the Management Board and Supervisory Board of German listed companies to provide an annual declaration of conformity with the recommendations of the “German Corporate Governance Code Government Commission” published by the Federal Ministry of Justice or to explain which recommendations of the Code were / are not applied.
The Executive Board and Supervisory Board declare pursuant to § 161 Stock Corporation Act (AktG) that in its implementation of the German Corporate Governance Code Hannover Rück SE diverges in four respects from the recommendations contained in the version of the Code dated 13 May 2013: Code Item 4.2.3 Para. 2; Caps on the amount of variable compensation elements in management board contracts
This means that upon allocation of the share awards the expense accruing to the company on this variable compensation element is fixed (capped) at the time of allocation. In economic terms, these virtual share awards constitute a compulsory investment by the members of the Executive Board in the Hannover Re share that is geared to a holding period of four years. This compulsory investment thus appropriately takes into account both positive and negative developments at the company as reflected in the share price.
These share awards are paid out after a vesting period of four years according to the share price of the Hannover Re share applicable at the payment date plus an amount equivalent to the total dividends per share distributed during the vesting period. The virtual share awards thus follow the economic fortunes of physically awarded real shares.
Insofar as the delivery of real shares for retention by the Executive Board members is granted with a resale lock-up period as part of the variable compensation, a cap is normally only provided for with respect to the granting of shares (i. e. at the time of allocation) and not at the time of exercise, which is at the discretion of the recipient once the lock-up period has expired.
The virtual share awards of Hannover Re have a cap at the time of allocation and a time of exercise set by the company after four years. Given the safeguards put in place by the company, we consider a further cap at the time of exercise – especially in light of the desired economic identity of compulsory investments in virtual and real shares – to be unnecessary. As a precaution, however, the company is declaring a divergence from Code Item 4.2.3 Para. 2.
The current Chairman of the Supervisory Board of Hannover Rück SE served as the company’s Chief Financial Officer in the period from 1994 to 2002. During this time he acquired superb knowledge of the company and he is equipped with extensive professional expertise in the topics that fall within the scope of responsibility of the Finance and Audit Committee. With this in mind, the serving Chairman of the Supervisory Board is optimally suited to chairing the Audit Committee. In the opinion of Hannover Rück SE, it is therefore in the interest of the company to diverge from the recommendation contained in Code Item 5.2 Para. 2.
Hannover Re’s objective continues to be the consolidation and further expansion of its position as one of the leading, globally operating reinsurance groups of above-average profitability.
In 2010 the Supervisory Board had set out in its Rules of Procedure the goal of increasing the number of women on the Supervisory Board to at least two (at the time no women were represented on the body). This goal was accomplished in 2012 and in 2013 – with three female members of the Supervisory Board – it was actually surpassed. In addition, for the first time one of the members of the Supervisory Board’s Nomination Committee is a woman. The Supervisory Board again considered the concept for the advancement of women that had been implemented in 2012 and was informed of the progress that had been made. The primary objective of this concept is to foster promising young female professionals through a variety of measures and to enlarge the proportion of women in management positions. Considerable energy was once again devoted to the issue of sustainability. The aim here is to achieve commercial success on the basis of a solid business model in accordance with the needs of our staff and the company as well as with an eye to protecting the environment and conserving natural resources. We strive to reduce as far as possible the greenhouse gas emissions produced by our day-to-day business activities in order to come closer to reaching our goal of carbon neutrality. In so doing, we are demonstrably taking responsibility for a sustainable future. In 2011 we defined for the first time a concrete Sustainability Strategy setting out our primary objectives in this field. Not only that, in the year under review we again presented our Sustainability Report in the form of a so-called “GRI Report”. Further information on the topic of sustainability is provided on our website (www.hannover-re. com / sustainability / index.html).
In addition to our Corporate Governance principles, the Code of Conduct was also revised in 2013 ( com / resources / cc / generic / codeofconduct-e.pdf). Complementing our corporate strategy and the Corporate Governance principles, it establishes rules governing integrity in the behaviour of all employees of Hannover Re and is intended to help members of staff cope with the ethical and legal challenges that they face as part of day-to-day work. The rules defined in the Code of Conduct reflect the high ethical and legal standards that guide our actions worldwide. It is our belief that integrity in dealings with our stakeholders constitutes the foundation of a successful enterprise. In both our strategic planning and our day-to-day business activities, we therefore aspire to consistently apply the highest ethical and legal standards; for our actions and the way in which every single one of us presents and conducts himself or herself are crucial in shaping the image of the Hannover Re Group.
of the business development, the execution of strategic decisions, material risks and planning as well as relevant compliance issues. The Chairman of the Supervisory Board stays in regular contact with the Chairman of the Executive Board in order to discuss with him significant business occurrences. The composition of the Executive Board (including areas of responsibility) as well as of the Supervisory Board and its committees is set out on pages 6 and 233 respectively of the present Annual Report.
The Rules of Procedure of the Executive Board are intended to ensure that a consistent business policy is elaborated and implemented for the company in accordance with its strategic objectives. Within the framework of a consistent business policy, the principle of “delegation of responsibility” enjoys special status. In the interests of shareholders, importance is expressly attached to an organisation that facilitates costeffective, quick and unbureaucratic decision processes. Open and trusting cooperation geared to the interest of the whole is the foundation of success. In this context, the members of the Executive Board bear joint responsibility for the overall management of business. Irrespective of their overall responsibility, each member of the Executive Board leads their own area of competence at their individual responsibility within the bounds of the resolutions adopted by the Executive Board. Only persons under the age of 65 may be appointed to the Executive Board. The term of appointment shall be determined such that it expires no later than the end of the month in which the member of the Executive Board turns 65. The Supervisory Board takes account of diversity considerations in the composition of the Executive Board.
The provisions of the Act on the Adequacy of Management Board Remuneration (VorstAG) and of the Insurance Supervision Act in conjunction with the Regulation on the Supervisory Law Requirements for Remuneration Schemes in the Insurance Sector (VersVergV) have been observed. In addition, we took into account the more specific provisions of DRS 17 (amended 2010) “Reporting on the Remuneration of Members of Governing Bodies”.
Responsibility The Standing Committee decides on the content, formation, modification and cancellation as well as termination of service contracts with the members of the Executive Board. A full meeting of the Supervisory Board determines all remunerationrelated matters of content for the Executive Board of Hannover Rück SE and regularly reviews the remuneration structure and the adequacy of the remuneration system for the members of the Executive Board.
Objective, structure and system of Executive Board remuneration The total remuneration of the Executive Board and its split into fixed and variable components conform to regulatory requirements – especially the provisions of the Act on the Adequacy of Management Board Remuneration (VorstAG) and the Regulation on the Supervisory Law Requirements for Remuneration Schemes in the Insurance Sector (VersVergV).
Basic remuneration; Non-cash compensation, fringe benefits: Accident, liability and luggage insurance, company car for business and personal use (tax on the pecuniary advantage payable by the Board member), reimbursement of travel expenses and other expenditures incurred in the interest of the company
Proportion of variable remuneration: Chief Executive Officer / Chief Financial Officer: 70%; Board members except for Chief Executive Officer / Chief Financial Officer: 50%
An individually determined and contractually defined basic amount is paid for each 0.1 percentage point by which the RoE of the past three financial years exceeds the risk-free interest rate of 2.8%. Goal attainment of 100% corresponds to an RoE of 11.6%. Goal attainment can amount to a maximum of 200% and a minimum of -100%.
Business group bonus Proportion of variable remuneration: Board members except for Chief Executive Officer / Chief Financial Officer: 25%
Resolution by the Supervisory Board of 6 March 2013 regarding the reorganisation of the business group bonus from the 2013 financial year onwards: The basis for the business group bonus is the return generated on the capital allocated to the business group in the respective 3-year period just ended (RoCa = Return on Capital allocated).
The method used to calculate the IVC as a basis for determining the business group performance is checked by independent experts.
Special arrangements for 2013 and 2014: the basis for the average RoCa is the business group performance from 2013 onwards; the minimum business group bonus is EUR 0.
