Large losses as percentage of net premium earned (non-life reinsurance) 4 7.0% 16.5% 12.3% 4.6% 10.7%
1 Proposed dividend 2 Proposed bonus 3 Including funds withheld 4 Hannover Re Group’s net share for natural catastrophes and other major losses 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) 5 Operating result (EBIT) / net premium earned
A complete list of our shareholdings is provided on page 132 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 212 et seq.
Hannover Re, with a gross premium of around EUR 13.8 billion, is the third-largest reinsurer in the world.
The rating agencies most relevant to the insurance industry have awarded both Hannover Re and E+S Rück very good financial strength ratings: Standard & Poor’s “AA-” (Very Strong); A.M. Best “A+” (Superior).
Report by the Supervisory Board 206 Supervisory Board of Hannover Re 209
Branch offices and subsidiaries of the Hannover Re Group abroad 212 Glossary 215 Financial calendar 220 Contact information / Imprint 221
United States The United States is the largest and hence the most significant reinsurance market. The 2012 business year in the US was most notable for natural disasters such as Hurricane Sandy and the protracted drought.
Dear shareholders, The 2012 financial year was a highly successful one for your company. We largely accomplished our strategic objective of consolidating and expanding our position as one of the world’s leading reinsurers through profitable growth. Gross written premium was boosted by some 14 percent (10 percent adjusted for currency effects) to EUR 13.8 billion. Even more importantly, however, Group net income increased to EUR 858 million. This is the best result in our company’s history.
This good performance was driven, above all, by a good underwriting result in non-life reinsurance and exceptionally pleasing investment income. The result in life and health reinsurance was also satisfactory overall, even though it was adversely affected by a higher than expected mortality for some underwriting years of our risk-oriented life reinsurance business in the United States.
The good performance of Hannover Re’s business combined with the fact that our shareholders’ equity exceeds the requirements of the rating agencies Standard & Poor’s and A.M. Best for the ratings “AA-” and “A+” respectively as well as those of our own capital model have prompted us to distribute a bonus in addition to the dividend. The Supervisory Board and Executive Board will therefore propose to the Annual General Meeting that you should be paid a dividend of EUR 2.60 and a bonus of EUR 0.40 per share.
A number of significant events also occurred in 2012 for Hannover Re, all of them positive. For example, we moved forward well with the process for converting your company into a European limited company (Societas Europaea, SE). It is our expectation that this transformation can be completed in 2013. As we have already reported, this step reflects the increasingly international dimension of our company and our workforce. What is more, the transformation will give us greater flexibility in relation to your company’s choice of location, thereby enabling us to respond to regulatory developments if the need were to arise. It should, however, be noted that we currently have no intention of relocating your company’s home base from Hannover.
Special mention should also be made of the decision by rating agency A.M. Best to upgrade our already very good rating of “A” (Excellent) to “A+” (Superior). A.M Best thereby recognised not only your company ’s outstanding capitalisation, but also its excellent risk management and consistently good results in a challenging environment. In the reinsurance industry top marks from the rating agencies continue to be vitally important for reinsurers seeking to be offered and awarded the entire spectrum of reinsurance cessions as a preferred partner for primary insurers.
I would like now to explore in greater detail developments in our business groups of non-life and life and health reinsurance as well as on the investments side.
The largest single loss for the international insurance and reinsurance industry in the year under review was Hurricane Sandy, which caused extensive damage not so much because of its wind speeds but because of its vast diameter and the storm surges that it triggered. There are still some uncertainties surrounding the amount of insured damages, but they may exceed USD 20 billion – a figure that would make Sandy the second-largest insured hurricane event of all time in the United States. The net loss expenditure for Hannover Re was roughly EUR 258 million. However, given the additional premiums of around EUR 24 million booked for our net account due to experience-based treaty conditions, the strain is reduced to EUR 234 million. Major loss expenditures in the year under review nevertheless remained well below the expected level of EUR 560 million calculated at the beginning of the year.
The operating profit (EBIT) improved on the previous year by 82 percent, surging past the one billion euro threshold for the first time in Hannover Re’s history to reach EUR 1.1 billion. Net income in nonlife reinsurance also came in at a thoroughly pleasing EUR 686 million, an increase of 51 percent compared to the previous year.
In life and health reinsurance 2012 was the first year in which we conducted business under two areas of Board responsibility. This reflects the increased importance that we attach to the life and health re insurance business group. Not least on account of this change at Board level, the structure of the business group was modified in 2012. By creating a “Longevity” business center and the newly established “Asia” business center, we are focusing even more closely on the markets offering the greatest new business potential.
The development of our investment income was especially pleasing. Although interest rates continued to fall in the year under review, ordinary investment income climbed 13 percent to EUR 1.1 billion. This was attributable in part to the enlarged asset portfolio, driven particularly by the unchanged highly positive cash flow from operating activities, and partly to the planned expansion of corporate debt securities over the past two years. In this context we have paid close attention to the high quality and broad diversification of the risk as well as a below-average allocation of bank bonds.
In our assessment, the emerging markets of Asia as well as Central and Eastern Europe offer the greatest potential for further growth in life and health reinsurance. We shall also continue to grow our business in the United States and Australia. In addition, not least in light of demographic change, we see considerable growth opportunities in the reinsurance of longevity risks. With this in mind, we expect to generate growth of 5 to 7 percent (adjusted for currency effects) in 2013, with biometric results likely to improve on 2012.
Roland Vogel Asset Management Facility Management Finance and Accounting Information Technology
The Hannover Re share began 2012 at a price of EUR 38.325. After some volatile trading days early in January, the share touched its lowest point of the year on 9 January at EUR 37.355. In the days and weeks that followed, building on a broadly favourable round of renewals and a year of hitherto light losses, the price trended clearly higher. As early as 19 March the share broke through its historic all-time high of EUR 43.55. In the following months, which were overshadowed by concerns about the continued existence of the European Monetary Union, the share price tended to move sideways. It was only when the ECB announced that it would do everything necessary to stabilise the financial markets that they were able to breathe a huge sigh of relief. From July onwards the Hannover Re share enjoyed a consistently positive performance. Shortly before year-end, on 19 December, the share climbed to its highest point of the year at EUR 59.81 and at the same time set a new record high.
With a book value per share of EUR 50.22 the Hannover Re share showed a price-to-book (P / B) ratio of 1.2 at the end of the year under review; compared to the average MDAX P / B ratio of 1.8 as at year-end the share thus continues to be very moderately valued.
We devoted special attention to the topic of sustainability in the year under review: Hannover Re drew up its first sustainability report in accordance with the internationally recognised reporting standards of the Global Reporting Initiative (GRI). The report covered altogether 42 Profile Disclosures, 6 Management Approaches to 34 Aspects and 84 Performance Indicators as well as the requirements specific to the financial services sector. Right from the outset, Hannover Re thereby fulfilled the medium Transparency Level B defined by the GRI.
Not only that, in the year under review our Investor Relations website was chosen for the second consecutive time as the best in the MDAX and the industry by the company NetFederation. We received thoroughly positive feedback from IR Global Rankings, which rated our HTML Annual Report as the third-best in Europe (previous year: second-best) and number four (previous year: number two) worldwide on account of its extensive functionality.
The shareholding structure of Hannover Re was stable in the year under review. The interest held by Talanx AG remained at 50.2% both before and after its successful IPO. The stake held by private investors shrank marginally by 1.2 percentage points to 6.9%, whereas the proportion in the hands of institutional investors increased to 42.9%.
There were significant geographical shifts within our free float in the course of the year under review. The proportionate holdings in the Benelux countries grew from 8.6% to 17.9%, while the holdings in Germany and the United States contracted by 3.6% and 4.2% respectively, falling from 42.5% to 38.9% and from 23.6% to 19.4%. The proportionate holding in the United Kingdom similarly decreased by a modest 1.2 percentage points to 16.6%. Although the percentage shares attributable to the countries of Switzerland and France remained relatively constant at 3.5% and 1.4% respectively, the total shareholding in Asia for the first time added up to just about 1%.
Shareholding structure as at 31.12.2012 6.9% Private investors 42.9% Institutional investors 50.2% Talanx AG
Shareholding structure by countries / regions as at 31.12.2012 1 0.9% Asia 1.4% France 3.5% Switzerland 16.6% United Kingdom 19.4% United States 38.9% Germany 1.4% Other
Earnings per share (basic and diluted) 7.12 5.02 6.21 6.08 (1.05)
Price-to-cash flow (P / CF) ratio 8 2.7 1.8 2.9 2.3 1.9 1 Xetra daily closing prices from Bloomberg 2 Proposed dividend 3 Proposed bonus 4 Earnings per share / average of book value per share at start and end of year 5 Dividend per share / year-end closing price 6 Year-end closing price / book value per share 7 Year-end closing price / earnings per share 8 Year-end closing price / cash flow (from operating activities) per share
Europe Europe is both the oldest and one of the most important reinsurance markets.
• Expand primary insurance business in selected niche markets as a complement to our reinsurance activities
• E+S Rück: Maintain or enlarge the number of minority shareholders and cultivate trusting cooperation
For many years now we have reviewed our corporate strategy in a threeyear cycle. The present strategy is the product of the review conducted in 2011.
• Generate additional business opportunities on the basis of Solvency II
• Generate profit clearly in excess of the cost of capital
We have developed a Strategy Cockpit for implementation of the strategy and systematic steering of the target contributions. This Web-based management portal assists managers with the development and implementation of strategy-related measures. We thereby ensure a high degree of transparency within the organisation with an eye to execution of the strategy.
Cape Town took its name from the Cape of Good Hope, a major peril on the sea route to India
The US economy continued to recover at a moderate pace. Effective growth stimuli were once again lacking in the year under review. While spending on residential construction picked up again, uncertainties surrounding future tax burdens and fiscal policy (e. g. resulting from the “fiscal cliff” budget decision) were reflected in a general reluctance to invest. Private consumption, the key driver of US economic output, remained solid but – with disposable incomes virtually flat – was unable to boost growth. Government spending was restrained, although it rose again slightly towards the end of the year. Despite a generally positive trend on the US labour market, the continued high jobless number poses a risk and works against a more vigorous expansion of the economy. Gross domestic product (GDP) rose by 2.2% in 2012 as estimated by the ifo Institute.
In Germany the upswing of the past two years has been checked for the time being: after getting off to a solid start, growth declined appreciably from the spring onwards. The Federal Statistical Office calculated a rise of 0.7% in GDP for the full year in 2012. Despite a challenging economic environment, the German economy thus at least remained on an expansionary course. The contraction in growth resulted primarily from the European debt crisis. To some extent the rise in exports to other regions offset the softer demand from European markets. Overall, however, the increase in exports slowed, as did growth rates for imports. Once again, foreign trade was a major driver of GDP growth in 2012.
In view of the difficult economic climate German businesses took a cautious approach to their capital expenditure, cutting spending on machinery and equipment and holding back on inventory investments. The labour market trend in Germany softened slightly as the year progressed in tandem with the economic trend, although it remained positive. The Federal Statistical Office calculated that the size of the working population with jobs in Germany increased by 422,000 in 2012 compared to the previous year.
Economic expansion in Asia was curtailed in the year under review. A slowdown could be observed in emerging markets, triggered in part by faltering demand from industrialised nations but also often rooted partly in problems at home. India’s large economy, for example, suffered from overregulation and inadequate infrastructure. The surge in private consumption and also capital expenditure slowed markedly there in the year under review. The ifo Institute put GDP growth at just 3.7%. In China wage costs began to rise with increasing industrialisation and also due to demographic factors. The real estate sector has also been experiencing a downturn since the previous year. What is more, the country found itself caught up in the economic weakness affecting the industrialised world. As a result, GDP grew by just 7.8% in the year under review.
Japan enjoyed a sizeable boost in economic output at the beginning of 2012, only to be followed by a decline as the year progressed. With the strained state of the US economy easing only slowly, and given the crisis in the Eurozone as well as the cooldown in China’s economy, Japan’s foreign trade was significantly impacted. GDP rose by 2.1% relative to the previous year.
The volatile economic environment and accompanying economic policy measures also shaped developments in the international insurance industry in the year just ended: with many markets in a state of stagnation, the order of the day for insurers was once again to demonstrate their stability. Long-term investment strategies and sophisticated risk management systems paid off. The year under review was spared claims on the exceptional scale incurred in 2011 as a result of that year’s devastating natural disasters.
In 2012, following on from Florida and New York, more US states created a legal avenue – subject to strict conditions – for financially strong foreign reinsurers to collateralise their liabilities to US cedants at a lower rate than the otherwise prescribed 100%. Hannover Re is currently authorised in Florida and New York with a reduced collateral requirement of 20%. If additional states follow suit and adopt the regulatory reform contained in the non-binding model law of the National Association of Insurance Commissioners (NAIC), Hannover Re can look forward to the prospect of more equitable framework conditions here too.
The German Federal Parliament adopted a package of measures in 2012 as part of the SEPA (Single Euro Payments Area) Accompanying Act with a view to strengthening the risk-bearing capacity of the life insurance industry. The steps taken by the federal government address the resilience of life insurers in times of crisis such as the currently protracted phase of low interest rates. Even though German life insurers continue to be able to meet their guarantee commitments over the medium and long term, a sustained policy of low interest rates will pose a challenge to them.
Business development We are thoroughly satisfied with the development of our business in the 2012 financial year. For a financially strong reinsurer such as Hannover Re, the market offered attractive opportunities for profitable growth – both in non-life and life and health reinsurance. Despite a challenging capital market climate we generated very good investment income. The result for the year was also helped by the fact that major loss expenditure – unlike in the previous year – was rather moderate.
Our premium volume in total business showed further pleasing growth in the year under review. Gross premium increased by 13.9% to EUR 13.8 billion (EUR 12.1 billion). At constant exchange rates – especially against the US dollar – the increase would have been 9.5%. Growth thereby actually surpassed our guidance of 7% to 8%, which we had revised upwards during the year. The level of retained premium decreased slightly to 89.8% (91.2%). Net premium earned increased by 14.2% to EUR 12.3 billion (EUR 10.8 billion). At unchanged exchange rates, growth would have come in at 9.9%.
As anticipated, our second business group – life and health reinsurance – also fared well in the year under review. It now contributes 44.0% of the total premium volume. Both mature insurance markets, such as the United States and the United Kingdom, and emerging countries in Asia – first and foremost China – offered attractive opportunities for profitable growth. Our reporting structures were adjusted and refined to focus even more closely on our growth markets. We now divide our business into Financial Solutions and Risk Solutions; the latter is further subdivided into Mortality, Longevity and Morbidity.
We also significantly boosted our total net investment income from assets under own management relative to the previous year: it came in at EUR 1.3 billion (EUR 1.0 billion) as at 31 December 2012. Along with the pleasing rise in ordinary income, this increase was driven by realised gains of EUR 227.5 million (EUR 179.6 million). For the most part, these derived from three sources: firstly, strategic shifting of funds to stabilise allocation ratios within our credit portfolio; secondly, the implementation of our Corporate Social Responsibility strategy within our holdings of fixed-income securities; thirdly, our real estate portfolio, in which we partially realised some substantial increases in value in the third quarter. Unrealised gains on our asset holdings recognised at fair value through profit or loss also contributed to the pleasing result in an amount of EUR 89.3 million (-EUR 38.8 million). These resulted primarily from the gratifying fair value development of the ModCo derivatives and inflation swaps.
Thanks to the pleasing developments in non-life and life and health reinsurance as well as on the investment side, the operating profit (EBIT) for the Hannover Re Group surged by 67.2% to EUR 1.4 billion (EUR 0.8 billion) as at 31 December 2012. The increase on the previous year was assisted by substantially lower major loss expenditure of EUR 477.8 million (EUR 980.7 million). Group net income improved significantly to EUR 858.3 million (EUR 606.0 million), a new record result for Hannover Re. Earnings per share amounted to EUR 7.12 (EUR 5.02).
In November 2012 Hannover Re issued a subordinated bond with a volume of EUR 500 million through its subsidiary Hannover Finance (Luxembourg) S. A. The purpose of this bond issue was to take advantage of the very attractive interest rate level in order to further optimise the company’s capital structure. Together with this new issue Hannover Re has four outstanding hybrid bonds in the capital markets.
In view of Hannover Re’s very healthy capitalisation and consistently good results, the rating agency A.M. Best upgraded our rating from “A” (Excellent) to “A+” (Superior) in September 2012.
We also received a very special mark of distinction in the month of September. The highly respected UK insurance daily “Insurance Day” crowned Hannover Re “Reinsurance Company of the Year” in recognition of the company’s successful business performance.