Attainment of three-year targets (basis for 2013 and 2014: business group performance from 2013 onwards)
Personal qualitative, quantitative targets; individual contribution to the overall result, leadership skills, innovative skills, entrepreneurial skills, specific features of area of responsibility; The individual bonus for goal attainment of 100% is contractually stipulated. Over- and underfulfilment result in additions / deductions.
The minimum individual bonus amounts to EUR 0 and the maximum is double the bonus payable upon complete goal attainment.
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 page 24 “Management system”).
Of the total amount of defined variable remuneration, a partial amount of 60% is paid out in the month following the Supervisory Board meeting that approves the consolidated financial statement. The remaining amount of 40% is initially withheld as explained below with a view to encouraging long-term value creation: Short-term Medium-term Long-term 60% of the variable remuneration with the next monthly salary payment following the Supervisory Board resolution 20% of the variable remuneration in the bonus bank; withheld for 3 years; the positive amount contributed 3 years prior to the payment date is available for payment, provided this does not exceed the balance of the bonus bank in light of credits / debits up to and including those for the financial year just ended; an impending payment not covered by a positive balance in the bonus bank is omitted; a positive balance in the bonus bank is carried forward to the following year after deduction of any payment made; a negative balance is not carried forward to the following year; loss of claims due from the bonus bank in special cases: resignation from office without a compelling reason; contract extension on the same conditions is rejected; no interest is paid on credit balances.
If the contractual relationship ends normally prior to the end of the vesting period for the bonus band or HR-SAs, and if a contract extension is not offered, the member of the Executive Board retains his entitlements to payment from the bonus bank – making reference to a defined forward projection of the bonus bank – and for already awarded HR-SAs.
Variable remuneration under the old remuneration structure (until 2011) The virtual stock option plan with stock appreciation rights existing under the old remuneration structure remains in force for all members of the Executive Board until all stock appreciation rights have been exercised or have lapsed. In the 2013 financial year no further stock appreciation rights were granted to active Board members. Of the stock appreciation rights granted in previous years, active and former Board members exercised amounts totalling EUR 1.4 million (previous year: EUR 4.3 million) in 2013.
The remuneration (excluding pension payments) received by former members of the Executive Board totalled EUR 0.4 million (EUR 2.4 million).
Variable remuneration payable Bonus bank Share awards from seats with Group bodies 4 in EUR thousand 1 As at the balance sheet date no Board resolution was available regarding the performance-based remuneration for 2013. The variable remuneration is recognised on the basis of estimates and the provisions constituted accordingly.
In 2013 altogether EUR 10,700 more than had been originally reserved was allocated to the bonus bank for 2012. 5 The nominal amount is stated; virtual Hannover Re share awards are automatically granted in an amount equivalent to 20% of the variable remuneration.
6 In order to calculate the number of share awards for 2013 reference was made to the Xetra closing price of the Hannover Re share on 30 December 2013 (EUR 62.38). The number to be actually awarded is established from the arithmetic mean of the Xetra closing prices of the Hannover Re share in a period from five trading days before to five trading days after the meeting of the Supervisory Board that approves the consolidated financial statement in March 2014. The applicable market price of the Hannover Re share had increased from EUR 58.96 (28 December 2012) to EUR 61.54 by the allocation date (6 March 2013) of the share awards for 2012; the share awards actually allocated for 2012 are shown here, not those estimated in the 2012 Annual Report.
An orphan’s pension shall be granted in the amount of 15% – in the case of full orphans 25% (final-salary pension commitment ) or 30% (contribution-based pension commitment) – of the retirement pay that the Board member received or would have received on the day of his death if the pensionable event had occurred owing to a permanent incapacity for work.
DBO 31.12. Personnel expense 1 Mr. Vogel was appointed as a member of the Executive Board on 1 April 2009. He was first granted a pension commitment on the basis of his service to the company prior to 2001; the earned portion of the commitment from the Unterstützungskasse is therefore established as a proportion (in the ratio [currently attained service years since entry] / [attainable service years from entry to exit age]) of the final benefit. Measurement under IFRS consequently uses the defined benefit method. An annual premium of EUR 95,000 (25% of the pensionable income) was paid for Mr. Vogel in 2013. The guaranteed interest rate of his commitment is 3.25%.
All the members of the Supervisory Board receive an attendance allowance of EUR 1,000 for their participation in each meeting of the Supervisory Board and the Committees in addition to the aforementioned remuneration. If a meeting of the Supervisory Board and one or more Committee meetings fall on the same day, the attendance allowance for this day is only paid once in total.
Dealings in shares, options and derivatives of Hannover Rück SE effected by members of the Executive Board or Supervisory Board of Hannover Re or by other persons with managerial functions who regularly have access to insider information concerning the company and who are authorised to take major business decisions – as well as such dealings conducted by certain persons closely related to the aforementioned individuals – in excess of EUR 5,000 are to be reported pursuant to § 15a Securities Trading Act (WpHG). No such reportable transactions took place in the 2013 financial year.
Members of the Supervisory Board and Executive Board of Hannover Rück SE as well as their spouses or registered partners and first-degree relatives hold less than 1.0% of the issued shares. The total holding as at 31 December 2013 amounted to 0.056% (0.056%) of the issued shares, i. e. 67,103 (67,118) shares.
Members of staff on the levels of Chief Manager, Senior Manager and Manager are also able to participate in a variable remuneration system through the Group Performance Bonus (GPB). The Group Performance Bonus (GPB) is a remuneration model launched in 2004 that is linked to the success of the company. This tool is geared to the minimum return on equity of 750 basis points above the risk-free interest rate and the return on equity actually generated. For those participating in the GPB 14.15 monthly salary payments are guaranteed; a maximum of 16.7 salary payments is attainable. Since its launch the maximum amount of the GPB was paid out in 2006, 2007, 2009, 2010 and 2012.
Hannover Re Group All 149 Group senior executives worldwide receive a cash bonus upon corresponding goal attainment. 148 of them participate in the Share Award Plan.
Home Office Hannover 581 staff (excl. seconded employees) out of the altogether 1,201 at Hannover Home Office (incl. 90 senior executives) are GPB-eligible.
The measurement of the business group targets – which in the case of the treaty / regional departments account for 40% of overall goal attainment – is geared to the actual value created. The Intrinsic Value Creation (IVC) of the business group encompassing the relevant area of responsibility is therefore used as a one-year measurement basis. Negative performance contributions are excluded here – the minimum possible goal attainment is 0%. The maximum possible goal attainment is limited to 150%.
On management level 3 (Director and General Manager) the minimum variable remuneration amounts to EUR 0 on the premise that the degree of attainment for all goals is 0%. For management level 2 (Managing Director) in treaty / regional departments the minimum limit for the variable remuneration is set at -10% if the degree of goal attainment for Group net income is -50% while at the same time goal attainment of 0% is determined for the business group targets and individual targets. For management level 2 (Managing Director) in service departments -20% of the variable remuneration is possible as the lower limit, if the degree of goal attainment for Group net income is -50% and at the same time goal attainment of 0% is determined for the individual targets.
The cash bonus was paid for the first time in June 2013 for the 2012 financial year. In view of the fact that the share awards were also allocated for the first time in June 2013 for the 2012 financial year, they will be paid out for the first time in the spring of 2017 including dividends paid for the 2012, 2013, 2014 and 2015 financial years.
Growing markets Studies by the Global Earthquake Model Foundation show that the number of people worldwide at moderate or severe risk of experiencing earthquakes will grow by more than 30% by 2030. In the same period the insured values in earthquake-exposed regions will rise disproportionately. This is a consequence of increasing insurance densities and higher-value construction methods, which in turn are attributable to greater prosperity in many countries around the world.