In the year under review we merged our two Irish subsidiaries, Hannover Reinsurance (Ireland) Ltd. and Hannover Life Reassurance (Ireland) Ltd., and transformed the resulting entity into a new legal form. All activities in the areas of non-life and life and health reinsurance are now concentrated at the new company Hannover Re (Ireland) Plc. This merger was intended, in particular, to facilitate better use of the available capital base and to streamline business processes such as financial reporting.
The resolution adopted by the Executive Board to transform Hannover Re into a European limited company (Societas Europaea, SE) was approved by the Ordinary General Meeting in May 2012. This change is intended to reflect the increasingly international dimensional of Hannover Re’s business operations and workforce. The necessary steps proceeded according to plan in the year under review. The transformation is expected to become legally effective in the first quarter of 2013.
The Executive Board of the Hannover Re Group assesses the development of business in 2012 as highly satisfactory. The Group improved significantly on the previous year in all key indicators – premium income, investment income, operating result (EBIT) and Group net income. Especially given the challenging situation on international capital markets and the overall decline in interest rates, we are exceptionally satisfied with our investment income. On account of the favourable net income the development of the Hannover Re Group’s shareholders ’ equity was very pleasing, pushing the total policyholders’ surplus to a new record high. At the time of preparing the management report the favourable business position of the Hannover Re Group remains unchanged; the Group’s financial strength is on a high level and has been further reinforced.
Our business groups In the following sections we discuss the development of the financial year in our two strategic business groups, namely nonlife reinsurance and life and health reinsurance. Supplementary to the information provided here, Section 5 of the notes to this Annual Report entitled “Segment reporting” shows the key balance sheet items and profit components broken down into the two business groups.
The most appreciable price increases were obtained, as expected, in property catastrophe business. In view of the substantial losses incurred from natural catastrophes in the previous year, prices for reinsurance covers improved markedly. Further positive adjustments followed in the rounds of renewals that took place within the year.
In global reinsurance business we booked sizeable growth, above all in the markets of Asia and the Middle East. As planned, we enlarged our portfolio of facultative reinsurance and stepped up our writing of agricultural risks.
Hannover Re once again enabled the capital market to participate in (natural) catastrophe risks. The cover (“K” quota share), a proportional retrocession programme, was renewed with a volume of USD 350 million. This transaction complements our traditional programme of protection covers that we use to protect against peak exposures.
Key figures for non-life reinsurance in EUR million 2012 + / – previous year
Earnings per share in EUR 5.69 +50.6% 3.78 4.82 3.92 (1.33)
Our business developed satisfactorily in the year under review in our target markets of Germany and North America. The premium volume grew by 14.8% to EUR 2,131.1 million (EUR 1,857.6 million ). The combined ratio stood at 101.3%, after 106.1% in the previous year. The operating profit (EBIT) for the target markets totalled EUR 270.4 million (EUR 184.0 million).
Germany Within the Hannover Re Group the German market is served by our subsidiary E+S Rück. As the “dedicated reinsurer for Germany”, the company has been a sought-after partner for decades thanks to its good rating, pronounced customer orientation and the continuity of its business relations. E+S Rück is superbly positioned in our domestic market and continues to rank as the number two in Germany – the world’s secondlargest non-life reinsurance market. It even ranks first in the reinsurance of motor business.
Property / casualty insurance in Germany continued to expand in 2012. This pleasing growth was driven principally by motor insurance, which showed a gain of around 5% after years of premium erosion. Nevertheless, the property insurance lines also posted appreciable growth, boosted in particular by comprehensive homeowners insurance. General liability lines, on the other hand, were under considerable competitive pressure – especially in commercial and industrial business.
The loss experience in the year under review was considerably less troubled than the previous year. In the absence of large natural perils events, such as the hailstorms of 2011, motor own damage insurance saw an appreciable decline in the number of claims. This factor, in conjunction with the premium hikes that were obtained, served to improve the combined ratio, although it is still not adequate. The situation in motor liability insurance was more favourable: including the run-off of claims from prior years, it was possible to bring the combined ratio here back below 100% for the first time. While the average expenditure per claim was higher at around EUR 3,500, this increase was significantly less than the rise in premium.
Overall, we cemented our position as one of the leading reinsurers in the profitable German market in the year under review. Gross premium volume increased by 2.9% (6.5%), leaving us thoroughly satisfied with developments on our domestic market.
The economic environment for our clients in North America was broadly advantageous in the year under review. Insured values continued to grow and premiums increased. For many of our clients the rise in premium volume points the way forward and puts in place the foundation for further positive earnings trends. Yet the continued low level of interest rates was an adverse factor, as was the so-called “Superstorm Sandy” loss event in the fourth quarter of 2012. Returns on equity in the primary insurance market consequently only came in around 4% to 6% for the fourth consecutive year. In view of these tendencies, the pressure to achieve a combined ratio significantly below 95% mounted on all major risk carriers. The rate increases in the original market that could be observed from mid-2011 onwards gathered momentum in the 2012 financial year. The most appreciable price increases were in industrial property lines and for workers’ compensation covers. Nevertheless, the attractive profitability level of the last hard market phase has by no means been achieved as yet.
Premium income in the reinsurance market again climbed disproportionately strongly in the year under review. There were scarcely any new market players, while the process of consolidation progressed apace thanks to a number of takeovers. Although capital resources are higher, the market can be described as disciplined.
Thanks to our excellent credit rating we are a valued partner for our clients, who therefore attach considerable importance to the fact that almost all their casualty placements are submitted to our company. The upgrading of our rating from “A” to “A+” by A.M. Best served to reinforce our clients’ trust, enabling us to further enlarge our shares in their reinsurance coverage.
Access to the entire portfolio of our clients and brokers also puts us in a position to optimally diversify our own portfolio. This is illustrated by the following figures: we maintain some 2,500 treaties with almost 600 clients. Time and again our clients voice their considerable appreciation of our broad product range and our willingness to participate in all lines as long as the price is commensurate with the risk. As a result, for more than ten years now relevant surveys have regularly ranked us as number 1 in the broker market.
The development of our specialty lines was satisfactory. This segment of non-life reinsurance includes marine and aviation business, credit and surety, structured reinsurance products, ILS (Insurance-Linked Securities), the London Market and direct business.
The premium volume climbed from EUR 2,569.2 million to EUR 2,797.7 million in the year under review. The combined ratio increased slightly from 95.0% to 96.5%. The operating profit (EBIT) for the specialty lines fell slightly short of the previous year at EUR 314.3 million (EUR 327.9 million).
Marine Hannover Re ranks among the market leaders in marine reinsurance.
The general business environment in this area improved in the year under review, as world trade increasingly bounced back from the adversities of the 2008 financial and economic crisis. The pace of recovery is, however, slowed by the euro crisis, since uncertainties about the stability of the currency and the Eurozone’s ability to hold together has negative repercussions on the transport of goods. Overall, though, we are satisfied with conditions; demand in marine business largely remained stable, while the Asian region actually delivered growth.
Rates in cargo insurance held stable or slipped back slightly in the year under review. This was also true of marine liability insurance, with the exception of special P&I covers. In view of the heavy losses incurred by reinsurers from shipping accidents, we were able to obtain significant pricing and structural changes for P&I reinsurance arrangements under the loss-impacted programmes effective 1 January 2013. It was also possible in 2012 to push through structural changes in relation to prices and retentions for offshore risks – as a consequence of the incident involving a large FPSO (floating production, storage and offloading) unit as well as a number of smaller loss events.
The underwriting result for our marine business reflects the considerable strains from major losses. The combined ratio consequently rose from 73.6% to 114.8%.
We are a market leader for non-proportional treaties in the airline market, whereas in the proportional sector we write our business opportunistically and concentrate primarily on niche segments. We maintained our involvement in non-proportional reinsurance on a stable level. By entering into strategic partnerships we were able to expand our portfolio in aviation reinsurance.
On the reinsurance side there has been a significant capacity surplus since 2009 owing to the sharp improvement in claims rates. All the companies that had scaled back their exposures in 2009 and 2010 have returned to the market. Not only that, more than ten new providers have moved into the credit and surety reinsurance business over the past two years.
In view of the prevailing capacity surplus further expansion of our market share was not a priority. We maintained our position in the credit sector. Only in cases where our required margins were met did we undertake measured expansion of our portfolio. In surety reinsurance our goal was to consolidate existing positions. In contrast to the credit line, we have not continued to enlarge our volume here, as a consequence of which the proportion of surety reinsurance in our total portfolio contracted from around 42% in 2008 to 35% in 2012. In business with political risks we continued the moderate expansion of our portfolio in the year under review.
All in all, we are satisfied with developments in credit and surety reinsurance and in political risks business. The premium volume grew modestly in the year under review.
The combined ratio nudged slightly higher in the 2012 financial year from 87.7% to 90.4%.
The volume of new issues in the year under review was stable relative to the previous year; an increase had originally been anticipated. However, uncertainty surrounding the development of the Hurricane Sandy loss event resulted in fewer new instruments being brought to market at the end of the year than had been initially anticipated.
The available funds comfortably exceed the opportunities for new investments in catastrophe bonds. This prompts investors to search for further investment possibilities in the reinsurance sector, for example by way of industry loss warranties and collateralised reinsurance programmes. In the latter case the investor assumes reinsurance risks that are normally collateralised in the amount of the limit of liability.
Through its product range Hannover Re enables investors to enjoy optimised and customised access. We substantially expanded our collateralised reinsurance business in the year under review. In addition, we played a successful part in structuring a catastrophe bond for Japanese earthquake risks with a volume of USD 300 million.
In 2012 the state of the UK economy again failed to show any significant improvement on the previous year. For the reinsurance industry it was another year of fierce competition. Owing to reduced spending on infrastructure projects, covers for risks in the construction industry were particularly hard hit. Yet this was also true of professional indemnity insurance, aviation insurance, motor insurance and property lines. Still, market conditions in individual segments varied. Rate increases were obtained, for example, for policies with natural catastrophe exposures and in the area of commercial motor insurance.
Our second company writing specialty lines, Compass Insurance Limited, is one of the leading players in this field in South Africa. The year under review was one of unusually heavy losses for the company. In addition to several hailstorms, a blaze destroyed more than 100 thatched homes in a residential area and caused considerable losses for the local insurance industry. We were also impacted by this event because one of our local partner underwriting managers has specialised in thatched houses. The resulting loss expenditure for our account amounted to EUR 10.4 million.
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.
The premium volume grew by 16.1% in the year under review to EUR 2,788.7 million (EUR 2,398.7 million). The combined ratio retreated from 112.3% in the previous year – which had been impacted by exceptionally heavy loss expenditure – to 90.9%. The operating profit (EBIT) surged from EUR 19.2 million to EUR 507.1 million.
Whereas the previous year had been overshadowed by several natural disasters, the year under review was spared major losses for our company. All in all, we are satisfied with the development of our business in the markets of Northern Europe. Reinsurance rates were broadly stable, with price increases attainable under loss-impacted programmes. Our portfolio remained stable.
Japan For Hannover Re Japan is an important market – one in which business relations are traditionally of a long-term nature. Our relationships with clients became even closer as a consequence of the commitment that we showed to our Japanese cedants in the aftermath of the devastating earthquake of March 2011.
Along with catastrophe covers we transact our business in Japan across all lines of property and casualty insurance; especially in casualty business and in personal accident insurance, we enjoy a leading position. Having been heavily impacted by the earthquake and subsequent tsunami in the previous year, the Japanese market was spared major losses in the year under review.
Following on from already marked increases in 2011, rates again surged sharply higher in the aftermath of the earthquake. Since the flood events in Thailand had also inflicted sizeable losses on Japanese insurers, covers for flood risks similarly showed significant price increases. Overall, rates and conditions moved in a very favourable direction across most lines of business.
Southeast Asia Hannover Re’s main markets in Southeast Asia are Malaysia, Thailand, the Philippines, Indonesia and India. Our portfolio here consists predominantly of property business. The accident, crop and livestock insurance lines as well as structured reinsurance products were further expanded in the year under review. We also continued to engage in the field of micro-insurance, which enables low-income individuals to purchase insurance protection. This market has grown particularly strongly in India.
Given the ever-greater importance attached to risk-based models and the requirements placed on insurers’ capital resources in Southeast Asia, ceding companies prefer to approach reinsurers with very good ratings for placement of their reinsurance covers. Against this backdrop, demand continued to grow in proportional motor business.
Following on from 2011, which was a year of heavy losses for Australia and even more so for New Zealand, no major losses were recorded in the year under review. As a consequence of the strains incurred in the previous year, appreciable rate increases and improvements in conditions were observed for catastrophe covers in 2012. Prices in the casualty sector remained unchanged.
All in all, we are satisfied with the development of our portfolio in Australia and New Zealand. Our premium volume increased in the year under review.
The economic development of this region was more muted than in previous years, although it began to pick up again from the second quarter onwards. The primary insurance market was highly competitive, exacerbating the pressure on rates. On the reinsurance side new players forced their way into the markets with additional capacities. Prices for non-proportional motor and catastrophe business were particularly hard hit by this excess supply.
The otherwise exceptionally vigorous premium growth was curtailed by various special effects in the year under review. These included the slowdown in economic growth associated with the Arab Spring and the termination of business relations with Syrian companies as sanctions entered into force. Despite this, further dynamic expansion is to be anticipated in retakaful business. Since 2009 we had enjoyed an average growth rate of around 25%.
The loss situation in the year under review was satisfactory. The largest single loss was a fire at a shopping centre in Qatar’s capital city. The resulting strain for our company was in the mid-single-digit million euros.
Agricultural risks Demand for the insurance of agricultural land and livestock continues to grow, especially in view of a steadily rising need for food and the effects of climate change. This is especially true of developing countries, where micro-insurance programmes – which protect individuals with minimal financial means against crop failures – are taking on added importance. Given the expanding premium volume written by primary insurers, the premium for reinsurance covers also increased worldwide. Hannover Re is one of the largest reinsurers of agricultural risks.
The year under review brought heavy losses for business with agricultural risks. Most notable was the catastrophic drought in the United States, which caused enormous damage to the farming sector. Our result, too, was impacted by this loss event in an amount of EUR 43 million.
Global catastrophe business The bulk of Hannover Re’s catastrophe business is written out of Bermuda, which has established itself as the worldwide centre of competence for this line. Our financial strength and excellent ratings have made us a preferred and sought-after partner for ceding companies and brokers for quite some years now.
The rate increases on the reinsurance side were driven in part by the losses incurred in the previous year but also by adjustments made to natural catastrophe models.
After the two previous years had seen exceptionally heavy losses, the 2012 financial year essentially passed off moderately for the worldwide (re)insurance industry; this was especially true of the first six months. Nevertheless, small to midsized loss events were recorded, including for example the earthquakes in Italy and hailstorms in the United States. Other events were for the most part carried by primary insurers in their retentions. In contrast to early expert assessments, Hurricane Sandy in the US took a substantial toll on the insurance industry: the market loss is put at more than USD 20 billion. The net strain from Sandy for Hannover Re’s account totalled EUR 258 million.
Our strategy for underwriting catastrophe business remained largely unchanged in the year to review.
In the United States we scaled back our motor liability portfolio and increased the share of agency and niche business. We also stepped up our involvement in personal accident insurance. With market conditions broadly stable, we successfully boosted our premium volume in the US.
Premium volume rose slightly as planned in the year under review.
Our business model is geared to current market conditions and customer needs, and is therefore subject to change over time. As a first step, therefore, we have refined our reporting structure and are henceforth dividing the business into Financial Solutions and Risk Solutions; further differentiation is made between Longevity, Mortality and Morbidity under the umbrella of Risk Solutions.
Financial Solutions covers all treaties in which the primary emphasis is on financing or capital management components. Reinsurance treaties focused first and foremost on the transfer of mortality risks are allocated to the Mortality category. Allocation to the Longevity and Morbidity categories is similarly determined by the underlying risks. In this context, Morbidity encompasses not only health business but also other “survival risks” such as disability and critical illness. This means that the reporting structure now puts the focus on the individual risk types.
Life insurers, too, are finding themselves increasingly affected by the economic climate and general legal environment. On the international financial markets investors struggled above all with the protracted low level of interest rates. The dominant topics in Europe continued to be the debt crisis and the new capital requirements for insurers that are to be implemented with Solvency II.
We continued to successfully expand our involvement in emerging markets. In this regard, we stepped up our activities above all in Central and Eastern Europe, Asia and Latin America and achieved pleasing portfolio growth.
Gross premium income in the financial year just ended amounted to EUR 6.1 billion (EUR 5.3 billion). This represents a pleasing increase of 14.9%. Adjusted for exchange rate fluctuations, growth would have come in at 9.8% – hence comfortably beating our target of premium growth in the range of 5% to 7%. With net premium earned standing at EUR 5.4 billion (EUR 4.8 billion), our retention retreated slightly to 89.3% (91.0%).