Forecast • Solid prospects for 2014 despite softer market conditions in non-life reinsurance • Stable to modestly higher gross premium volume in total business • Selective underwriting policy in non-life reinsurance should preserve 2013 profitability • Significantly improved result expected in life and health reinsurance • Return on investment of 3.2% for assets under own management • Group net income in the order of EUR 850 million targeted
Global economy The outlook for the global economy continued to brighten as it put 2013 behind it and moved into 2014. Factors which had put the world’s economy under appreciable strain over the past two years began to diminish in significance: in the United States the process of consolidation continued apace, while in the Eurozone confidence solidified in the survival of the single currency area. The Kiel Institute for the World Economy expects the effects of expansionary monetary policy to be felt progressively more strongly as confidence grows among households and the business community. By and large, fiscal policy will also be less restrictive than in recent years.
Markets are prepared for the fresh fiscal restrictions that take effect in the US budget at the beginning of 2014, as a consequence of which the restraining effect on the economy will be far slighter than in previous years. In view of the improved state of the economy, the budget deficit in the 2014 financial year will continue to shrink.
China, India, Japan The growth in potential output will slow in a number of emerging economies, although it should remain on a high level. The Kiel Institute for the World Economy expects China’s growth rate to retreat slightly in the coming year; it will probably stand at 7.5% in 2014. Particularly in China, the figures published by the ECB suggest that the growth potential for the coming years will follow a downward trend. Given that the population of working age is shrinking in size, the gradual elimination of demand imbalances will lead to a shift in capital spending towards private consumption. For India, too, the forecast of 5% for the coming year is well short of the higher levels of prior years.
Capital markets All in all, 2014 is likely to be a solid year on the financial markets, driven by further recovery in the global economy and stabilisation in public finances. While we expect the European Central Bank to initially maintain its low interest rate policy, the US Federal Reserve should continue its progressive pullback from active market intervention, although it will likely leave interest rate policy unchanged. In 2014 international bond markets will again see unusually low interest rate levels. In the relevant currency areas for our company we expect at most moderate increases in key interest rates. With respect to treasury bonds issued by the countries of the European Monetary Union with higher risk premiums, which have been the focus of so much attention of late, the stabilisation that began to take hold in 2013 may be sustained. Last but not least, the incremental strategy for resolving the Euro debt crisis may lead to a sometimes volatile capital market environment. While the necessary consolidation of public finances in the western world will continue to preoccupy the economic environment, it may, however, overcompensate due to resurgent domestic consumption and investment demand. Overall, the risks to the world economy have not really diminished, but the opportunities are greater. Broad diversification within the investment portfolio will therefore continue to be of considerable importance in the current financial year.
Generating growth will likely continue to be a dominant topic despite sustained competition. Industry experts anticipate stimuli for both non-life and life and health reinsurance first and foremost from growth markets: attractive business potential should be available here in view of rising population numbers and the associated urbanisation. If major losses – especially from natural disasters – are again absent in 2014, the market may soften and hence usher in further premium reductions. The market for catastrophe bonds (ILS), which gives investors with strong capital resources access to the (re)insurance market, may further exacerbate the pressure on prices. Now more than ever, therefore, the industry will likely attach importance to prices and conditions that appropriately reflect the risks. Moderate nominal premium growth is anticipated for the German insurance industry in 2014, although the overall expectation is slightly below that of the previous year.
Despite the fiercer competition, we were satisfied with the outcome of the renewals. Thanks to our selective underwriting policy we were able to generate adequate margins. We expect the profitability of the new business written to remain broadly stable relative to 2013.
Even though the rate erosion was appreciable in some areas, prices were obtained on a level commensurate with the risks. The rate reductions in non-proportional business amounted to 3.8%. Despite various efforts in the market to bring about softening, we were able to write our business at broadly unchanged conditions.
The development of our business is described in greater detail below.
Specialty lines In marine reinsurance we expect to see further rate increases in 2014 for Protection & Indemnity (P&I) covers owing to the deterioration of the liability claims associated with the challenging salvage of the “Costa Concordia” cruise ship. The price level for non-proportional reinsurance of business with offshore exposure should remain stable on both the property and casualty side. As far as the other lines are concerned, such as hull, cargo and marine liability, the rate environment is likely to remain broadly stable. Hannover Re anticipates more intense competition and hence pressure on prices under marine programmes that do not cover worldwide exposures. These include, in particular, the European and Asian markets.
In view of the very good underwriting results booked in aviation reinsurance in recent years, prices on both the primary and reinsurance markets are continuing to decline. With this in mind, our focus remains firmly on disciplined underwriting so as to preserve the profitability of our portfolio. Reflecting our selective underwriting approach in the treaty renewals as at 1 January 2014, our premium volume contracted. For the year as a whole, too, we anticipate an appreciable drop in our premium income.
With the economy slowly recovering, we are standing by our underwriting policy in credit and surety reinsurance. In the area of credit insurance we expect premium income to remain stable or decline slightly at constant claims rates. In surety reinsurance, on the other hand, loss expenditure is again likely to exceed the multi-year average, despite trending slightly lower. In business with political risks we enlarged our portfolio by a double-digit margin in the renewals as at 1 January 2014; we anticipate further premium growth coupled with good claims rates. For 2014 Hannover Re expects to see premium volume in its credit and surety business come in slightly lower than the previous year.
In our business with structured reinsurance products we anticipate further healthy demand for tailored reinsurance solutions in the current financial year. The key driver here is the increasing integration of reinsurance into companies’ risk management. This trend has been fostered by the rising capital requirements imposed on providers: with ever more countries implementing risk-based solvency systems and the adoption of Solvency II taking on increasingly concrete form, 2014 is again likely to see strong demand for contracts designed to provide solvency relief.
We do not anticipate premium growth for our reinsurance business in the United Kingdom in the current year. Although rates in non-proportional motor reinsurance are likely to flatten out somewhat after the increases in previous years, the price level is still high. In direct business the focus of our subsidiary Inter Hannover is on risk selection with a view to further enhancing the quality of its portfolio. In South Africa we expect our reinsurance business and specialty lines to deliver modest premium growth and improved profitability in 2014.
Global reinsurance Treaty reinsurance worldwide The premium volume for our portfolio of worldwide treaty reinsurance is expected to remain broadly stable.
For the markets of the Asia-Pacific region we are looking at further premium growth. In Japan we expect stable demand for reinsurance covers; rates for natural catastrophe risks are likely to retreat in the April renewals, but should still remain on a good level. Overall, it is our assumption that our portfolio in Japan will deliver modest premium growth in the original currency. The region of South and Southeast Asia should prove to be an engine of growth in the current year and beyond. Consequently, we anticipate a further rise in premium volume for our portfolio in this region. Rates in most markets of South and Southeast Asia are likely to remain broadly stable. Given that 2013 was another relatively untroubled year on the claims side in Australia and New Zealand, the pressure here on prices intensified. Nevertheless, we are looking to profitably enlarge our portfolio in these markets (adjusted for exchange rate effects) based on our local presence and long-standing client relationships. Particularly in Australia, the prudential regime newly adopted in 2014 should further drive demand for reinsurance.
Retakaful business is developing well. In this area we shall continue to concentrate on expanding profitable business and it is our expectation that the licence granted in principle in 2013 for a branch of Hannover ReTakaful in Labuan will lead to further sustained growth in Malaysia.
In the area of agricultural covers we anticipate undiminished demand. Key factors here are a growing demand for food and a greater need to protect against extreme weather events. In addition, the use of index-based insurance products – along with loss-based covers – is likely to increase, especially in the field of micro-insurance policies in developing countries. Hannover Re’s premium volume for agricultural risks should again rise sharply in the current financial year.
1 In EUR, development in original currency may vary 2 ++ = significantly above the cost of capital; + = above the cost of capital; + / – = on a par with the cost of capital; – = below the cost of capital
In the United States we anticipate further contraction in the risk-oriented life reinsurance market. We are nevertheless cautiously optimistic that we can again enlarge our market share in 2014. Furthermore, it is our expectation that effective portfolio management will be a success factor in this business segment going forward and will hence take on growing importance.
In addition to offering protection for biometric risks, we are also working on the assumption that primary insurers will have an increasing need for service offerings in 2014. In our assessment, an efficient combination of coverage for biometric risks and resource-saving processes will be reflected in stronger demand.