Our Mortality business contributed the bulk of gross premium at EUR 2,824.6 million (EUR 2,623.6 million). The considerable strategic importance that we attach to Financial Solutions business is borne out by the premium volume of EUR 1,536.6 million (EUR 1,117.6 million). Premium of EUR 883.6 million (EUR 884.9 million) was booked in the Longevity sector in the year under review. Morbidity business generated gross premium of EUR 813.0 million (EUR 644.1 million).
In the case of reinsurance treaties geared towards prefinancing arrangements, the client-related counterparty risk is a vital factor. We therefore attach particular importance to a solid financial position and without exception a good credit standing, as reflected in the rating of our ceding companies. In this way we reduce to a minimum the likelihood of a business partner defaulting. Consequently, there were no adverse effects to report in the year under review.
Our result is further influenced by the following factors: • risk associated with the persistency of the business in force
• to a modest extent, the investment performance of the assets under own management as well as the reserve deposits with ceding companies
Our active portfolio management ensures that we stay abreast of changes in our portfolio at all times and are able to respond immediately to emerging trends that do not correspond to our expectations.
In order to keep exchange rate fluctuations to a minimum, we write most of our reinsurance treaties with ceding companies in the respective local currency and also furnish the required reserves in the individual currencies. In the financial year just ended such fluctuations in exchange rates significantly affected the growth scenario in life and health reinsurance: the extraordinarily strong growth in premium volume and profitability evident at first glance is to some extent normalised by a comparison with the figures after adjustment for exchange rate movements.
Key figures for life and health reinsurance in EUR million 2012 + / – previous year
Gross premium incl. premium deposits 8,059.2 +15.6% 6,974.6 6,708.0 6,861.0 5,315.6
Earnings per share in EUR 1.91 +26.7% 1.51 1.82 2.47 0.65 1 Operating result (EBIT) / net premium earned
After allowance for non-controlling interests, life and health reinsurance delivered Group net income of EUR 230.9 million (EUR 182.3 million) for the 2012 financial year. Earnings per share came in at EUR 1.91 (EUR 1.51).
Germany We traditionally write life and health reinsurance in the German market through our subsidiary E+S Rückversicherung AG. The focus of our activities here is on life and annuity business. We work closely with our customers to develop innovative insurance concepts that meet the constantly changing needs of this market.
The changeover to unisex tariffs in primary insurance business occurred on 21 December 2012. The implications of this reform for policyholders and pricing were difficult to assess in advance. For new contracts taken out in the final months of 2012 many insurers are therefore offering an option to switch to one of the new unisex tariffs. This topic is also a preoccupation for the reinsurance industry, since the conditions in reinsurance treaties are normally aligned with the original rates on the primary side.
Beyond the borders of the United Kingdom customers are increasingly taking an interest in longevity solutions. We are already hard at work on establishing the Longevity segment in other markets and countries. Initial enquiries from European neighbours generated positive responses to our quotations.
Last year Financial Solutions business offered us exceptionally attractive growth stimuli in the field of structured reinsurance products. We support our US clients here with individual reinsurance concepts designed to provide relief for their reserves and capital. In this sector we draw on our considerable expertise and operate as the market-leading provider.
While the result in the previous year had been negatively affected by high valuation losses, the investments deposited with our US ceding companies to cover benefit reserves fared consistently well in the year under review. A valuation gain in the mid-double-digit million euro range was recognised for 2012. These valuation fluctuations are directly reflected in income under the item “unrealised gains / losses on investments ”. Given that the opposing effects this year virtually cancelled each other out, our net income after tax came in entirely within our expectations. In the year under review we therefore generated a thoroughly gratifying profit after the weak result recorded in the previous year.
Central and Latin America International reinsurers are increasingly turning the focus of their attention to the reinsurance market in Central and Latin America, particularly due to the upbeat economic development of this region. Demand from local insurers spans a highly diversified product range, extending from traditional life insurance through pension insurance products to accident and health insurance solutions. We have been an established business partner for quite some years now and we have built up good customer relationships. The product diversity described above is similarly reflected in our portfolio, with group life business accounting for the lion’s share.
Competition has heated up appreciably over the years as the number of market players increased. We nevertheless boosted our premium volume by almost one-third in the year under review and again improved our profit margin.
India offers us promising opportunities most notably through online sales of insurance products and the health insurance market. These positive developments have, however, been put under a cloud by draft new regulations for life reinsurance business. These new requirements heavily restrict the scope available to life insurers for efficient risk management, which will detrimentally impact the (re)insurance industry in the future.
In the financial year just ended we systematically expanded our business in Asia by cultivating markets and acquiring new clients. In the Philippines, for example, microinsurance is enjoying particularly brisk demand. Over the past five years alone the number of policyholders there has more than doubled.
In the field of Sharia-compliant reinsurance – so-called retakaful business – we further stepped up our activities in Malaysia and Saudi Arabia.
The South African market is generally known for its power of innovation. We actively support our clients with new product solutions and the opening up of new sales channels. In so doing, they are able to benefit from both our local market knowledge and our worldwide expertise. This is something that our existing customers appreciate and is also a key factor in the acquisition of new accounts.
The picture on equity markets was a mixed one over the course of the year. Marked volatility and uncertainty once again characterised the market environment. After getting off to a bright start in the first three months, the DAX lost ground sharply in the second quarter against a backdrop of mounting economic concerns and worries about the stability of the Eurozone. In the second half of the year the DAX posted clear gains. The Dow Jones index significantly underperformed the DAX over the year as a whole.
Despite a period of softness around the middle of 2012, the euro ultimately closed largely unchanged year-on-year against the US dollar, pound sterling and the Canadian and Australian dollars.
With these goals in mind we engage in active risk management on the basis of balanced risk / return analyses. In this context we observe centrally implemented investment guidelines and are guided by the insights of dynamic financial analysis. These measures are intended to safeguard the generation of an appropriate level of return while at the same time staying within our clearly defined risk appetite. In so doing, it must be ensured that we are able to meet our payment obligations at all times. Within the scope of our asset / liability management (ALM) the allocation of investments by currencies and maturities is determined by the technical liabilities. The modified duration of our bond portfolio is geared largely to the average maturity of the technical liabilities.
By adjusting the maturity pattern of our fixed-income securities to the expected payment patterns of our liabilities we reduce the economic exposure to the interest rate risk. In the current reporting period we slightly increased the modified duration of our fixed-income portfolio, as a result of which it reached 4.5 years (4.2 years) as at 31 December 2012. In addition, through active and regular management of the currency spread in our fixed-income portfolio we bring about extensive matching of currencies on the assets and liabilities sides of the balance sheet, as a consequence of which fluctuations in exchange rates have only a limited effect on our result.
We recognise a derivative for the credit risk associated with special life reinsurance treaties (ModCo) under which securities deposits are held by cedants for our account; the performance of this derivative in the period under review gave rise to unrealised gains of EUR 51.8 million recognised in investment income. These unrealised gains contrasted with unrealised losses of EUR 55.4 million in the previous year. The inflation swaps taken out in 2010 and 2011 to hedge part of the inflation risks associated with the loss reserves in our technical account produced unrealised gains of EUR 28.0 million (EUR 11.6 million ) recognised in investment income. The changes in the fair values of the inflation swaps are recognised in income as a derivative pursuant to IAS 39. Altogether, the unrealised gains on our assets recognised at fair value through profit or loss amounted to EUR 89.3 million, contrasting with unrealised losses of EUR 38.8 million in the previous year.
The net realised gain on disposals amounted to EUR 227.5 million (EUR 179.6 million); it derived primarily from regrouping moves out of government bonds and into corporate bonds and asset-backed securities. Additional amounts realised in the area of corporate bonds were due to application of the parameters set out in our Corporate Social Responsibility strategy.
Principally thanks to the further rise in ordinary income, but also due to the increased unrealised gains recognised in investment income, our net investment income clearly surpassed the previous year’s level. It stood at EUR 1,300.2 million (EUR 1,045.5 million) in the year under review. This produced an average return for our assets under own management (including effects from derivatives) of 4.3%.
The portfolio of fixed-income securities excluding short-term assets climbed again to EUR 29.0 billion (EUR 25.2 billion). Hidden reserves for available-for-sale fixed-income securities recognised in shareholders’ equity totalled EUR 1,144.6 million (EUR 416.1 million). The spread of asset classes shifted as planned towards corporate bonds and asset-backed securities, while the share of short-term investments was reduced. As to the quality of the bonds – measured in terms of rating categories –, the increase in the proportion of corporate debt and asset-backed securities was barely perceptible 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 84.2% (86.7%).
We held a total amount of EUR 1.1 billion (EUR 1.5 billion) in short-term investments and cash at the end of the year under review. Funds withheld amounted to EUR 14.8 billion (EUR 13.3 billion).
Asset / liability management Within the scope of our asset / liability management (ALM) the allocation of investments by currencies and maturities is determined by the technical liabilities. The modified duration of our bond portfolio – at 4.5 years (4.2 years) – is geared largely to the average maturity of the technical liabilities. We thereby adjust the maturity pattern of the fixed-income securities to the expected payment patterns of our liabilities and reduce the economic exposure to the interest rate risk. In addition, through active and regular management of the currency spread in our fixed-income portfolio we bring about extensive matching of currencies on the assets and liabilities sides of the balance sheet, as a consequence of which fluctuations in exchange rates have no significant influence on our result. At year-end 2012 we held 40.4% (39.9%) of our investments in euro, 37.1% (37.4%) in US dollars and 8.2% (7.6%) in pound sterling.
Management of policyholders’ surplus The preservation of its capital is a key strategic objective for Hannover Re. In the 2012 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,
Capital structure as at 31.12.2012 4.4% Loans and subordinated capital 5.1% Other liabilities 78.2% Technical provisions and liabilities
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. Some Group companies are subject to additional 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 62 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 pleasing. Compared to the position as at 31 December 2011, it increased by EUR 1,133.6 million in the year under review to EUR 6,740.3 million.
The Group net income for 2012 attributable to the shareholders of the Hannover Re Group increased to EUR 858.3 million (EUR 606.0 million). The non-controlling interest in the profit generated in the year under review totalled EUR 75.4 million (EUR 70.8 million).
For further explanatory information please see our remarks in the notes to this report, Section 6.12 “Debt and subordinated capital”, page 176 et seq., and Section 6.13 “Shareholders’ equity, non-controlling interests and treasury shares”, page 178.
Hannover Finance (Luxembourg) S.A., subordinated debt, EUR 500 million; 2005 / undated 1.6.2005 5.00 489.6 485.7
Cash flow from investing activities The net cash outflows from investing activities amounted to altogether EUR 2,712.9 million in 2012 and were thus considerably higher than in the previous year. While the proportion of government bonds remained stable overall, holdings of corporate bonds and asset-backed securities of an attractive quality were further expanded in line with the investment strategy. At the same time, the proportion of short-term investments was reduced. Realised returns on real estate produced a cash inflow of EUR 232.9 million. In the same context, new investments resulted in a cash outflow of EUR 315.1 million.
Regarding the development of the investment portfolio please see also our remarks in the “Investments” section of the management report on page 48 et seq.
Cash flow from financing activities Compared to the previous year, the cash flow from financing activities increased by EUR 598.2 million from -EUR 449.9 million to EUR 148.4 million. The change was influenced first and foremost by the inflow of funds from the subordinated debt 2012 / 2043 in an amount of EUR 500.0 million placed on 20 November 2012. The cash outflow in the year under review was due principally to the dividend of EUR 253.3 million paid by the parent company Hannover Re as well as repayment of a long-term debt of EUR 125.2 million by Hannover Re Real Estate Holdings, Inc. Overall, the cash and cash equivalents therefore increased by EUR 65.2 million year-on-year to EUR 572.2 million.
For further information on our liquidity management please see page 75 of the risk report.
The common shares (share capital) of Hannover Re amount to EUR 120,597,134.00. They are divided into 120,597,134 registered no-par shares.
Making optimal use of our employees’ broad-ranging skills and different ways of thinking as well as their individual strengths and cultural diversity is a central factor in our corporate success. It is for this reason that the topics of leadership and diversity management were key areas of emphasis in our human resources activities in 2012. In the context of the review of our Management Principles, all managerial staff around the world worked together for the first time to arrive at a shared understanding of leadership. Appreciation of our employees as well as their diversity – in professional, personal and cultural terms – were highlighted as overriding values that will form the foundation of our Management Principles going forward. Our diversity management has been enhanced through the addition of a mentoring programme designed to promote the advancement of women within the organisation. As Chief Executive Officer Ulrich Wallin notes: “The advancement of women is crucial to securing our future. As a company pursuing ambitious objectives, it is absolutely essential for us to recognise, foster and maximise in the company ’s interest the potential inherent in every member of staff”.
Key personnel ratios The Hannover Re Group employed 2,312 (2,217) staff as at 31 December 2012. The turnover ratio at Home Office in Hannover of 2.8% was appreciably lower than in the previous year (4.3%). The rate of absenteeism – at 3.5% – was virtually unchanged from the previous year (3.4%). The turnover ratio and rate of absenteeism nevertheless continued to be below the average expected across the industry as a whole.
For some years now Hannover Re has been well placed in many areas of diversity management, especially when it comes to supporting the compatibility of family and working life. A broad range of part-time working solutions, flexibility for members of staff returning from parental leave, individual opportunities for teleworking, an infant daycare centre and cooperation with a family service provider have long been part of day-to-day practice at our company.
An important topic in the current debate surrounding diversity management is the proportion of women and men on various hierarchical levels. Although the total workforce is split virtually down the middle into men and women, it is the case at Hannover Re – as is widely found elsewhere – that women are significantly less well represented at higher levels of the corporate hierarchy. With a view to changing this, the Executive Board has now decided to initiate a range of further measures that will bring the advancement of women, in particular, more sharply into focus.
Thus, for example, the existing personnel development tools have been enhanced through the addition of a mentoring programme. This is intended to bring together female employees (mentees) and seasoned managers (mentors) for a regular exchange over a period of 12 months. The focus of their discussions is to be on interdisciplinary topics that further strengthen the mentees in their general reflection on themselves and their actions and assist with their character development. The programme is consistently geared to the individual issues and needs of the mentees. The significance attached to this programme is evident not least from the fact that Board members will also serve as mentors.
Among further measures planned for the advancement of women are seminars that will deal with gender-specific communication patterns and roles. In the interests of change management, awareness is to be raised in this regard among both managers and female employees and they are to be given pointers for reflection on their existing modes of thought and patterns of behaviour.
Good interaction between our managers and staff is imperative if we are to achieve our strategic objectives. For Hannover Re, leadership in the spirit of our Management Principles has long been of high importance and it favourably influences the dedication of our employees and the overall working atmosphere as it is experienced within the company.
Drawn up back in the late 1990s, the currently valid Management Principles have now been revised; they constitute the basis for actions taken by our managerial staff and have come to form part of our personnel development tools alongside management feedback and our management seminars.
For the first time since their adoption, the Management Principles were subjected to detailed scrutiny in 2012. This was prompted, among other things, by the strategy review conducted in 2011, which put even greater emphasis on the importance of the Management Principles worldwide. The opportunity for this review was presented by the Global Management Forum 2012, at which Hannover Re Group managers from around the world explored in depth the topic of leadership. The purpose of their deliberations was to revise our Management Principles in order to ensure that all managers worldwide could commit to them. In this way, complementary to the existing Management Principles, two additional values were defined that had not previously been explicitly put down in writing: firstly, the aspect of appreciation as the basis for our daily actions and our mutual trust; secondly, diversity in professional, personal and cultural terms, which we consider to be an enrichment and which gives rise to fresh impetus for extending our commercial success. Going forward, then, these two aspects will therefore precede our Management Principles as the higher-order values of “appreciation” and “diversity” and they will henceforth constitute the foundation of these principles.
Hannover Re’s stated strategic aim is to be the best option for our clients when they come to choose their reinsurance partner. Since 2012 our personnel development activities have supported attainment of this goal with the new seminar offering entitled “Client Centric Re Skills”.
More than 40 seasoned underwriters from Germany and abroad have already participated in the two seminars held in the year under review. The consistently positive feedback confirms that even for experienced negotiators we have developed a valuable skills training tool, and over the coming years this seminar will therefore become an integral part of our further training programme.
Profit and value creation are indispensable prerequisites for sustainable development in the interests of our clients, shareholders, staff and business partners. As a leading player in the reinsurance industry, our commercial success is crucially dependent on a reliable assessment of present and emerging risks. The topic of sustainability therefore has a direct bearing on the operational activities of Hannover Re. Not only that, sustainability also forms an important part of how we see our business. Our goal is to achieve economic success in conformity with legal regulations and in light of the needs of our staff and the company, while also giving due consideration to conservation of the environment and natural resources. In so doing, our premises of financing growth through self-generated profits and avoiding imbalances that could necessitate capital measures continue to apply unchanged. Our operations are thus guided primarily by profitability considerations and we concentrate on attractive segments of reinsurance business.
With this in mind, in September 2011 we drew up a Sustainability Strategy for Hannover Re in which we explicitly commit to our strategic objective of sustainable value creation. This Sustainability Strategy is based on good and sustainable compliance and puts into more concrete terms the higher-level corporate strategy of the Hannover Re Group. For us, sustainability encompasses the following five aspects: • Governance and dialogue
In 2012 we reported for the first time on our achievements as a responsible enterprise in the form of a stand-alone Sustainability Report. From the outset we followed the currently applicable and internationally recognised guidelines of the Global Reporting Initiative (GRI), and we have received confirmation that we fulfil Application Level “B” – the medium level of transparency – defined by the GRI. In total, we reported on 42 Profile Disclosures, 6 Management Approaches to altogether 34 Aspects and 84 Performance Indicators as well as all Financial Services Sector Disclosures.
The success of our company is directly dependent on the successful work of our staff. We therefore pay special attention to their skills, experience and commitment and we attach considerable importance to outstanding personnel development and management activities. In this context, the compatibility of career and private life for our employees is especially significant. By way of flexible working-time models such as part-time employment and telecommuting as well as flexitime arrangements without core working hours Hannover Re promotes the balance between these two elements.
Furthermore, we attach particular importance to maintaining the physical and mental well-being of our staff. The focus is on the prevention of disease. Through medical check-ups by the company physician, workplace inspections, advice on matters of general medicine as well as an extensive range of sporting opportunities we seek to play our part in helping our employees to stay healthy.
The table below breaks down Hannover Re’s consumption and emissions over the past 5 years.
More detailed information on our social commitment is published on our website (www.hannover-re.com / sustainability / index.html).
Operationalisation of our corporate strategy takes place on multiple levels and ultimately leads into guidelines, including for example the underwriting guidelines used by our treaty and regional departments.
We manage our total enterprise risk such that we can expect to generate positive Group net income with a probability of 90% and the likelihood of the complete loss of our economic equity and shareholders’ equity does not exceed 0.03% p. a. These indicators are monitored using our internal capital model. The necessary equity resources are determined according to the requirements of our economic capital model, solvency regulations, the expectations of rating agencies with respect to our target rating and the expectations of our clients. Above and beyond that, we maintain an equity buffer in order to be able to act on new business opportunities at any time. We manage the level of our shareholders’ equity in such a way that our targeted return of 750 basis points above the “risk-free” interest rate is attainable.
Opportunities for the Hannover Re Group are to be anticipated inter alia as a consequence of the impending adoption of riskbased solvency systems, such as Solvency II in Europe. Irrespective of the date of implementation of Solvency II on the European level, risk-based national regulations are already in force and others will likely follow. We have long practised a risk-based and value-based management approach of the type which regulators will call for under Solvency II and we began to make our preparations for the requirements of Solvency II at an early stage. This includes, among other things, participating in all Quantitative Impact Studies (QIS) and entering the pre-application phase for approval of an internal capital model. We see Solvency II as an opportunity for the convergence of international regulatory
Stronger demand for reinsurance covers can also be expected as a consequence of content-based adjustments to the natural catastrophe simulation models used by many companies (including Hannover Re) as well as the vigorous growth recorded in a number of markets. Furthermore, we anticipate rising demand for individual protection against biometric risks in major emerging markets such as China, India and Brazil. Business ideas and opportunities are systematically analysed by our Business Opportunity Management unit with the aim of generating new business and thereby enabling the Hannover Re Group to enjoy continued sustainable growth going forward. This is complemented by initiatives such as our “future radar”, a systematic analysis of relevant factors that will drive future success.
This evaluation testifies to the quality of our holistic approach to risk management. We would additionally refer the reader to our remarks on the financial strength ratings of our subsidiaries in the “Financial position” section of the management report. All activities and decisions within the Group are guided not only by profit targets but also increasingly by sustainability considerations. We have defined what we consider to be the most important issues in the context of our sustainability strategy.
Functions within the risk management system There is an interplay between the individual bodies and functions in our risk management system. Their roles and responsibilities are clearly defined.
Chief Risk Officer • Responsibility for holistic risk monitoring across the Group as a whole and the business groups (systematic identification and assessment, control / monitoring and reporting) of all material risks from the Group perspective (technical risks in life / health and non-life reinsurance, market risks, credit risks, operational risks and other risks)
Group Risk Management • Risk monitoring across the Group as a whole and the business groups of all material risks from the company perspective
Business units 1 • Risk steering: primary responsibility for risk identification and assessment on the departmental level based on the guidelines of Group Risk Management
• Setting up and monitoring of the department’s internal control system (ICS)
Quantitative risk management methods In the interests of our shareholders and clients we strive to ensure that our risks remain commensurate with our capital resources. Our quantitative risk management provides a uniform framework for the evaluation and steering of all risks affecting the company as well as of our capital position. In this context, the internal capital model is our central tool.
The internal capital model of Hannover Re is a stochastic enterprise model. Based on predefined probability distributions, a large number of scenarios are generated for technical risks, counterparty defaults, capital market conditions and other business events and their effect on the company’s financial situation is determined. 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.
The internal capital model encompasses all quantifiable risks and splits them into technical risks, market risks, credit risks and operational risks. These risks are carried over to Hannover Re’s risk map and further broken down, e. g. into interest rate risks, catastrophe risks and reserving risks. Dependencies exist between these risks, which Hannover Re takes into account in order to adequately establish its target capitalisation. The model enables us to consistently measure and aggregate the individual risks and to analyse the interactions between risks. Last but not least, we are able to verify whether the level of available economic capital exceeds the capital required to operate the business.
Hannover Re calculates the required 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 is therefore significantly higher than the future requirements under Solvency II, where the confidence level is 99.5%.
Available capital and required risk capital 1 in EUR million 2012 2011
1 The required risk capital is the Value at Risk for the confidence level of 99.97% of the potential change in value over a period of one year.
Available economic capital 10,379.7 8,758.7 1 In contrast to the last annual report, the value adjustment due to operating costs is allocated to the individual business groups rather than the other value adjustments. The figures for the previous year have been adjusted accordingly.
The substantial increase in the available economic capital resulted overall in an increase in the coverage ratio to 173.9%. The Hannover Re Group thus continues to be very well capitalised.
The available economic capital, which is available as liable capital for policyholders, is comprised of the economic equity measured as described above and the hybrid capital. The internal capital model is based on current methods from actuarial science and financial mathematics. In the case of technical risks, we are able to draw on a rich internal data history to estimate the probability distributions, e. g. for the reserving risk. For risks from natural perils we use external models, which are adjusted in the context of a detailed internal review process such that they reflect our risk profile as closely as possible. In the area of life / health reinsurance long-term payment flows are modelled under various scenarios. With respect to all the aforementioned risks we use internal data to define scenarios and probability distributions. The internal data is enhanced by way of parameters set by our internal experts. These expert parameter settings are especially significant in relation to extreme events that have not previously been observed.
Hannover Re’s business model is based inter alia on building up the most balanced possible portfolio so as to achieve the greatest possible diversification effects and in order to deploy capital efficiently. Diversification exists between individual reinsurance treaties, lines, business segments and risks. We define the cost of capital to be generated per business unit according to the capital required by our business segments and lines as well as their contribution to diversification.
Qualitative risk management methods Qualitative methods and practices are a fundamental element of our internal risk management and control system as well as of potential future requirements for the Own Risk and Solvency Assessment (ORSA). 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.
The Framework Guideline defines concepts, stipulates responsibilities and provides a guide for the description of controls. In addition, it forms the basis for the accomplishment of internal objectives and the fulfilment of external requirements imposed on Hannover Re. The ICS consists of systematically structured organisational and technical measures and controls within the enterprise. It serves, inter alia, to safeguard compliance with guidelines and to reduce risks in the interests of secure execution of corporate strategy. This includes, among other things: • documentation of the controls within processes, especially in accounting,
In the area of Group accounting and Group reporting, processes with integrated controls ensure the completeness and accuracy of the consolidated financial statement. A structure made up of differentiated criteria and materiality thresholds ensures that we can identify and minimise the risk of material errors in the consolidated financial statement at an early stage. All components of the accounting-related internal control system, the processes for the organisation and implementation of consolidation tasks and for the preparation of the consolidated financial statement as well as the accompanying controls are consistently documented. In order to safeguard and continuously improve the adequacy of the control system it is subject to regular review and evaluation. In this regard, the Internal Audit function ensures that the quality of the control system is constantly monitored. All relevant accounting principles are collated in a Group Accounting Manual that sets out uniform Group-wide rules for the recognition, measurement and reporting of items in the consolidated financial statement. The process for updating and, if necessary, adjusting these rules is clearly regulated with respect to information channels, responsibilities and period of validity. Not only that, we provide prompt Group-wide notification of significant developments and modified requirements in Group financial reporting.
Within the scope of our control system the Group companies are responsible for the completeness, accuracy and reliability of the financial data that they pass on. Data for the preparation of the consolidated financial statement is delivered using a Web-based IT application. The relevant data for the Group financial reporting is collected in a database and processed via automatic interfaces in a consolidation system. Depending upon the results of our checks, these figures can be corrected if necessary. Given that our Group financial reporting is heavily dependent on IT systems, these systems also need to be subject to controls. Authorisation concepts regulate system access and for each step content-based as well as system-side checks have been implemented, by means of which errors are analysed and promptly eliminated.
Risk landscape of Hannover Re The risk landscape of Hannover Re encompasses technical risks in non-life and life and health reinsurance, market risks, credit risks, operational risks and other risks. The specific risk characteristics and the principal monitoring and management mechanisms are described in the following sections.
• We steer the acceptance of risks systematically through our underwriting guidelines. We have confidence in the entrepreneurial abilities of our underwriters and grant them the most extensive possible powers.
• We impose the highest requirements on the processing of product-related data. Excellent data quality, security and integrity are the key hallmarks of our service processes.
We make a fundamental distinction between risks that result from business operations of past years (reserving risk) and those stemming from activities in the current or future years (price / premium risk). In the latter case, special importance attaches to the catastrophe risk.
A significant technical risk is the reserving risk, i. e. the risk of under-reserving losses and the associated strain on the underwriting result. In order to counter this risk we calculate our loss reserves based on our own actuarial estimations and establish, where necessary, additional reserves supplementary to those posted by our cedants as well as the segment reserve for losses that have already occurred but have not yet been reported to us. Liability claims have a major influence on this reserve. The segment reserve is calculated on a differentiated basis according to risk categories and regions. The segment reserve established by the Hannover Re Group amounted to EUR 5,183.7 million in the year under review.
Asbestos- and pollution-related claims involve complex calculation methods. The adequacy of these reserves can be estimated using the so-called “survival ratio”. This ratio expresses how many years the reserves would cover if the average level of paid claims over the past three years were to continue.
Survival ratio in years and reserves for asbestos-related claims and pollution damage in EUR million 2012 2011
Asbestos-related claims / pollution damage 27.8 182.2 29.1 28.4 194.0 25.9
The statistical run-off triangles used by our company are another monitoring tool. They show the changes in the reserve over time as a consequence of paid claims and in the recalculation of the reserves to be established as at each balance sheet date. Their adequacy is monitored using actuarial methods (cf. here Section 6.7 “Technical provisions” on page 165 et seq.). 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 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 100-year and 200-year aggregate loss as well as the utilisation thereof are set out in the following table.
Limits and thresholds for the 100- and 200-year aggregate annual loss as well as utilisation thereof in EUR million Limit 2012
All natural catastrophe risks, net exposure 100-year aggregate annual loss 1,248 1,123 1,047 200-year aggregate annual loss 1,469 1,322 1,268
Our company incurred the catastrophe losses and major claims shown below in the 2012 financial year.
Catastrophe losses and major claims1 in 2012 in EUR million Date gross net
Hurricane Sandy in the United States 24 October – 1 November 340.9 257.5
Typhoon Haikui in Taiwan, China and the Philippines 2 August 13.3 13.3
Hurricane Isaac in the United States 24 – 31 August 13.1 6.8 1 Natural catastrophes and other major claims in excess of EUR 10 million gross
• 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 Group-wide 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.
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.
The change in the MCEV under the scenarios shown captures the low volatility in this area and reflects our portfolio’s high degree of diversification. The asymmetry in the interest rate sensitivities is primarily due to model enhancements with respect to the allowance made for dynamic management decisions in the US market. In particular, the contractually agreed limitations on possible premium increases in the event of unfavourable capital market developments were captured in the model. The consolidated MCEV before non-controlling interests amounted to EUR 3,180.7 million (2010: EUR 2,711.9 million) as at 31 December 2011. This represents an increase of 17.3% (22.7%). The operating MCEV earnings totalled EUR 314.9 million (EUR 299.5 million), while the value of new business stood at EUR 245.0 million (EUR 153.4 million). We shall publish the MCEV for the 2012 financial year on our Internet website at the same time as the report on the first quarter of 2013.
Market risks We pursue an investment policy in which the primary emphasis is on the stability of the generated return. With this in mind, our portfolio is guided by the principles of broad diversification and a balanced risk / return ratio. The most significant market price risks are share price, interest rate and currency risks.
With a view to preserving the value of our assets under own management, we constantly monitor adherence to a trigger mechanism based on a clearly defined traffic light system that is applied across all portfolios. This system puts the accumulated fluctuations in fair value and realised gains / losses on investments since the beginning of the year in relation to a maximum loss amount, with an eye to clearly graduated trigger values. These are unambiguously defined in conformity with our risk appetite and trigger specified actions if a corresponding fair value development is overstepped. Our conservatively oriented investment portfolio recorded appreciable fair value
The short-term loss probability measured as the “Value at Risk” (VaR) is another vital tool used for monitoring and managing market price risks. It is calculated on the basis of historical data, e. g. the volatility of the securities positions under own management and the correlation between these risks. As part of these calculations the decline in the fair value of our portfolio is simulated with a certain probability and within a certain period. The VaR of the Hannover Re Group determined in accordance with these principles specifies the decrease in the fair value of our securities portfolio under own management that with a probability of 95% will not be exceeded within ten trading days. A multi-factor model is used to calculate the VaR indicators for the Hannover Re Group. It is based on time series of selected representative market parameters (equity prices, yield curves, spread curves, exchange rates, commodity prices and macro-economic variables). All asset positions are mapped on the level of individual positions within the multi-factor model; residual risks (e. g.
Further information on the risk concentrations of our investments can be obtained from the tables on the rating structure of fixed-income securities as well as on the currencies in which investments are held. Please see our comments in Section 6.1 of the notes, “Investments under own management”, page 153 et seq.
Currency risks are especially relevant if there is a currency imbalance between the technical liabilities and the assets. Through extensive matching of currency distributions on the assets and liabilities side, we reduce this risk on the basis of the individual balance sheets within the Group. The shortterm Value at Risk therefore does not include quantification of the currency risk. We regularly compare the liabilities per currency with the covering assets and optimise the currency coverage in light of relevant collateral conditions 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 154.
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 continuous 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.
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
The key ratios for management of our bad debt risk are as follows: • 90.4% of our retrocessionaires have an investment grade rating (“AAA” to “BBB”).
• Since 2008 we have reduced the level of recoverables by altogether 7.3%.
• In terms of the Hannover Re Group’s major companies, EUR 174.7 million (5.7%) of our accounts receivable from reinsurance business totalling EUR 3,065.7 million were older than 90 days as at the balance sheet date.
In order to limit the risk of counterparty default we define 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 79.8 million on a fair value basis. This corresponds to a proportion of 0.2%.
The individual countries account for the following shares: Spain EUR 32.7 million, Portugal 19.8 million, Italy 18.8 million and Ireland 8.5 million. No impairments had to be taken on these holdings. Our portfolio does not contain any bonds of Greek issuers. The breakdown into individual countries and specific exposures is shown in the following table.
Operational risks 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. Operational risks are monitored primarily by way of appropriate process management. These risk potentials are evaluated inter alia on the basis of expert assessments and by means of scenario analyses. Such evaluations enable us to prioritise operational risks. When it comes to the monitoring of these risks, we attach special emphasis to the following individual risks.
Compliance risks are associated with the risk of breaches of standards and requirements, non-compliance with which may entail lawsuits or official proceedings with not inconsiderable detrimental implications for the business activities of the Hannover Re Group (e. g. tax, anti-trust, embargo or regulatory law). Upon suspicion of breaches of the law pertaining to Hannover Re, our employees and business partners are able to report such suspicions anonymously using our electronic whistleblower system, which can be accessed through our website. These tips are brought to the attention of Hannover Re’s Compliance Office, which is thus able to investigate the grounds for suspicion. Responsibilities within the compliance organisation are regulated Group-wide and documented in a manual. The process is documented in regular compliance reports and complemented by training activities.