Against the backdrop of the European debt crisis – which has still to be overcome – and the associated uncertainties, we shall maintain the conservative orientation of significant parts of our investment portfolio. Nevertheless, irrespective of the issue of government debt, the improved economic outlook will be reflected in selective risk-taking. Our emphasis on broad diversification shall remain unchanged. By way of a neutral modified duration we shall continue to ensure that the interest rate risk is tightly managed.
The enlargement of the asset portfolio is expected to have a positive effect on investment income, although the average return will decline owing to sustained low interest rates. In view of the low returns on more secure investments, we shall continue to invest in products offering attractive credit spreads and selectively expand our portfolio in the areas of alternative investments and real estate.
Given the high capital requirements and potentially increased volatility on equity markets – which are in part driven by liquidity –, our cautious stance on investments in listed equities remains unchanged.
In the current year, despite a challenging environment both on the capital market and in reinsurance business, we anticipate a good overall result for the Hannover Re Group.
The expected positive cash flow that we generate from the technical account and our investments should – subject to stable exchange rates – lead to further growth in our asset portfolio. We are targeting a return on investment of 3.2%. In both nonlife and life and health reinsurance it is our assumption that we shall accomplish our minimum IVC targets of 2% xRoCA for non-life reinsurance and 3% xRoCA for life and health reinsurance.
Our strategic objective is to generate a minimum return on equity within the Group that is 750 basis points above the riskfree interest rate. We also seek to increase both the earnings per share and the book value per share (including dividends paid) by at least 10% annually.
Matters of special significance arising after the closing date for the consolidated financial statements are discussed in Section 8.11 of the notes “Events after the balance sheet date” on page 224.
Fixed-income securities – at fair value through profit or loss 6.1 36,061 147,413 161,130
Other financial assets – at fair value through profit or loss 6.1 70,082 60,835 21,026
A nn ua l fi na nc ia l s ta te m en ts
Equity attributable to shareholders of Hannover Rück SE 5,888,436 6,032,472 4,967,518
Total shareholders’ equity 6,530,027 6,714,144 5,603,160 1 Adjusted pursuant to IAS 8 (cf. Section 3.1 of the notes)
Profit / loss from investments in associated companies 7.2 12,536 10,415
Diluted earnings per share 7.43 7.04 1 Adjusted pursuant to IAS 8 (cf. Section 3.1 of the notes)
Total recognised income and expense 242,278 1,437,768 thereof: Attributable to non-controlling interests 23,179 104,862
Consolidated statement of changes in shareholders’ equity 2013 in EUR thousand Common shares Additional paid-in capital
Adjusted on the basis of IAS 8 1 – – – – – 14,394 (17,507) (3,113) (382) (3,495)
Changes in ownership interest with no change of control status – – – – – – (1,349) (1,349) 1,426 77
Total income and expense recognised 1 Adjusted pursuant to IAS 8 (cf. Section 3.1 of the notes)
Cash flow from operating activities 2,225,496 2,637,162 1 Adjusted pursuant to IAS 8 (cf. Section 3.1 of the notes)
With the entry in the commercial register of Hannover County Court the transformation of Hannover Rückversicherung AG to the legal form of a European Company, Societas Europaea (SE), came into effect on 19 March 2013. The company thus bears the name Hannover Rück SE and its registered office is located at Karl-Wiechert-Allee 50, 30625 Hannover, Germany. The designation Hannover Rück SE is used consistently in the present Group annual financial report, including when discussing facts and circumstances that materialised in the period prior to transformation. Hannover Rück SE (“Hannover Rück SE”) and its subsidiaries (collectively referred to as the “Hannover Re Group” or “Hannover Re”) transact all lines of non-life and life and health reinsurance and maintain business relations with more than 5,000 insurance companies on every continent. With gross premium of approximately EUR 14.0 billion, Hannover Re is one of the largest reinsurance groups in the world. The company’s network consists of more than 100 subsidiaries, affiliates, branches and representative offices worldwide with a total workforce of roughly 2,400. The Group’s German business is conducted by the subsidiary E+S Rückversicherung AG (“E+S Rück AG”).
Pursuant to EU Regulation (EC) No. 1606 / 2002, the present consolidated financial statement and group management report of Hannover Re have been drawn up in accordance with the International Financial Reporting Standards (IFRS) that are to be applied within the European Union. In addition, we have made allowance for the regulations that are also applicable pursuant to § 315a Para. 1 German Commercial Code (HGB) and the supplementary provisions of the Articles of Association of Hannover Rück SE as amended on 18 July 2013.
The annual financial statements included in the consolidated financial statement were for the most part drawn up as at 31 December. Pursuant to IAS 27 “Consolidated and Separate Financial Statements” there is no requirement to compile interim accounts for Group companies with diverging reporting dates because their closing dates were no earlier than three months prior to the closing date for the consolidated financial statement. Allowance has been made for the effects of significant transactions between the diverging reporting dates and the closing date for the consolidated financial statement.
The consolidated financial statement was drawn up in euros (EUR), the amounts shown have been rounded to EUR thousands and – provided this does not detract from transparency –
The present consolidated financial statement was prepared by the Executive Board on 24 February 2014 and hence authorised for issue.
IFRS 13 “Fair Value Measurement”, a standard published in May 2011, must be applied prospectively to financial years beginning on or after 1 January 2013. The standard establishes uniform and consistent requirements for the measurement of fair value, which had hitherto been contained in various standards. In this context, the fair value is defined as the exit price, the calculation of which shall be based as far as possible on relevant observable inputs. In addition, extensive explanatory and qualitative disclosures are required; these are intended, in particular, to describe the quality of the calculation of fair value. Hannover Re applied IFRS 13 for the first time with effect from 1 January 2013. Initial application did not result in any significant change in the carrying values in the consolidated financial statement. With regard to the new disclosures we would refer overall to our remarks in the subsection “Information on fair values and fair value hierarchy” at the end of Section 6.1 “Investments under own management”.
The IASB has issued the following standards, interpretations and amendments to existing standards with possible implications for the consolidated financial statement of Hannover Re, application of which is not yet mandatory for the year under review and which are not being applied early by Hannover Re: In December 2013 the IASB issued “Annual Improvements to IFRSs 2010 – 2012 Cycle” and “Annual Improvements to IFRSs 2011 – 2013 Cycle”. The annual improvements involve minor amendments and clarifications relating to the following standards: IFRS 2 “Share-based Payment”, IFRS 3 “Business Combinations ”, IFRS 8 “Operating Segments”, IFRS 13 “Fair Value Measurement”, IAS 16 “Property, Plant and Equipment”, IAS 24 “Related Party Disclosures”, IAS 38 “Intangible Assets”, IFRS 1 “First-time Adoption of International Financial Reporting Standards” and IAS 40 “Investment Property”. Both collections of improvements are effective for annual periods beginning on or after 1 July 2014, but they have still to be adopted by the EU. Hannover Re is currently reviewing the implications of these amendments.
In June 2012 the IASB issued “Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance – Amendments to IFRS 10, IFRS 11 and IFRS 12”. These amendments clarify that the effective date of IFRS 10 is 1 January 2013, if the financial year coincides with the calendar year. The requirement to provide adjusted comparative information is limited upon initial application to only the immediately preceding period; retrospective adjustments for subsidiaries sold in the comparative period are not required. Furthermore, it is not necessary to provide comparative information on unconsolidated structured entities upon initial application of IFRS 12. These amendments were endorsed by the EU in April 2013.
The requirements of IFRS 10, 11 and 12 as well as the revised IAS 27 and 28 are to be applied to financial years beginning on or after 1 January 2013. The Accounting Regulatory Committee (ARC) decided in June 2012 that application of the aforementioned standards within the EU shall not be mandatory until one year later, with an effective date of 1 January 2014. The new IFRS 10, 11, 12 and the revised IAS 27 and 28 as well as the changes published in the previous year have now been endorsed in their entirety by the EU. Hannover Re does not expect initial application of the new and revised standards on consolidation to have any significant implications for its scope of consolidation.