Information technology risks and information security risks arise, inter alia, out of the risk of the inadequate integrity, confidentiality or availability of systems and information. Losses and damage caused by unauthorised access to IT systems or by computer viruses, for example, pose a serious threat to the Hannover Re Group. Given the broad spectrum of such risks, a diverse range of steering and monitoring measures and organisational standards have been put in place. Among other things, our employees are made more conscious of such security risks through practically oriented tools and training opportunities, e. g. with regard to the handling of personal data.
Other risks Of material importance to our company in the category of other risks are primarily emerging risks, strategic risks, reputational risks and liquidity risks.
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. It is therefore vital to detect these risks at an early stage and then determine their relevance. For the purpose of early detection we have developed an efficient process that spans divisions and lines of business and we have ensured its linkage to risk management. Operational implementation is handled by an expert working group assembled specially for this task. The analyses performed by this working group are used Group-wide in order to pinpoint any necessary measures (e. g. the implementation of contractual exclusions or the development of new reinsurance products). By way of example, the risks arising out of the emergence of large cities and urban conurbations – so-called megacities – are analysed by this working group. The growth of such urban centres goes hand-in-hand with a host of different problems, including a growing demand for food, drinking water, energy and living space. These challenges may also have implications for our treaty portfolio – in the form not only of risks but also opportunities, e. g. through increased demand for reinsurance products. Climate change, nanotechnology, political unrest, amendments to laws and changes in regulatory requirements as well as pandemics may be cited as examples of other emerging risks.
Strategic risks derive from a possible imbalance between the corporate strategy of the Hannover Re Group and the constantly changing general business environment. Such an imbalance might be caused, for example, by incorrect strategic policy decisions, a failure to consistently implement the defined strategies and business plans or an incorrect allocation of resources. We therefore regularly review our corporate strategy in a multi-step procedure and adjust our processes and the resulting guidelines as and when required. We have defined performance criteria and indicators for the operational implementation of the strategic guidelines; these are authoritative when it comes to determining fulfilment of the various targets. With the “Strategy Cockpit” the Executive Board and responsible managers have at their disposal a strategy tool that assists them with the planning, elaboration and management of strategic objectives and measures and safeguards their overall perspective on the company and its strategic risks. Further details are provided in the section entitled “Our strategy” on page 18 et seq.
Reputational risks refer to the risk that the trust put in our company by clients, shareholders, employees or the public at large may be damaged. This risk has the potential to jeopardise the business foundation of the Hannover Re Group. A good corporate reputation is therefore an indispensable prerequisite for our core business as a reinsurer. Loss of reputation may occur, for example, as a consequence of a data mishap or a case of fraud. We use a number of different practices to minimise this risk, including for example our set communication channels, a professional approach to corporate communications, tried and tested processes for defined crisis scenarios as well as our established Code of Conduct. Our rules governing the use of social networks (social media) as well as the principles defined in our sustainability strategy for conducting business in a responsible and sustainable manner round off this set of tools.
With a view to allocating our demanding profit and growth targets for the Group to the individual business activities and profit centres on a basis that adequately reflects the risks and in order to be able to measure goal attainment, we have used a set of value-based management tools for many years now.
In Performance Excellence (PE) we have at our disposal a consistent method Group-wide that enables us to steer the development of the company and measure the extent to which we have achieved our strategic objectives. The decentralised approach used by PE is of special importance in this context: every single organisational unit defines and continuously examines its contributions to execution of the Hannover Re Group strategy and develops improvement initiatives.
Capital allocation The main component of value-based management is the riskappropriate 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 / 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.
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 6.8%, we can point to a lower average cost of capital than our competitors.
Since comparison of absolute amounts is not always meaningful, we have introduced the xRoCA (excess return on capital allocated) in addition to the IVC. This describes the IVC in relation to the allocated capital and shows us the relative excess return generated above and beyond the weighted cost of capital. Complementary to this, the IVC margin corresponds to the ratio of the IVC to the net premium earned, i. e. the intrinsic value creation as a percentage of our net premium income.
Non-life reinsurance Gross premium growth 4 3% – 5% 13.1% 7.7% 10.3% 15.2% -3.8%
Code Item 5.3.2; Independence of the Chairman of the Audit Committee
Executive Board or decisions initiated by him as a member of the Executive Board were still being realised. In the opinion of Hannover Rückversicherung AG, it is therefore in the interest of the company to diverge from this recommendation contained in Item 5.3.2.
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. In the middle of the year a concept designed to promote the advancement of women was adopted for the company’s workforce and brought to the attention of the Supervisory Board. Through a variety of measures the company is seeking to do more to foster promising young female professionals and to enlarge the proportion of women in management positions. The Executive Board and Supervisory Board also considered at length the issue of sustainability and Corporate Social Responsibility. Hannover Re’s strategic orientation towards sustainability forms a key element of its corporate strategy. 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, for the first time in the year under review we also presented a Sustainability Report and an initial so-called “GRI Report”. Further information on the topic of sustainability is provided on our website (www.hannover-re.com / sustainability / index.html).
Complementing our corporate strategy and Corporate Governance principles, our Code of Conduct establishes binding rules worldwide governing integrity in the behaviour of all employees of Hannover Re. They are intended to help us cope with the ethical and legal challenges that we face as part of day-to-day work. The Executive Board is expressly committed to observance of these rules.
Working practice of the Executive Board and Supervisory Board The Executive Board and Supervisory Board of Hannover Re work together on a trusting basis to manage and monitor the company. In accordance with the Rules of Procedure of the Executive Board, matters of fundamental importance require the consent of the Supervisory Board. In addition, the Supervisory Board is kept informed on a regular and timely basis 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 8 and 209 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.
It prepares the Supervisory Board’s examination of the annual financial statement, management report and proposal for the appropriation of profit as well as of the consolidated financial statement and Group management report. In this context, the Finance and Audit Committee receives detailed information on the auditor’s view of the net assets, financial position and results of operations as well as explanations of the effects of any modified recognition and measurement principles on the net assets, financial position and results of operations together with available alternatives. In addition, the committee prepares the Supervisory Board’s decision on the commissioning of the independent auditor for the financial statements. It considers matters associated with the necessary independence of the auditor, the awarding of the audit mandate to the independent auditor, the determination of the audit concentrations and the fee agreement.
The Standing Committee prepares personnel decisions for the Supervisory Board and decides in lieu of the Supervisory Board on the content, formation, amendment and termination of contracts of service with the members of the Executive Board with the exception of matters of remuneration-related content and their implementation. It bears responsibility for the granting of loans to the group of persons specified in §§ 89 Para. 1, 115 Stock Corporation Act and those considered equivalent pursuant to § 89 Para. 3 Stock Corporation Act as well as for the approval of contracts with Supervisory Board members in accordance with § 114 Stock Corporation Act. It exercises the powers arising out of § 112 Stock Corporation Act in lieu of the Supervisory Board and – in cooperation with the Executive Board – ensures that long-term succession planning is in place.
Information regarding the following items is provided in the remuneration report: • Remuneration report for the Executive Board and individualised disclosure of the remuneration received by Supervisory Board members pursuant to Items 4.2.5 and 5.4.6 of the German Corporate Governance Code
• Securities transactions pursuant to Item 6.6 of the German Corporate Governance Code
• Shareholdings pursuant to Item 6.6 of the German Corporate Governance Code
Information on share-based payment pursuant to Item 7.1.3 of the German Corporate Governance Code is provided in Section 8.3 of the notes “Share-based payment”, page 191 et seq., and in the remuneration report with respect to the members of the Executive Board.
The remuneration report summarises the principles used to determine the remuneration of the Executive Board of Hannover Re and explains the structure, composition and amount of the components of the remuneration received by the Executive Board in the 2012 financial year on the basis of the work performed by the Board members for Hannover Re and its affiliated companies.
In addition, the amount of remuneration paid to the Supervisory Board on the basis of its work for Hannover Re and its affiliated companies and the principles according to which this remuneration is determined are described; we also explain the principles on which the remuneration for managers below the level of Executive Board is based.
The remuneration report is guided by the recommendations of the German Corporate Governance Code and contains information which forms part of the notes to the 2012 consolidated financial statement as required by IAS 24 “Related Party Disclosures ”. Under German commercial law, too, this information includes data specified as mandatory for the notes (§ 314 HGB) and the management report (§ 315 HGB). These details are discussed as a whole in this remuneration report and presented in summary form in the notes.
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”.
Remuneration of the Executive Board Responsibility Responsibility for determining the amount of remuneration received by the Executive Board of Hannover Re rests with the full Supervisory Board.
With an eye to these objectives, the remuneration system has two components: fixed salary / non-cash compensation and variable remuneration. The variable remuneration elements have a multi-year assessment basis and thereby promote the sustainable development of the company. In the event of 100% goal attainment, the share of the total remuneration attributable to variable elements is 60%.
Variable remuneration (60% of total remuneration upon 100% goal attainment) The following chart summarises the make-up of the variable remuneration components. For details of measurement and payment procedures please see the two tables following the chart.
Personal and business group targets (IVC) 2 for the financial year
1 Chief Executive Officer / Chief Financial Officer 70% profit bonus, 30% performance bonus (personal targets); all other Board members: 50% profit bonus, 50% performance bonus (25% personal targets / 25% business group targets)
Until 2013: The Supervisory Board determines degree of goal attainment according to its best judgement From 2013 onwards: Attainment of the IVC
The Supervisory Board determines degree of goal attainment according to its best judgement 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.
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; 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.
Automatic granting of virtual Hannover Re share awards with a value equivalent to 20% of the variable remuneration; payment of the value calculated at the payment date after a vesting period of 4 years; value of the share on awarding / payment: unweighted arithm. mean of the Xetra closing prices five trading days before to five trading days after the meeting of the Supervisory Board that approves the consolidated financial statement; additional payment of the sum total of all dividends per share paid out during the vesting period; changes in a cumulative amount of 10% or more in the value of the share awards caused by structural measures trigger an adjustment.
Profit bonus The profit bonus is dependent on the risk-free interest rate and the average return on equity (RoE) over the last three financial years. Goal attainment can amount to a maximum of 200% and a minimum of -100%.
The RoE is calculated using the IFRS Group net income (excluding non-controlling interests) and the arithmetic mean of the IFRS Group shareholders’ equity (excluding non-controlling interests) at the beginning and end of the financial year.
The risk-free interest rate is the average market rate over the past five years for 10-year German government bonds and is set at an agreed value of 2.8%. The arrangements governing the profit bonus can be adjusted if the risk-free interest rate of 2.8% changes to such an extent that an (absolute) deviation of at least one percentage point arises.
Performance bonus The performance bonus for the Chief Executive Officer and the Chief Financial Officer is arrived at from individual qualitative and, as appropriate, quantitative targets defined annually by the Supervisory Board that are to be accomplished in the subsequent year. For members of the Executive Board with responsibility for a certain business group, the performance bonus consists in equal parts of the business group bonus and the individual bonus.
The criteria for the individual bonus for all members of the Executive Board include, for example, the individual contribution to the overall result, leadership skills, innovative skills, entrepreneurial skills and other quantitative and qualitative personal targets, making special allowance for the specific features associated with the Board member’s area of responsibility.
The degree of goal attainment is determined by the Supervisory Board according to its best judgement. The individual bonus for goal attainment of 100% is contractually defined. Overfulfiment and underfulfilment result in additions and deductions respectively. The lowest individual bonus amounts to EUR 0 and the highest is equivalent to double the bonus upon complete fulfilment of targets.
The business group bonus is guided by the average Intrinsic Value Creation (IVC) achieved in the three-year period justended for the business group that falls within the relevant Board member’s area of responsibility. A generally valid concept for measuring the IVC is currently undergoing further refinement and will be finalised at the Supervisory Board meeting in March 2013. It is envisaged that the criteria adopted in March 2013 will apply retroactively from 1 January 2013 onwards.
For the 2012 financial year the business group bonus is established by the Supervisory Board according to its best judgement.
Retained portion of the variable remuneration Bonus bank (retention for a period of three years) Each year 20% of the mathematically determined positive variable remuneration is allocated to the bonus bank. If the mathematically calculated amount of variable remuneration is negative, 100% of this negative amount is allocated to the bonus bank.
The amount allocated to the bonus bank in each case is paid out after three years to the extent that it is covered by the balance existing at that time. Any portion of the variable remuneration due for disbursement that is not covered by the balance in the bonus bank is forfeited.
No interest is payable upon the balance in the bonus bank.
Share awards (vesting period of four years) 20% of the mathematically determined variable remuneration is granted as share-based remuneration in the form of virtual Hannover Re share awards (HR-SAs). The total number of HRSAs granted is based on the value per share of Hannover Re at the time when the award is made. The value per share of Hannover Re is established according to the unweighted arithmetic mean of the Xetra closing prices of the Hannover Re share in a period of five trading days before to five trading days after the meeting of the Supervisory Board that approves the consolidated financial statement. The HR-SAs are awarded automatically without any requirement for a declaration by Hannover Re or the member of the Executive Board.
For each HR-SA the value of the Hannover Re share calculated on the disbursement date (value calculated in the same way as when the award is made) – plus an amount equivalent to the total dividends distributed during the vesting period – is paid out after expiry of a vesting period of four years. Taxes and social security contributions due are borne by the member of the Executive Board. Board members have no entitlement to delivery of shares.
With regard to Item 4.2.3 Paragraph 4 of the German Corporate Governance Code – “Caps on severance payments in management board contracts” – we would refer the reader to our remarks in the Declaration of Conformity contained in the section “Enterprise management” on page 80 of this Group Annual Report.
If the company insists on a non-competition clause with Mr. Wallin for two years after the termination of his service contract, he shall be recompensed in a monthly amount of 50% of his most recent fixed remuneration. Income earned through the application of his working capacity elsewhere shall be counted towards this compensation insofar as such income in combination with the compensation exceeds 100% of the most recently received fixed remuneration. The non-competition clause shall not apply if the contract ends prior to the age of 65 because the company does not extend it or because Mr. Wallin declines an extension offered to him on what are for him inferior terms, or if the premature termination or non-extension is due to a compelling reason for which the company is responsible.
Amount of remuneration received by the Executive Board The total remuneration received by the Executive Board of Hannover Re on the basis of its work for Hannover Re and its affiliated companies is calculated from the sum of all the components set out in the following table pursuant to DRS 17 (amended 2010).
The remuneration (excluding pension payments) received by former members of the Executive Board totalled EUR 2.4 million (EUR 0.1 million).
Stock appreciation rights awarded for 2010 in 2011 and 1 As at the balance sheet date no Board resolution was available regarding the performance-based remuneration for 2012. The variable remuneration is recognised on the basis of estimates and the provisions constituted accordingly.
In 2012 altogether EUR 900 more than had been originally reserved was allocated to the bonus bank for 2011. 6 The nominal amount is stated; virtual Hannover Re share awards are automatically granted in an amount equivalent to 20% of the variable remuneration. The equivalent amount will be paid out in 2017 at the prevailing share price of Hannover Re. In 2012 nominal amounts of EUR 900 more than had been originally reserved were used as a basis for allocation of the 2011 share awards.
The following table shows the expense for share-based remuneration of the Executive Board in the financial year. The table is to be viewed independently of the presentation of the total remuneration received by active members of the Executive Board pursuant to DRS 17.
Dr. Wolf Becke 3 2012 – – – – 0.0 1 The change in the reserve for share awards from previous years derives from the increased market price of the Hannover Re share, the dividend approved for 2011, a contract extension for Dr. Pickel and the spreading of the expense for share awards across the remaining period of the individual service contracts.
Cash remuneration actually accruing to active members of the Executive Board
Retirement provision Final-salary pension commitment (appointment before 2009) The contracts of members of the Executive Board first appointed prior to 2009 contain commitments to an annual retirement pension calculated as a percentage of the pensionable fixed annual remuneration (defined benefit). The target pension is at most 50% of the monthly fixed salary payable on reaching the age of 65. A non-pensionable fixed remuneration component was introduced in conjunction with the remuneration structure applicable from 2011 onwards.
In the event of pension entitlement, a claim to life-long retirement pay exists. The pensionable event occurs on or after reaching the age of 65 or on account of a permanent incapacity for work.
If a member of the Executive Board is permanently incapacitated for work during the period of the service contract, the service contract shall terminate at the end of the sixth month after which the permanent incapacity for work is established – although no later than the end of the service contract. A permanent incapacity for work exists if the Board member will probably be permanently unable to perform without reservation the tasks assigned to him.