In November 2009 the IASB issued IFRS 9 “Financial Instruments ” on the classification and measurement of financial instruments. IFRS 9 is the first step in a three-phase project intended to replace IAS 39 “Financial Instruments: Recognition and Measurement” with a new standard. IFRS 9 introduces new requirements for classifying and measuring financial assets. The provisions of IFRS 9 were expanded in October 2010 with an eye to financial liabilities for which the fair value option is chosen. In December 2011 the IASB issued “Mandatory Effective Date and Transition Disclosures (Amendments to IFRS 9 and IFRS 7)”, delaying the mandatory effective date of IFRS 9 to annual periods beginning on or after 1 January 2015. In addition, it modified the relief from restating comparable periods and the associated disclosures in IFRS 7. In November 2013, as part of further amendments to IFRS 9, the IASB published “Amendments to IFRS 9: Mandatory Effective Dates and Transition Disclosures; Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39”. The purpose of these amendments is to include the new general hedge accounting model and allow early adoption of the requirement to present fair value changes due to own credit risk on liabilities designated at fair value through profit or loss in other comprehensive income. In addition, the mandatory effective date of 1 January 2015 was removed and deferred indefinitely, at the earliest until 1 January 2017. Neither IFRS 9 nor the specified subsequent amendments have yet been endorsed by the EU.
The estimation of the share of the equalisation reserve probably attributable to permanent establishments abroad, in respect of which the so-called exemption method is to be applied for the purposes of the pertinent double taxation agreement, was modified at Hannover Rück SE. Given that an equalisation reserve pursuant to § 341h Commercial Code (HGB) and § 29 Regulation on the Presentation of Insurance Company Accounts (RechVersV) is not carried for tax purposes under local provisions in these countries, this results in a decrease in the deferred tax liabilities recognised in the consolidated financial statement of Hannover Re. This adjustment represents a change in an accounting estimate, which pursuant to IAS 8.32 et seq. is to be recognised in profit or loss prospectively and in the current period. Altogether, deferred tax liabilities of EUR 89 million were reversed in profit or loss. The allocation of the equalisation reserve to the permanent establishments abroad for future financial years and hence the effect of this adjustment on subsequent accounting periods is carried out according to a premium code for each line of business reported in the financial statement and cannot reasonably be estimated.
In June 2011 the IASB published amendments to IAS 1 “Presentation of Financial Statements”. The revised IAS 1 requires entities to group items presented in OCI based on whether they are potentially reclassifiable to profit or loss subsequently, i. e. those that might be reclassified and those that will not be reclassified. Subtotals are to be shown accordingly for the two groups. Tax associated with items presented before tax is to be shown separately for each of the groups of OCI items. The amendments were adopted by the EU in June 2012 and are applicable retrospectively to annual periods beginning on or after 1 July 2012. Hannover Re applied the amended IAS 1 for the first time with effect from 1 January 2013, restructured the consolidated statement of comprehensive income and restated accordingly the disclosure for the comparable period in accordance with IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”. The changes did not have any implications for the carrying values in the consolidated financial statement or for Group net income.
For certain contracts in the area of life and health reinsurance an option was exercised differently at various Group companies with respect to the accounting of the interest rate-induced portion of the change in the loss and loss adjustment expense reserve (loss reserve). In some cases this item was recognised in the statement of income, while in other cases it was recognised directly in equity. In accordance with the provisions of IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”, we have recognised this item on a consistent Group-wide basis in the statement of income in the present financial statement and we have restated the comparable figures accordingly pursuant to IAS 8.41.
Consolidated balance sheet as at 1 January 2012 in EUR thousand 1.1.2012 as stated
The following restatements were to be made in the consolidated statement of income for the comparable period of the previous year due to retrospective application of the aforementioned changes: Consolidated statement of income 2012 in EUR thousand as stated Application of
Income and expense recognised directly in equity that cannot be classified
Transferred to the consolidated statement of income (156,920) – – (156,920)
Reinsurance contracts: IFRS 4 “Insurance Contracts” represents the outcome of Phase I of the IASB project “Insurance Contracts” and serves as a transitional arrangement until the IASB defines the measurement of insurance contracts after completion of Phase II. IFRS 4 sets out basic principles for the accounting of insurance contracts. Underwriting business is to be subdivided into insurance and investment contracts. Contracts which transfer a significant insurance risk are considered to be insurance contracts, while contracts without significant insurance risk transfer are to be classified as investment contracts. The standard is also applicable to reinsurance contracts.
Financial assets classified as available for sale are carried at fair value; accrued interest is recognised in this context. We allocate to this category those financial instruments that do not satisfy the criteria for classification as held to maturity, loans and receivables, at fair value through profit or loss, or trading. Unrealised gains and losses arising out of changes in the fair value of securities held as available for sale are recognised – with the exception of currency valuation differences on monetary items – directly in shareholder’s equity after deduction of deferred taxes.
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”.
Other invested assets are for the most part recognised at nominal value. Insofar as such financial assets are not listed on public markets (e.g. participating interests in private equity firms), they are carried at the latest available net asset value as an approximation of the fair value. Loans included in this item are recognised at amortised cost.
Provisions for pensions are established in accordance with IAS 19 “Employee Benefits” using the projected unit credit method. They are calculated according to actuarial principles and are based upon the commitments made by the Hannover Re Group for retirement, disability and widows’ benefits. The amount of the commitments is determined according to length of service and salary level. The pension plans are defined benefit plans. The basis of the valuation is the estimated future increase in the rate of compensation of the pension beneficiaries. The benefit entitlements are discounted by applying the capital market rate for highest-rated securities. Amounts carried as liabilities are recognised under other liabilities. All changes in valuation, especially actuarial gains and losses, are captured immediately in cumulative other comprehensive income. Service cost and interest cost are recognised in the statement of income. Returns on plan assets are determined using the same interest rate as that used in the calculation of the present value of the defined benefit obligation.
Non-controlling interests are shares in the equity of affiliated companies not held by companies belonging to the Group. IAS 1 “Presentation of Financial Statements” requires that noncontrolling interests be recognised separately within Group shareholders’ equity. The non-controlling interest in profit or loss is shown separately following the net income. This item refers mainly to non-controlling interests in E+S Rück AG.
Disclosures about financial instruments: IFRS 7 “Financial Instruments: Disclosures” requires more extensive disclosures according to classes of financial instruments. In this context, the term “class” refers to the classification of financial instruments according to their risk characteristics. A minimum distinction is required here between measurement at amortised cost or at fair value. A more extensive or divergent distinction should, however, be geared to the purpose of the corresponding disclosures in the notes. In contrast, the term “category” is used within the meaning of the measurement categories defined in IAS 39 “Financial Instruments: Recognition and Measurement” (held to maturity, loans and receivables, available for sale and financial assets at fair value through profit or loss with the subcategories of trading and designated financial instruments). Essentially, the following classes of financial instruments are established: • Fixed-income securities
Transactions in foreign currencies reported in Group companies ’ individual financial statements are converted into the functional currency at the transaction rate. In accordance with IAS 21 “The Effects of Changes in Foreign Exchange Rates” the recognition of exchange differences on translation is guided by the nature of the underlying balance sheet item. Exchange differences from the translation of monetary assets and liabilities are recognised directly in the statement of income. Currency translation differences from the translation of non-monetary assets measured at fair value via the statement of income are recognised with the latter as profit or loss from fair value measurement changes. Exchange differences from non-monetary items – such as equity securities – classified as available for sale are initially recognised outside income in a separate item of shareholders’ equity and only booked to income when such non-monetary items are settled.
The individual companies’ statements of income prepared in the local currencies are converted into euro at the average rates of exchange and transferred to the consolidated financial statement. The conversion of foreign currency items in the balance sheets of the individual companies and the transfer of these items to the consolidated financial statement are effected at the mean rates of exchange on the balance sheet date. In accordance with IAS 21 “The Effects of Changes in Foreign Exchange Rates” differences from the currency translation of financial statements of foreign Group companies must be recognised in the consolidated financial statement as a separate item in shareholders’ equity. Currency translation differences resulting from long-term loans or lendings without specified maturity between Group companies are similarly recognised outside the statement of income in a separate item of shareholders ’ equity.
Ceded reinsurance premiums are deducted from the gross written premium. Assets and liabilities in connection with reinsurance ceded are recognised on a gross basis. The reinsured portions of the reserves are estimated on a basis consistent with the reserves attributable to the reinsured risk. Income and expenses in connection with reinsurance treaties are recognised on a basis consistent with the underlying risk of the reinsured business.
Hannover Re | Annual Report 2013 4. Consolidation 4.1 Consolidation principles
The capital consolidation is based on the revaluation method. In the context of the “purchase accounting” method the acquisition costs of the parent company 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.
Companies over which Hannover Re is able to exercise a significant influence are normally consolidated at equity as associated companies with the proportion of the shareholders’ equity attributable to the Group. A significant influence is presumed to exist if a company belonging to the Hannover Re Group directly or indirectly holds at least 20% – but no more than 50% – of the voting rights. Income from investments in associated companies is recognised separately in the consolidated statement of income.
Non-controlling interests in shareholders’ equity are reported separately within Group shareholders’ equity in accordance with IAS 1 “Presentation of Financial Statements”. The noncontrolling interest in profit or loss, which forms part of net income and is shown separately after net income as a “thereof” note, amounted to EUR 43.8 million (EUR 75.4 million) in the year under review.
In conformity with Item 7.1.4 of the recommendations of the German Corporate Governance Code as amended on 13 May 2013, 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 Re Euro PE Holdings GmbH & Co. KG, Hannover / Germany 1 90.92 EUR 134,474 2,909
Hannover Euro Private Equity Partners III GmbH & Co. KG, Cologne / Germany 1 67.08 EUR 37,688 2,790
Hannover Euro Private Equity Partners IV GmbH & Co. KG, Cologne / Germany 1 60.17 EUR 58,021 2,945
Hannover Euro Private Equity Partners II GmbH & Co. KG, Cologne / Germany 1 57.50 EUR 7,809 4,510
HEPEP II Holding GmbH, Cologne / Germany 1 57.50 EUR 3,605 526
HANNOVER Finanz GmbH, Hannover / Germany 5 27.78 EUR 69,697 6,281
Hannover Finance (UK) Limited, Virginia Water / United Kingdom 1 100.00 GBP 110,825 (15)
Hannover Life Reassurance Bermuda Ltd., Hamilton / Bermuda 1 100.00 EUR 283,004 35,439
Hannover Re (Ireland) Limited, Dublin / Ireland 1, 6 100.00 EUR 1,361,245 67,638
Hannover Life Re of Australasia Ltd, Sydney / Australia 1 100.00 AUD 451,097 37,827
Hannover Services (UK) Limited, Virginia Water / United Kingdom 1 100.00 GBP 603 (63)
International Insurance Company of Hannover Plc, London / United Kingdom 1 100.00 GBP 143,427 (6,005)
Inter Hannover (No.1) Limited, London / United Kingdom 5 100.00 GBP (29) (26)
Leine Investment General Partner S.à r.l., Luxembourg / Luxembourg 1, 7 100.00 EUR 38 17
Hannover Reinsurance Group Africa (Pty) Ltd., Johannesburg / South Africa 100.00 ZAR 209,906 129,888
Compass Insurance Company Limited, Johannesburg / South Africa 100.00 ZAR 125,761 (33,816)
Micawber 185 (Pty) Ltd., Johannesburg / South Africa 100.00 ZAR 20,955 2,979
Peachtree (Pty) Ltd., Johannesburg / South Africa 9 100.00 ZAR – –
Hannover Reinsurance Mauritius Ltd., Port Louis / Mauritius 100.00 MUR 48,048 (2,130)
Hannover Re Real Estate Holdings, Inc., Orlando / USA 1, 7 95.10 USD 426,139 18,920 5115 Sedge Corporation, Chicago / USA 7, 9 95.10 USD 723 1,108
Continuation: Foreign companies / Affiliated consolidated companies 11 Stanwix, LLC, Pittsburgh / USA 7 95.00 USD 35,616 2,976
River Terrace Parking, LLC, Wilmington / USA 7 95.00 USD 23,118 94
HR GLL Central Europe Holding GmbH, Munich / Germany 1 81.83 EUR 61,950 (75)
HR GLL Roosevelt Kft, Budapest / Hungary 1 81.83 HUF 547,772 547,222
HR GLL Europe Holding S.à r.l., Luxembourg / Luxembourg 1 81.83 EUR 38,877 (3)
Kaith Re Ltd., Hamilton / Bermuda 1 88.00 USD 739 (356)
MUA Insurance Company Ltd., Cape Town / South Africa 51.00 ZAR 7,043 (3,289)
GLL Terry Francois Blvd, LLC, Wilmington / USA 7, 9 48.40 USD – –
Transit Underwriting Managers (Pty) Ltd., Cape Town / South Africa 45.90 ZAR 880 (111)
MUA Insurance Acceptances (Pty) Ltd., Cape Town / South Africa 40.80 ZAR 10,142 11,934
Cargo Transit Insurance (Pty) Ltd., Helderkruin / South Africa 40.80 ZAR (4,499) –
Landmark Underwriting Agency (Pty) Ltd., Bloemfontein / South Africa 38.51 ZAR 1,096 (1,450)
Hospitality Industrial and Commercial Underwriting Managers (Pty) Ltd., Johannesburg / South Africa 36.82 ZAR 1,534 1,860
Garagesure Consultants and Acceptances (Pty) Ltd., Johannesburg / South Africa 35.70 ZAR 1,468 1,689
Construction Guarantee (Pty) Ltd., Johannesburg / South Africa 9 30.60 ZAR – –
International Mining Industry Underwriters Limited, London / United Kingdom 1 100.00 GBP 552 63
Hannover Rück SE Escritório de Representação no Brasil Ltda., Rio de Janeiro / Brazil 5 100.00 BRL 1,234 260
London & European Title Insurance Services Limited, London / United Kingdom 5 100.00 GBP 79 (248)
ITAS Vita S.p.A., Trent / Italy 5 34.88 EUR 80,468 4,114
Clarendon Transport Underwriting Managers (Pty) Ltd., Johannesburg / South Africa 1 16.66 ZAR 16,593 27,567
Camargue Underwriting Managers (Pty) Ltd., Johannesburg / South Africa 1 13.26 ZAR 11,026 7,615
Hurst Holme Insurance Company Limited – account 2009-01 SCC, Hamilton / Bermuda 5, 9 28.50 USD 609 (1,968)
XS Direct Holdings Limited, Dublin / Ireland 5 25.00 EUR 2,398 657
XS Direct Insurance Brokers Limited, Dublin / Ireland 5 25.00 EUR 299 263
New PF Limited, Dublin / Ireland 5, 9, 15 25.00 EUR (6) –
Iconica Business Services Limited, Bradford / United Kingdom 16 18.75 GBP (1) (2)
Clarenfin (Pty) Ltd., Johannesburg / South Africa 4 16.66 ZAR – –
Acte Vie S.A. Compagnie d‘ Assurances sur la Vie et de Capitalisation, Strasbourg / France 5 9.38 EUR 8,482 168 1 Provisional (unaudited) figures 2 Year-end result after profit transfer 3 Financial year as at 30 September 2013 4 Company is inactive 5 Figures as at 31 December 2012 6 Formerly Hannover Life Reassurance (Ireland) PLC, merged with Hannover Reinsurance (Ireland) PLC 7 IFRS figures 8 Financial year as at 31 October 2013 9 Company is in liquidation 10 Certain equity items are not counted under IFRS, as a consequence of which the amount of capital and reserves can be negative here.
According to the local accounting practice relevant for supervisory purposes, the company is adequately capitalised. 11 Last annual financial statement compiled as at 31 December 1997 12 Financial year as at 31 March 2013 13 Company was newly established in 2013; an annual financial statement is not yet available 14 Company was newly established in 2011; business operations have not commenced to date 15 Formerly Indemnity Guarantee Company Limited 16 Financial year as at 30 September 2012
Consolidation of special purpose entities Business relations with special purpose entities are to be examined in accordance with SIC-12 “Consolidation – Special Purpose Entities” with an eye to their implications for consolidation.