The amount of the benefits is determined according to the pensionable income and the qualifying period of employment. The benefit level as a percentage of the pensionable fixed remuneration is contractually defined upon appointment and increases annually by 1 to 2 percentage points to a maximum of 50%
upon reaching age 65. For the purpose of calculating the retirement pay for Board members appointed in the years up to and including 2008 in the event of a pension entitlement due to permanent incapacity for work, half of the difference between the percentage attained and the percentage that the Board member would have attained upon reaching age 65 is added to the percentage attained until leaving the company.
Until age 65 is reached 50% of other income earned by the Board member is counted towards the retirement pay.
An early retirement pension is paid to a member of the Executive Board who documents that he is receiving a full pension through submission of the pension notice.
An orphan’s pension shall be granted in the amount of 15% – 25% if the widow’s pension does not apply – 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. The orphan’s pension is payable at most until the age of 27. Income from an employment or training relationship is partially counted towards the orphan’s pension.
Surviving dependant’s benefit (in the case of a contribution- based pension commitment) Following the death of an eligible benefit recipient, the surviving spouse receives a life-long spouse’s pension. The amount of the spouse’s pension is equivalent to 60% of the pension that the deceased Board member received or would have received if he had been incapacitated for work at the time of his death.
The spouse’s pension is only paid if the marriage was entered into before the Board member reached the age of 60 and before occurrence of the pensionable event and provided the marriage existed until the date of the Board member’s death.
child benefits could have been claimed for the child under the Federal Child Benefit Act.
The pension payments to former members of the Executive Board and their surviving dependants, for whom 13 (13) pension commitments existed, totalled EUR 1.4 million (EUR 1.2 million) in the year under review. The projected benefit obligation of the pension commitments to former members of the Executive Board amounted to altogether EUR 22.5 million (EUR 15.8 million).
Premium 1 Percentage of pensionable income (fixed annual remuneration as at the reference date of 1 July of each year) 2 Guaranteed interest rate 2.25%
In addition, the members of the Finance and Audit Committee formed by the Supervisory Board receive remuneration of EUR 15,000 for their Committee work and the members of the Standing Committee formed by the Supervisory Board receive remuneration of EUR 7,500. In this case, too, the Chairman of the Committee receives twice and the Deputy Chairman oneand -a-half times the stated amounts. No remuneration is envisaged for the Nomination Committee.
Karl Heinz Midunsky Member (until 3 May 2011) of the • Supervisory Board • Nomination Committee
Dr. Andrea Pollak Member of the Supervisory Board Fixed remuneration 30.0 19.8
Gert Wächtler 3 Member of the Supervisory Board Fixed remuneration 30.0 30.0
Reimbursement of expenses 3.0 3.0 1 Amounts excluding reimbursed VAT 2 Including supervisory board remuneration and remuneration for committee work received from entities affiliated with the company 3 Employee representatives
Securities transactions and shareholdings (directors’ dealings) Dealings in shares, options and derivatives of Hannover Rückversicherung AG 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). The reportable transactions listed in the following table took place in the 2012 financial year.
Remuneration of staff and senior executives Structure and system The remuneration scheme for senior executives below the Executive Board (management levels 2 and 3) consists of a fixed annual salary and a system of variable remuneration. This is comprised of a short-term variable remuneration component, the annual cash bonus, and a long-term share-based remuneration component, the Share Award Plan. This variable remuneration has been uniformly applied worldwide since 1 January 2012 to all Group senior executives (i. e. Managing Directors, Directors and General Managers). It satisfies the requirements of the Regulation on the Supervisory Law Requirements for Remuneration Schemes in the Insurance Sector (VersVergV), which entered into force on 13 October 2010, inasmuch as – in its basic principles and parameters – it meets the special requirements of § 4 VersVergV and is appropriately realised according to the various management levels. As part of the reorientation of the remuneration system for senior executives the Share Award Plan of the Executive Board was consciously extended to include management levels 2 and 3. Given that at the same time the stock appreciation rights plan for senior executives was cancelled with effect from the 2012 allocation year, this means that a uniform share-based remuneration component has been maintained for the Executive Board and senior executives alike.
The Group net income is measured by the average return on equity (ROE) of the Hannover Re Group over the last three financial years. The maximum possible goal attainment is 200%. A lower limit is placed on goal attainment of -50% (penalty) for management level 2 (Managing Director) and 0% for management level 3 (Director and General Manager).
If the average return on equity over the last three financial years reaches the risk-free interest rate, goal attainment is 0%. The risk-free interest rate is the average market interest rate over the past five years for 10-year German government bonds. If the average return on equity over the last three financial years is less than the risk-free interest rate or if it is negative, this results in a negative performance contribution / degree of goal attainment for management level 2 (Managing Director). If the average return on equity over the last three financial years reaches the expected minimum return on equity (750 basis points above risk-free), goal attainment stands at 85%. Given an average return on equity over the last three financial years of 882 basis points above the applicable risk-free interest rate, goal attainment of 100% is recorded.
Following expiry of a vesting period of four years the value of one Hannover Re share calculated at the disbursement date is paid out for each share award. The value of the Hannover Re share is again determined from the average of the closing prices of the shares in a period from 20 trading days before to 10 trading days after the meeting of the Supervisory Board that approves the consolidated balance sheet. In addition, a sum in the amount of the dividend is paid out for each share award, insofar as dividends were distributed to shareholders. The level of the dividend payment is the sum total of all dividends per share paid out during the period of the share awards multiplied by the number of share awards.
Global economy The forecast for the global economy in 2013 is subject to numerous uncertainties. As the world economy put 2012 behind it and moved into 2013, it was heavily overshadowed by the Eurozone crisis and the unpredictable direction of fiscal policy in the United States. At the beginning of 2013, it was only after an agonising struggle that an initial last-minute compromise was reached in the US budget dispute surrounding the so-called fiscal cliff. What is more, the pace of growth in emerging markets remains muted.
All in all, developments in 2013 will depend first and foremost on how the crisis in the Eurozone unfolds. Just how well it is managed will in turn depend on the success of consolidation measures taken by the individual member states. In its basic scenario for the current year, the Ifo Institute assumes that member states will continue unchanged and on schedule along the path towards consolidation and that there will be no reescalation of the financial situation in the Eurozone.
Germany Germany enters the 2013 financial year with a diminished pace of growth. Working on the assumptions of its basic scenario, i. e. that there will be no further intensification of the crisis in the Eurozone and that consolidation measures will be systematically implemented, the Ifo Institute anticipates a delayed upturn in Germany over the course of the year. This may be driven by stimuli from the domestic economy as well as by growing non-European demand for German export goods. As a result, private consumption and equipment spending could also pick up again; exports may begin to rise again as well. No appreciable improvement is expected on the labour market for the time being; unemployment will probably rise slightly to 6.9%. According to the Ifo Institute, GDP should grow by around 0.7% overall.
Insurance industry In 2013 the international insurance industry once again finds itself facing the challenge of negotiating an uncertain market climate and economic situation. The financial and debt crises in Europe have still not been resolved and are casting a shadow over international markets. Despite this general environment, the insurance sector will probably be able to maintain its stable course. Given that there has been no easing in competition, the challenge of generating more growth is likely to be the dominant topic again.
The improvement of risk management systems remains a key concern for insurers. As a general principle, investment strategies will likely take a long-term view. Life insurers, in particular, face the problem of creating attractive individual retirement provision products for consumers despite the sustained policy of low interest rates. In view of climate change, strategies to protect against risks associated with the repercussions of extreme weather conditions are taking on increased significance around the world.
We were satisfied with the renewals as at 1 January 2013, when around two-thirds of our treaties in non-life reinsurance (excluding facultative business and structured reinsurance) were renegotiated. Although the environment was considerably more competitive than in the previous year, our selective underwriting approach enabled us to attain a price level at least equivalent in quality to the good year of 2012. In the more profitable non-proportional sector we generated pleasing growth of 6%. Proportional business, on the other hand, contracted slightly.
The development of our North American portfolio was very pleasing, although in US casualty business there was a noticeable trend towards clients ceding less and less business to reinsurers.
We see growth potential in Latin America, the countries of Central and Eastern Europe and in business with agricultural risks.
For the current financial year we anticipate an enlarged premium volume, driven both by new business and the enlargement of existing participations. We are also seeking to further expand our agency business. All in all, we expect the result generated by our portfolio in North America to show further improvement on the previous year.
Specialty lines We were satisfied with the treaty renewals in specialty lines.
Unless the state of the global economy improves, claims rates in credit and surety reinsurance will again tend to move higher in the current financial year. With this in mind, as in the previous year, we are not seeking to expand our market share in 2013, but rather to maintain our share unchanged. In view of the considerable capacities in the market we shall continue to write our business highly selectively. The premium volume for our credit and surety business is likely to remain stable in the current financial year.
We intend to further step up our activities in the area of insurance -linked securities in the current financial year. In this context, our focus will be on packaging and structuring non-life and life reinsurance risks. Our collateralised reinsurance portfolio will also be systematically expanded, and we shall continue to play an active part as an investor in catastrophe bonds.
In 2013 we were able to renew our “K” quota share – a collateralised modelled quota share cession of non-proportional reinsurance treaties in the property catastrophe, aviation and marine (including offshore) lines that we have placed in the ILS market for almost 20 years – with a capacity of USD 328 million.
Global reinsurance Treaty reinsurance worldwide The premium volume for our portfolio of global treaty reinsurance is expected to remain stable.
Although improved conditions have been anticipated for several years in France, a trend towards higher prices cannot currently be discerned. On average, we are assuming prices will be slightly lower in 2013. The premium volume should remain stable overall.
In the markets of Central and Eastern Europe demand for highquality reinsurance protection should remain strong in 2013 and beyond. We expect reinsurance rates to remain stable overall. Despite the worldwide financial and economic crisis, we are convinced that further profitable growth can be generated here going forward. It is our assumption that the premium volume in the current financial year will again show double-digit growth.
Global catastrophe business In part owing to the low interest rate environment, further capital can be expected to flow into global catastrophe reinsurance. As was already observed in the past year, activities in the area of insurance-linked securities should continue to gather momentum in 2013. As an additional factor, the (re)insurance industry enjoyed a thoroughly successful 2012, hence leaving the capital base of insurers further strengthened. Nevertheless, the losses incurred from Hurricane Sandy should help to significantly ease the pressure for price reductions. Both the impacted programmes and those with a negative experience from earlier loss events should see marked rate increases. We expect to show a modest increase in our premium volume from global catastrophe business.
Hannover Re has for years been an internationally established and valued business partner in the field of life and health reinsurance. Going forward, as in the past, we shall attach considerable importance to long-term, partnership-based relations with our clients, who benefit from individually tailored reinsurance solutions. We offer our customers reinsurance protection worldwide in all lines of life and health reinsurance. This extends from traditional risk-oriented products through pension and retirement provision solutions to optimisation of a customer’s capital management and solvency position. In so doing, we keep a close eye on the balanced global diversification of our life and health reinsurance portfolio as well as our company’s internal diversification with the non-life reinsurance business group.
In mature insurance markets the demographic trend is reflected most strikingly in demand for longevity covers. Demand is rising among an ageing population for pension and long-term care insurance products as well as disability protection. The longevity sector therefore remains an important market for our company, which we expect to deliver strong business potential going forward. In other lines, by contrast, the developed reinsurance markets are notable for a high degree of insurance penetration and hence are extremely competitive. The order of the day here is to respond to the needs of our customers with individually tailored and innovative insurance concepts.
The shock that international financial markets suffered when a number of major banks found themselves in distress has also caused uncertainty within the insurance industry. By way of more stringent legal requirements national and international regulators alike are seeking to exert greater oversight over insurance companies. In Europe, for example, Solvency II envisages extensive reporting and disclosure duties, the implementation of an adequate risk management system and the putting up of capital resources on a level geared to the underlying risks. This will present considerable challenges, especially for the European insurance industry. Implementation of Solvency II, which was planned for 2013, has, however, been postponed again. It is now anticipated that the rules will probably not fully come into effect until after 2016. In the interim there is debate as to whether uncontroversial parts should be adopted beforehand so as to introduce Solvency II gradually, as it were. As a general principle, it is important to systematically track developments in this respect so to be ready to act without delay when Solvency II is implemented.
Non-life reinsurance Irrespective of statements made regarding individual markets in non-life reinsurance, it should be noted – as in past years – that the probabilities of occurrence for (natural) catastrophe events in terms of their number and scale as well as their magnitude for the insurance industry are subject to considerable fluctuations.
Actors with efficient processes and structures can in fact profit from the current economic situation by using the margins made possible by their low costs as competitive advantages. Profitable growth can be safeguarded, in particular, by taking a forward-looking approach to emerging risks such as climate change, health risks (e. g. through resistance to antibiotics or due to endocrine disruptors) as well as cyber risks such as digital wildfires. Furthermore, major losses such as Hurricane Sandy (2012), the floods in Thailand (2011) and the earthquakes in Japan and New Zealand (2011) have shown that not only the continuous enhancement and rechecking of models but also the assurance of rapid, objective and reliable major loss management so as to be able to meet client concerns in a flexible manner are crucial success factors.
Life and health reinsurance Stable growth and minimal exposure to random fluctuations in results are the traditional hallmarks of life and health reinsurance that make it an attractive business segment.
Internationally, the life and health reinsurance market offers sustained attractive potential. The progressive demographic shift in mature markets such as the United States, United Kingdom, Japan and Germany is generating steadily growing demand for seniors’, long-term care and annuity insurance products. In so-called emerging markets such as India, Brazil and also Russia dynamic economic growth is creating a middle class with purchasing power, which is taking an increasingly strong interest in protecting their families and preserving their wealth as well as safeguarding their health and providing for retirement.
Under these conditions, we are convinced that the international life and health reinsurance market will offer healthy earnings opportunities for our company in the years ahead, as it has in the past.
In the current year we anticipate a very good overall result for the Hannover Re Group. Our non-life reinsurance business group is expected to deliver an increase of 3% to 5% in gross premium income at constant exchange rates.
Based on constant exchange rates, we therefore expect to grow our total gross premium for the Hannover Re Group by around 5%.
Looking beyond the current financial year, we expect broadly favourable conditions in non-life reinsurance and life / health reinsurance.
Fixed-income securities – at fair value through profit or loss 6.1 147,413 161,130
Commission and brokerage, change in deferred acquisition costs 7.3 2,649,693 2,336,128
Total recognised income and expense 1,460,409 804,780 thereof: Attributable to non-controlling interests 107,280 65,376
Changes in the consolidated group – – – – – – (12,716) (12,716) 1,026 (11,690)
Other changes recognised outside income 1 – – (5,717) – – – 5,717 – – –
Capital increases / additions – – – – – – – – 30 30
Cash and cash equivalents at the beginning of the period 506,963 475,227 1
Change in cash and cash equivalents (I. + II. + III. + IV.) 65,225 31,736
An interest of 50.22% in Hannover Rückversicherung AG is held by Talanx AG, which in turn is majority-owned (with a stake of 82.3%) by HDI Haftpflichtverband der Deutschen Industrie V.a.G. (HDI).
Since 2002 the standards adopted by the International Accounting Standards Board (IASB) have been referred to as “International Financial Reporting Standards (IFRS)“; the standards dating from earlier years still bear the name “International Accounting Standards (IAS)“. Standards are cited in our notes accordingly; in cases where the notes do not make explicit reference to a particular standard, the term IFRS is used.
In addition, the German Accounting Standards (DRS) adopted by the German Accounting Standards Committee (DRSC) have been observed insofar as they do not conflict with currently applicable IFRS.
The present consolidated financial statement was released for publication by the Executive Board on 18 February 2013.
In addition, for transfers of financial assets that result in full derecognition but where the entity has continuing involvement in the assets, information is to be disclosed that allows users to evaluate the nature of and risks associated with the entity’s continuing involvement in derecognised financial assets. This includes, inter alia, the maximum exposure to loss from continuing involvement as well as a maturity analysis of future cash flows. The amendments, which are applicable for the first time in the 2012 financial year, had no implications for Hannover Re in the period under review.
In accordance with IFRS 11 a proportionate inclusion of interests in joint ventures will no longer be permissible in future. Rather, interests in joint ventures must be accounted for using the equity method.
In addition, the disclosure requirements previously contained in IAS 27 and IAS 31 have been combined and restructured in IFRS 12 “Disclosure of Interests in Other Entities”. With the aim of clarifying for the users of financial statements the nature of an entity’s interest in other entities as well as the effects of those interests on its financial position, financial performance and cash flows, significantly expanded disclosures of information are required in comparison with the previous requirements.
The revised version of IAS 27 will in future consist solely of requirements for the accounting of investments in subsidiaries, jointly controlled entities and associates in separate (nonconsolidated ) financial statements of the parent company. In this context, only minimal changes were made relative to the previous wording of the standard.
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. While the new IFRS 10, 11, 12 and the revised IAS 27 and 28 were ratified by the EU in December 2012, ratification of the amendments published in the year just ended is still pending.
IFRS 13 “Fair Value Measurement”, a standard published in May 2011, is intended to establish 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. IFRS 13 must be applied to financial years beginning on or after 1 January 2013.
Actuarial gains and losses therefore have to be recognised entirely in OCI and cannot be recycled through profit or loss in subsequent periods. In addition to extended disclosure requirements, the treatment of termination benefits is changed.
The amendments to IAS 1 are to be applied to financial years beginning on or after 1 July 2012. It is envisaged that the amended IAS 19 will be applicable for the first time to financial years beginning on or after 1 January 2013. The amendments to IAS 1 and IAS 19 were ratified by the EU during the period under review.
Amendments to IFRS 7 Financial Instruments: Disclosures – Offsetting Financial Assets and Financial Liabilities
Amendments to IAS 32 – Offsetting Financial Assets and Financial Liabilities 1 January 2014 13 December 2012 3. Accounting policies 3.1 Changes in accounting policies
The treatment of tax expenditures in connection with unrealised income and expenses from investments that are already taxable under local tax law has been corrected for prior financial years. In the 2012 financial year this resulted in an increase in retained earnings that was recognised outside income and a reduction in unrealised gains and losses on investments in amounts of EUR 5.7 million respectively. Retrospective adjustment of the disclosure for the previous year would have led to a reduction in tax expenditure of EUR 0.3 million. Adjustment of the previous year was omitted in view of the relative insignificance of the amounts involved.
Loans and receivables are non-derivative financial instruments that entail fixed or determinable payments on a defined due date and are not listed on an active market or sold at short notice. They are carried at amortised cost.
Financial assets at fair value through profit or loss consist of securities held for trading and those classified as measured at fair value through profit or loss since acquisition. This refers principally to unsecured debt instruments issued by corporate issuers and derivative financial instruments. Within the scope of the fair value option provided under IAS 39 “Financial Instruments: Recognition and Measurement”, according to which financial assets may be carried at fair value on first-time recognition subject to certain conditions, all structured securities that would have needed to have been broken down had they been recognised as available for sale or under loans and receivables are also recognised here. Hannover Re makes use of the fair value option solely for selected subportfolios of its assets. In addition, derivative financial instruments that Hannover Re does not recognise as a valuation unit with underlying risks are recognised here. Securities held for trading and securities classified as measured at fair value through profit or loss since acquisition are carried at their fair value on the balance sheet date. If stock market prices are not available for use as fair values, the carrying values are determined using generally acknowledged measurement methods. All unrealised gains or losses from this valuation are recognised in net investment income. The classification of financial assets at fair value through profit or loss is compatible with Hannover Re’s risk management strategy and investment strategy, which are oriented extensively towards economic fair value variables.
Establishment of the fair value of financial instruments carried as assets or liabilities: the fair value of a financial instrument corresponds to the amount that Hannover Re would receive or pay if it were to sell or settle the said financial instrument on the balance sheet date. Insofar as market prices are listed on markets for financial instruments, their bid price is used. In other cases the fair values are established on the basis of the market conditions prevailing on the balance sheet date for financial assets with similar credit rating, duration and return characteristics or using recognised models of mathematical finance. Hannover Re uses a number of different valuation models for this purpose. The details are set out in the table on page 125. For further information please see our explanatory remarks on the fair value hierarchy in Section 6.1 “Investments under own management”.
Unlisted equities Theoretical price Acquisition cost, cash flows, EBIT multiples, as applicable book value
Theoretical price Listing of the underlying share, implicit volatilities, money-market interest rate, dividend yield
Insurance derivatives Theoretical price Market values, actuarial parameters, interest rate curve
Netting of financial instruments: financial assets and liabilities are only netted and recognised in the appropriate net amount if a corresponding legal claim (reciprocity; similarity and maturity ) exists or is expressly agreed by contract, in other words if the intention exists to offset such items on a net basis or to effect this offsetting simultaneously.
Real estate used by third parties (investment property) is valued at cost less scheduled depreciation and impairment. Straight-line depreciation is taken over the expected useful life – at most 50 years. Under the impairment test the market value of real estate for third-party use (recoverable amount) is determined using acknowledged valuation methods and compared with the carrying value; arising impairments are recognised. Maintenance costs and repairs are expensed. Value-enhancing expenditures are capitalised if they extend the useful life.
Contract deposits: under this item we report receivables and liabilities under insurance contracts that satisfy the test of a significant risk transfer to the reinsurer as required by IFRS 4 “Insurance Contracts” but fail to meet the risk transfer required by US GAAP. IFRS 4 in conjunction with FASB ASC 944-20-15 requires insurance contracts that transfer a significant technical risk from the ceding company to the reinsurer to be differentiated from those under which the risk transfer is of merely subordinate importance. Since the risk transfer under the affected transactions is of subordinate importance, these contracts are recognised using the “deposit accounting” method and hence eliminated from the technical account. The compensation for risk assumption booked to income under these contracts is netted under other income and expenses. The payment flows resulting from these contracts are shown in the cash flow statement under operating activities.
The other intangible assets largely consist of purchased and self-developed software. This is recognised at acquisition cost less scheduled depreciation. Intangible assets are regularly tested for impairment and impairment is taken where necessary. The other intangible assets also include acquired life reinsurance portfolios. These are carried at the present value of future profits (PVFP) at time of acquisition, which is calculated as the present value of profits expected from the acquired blocks of business disregarding new business and tax effects. Scheduled amortisation is taken according to the periods of the underlying acquired contracts. The PVFP is regularly tested for impairment using a liability adequacy test and impairments are taken if necessary. In this regard please see Section 3.3 “Major discretionary decisions and estimates”.
Deferred tax assets are also recognised on tax loss carry-forwards and for tax credits. Insofar as the deferred taxes refer to items carried directly in equity, the resulting deferred taxes are also recognised directly in equity. Value adjustments are taken on deferred tax assets as soon as realisation of the receivable no longer appears likely. Deferred taxes are measured according to the tax regulations specific to the country concerned that are applicable or have been adopted as at the closing date.
Deferred tax assets may only be netted with deferred tax liabilities if an enforceable right exists to net actual tax refund claims with actual taxes owing. A precondition here is that the deferred tax assets and deferred tax liabilities refer to income taxes that are levied by the same revenue authority either for (i) the same taxable entity or for (ii) different taxable entities. In this regard, there must be an intention – in every future period in which the discharge or realisation of substantial amounts of deferred tax liabilities / deferred tax assets is to be expected – either to bring about the settlement of the actual taxes owing and refund claims on a net basis or to discharge the liabilities at the same time as the claims are realised. The recognition of deferred tax assets and deferred tax liabilities in the consolidated balance sheet makes no distinction between short-term and long-term.
Technical reserves: the technical reserves are shown for gross account in the balance sheet, i.e. before deduction of the share attributable to our reinsurers; cf. here the remarks concerning the corresponding assets. The reinsurers’ portion is calculated and accounted for on the basis of the individual reinsurance contracts.
For further details, for example concerning the modelling of natural catastrophe scenarios and the assumptions relating to asbestos and pollution risks, the reader is referred to our comments in the risk report on page 60 et seq. We would further refer to our explanatory remarks on the technical reserves in Section 3.2 “Summary of major accounting policies” and Section 6.7 “Technical provisions”.
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 75.4 million (EUR 70.8 million) in the year under review.
Non-controlling interests in partnerships are reported in accordance with IAS 32 “Financial Instruments: Presentation” under long-term liabilities.
Companies included at equity 1 Consists of: 20 (19) individual companies and 38 (36) companies which are fully consolidated in 3 (3) subgroups. 2 Consists of: 2 (1) associated companies and 4 (5) companies which are included at equity in 1 (1) subgroup.
In conformity with Item 7.1.4 of the recommendations of the German Corporate Governance Code as amended on 15 May 2012, 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.
HILSP Komplementär GmbH, Hannover / Germany 3 100.00 EUR 25 (1)
Hannover Insurance-Linked Securities GmbH & Co. KG, Hannover / Germany 3 100.00 EUR 55,855 5,036
Hannover America Private Equity Partners II GmbH & Co. KG, Hannover / Germany 3 95.28 EUR 205,314 20,299
HR GLL Central Europe GmbH & Co. KG, Munich / Germany 5 74.40 EUR 110 –
Hannover Euro Private Equity Partners III GmbH & Co. KG, Cologne / Germany 3 67.08 EUR 42,815 6,394
HEPEP III Holding GmbH, Cologne / Germany 3 67.08 EUR 9,546 393
Hannover Euro Private Equity Partners II GmbH & Co. KG, Cologne / Germany 3 57.50 EUR 8,709 8,422
Hannover Life Reassurance Company of America, Orlando / USA 1 100.00 USD 180,976 9,378
Hannover Life Re of Australasia Ltd, Sydney / Australia 1 100.00 AUD 336,480 38,073
Hannover Re (Bermuda) Ltd., Hamilton / Bermuda 1 100.00 EUR 1,056,837 169,716
Hannover ReTakaful B.S.C. (c), Manama / Bahrain 1 100.00 BHD 41,070 6,768
Leine Investment General Partner S.à r.l., Luxembourg / Luxembourg 5 100.00 EUR 30 –
Leine Investment SICAV-SIF, Luxembourg / Luxembourg 5 100.00 USD 200 –
Kaith Re Ltd., Hamilton / Bermuda 1 88.00 USD 95 (291)
Secquaero ILS Fund Ltd., Georgetown, Grand Cayman / Cayman Islands 9 74.09 USD 73,651 2,884
Clarendon Insurance Group, Inc., Wilmington / USA 100.00 USD 221,640 –
Hannover Reinsurance Group Africa (Pty) Ltd., Johannesburg / South Africa 100.00 ZAR 210,017 154,417
Hannover Life Reassurance Africa Limited, Johannesburg / South Africa 100.00 ZAR 416,212 (7,678)
Hannover Reinsurance Africa Limited, Johannesburg / South Africa 100.00 ZAR 781,523 145,608
Micawber 185 (Pty) Ltd., Johannesburg / South Africa 100.00 ZAR 17,976 2,121
Lireas Holdings (Pty) Ltd., Johannesburg / South Africa 51.00 ZAR 189,537 21,353
MUA Insurance Company Ltd., Cape Town / South Africa 51.00 ZAR 10,332 547
Garagesure Consultants and Acceptances (Pty) Ltd., Johannesburg / South Africa 40.80 ZAR 955 1,614
Cargo Transit Insurance (Pty) Ltd., Helderkruin / South Africa 40.80 ZAR (4,499) (1,977)
Landmark Underwriting Agency (Pty) Ltd., Bloemfontein / South Africa 38.51 ZAR 2,586 (361)
Thatch Risk Acceptances (Pty) Ltd., Cape Town / South Africa 33.14 ZAR 1,466 2,219
Envirosure Underwriting Managers (Pty) Ltd., Durban / South Africa 30.60 ZAR (415) 1,275
Firedart & Construction Guarantee Underwriting Managers (Pty) Ltd., Johannesburg / South Africa 25.45 ZAR 11,321 6,473
Camargue Underwriting Managers (Pty) Ltd., Parktown / South Africa 13.26 ZAR 7,274 3,168
Hannover Re Real Estate Holdings, Inc., Orlando / USA 9 95.10 USD 377,855 32,023
Hannover Re Real Estate Holdings, Inc. compiles its own subgroup financial statement in which the following companies are included: Consolidated companies 5115 Sedge Corporation, Chicago / USA 9 95.10 USD 564 (1,075)
GLL HRE CORE PROPERTIES, LP, Wilmington / USA 9 95.00 USD 198,698 38,168 11 Stanwix, LLC, Pittsburgh / USA 9 95.00 USD 30,139 546
One Winthrop Square, LLC, Wilmington / USA 9 95.00 USD 22,196 630 402 Santa Monica Blvd, LLC, Wilmington / USA 9 95.00 USD 31,358 706 300 South Orange Avenue, LLC, Orlando / USA 9 95.00 USD 55,104 1,209 465 Broadway, LLC, Wilmington / USA 9, 10 95.00 USD (1,085) 13,757
1225 West Washington, LLC, Tempe / USA 9 95.00 USD 22,162 31 975 Carroll Square, LLC, Washington D.C. / USA 9 95.00 USD 60,519 431
GLL Terry Francois Blvd, LLC, Wilmington / USA 9, 10 48.40 USD 4,823 51,980
ITAS Vita S.p.A., Trent / Italy 4 34.88 EUR 76,354 55
ASPECTA Assurance International AG, Vaduz / Liechtenstein 4 30.00 CHF 15,964 6,297
Capital System GmbH, Hannover / Germany 4 49.00 EUR 211 (64)
HR Hannover Re, Correduría de Reaseguros, S.A., Madrid / Spain 1 100.00 EUR 266 35
LRA Superannuation Plan Pty Ltd., Sydney / Australia 12 100.00 AUD – –
Mediterranean Reinsurance Services Ltd., Hong Kong / China 10, 13 100.00 USD 125 –
Hannover Services (México) S.A. de C.V., Mexico City / Mexico 4 100.00 MXN 10,777 225
London & European Title Insurance Services Limited, London / United Kingdom 1 100.00 GBP 80 (283)
Hannover Re Services Italy S.R.L., Milan / Italy 1 99.64 EUR 485 103
Energi Insurance Services, Inc., Peabody / MA, USA 4 28.50 USD 738 (567)
Hurst Holme Insurance Company Limited – account 2006-03 SCC, Hamilton / Bermuda 4 28.50 USD 818 38
Sciemus Power MGA Limited, London / United Kingdom 4 25.00 GBP 1 –
PlaNet Guarantee (SAS), Saint-Ouen / France 4 23.58 EUR 651 (797)
Iconica Business Services Limited, Bradford / United Kingdom 5 18.75 GBP 301 –
Acte Vie S.A. Compagnie d’Assurances sur la Vie et de Capitalisation, Strasbourg / France 4 9.38 EUR 8,404 140 1 Provisional (unaudited) figures 2 Year-end result after profit transfer 3 Financial year as at 30 September 2012 4 Figures as at 31 December 2011 5 Company was newly established in 2012; an annual financial statement is not yet available 6 Formerly Hannover Life Reassurance (Ireland) PLC, merged with Hannover Reinsurance (Ireland) PLC 7 Financial year as at 30 October 2011 8 Financial year as at 31 March 2012 9 IFRS figures 10 Company is in liquidation 11 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. 12 Company is inactive 13 Last annual financial statement compiled as at 31 December 1999 14 Company was newly established in 2011; business operations have not commenced to date
In cases where IFRS do not currently contain any specific standards, Hannover Re’s analysis – in application of IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” – also falls back on the relevant standards of US GAAP.
In July 2009 Hannover Re issued a catastrophe (“CAT”) bond with the aim of transferring to the capital market peak natural catastrophe exposures deriving from European windstorm events. The CAT bond, which had a volume of nominally EUR 150.0 million, had a term until 31 March 2012 and ended as per the contractual agreement; it was placed with institutional investors from Europe and North America by Eurus II Ltd., a special purpose entity domiciled in the Cayman Islands. Hannover Re did not exercise a controlling influence over the special purpose entity. Under IFRS this transaction was to be recognised as a financial instrument.
Hannover Re does not bear the majority of the economic risks or benefits arising out of its business relations with these special purpose entities and cannot exercise a controlling influence over them, there is no consolidation requirement for Hannover Re. 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”.
On 31 October 2012 Funis GmbH & Co. KG, which is wholly owned by Hannover Re, acquired 30% of the shares in the Liechtenstein-based life insurance company ASPECTA Assurance International AG from Talanx International AG for a purchase price of EUR 1. At the same time the remaining shares were sold by Talanx International AG to an investor outside the Group. Based on its percentage of the voting rights, Funis is able to exert a significant influence over the company. The interest in the company is therefore included at equity in the amount of shareholders’ equity attributable to the Group. The negative difference of EUR 0.7 million resulting from netting of the purchase price with the proportionate shareholders’ equity was written back to income. It was recognised under profit or loss on shares in associated companies.
HR GLL Central Europe GmbH & Co. KG, which is based in Munich, was established in July 2012. The business object of the company is to purchase, manage, lease and sell commercial real estate or equivalent rights in Europe with a focus on Central European member states of the European Union. The company was included in the consolidated financial statement for the first time with effect from the third quarter of 2012. At the time of initial consolidation and as at the balance sheet date Hannover Re held 74.4% of the shares in the company.