In the previous year Hannover Re issued a catastrophe (“CAT”) bond for the purpose of transferring to the capital market peak natural catastrophe exposures deriving from European windstorm events. The term of the CAT bond, which has a volume of nominally EUR 100.0 million, runs until 31 March 2016; it was placed with institutional investors from Europe, North America and Asia by Eurus III Ltd. Eurus III Ltd. is a special purpose entity domiciled in Hamilton / Bermuda that was registered in August 2012 as a “special purpose insurer” under the Bermuda Insurance Act 1978. The retrocessions concluded with the special purpose entity under the transaction afford Hannover Rück SE, E+S Rückversicherung AG and Hannover Re (Bermuda ) Ltd. protection against the aforementioned catastrophe risks. Since Hannover Re does not exercise a controlling influence over Eurus III Ltd., there is no consolidation requirement for the special purpose entity.
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 this securitisation was equivalent to EUR 238.9 million (EUR 268.0 million) as at the balance sheet date. The transaction has an indefinite term and can be cancelled annually by the investors. Kaith Re Ltd., a special purpose entity domiciled in Bermuda, is used as a transformer for part of the transaction.
Depending upon the classification of the contracts pursuant to IFRS 4 or IAS 39, the transactions are recognised either in the technical account or as derivative financial instruments or as financial guarantees. Please see also our remarks in Section 8.1 “Derivative financial instruments and financial guarantees”.
Within the US subgroup Hannover Re Real Estate Holdings, Inc., which is 95.1% owned, all shares in the special purpose companies Broadway 101 LLC and River Terrace Parking LLC were acquired through the subsidiary GLL HRE Core Properties, LP.
By way of the contractually agreed transfer of its management share in Secquaero ILS Fund Ltd., Georgetown, Grand Cayman back to the investment manager outside the Group, Hannover Re relinquished control over the company and its participations with effect from 1 January 2013. Since that date the company has therefore no longer been included in the consolidated financial statement, but is instead carried as a participating interest at net asset value and recognised under other invested assets. Income of EUR 1.2 million was carried under other income and expenses from derecognition of the assets and liabilities as well as initial recognition of the participating interest at net asset value. In addition, cumulative other comprehensive income of EUR 5.5 million was realised from currency translation.
With effect from 5 December 2013 the Malaysian regulator Labuan Financial Services Authority granted Hannover Re Takaful B.S.C. (c), Manama, licences to operate two branches. The branches commenced business operations in January 2014.
Hannover Re transferred all the business of its subsidiary Hannover Life Reassurance (UK) Ltd., Virginia Water, to a newly established branch of Hannover Rück SE with the same registered office effective 1 January 2013 by way of a so-called
The “Consolidation” column includes not only the elimination of cross-segment transactions but also, more significantly, companies whose business operations cannot be unambiguously allocated to non-life reinsurance or life and health reinsurance. These are principally the service and financing companies belonging to the Group.
With the exception of Clarendon Insurance Group, Inc., Wilmington (CIGI), all the companies that were consolidated for the first time or no longer included in the consolidated financial statement in the year under review are allocable to the non-life reinsurance segment. Since the sale of its operational companies in 2011 CIGI, which was deconsolidated in December 2013, had been allocated to the financing companies recognised in the “Consolidation” column.
Total liabilities 24,438,446 24,245,199 1 Adjusted pursuant to IAS 8 (cf. Section 3.1)
Income / expense on funds withheld and contract deposits 14,947 13,754
Commission and brokerage, change in deferred acquisition costs and other technical income / expenses 1,532,749 1,573,976
Group net income 807,733 685,569 1 Adjusted pursuant to IAS 8 (cf. Section 3.1)
Loans and receivables due in one year 237,228 240,952 177,130 179,430 due after one through two years 220,144 228,825 408,386 423,503 due after two through three years 376,062 399,698 311,764 330,670 due after three through four years 280,019 298,656 382,075 417,721 due after four through five years 141,240 149,437 285,438 312,267 due after five through ten years 1,106,317 1,184,496 1,033,273 1,156,510 due after more than ten years 848,090 923,723 817,121 960,339
Variable-rate bonds (so-called “floaters”) are shown under the maturities due in one year and constitute our interest-related, within-the-year reinvestment risk.
Amortised cost, unrealised gains and losses and accrued interest on the portfolio of investments classified as held to maturity as well as their fair value in EUR thousand 2013
Government debt securities of EU member states 389,642 16,775 – 7,078 413,495
Amortised cost, unrealised gains and losses and accrued interest on the portfolio of investments classified as available for sale as well as their fair value in EUR thousand 2013
Hannover Re recognised in this category as at the balance sheet date derivative financial instruments in an amount of EUR 70.1 million (EUR 60.8 million) that are originally allocable to this item as well as fixed-income securities amounting to EUR 36.1 million (EUR 147.4 million) designated in this category.
Analysis of the fair value changes in the portfolio of fixedincome securities at fair value through profit or loss indicated that in no case were fair value changes of the instruments due to changes in ratings. In the previous year changes in the ratings of these instruments resulted in a fair value increase of EUR 1.1 million.
Participating interests and other invested assets, real estate funds 1,274,691 4,077 1,134,257 7,157
Fixed-income securities – held-to-maturity 887,752 1,254,110 407,966 116,959 – – – – 2,666,787
The maximum default risk of the items shown here corresponds to their carrying amounts.
Other financial assets – at fair value through profit or loss – – 24,374 344 – 45,364 – – 70,082
Fixed-income securities – available-for-sale 1,683,262 545,211 7,596,047 2,345,927 205,838 8,050,511 294,132 1,061,144 21,782,072
Equity securities – available-for-sale – – 16,138 – – 13,108 – – 29,246
Other financial assets – at fair value through profit or loss – – 18,732 223 – 41,880 – – 60,835
Net book value at 31 December of the previous year 133,017 127,554
Net book value at 31 December of the year under review 144,489 133,017
Net book value at 31 December of the previous year 491,660 397,037
Net book value at 1 January of the year under review 478,688 392,275
The fair value of investment property amounted to EUR 875.3 million (EUR 511.3 million) as at the balance sheet date.
Fair value hierarchy For the purposes of the disclosure requirements pursuant to IFRS 13 “Fair Value Measurement”, it is necessary to assign to a three-level fair value hierarchy not only the financial assets and liabilities recognised at fair value but also those assets and liabilities that are recognised at amortised cost but for which disclosure of fair value is envisaged in the context of the annual reporting. As a consequence of the prospective application of IFRS 13 the additional information required in comparison with IFRS 7 “Financial Instruments: Disclosures” is provided without corresponding figures for the previous year.
The fair value hierarchy, which reflects characteristics of the price data and inputs used for measurement purposes, is structured as follows: • Level 1: Assets or liabilities measured at (unadjusted) prices quoted directly in active and liquid markets.
In the year under review fixed-income securities, for the most part OTC bonds, with a fair value of EUR 7,603.4 million were no longer allocable to level 1 but rather to level 2. These financial assets are measured using average prices from price service agencies. Reallocation resulted exclusively from 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 the aforementioned average prices constitute level 2 inputs if the underlying data on which these average prices are based are firm bid prices or observable transaction-based prices. We therefore reclassified across the board to level 2 with effect from 1 January 2013 all fixed-income securities measured using such average prices that had previously been allocated to level 1. Reclassification is based neither on changed liquidity characteristics of these instruments nor on a modified investment strategy. This change in presentation had no implications for the carrying amounts in the present
Other than the above, no further reclassifications between level 1 and level 2 were to be made in the year under review as a consequence of changes in the liquidity of the instruments. In the previous year financial assets with a fair value of EUR 84.4 million were no longer allocable to level 1, but rather to level 2 on account of their reduced liquidity. Furthermore, in the previous year financial assets with a fair value of EUR 473.6 million were reclassified from level 2 to level 1 due to their improved liquidity. The reclassifications of the previous year affected mainly fixed-income securities held as available for sale. The specified amounts reclassified refer in each case to the book value of the investments recognised at the beginning of the period.
Fair value hierarchy of financial assets and liabilities recognised at fair value in EUR thousand 2013
The following table provides a reconciliation of the fair values of financial assets and liabilities included in level 3 at the beginning of the financial year with the fair values as at 31 December of the financial year.
Currency translation at 31 December of the year under review 841 – (4,191) (2,316)
Income and expenses recognised in the statement of income 4,186 – (3,477) –
Closing balance at 31 December of the year under review 27,329 8 1,061,953 54,812
Income and expenses from level 3 financial assets and liabilities in EUR thousand 2012
The contract deposits on the assets side decreased by EUR 47.8 million in the year under review from EUR 123.3 million to EUR 75.5 million.
Age structure of overdue accounts receivable in EUR thousand 2013 2012
Cumulative value adjustments at 31 December of the year under review 35,990 40,703
Gross book value of accounts receivable at 31 December of the year under review 2,981,675 3,106,367
Net book value of accounts receivable at 31 December of the year under review 2,945,685 3,065,664
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”.
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 3.2 “Summary of major accounting policies”.
Present value of future profits on acquired life reinsurance portfolios 85,270 92,100
The item “Other” includes receivables of EUR 73.6 million (EUR 54.8 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 in EUR thousand 2013 2012
This item consists of the present value of future cash flows recognised on business acquired in 2009 in the context of the acquisition of the ING life reinsurance portfolio. This intangible asset is amortised over the term of the underlying reinsurance contracts in proportion to the future premium income. The period of amortisation amounts to altogether 30 years.
Due to renegotiation of part of the portfolio a partial amount of EUR 3.8 million was derecognised through profit or loss. For further information please refer to our explanatory notes on intangible assets in Section 3.2 “Summary of major accounting policies”.
Gross book value at 31 December of the previous year 121,815 113,487
Gross book value at 31 December of the year under review 129,828 121,815
Cumulative depreciation at 31 December of the previous year 97,804 86,966
Net book value at 31 December of the previous year 24,011 26,521
Gross book value at 31 December of the previous year 184,725 175,867
As in the previous year, the other receivables do not include any items that were overdue but unadjusted as at the balance sheet date. Value adjustments were taken on other receivables in an amount of EUR 0.3 million in the year under review (previous year: minimal amount) on the basis of specific impairment analyses.
Technical provisions in EUR thousand 2013 2012 gross retro net gross retro net
In the year under review no specific value adjustments (previous year: EUR 0.4 million) were established on retrocessions, i. e. on the reinsurance recoverables on unpaid claims, while they were reversed in the amount of EUR 0.5 million (EUR 3.0 million). On balance, therefore, cumulative specific value adjustments of EUR 0.5 million (EUR 0.9 million) were recognised in these reinsurance recoverables as at the balance sheet date.
The total amount of the net reserve before specific value adjustments, to which the following remarks apply, was EUR 20,262.7 million (EUR 20,071.6 million) as at the balance sheet date.
The run-off triangles show the run-off of the net loss reserve (loss and loss adjustment expense reserve) established as at each balance sheet date, this reserve comprising the provisions constituted in each case for the current and preceding occurrence years.
As percentage of original loss reserve 1.0 0.1 0.4 0.4 0.2 0.3 0.6 0.0 (0.5) 0.4
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 3.2 “Summary of major accounting policies”.
Due after five through ten years 3,084,720 190,742 2,893,978 634,063 51,381 582,682
The average maturity of the loss and loss adjustment expense reserves was 5.2 years (5.1 years), or 5.2 years (5.1 years) after allowance for the corresponding retrocession shares. The benefit reserve had an average maturity of 12.6 years (12.0 years) – or 13.1 years (12.4 years) on a net basis.
The benefit reserve is established for life, annuity, personal accident and health reinsurance contracts. Based on the duration of these contracts, long-term reserves are constituted for life and annuity policies and predominantly short-term reserves are set aside for health and personal accident business.
Net book value after currency translation 10,705,301 499,438 10,205,863 10,358,669 380,590 9,978,079
Net book value at 31 December of the year under review 10,631,451 344,154 10,287,297 10,974,570 507,257 10,467,313
Net book value at 31 December of the year under review 2,405,497 139,039 2,266,458 2,339,809 138,373 2,201,436
The adequacy of the technical liabilities arising out of our reinsurance treaties is reviewed as at each balance sheet date. In the context of the adequacy testing of technical liabilities (liability adequacy test pursuant to IFRS 4 in conjunction with loss recognition test as per US GAAP) the anticipated future contractual payment obligations are compared with the anticipated future income. Should the result of the test indicate that the anticipated future income will not be sufficient to fund future payments, the entire shortfall is recognised in income by first writing off capitalised acquisition costs corresponding to the shortfall. Any remaining difference is constituted as an additional provision.
The contract deposits on the liabilities side decreased by EUR 228.0 million in the year under review from EUR 5,797.9 million to EUR 5,569.9 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 decrease was due principally to exchange rate effects.
In the context of initial application of the revised IAS 19 “Employee Benefits” in the year under review, the disclosures regarding provisions for pensions and other post-employment benefit obligations were restructured overall and the figures for the previous year were restated pursuant to IAS 8. Please see also our remarks in Section 3.1 “Changes in accounting policies” and in Section 3.2 “Summary of major accounting policies”.
Effective 1 December 2002 Group employees have an opportunity to accumulate additional old-age provision at unchanged conditions by way of deferred compensation through membership of HDI-Gerling Pensionskasse AG.
Disablement entails the risk that the assumed number of retirements from the subportfolio of eligible beneficiaries on grounds of disability does not correspond to the actual experience and for this reason increased benefit obligations have to be met.
Position at 1 January of the financial year 141,105 106,618 14,979 11,525 30 135
Past service cost and plan curtailments – (2,250) – – – –
Actuarial gain (–) / loss (+) from change in biometric assumptions (352) – – – – –
Actuarial gain (–) / loss (+) from change in financial assumptions (11,705) 31,683 – – – –
Experience gains (–) / losses (+) (885) 1,870 – – – –
Employee contributions and deferred compensation – 175 – – – –
The reconciliation of the projected benefit obligations with the recognised provisions for pensions is as follows: Provisions for pensions in EUR thousand 2013 2012
Projected benefit obligations at 31 December of the financial year 129,602 141,105
Impact of minimum funding requirement / asset ceiling at 31 December of the financial year 75 30
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 in EUR thousand Parameter increase Parameter decrease
Defined contribution plans In addition to the defined benefit plans, some Group companies have defined contribution plans that are based on length of service and the employee’s income or level of contributions. The expense recognised for these obligations in the 2013 financial year in accordance with IAS 19 “Employee Benefits” was
EUR 13.5 million (EUR 12.8 million), of which EUR 1.1 million (EUR 1.1 million) was due to obligations to members of staff in key positions and EUR 6.0 million (EUR 5.8 million) to contributions to the statutory pension insurance scheme in Germany.
Sundry liabilities 217,204 153,357 1 Adjusted pursuant to IAS 8 (cf. Section 3.1)
With regard to the liabilities from derivatives in an amount of EUR 119.0 million (EUR 86.6 million), please see our explanatory remarks on derivative financial instruments in Section 8.1 “Derivative financial instruments and financial guarantees”.
The sundry liabilities include, most notably, distributions within the year of EUR 72.0 million (EUR 53.0 million) from interests in private equity funds that had still to be recognised in income as at the balance sheet date.
Audits and costs of publishing the annual financial statements 5,646 (134) 5,512 – 5,311 4,765 136 (23) 5,899
Partial retirement arrangements and early retirement obligations 1 3,929 (30) 3,899 – 14 195 – 5 3,723 1 Adjusted pursuant to IAS 8 (cf. Section 3.1)
The provision for restructuring was constituted for measures relating to the administrative reorganisation of an affiliated company in the United Kingdom.
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 in EUR thousand 2013 2012
Development of sundry non-technical provisions in EUR thousand Balance at 31 December 2012