With effect from the second quarter of 2012 Svedea AB, Stockholm, was consolidated for the first time. In March 2010 Funis GmbH & Co. KG, which is wholly owned by Hannover Re, participated with a capital contribution of 75.2% of the shares, corresponding to EUR 8.0 thousand, in Svedea AB. The company ’s business object consists principally of writing liability insurance for motor vehicles and yachts. For reasons of materiality Svedea was carried as a participating interest until the first quarter of 2012. In view of the expansion of the business volume, the company was consolidated for the first time with effect from 30 June 2012. At the time of initial consolidation Funis held a stake of 69.2%; the amount of its holding as at the balance sheet date was 53.0%. The goodwill arising out of initial consolidation in an amount of EUR 12.7 million was netted with the cumulative retained earnings outside income and therefore was not recognised.
Within the US subgroup Hannover Re Real Estate Holdings, Inc., which is 95.1% owned, all shares in the property companies Nashville (Tennessee) West, LLC, Wilmington, 975 Carroll Square, LLC, Washington D.C. and 1225 West Washington, LLC, Tempe were acquired for a purchase price of altogether EUR 167.9 million through the subsidiary GLL HRE Core Properties, LP, Wilmington. The business object of each company is to hold and manage one property. In connection with the acquisition no intangible assets and no goodwill were capitalised. No contingent liabilities, conditional payments or separate transactions as defined by IFRS 3 were identified.
The disposals of the year under review within the South African subgroup Hannover Reinsurance Group Africa (Pty) Ltd., Johannesburg, as well as the liquidation of Hannover Re
In the third quarter of 2012 Hannover Reinsurance (Ireland) Public Limited Company (formerly Hannover Reinsurance (Ireland ) Limited, a wholly owned subsidiary of Hannover Rück Beteiligung Verwaltungs GmbH, HRBV), was merged into Hannover Life Reassurance (Ireland) Public Limited Company (formerly Hannover Life Reassurance (Ireland) Limited, a wholly owned subsidiary of Hannover Life Re AG). In order to implement the merger HRBV transferred Hannover Reinsurance (Ireland) to Hannover Life Reassurance (Ireland) via several intermediate steps by way of a capital increase against contribution in kind. On 19 July 2012 the Commercial Division of the Irish High Court gave final approval to the merger of the companies. The measure was executed in law effective 3 September 2012. The new trading name of the absorbing entity is Hannover Re (Ireland) Public Limited Company. Since this internal restructuring within the Group involves a transaction between companies under common control, the transaction does not give rise to goodwill nor does it have any implications for Group net income.
In the context of several capital increases in 2012 due to the participation of external investors in Secquaero ILS Fund Ltd., in which Hannover Re did not take part, the participating interest held by Hannover Re in the company decreased progressively with no change of control status to 74.09% as at the balance sheet date.
Within the South African subgroup Hannover Reinsurance Group Africa (Pty) Ltd., Johannesburg, business and assets of the subsidiary Construction Guarantee (Pty) Ltd, Parktown, (Construction Guarantee) were transferred to Firedart & Construction Guarantee Underwriting Managers (Pty) Ltd., Johannesburg, (Firedart) in the second quarter of 2012. Firedart, in which Lireas Holding (Pty) Ltd., Johannesburg, acquired a 49.9% interest in the year under review, has been included at equity in the subgroup financial statement since the date of acquisition. Construction Guarantee was in liquidation as at the balance sheet date.
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 / health reinsurance. These are principally the service and financing companies belonging to the Group.
Maturities of the fixed-income and variable-yield securities in EUR thousand 2012 2011
Loans and receivables due in one year 207,861 216,965 106,731 107,501 due after one through two years 408,386 423,503 205,235 209,847 due after two through three years 311,764 330,670 505,043 523,717 due after three through four years 382,075 417,721 306,484 318,696 due after four through five years 285,438 312,267 321,807 348,653 due after five through ten years 1,033,273 1,156,510 1,174,558 1,250,207 due after more than ten years 786,390 922,804 904,877 983,320
Available for sale due after one through two years 2,758,881 2,797,560 1,781,899 1,802,286 due after two through three years 2,525,881 2,616,092 2,197,915 2,228,729 due after three through four years 1,775,135 1,862,419 2,308,598 2,331,561 due after four through five years 2,436,644 2,549,947 1,807,404 1,844,680 due after five through ten years 7,132,799 7,617,225 5,204,281 5,299,165 due after more than ten years 2,709,969 3,033,562 2,074,463 2,276,517
Financial assets at fair value through profit or loss due in one year 69,544 69,544 35,186 35,186 due after one through two years 15,626 15,626 66,826 66,826 due after two through three years 17,619 17,619 5,399 5,399 due after three through four years 14,823 14,823 7,510 7,510 due after four through five years 4,936 4,936 2,595 2,595 due after five through ten years 7,276 7,276 5,625 5,625 due after more than ten years 17,589 17,589 37,989 37,989 1 Including accrued interest 2 Including short-term investments and cash
Government debt securities of EU member states 356,246 24,036 370 7,509 387,421
Amortised cost, unrealised gains and losses and accrued interest on loans and receivables as well as their fair value in EUR thousand 2011
Government debt securities of EU member states 10,375 424 – 203 11,002
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 2012
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 2011
Government debt securities of EU member states 1,514,373 67,635 12,909 19,062 1,588,161
The carrying amounts of the fixed-income securities and equity securities classified as available for sale as well as the shortterm investments allocated to this category correspond to their fair values, in the case of interest-bearing assets including accrued interest.
Debt securities of semi- governmental entities – 9,998 – 115 – 10,113
Analysis of the fair value changes in the portfolio of fixedincome securities at fair value through profit or loss indicated that a fair value increase of altogether EUR 1.1 million was due to changes in the ratings of callable bonds. In the previous year changes in the ratings of these instruments resulted in a fair value decrease of EUR 4.1 million.
For further explanatory remarks on the impairment criteria please see Section 3.2 “Summary of major accounting policies”.
Fixed-income securities – loans and receivables 1,515,276 1,531,861 159,992 121,593 47,829 4,391 – 34,245 3,415,187
Fixed-income securities – at fair value through profit or loss – 2,632 11,691 45,171 46,326 31,231 547 9,815 147,413
Fixed-income securities – available-for-sale 5,472,083 4,063,262 4,826,757 2,347,271 415,233 76,694 3,092 124,519 17,328,911
Fixed-income securities – held to maturity – 142,211 2,244,930 161,123 – 1,607,825 – – 4,156,089
Fixed-income securities – loans and receivables – 6,948 2,576,691 42,192 – 881,588 – 17,316 3,524,735
Fixed-income securities – available-for-sale 1,597,327 438,940 5,445,934 1,884,464 163,937 6,658,778 209,623 929,908 17,328,911
Equity securities – available-for-sale 13,472 – 15,168 57 – 11,690 – – 40,387
Net book value at 31 December of the previous year 127,554 127,644
Net book value at 31 December of the year under review 133,017 127,554
Gross book value at 31 December of the previous year 436,874 338,634
Gross book value at 31 December of the year under review 505,727 436,874
Cumulative depreciation at 31 December of the previous year 39,837 35,212
Cumulative depreciation at 31 December of the year under review 14,067 39,837
Net book value at 1 January of the year under review 392,275 308,502
Net book value at 31 December of the year under review 491,660 397,037
The additions to this item are due to the sharply increased investment activities of the real estate companies belonging to the Hannover Re Group. They are attributable principally – in an amount of EUR 182.6 million – to GLL HRE Core Properties, LP, Wilmington, a Group company belonging to Hannover Re Real Estate Holdings, Inc., while further additions of EUR 62.3 million were recorded with respect to Hannover Re Euro RE Holdings GmbH, Hannover.
The disposals can be attributed in an amount of EUR 136.7 million to Hannover Re Real Estate Holdings, Inc., which sold the properties held by the real estate companies 465 Broadway, LLC and GLL Terry Francois Blvd. LLC, both Wilmington, through GLL HRE Core Properties, LP. The cumulative depreciation taken in this context totalled EUR 13.4 million.
The reclassifications resulted from increased own use of office space in several commercial properties of Hannover Re in Hannover.
Fair value hierarchy For the purposes of the disclosure requirements pursuant to IFRS 7 “Financial Instruments: Disclosures”, the financial instruments recognised at fair value in the balance sheet are to be assigned to a three-level fair value hierarchy. This hierarchy, which reflects characteristics of the price data and inputs used for measurement purposes, is structured as follows: • Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities.
Total financial liabilities measured at fair value – 60,012 54,812 114,824
Fair value hierarchy of financial instruments recognised at fair value in EUR thousand 2011
Net book value at 1 January of the year under review 38,190 8 875,401 –
Income and expenses recognised in the statement of income (1,412) – 5,730 –
Currency translation at 31 December of the year under review (3,510) – 7,574 –
The breakdown of income and expenses recognised in the statement of income in the financial year in connection with financial instruments assigned to level 3 is as follows.
Income and expenses from level 3 financial instruments in EUR thousand 2012
The funds withheld totalling EUR 14,627.8 million (EUR 13,232.1 million) represent the cash and securities deposits furnished by our company to our cedants that do not trigger any cash flows and cannot be realised by cedants without our consent. The maturities of these deposits are matched to the corresponding provisions. In the event of default on such a deposit our reinsurance commitment is reduced to the same extent. The rise in funds withheld was attributable principally to increased new business in the area of life reinsurance.
The retrocessionaires’ portions of the technical provisions are based on the contractual agreements of the underlying reinsurance treaties. For further details please refer to our comments on the technical provisions in Section 6.7 “Technical provisions” on page 165 et seq. as well as the remarks in the risk report on page 72 et seq.
Net book value at 31 December of the year under review 1,841,279 1,926,570
The value adjustments on accounts receivable that we recognise in adjustment accounts changed as follows in the year under review: Value adjustments on accounts receivable in EUR thousand 2012 2011
Currency translation at 1 January of the year under review 40 531
With regard to the credit risks resulting from technical assets we would also refer the reader to our comments in the risk report on page 71 et seq.
Net book value at 31 December of the year under review 59,099 59,289
Present value of future profits on acquired life reinsurance portfolios 92,100 94,985
The item “Other” includes receivables of EUR 54.8 million resulting from the initial recognition in equity of derivative financial instruments in connection with 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 2012 2011
Net book value at 31 December of the previous year 94,985 98,368
This item consists of the present value of future cash flows from the business acquired that we recognised 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. For further information please refer to our explanatory notes on intangible assets in Section 3.2 “Summary of major accounting policies”.
Cumulative depreciation at 31 December of the previous year 86,966 75,637
Net book value at 31 December of the year under review 24,011 26,521
Gross book value at 31 December of the year under review 184,725 175,867
Net book value at 31 December of the year under review 32,136 35,672
Credit risks may result from other financial assets that were not overdue or adjusted as at the balance sheet date. In this regard, the reader is referred in general to our comments on the credit risk contained in the risk report on page 71 et seq.
Technical provisions in EUR thousand 2012 2011 gross retro net gross retro net
Specific value adjustment for retrocessions – 427 (427) – 2,247 (2,247)
Net book value at 31 December of the year under review 21,610,698 1,538,215 20,072,483 20,767,317 1,550,587 19,216,730 1 Including expenses recognised directly in shareholders’ equity
In the year under review specific value adjustments on retrocessions, i.e. on the reinsurance recoverables on unpaid claims, were established in an amount of EUR 0.4 million (EUR 2.2 million) and reversed in the amount of EUR 3.0 million (EUR 2.2 million). On balance, therefore, cumulative specific value adjustments of EUR 0.9 million (EUR 3.5 million) were recognised in these reinsurance recoverables as at the balance sheet date.
Net loss reserve and its run-off in the non-life reinsurance segment in EUR million 31.12. 2002 31.12.
The run-off profit of altogether EUR 322.1 million in the 2012 financial year derives, as in the previous year, above all from positive run-offs of reserves in the areas of credit / surety, marine / aviation and short-tail property business.
Due after one through five years 8,089,293 537,465 7,551,828 505,571 52,150 453,421
The average maturity of the loss and loss adjustment expense reserves was 5.1 years (5.1 years), or 5.1 years (5.1 years) after allowance for the corresponding retrocession shares. The benefit reserve had an average maturity of 12.0 years (12.8 years) – or 12.4 years (13.2 years) on a net basis.
Net book value after currency translation 10,358,669 380,590 9,978,079 9,089,916 347,970 8,741,946
Development of the unearned premium reserve in EUR thousand 2012 2011 gross retro net gross retro net
Net book value at 31 December of the year under review 2,339,809 138,373 2,201,436 2,215,864 91,823 2,124,041
The funds withheld under reinsurance treaties totalling EUR 821.1 million (EUR 644.6 million) represent the cash and securities deposits furnished to our company by our retrocessionaires that do not trigger any cash flows and cannot be realised without the consent of our retrocessionaires. The maturities of these deposits are matched to the corresponding shares of the reinsurers in the technical provisions. If such a share no longer exists the corresponding funds withheld are reduced to the same extent.
Provisions for pensions are established in accordance with IAS 19 “Employee Benefits” using the projected unit credit method. 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. The commitments to employees in Germany predominantly comprise benefit obligations financed by the Group companies. The pension plans are unfunded. Amounts carried as liabilities are recognised under other liabilities. The provisions for pensions in Germany and abroad were calculated on the basis of uniform standards according to prevailing economic circumstances.
The calculation of the provisions for pensions is based upon the following assumptions: Measurement assumptions
The change in the projected benefit obligation of the pension commitments as well as their breakdown into plans that are unfunded or are wholly or partially funded was as follows: Change in the projected benefit obligation in EUR thousand 2012 2011
Funding of the defined benefit obligation in EUR thousand 2012 2011
Projected benefit obligation at 31 December of the year under review 141,105 106,618
Funded status (present value of earned benefit entitlements less fund assets) 126,126 95,093
Fair value at 31 December of the previous year 11,525 10,464
Defined benefit obligations at 31 December of the year under review 141,105 106,618
In determining the actuarial gains and losses to be recognised in the statement of income the corridor method provided for as an option in IAS 19 “Employee Benefits” is applied.
The net periodic pension cost was recognised in the consolidated statement of income in amounts of EUR 3.9 million (EUR 6.9 million) under administrative expenses, EUR 1.0 million (EUR 1.6 million) under other expenses and EUR 0.9 million (EUR 0.8 million) under other investment expenses.
Present value of defined benefit obligation 141,105 106,618 109,962 93,462 79,908
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 2012 financial year in accordance with IAS 19 “Employee Benefits” was
The liabilities from derivatives of EUR 86.6 million (EUR 69.4 million ) consist of instruments to hedge currency and inflation risks as well as embedded derivatives recognised separately from the underlying insurance contract at fair value pursuant to IAS 39 “Financial Instruments: Recognition and Measurement ”. Please see our remarks on derivative financial instruments in Section 8.1 “Derivative financial instruments and financial guarantees”.
In order to safeguard the sustained financial strength of the Hannover Re Group, a Group company has issued subordinated debt by way of a number of callable bonds which are guaranteed by Hannover Re.
On 1 June 2005 Hannover Re issued further subordinated debt in the amount of EUR 500.0 million through its subsidiary Hannover Finance (Luxembourg) S.A. The bond is perpetual and carries a fixed coupon of 5.00% in the first ten years. It may be redeemed by Hannover Re on 1 June 2015 at the earliest and at each coupon date thereafter. If the bond is not called at the end of the tenth year, the coupon will step up to a floatingrate yield of 3-month EURIBOR +268 basis points. The interest will be serviced according to the same principles as those practised in the past.
Altogether four (previous year: three) subordinated bonds were recognised as at the balance sheet date with an amortised cost of EUR 2,233.0 million (EUR 1,731.6 million).
1 Excluding minority interests in partnerships; the maturities of derivative financial instruments and sundry non-technical provisions are broken down separately .
Unsecured letter of credit facilities with various terms (maturing at the latest in 2022) and a total volume equivalent to EUR 2,621.2 million (EUR 2,403.1 million) exist on a bilateral basis with financial institutions; in addition, a long-term unsecured line of credit intended specifically for US life business was concluded in December 2009 with a total volume equivalent to EUR 379.3 million (EUR 386.2 million).
For further information on the letters of credit provided please see our explanatory remarks in Section 8.7 “Contingent liabilities and commitments”. A number of LOC facilities include standard market clauses that allow the banks rights of cancellation in the event of material changes in our shareholding structure or trigger a requirement on the part of Hannover Re to furnish collateral upon materialisation of major events, for example if our rating is significantly downgraded. Please see our explanatory remarks in the “Financial position” section of the management report, page 55, on the information pursuant to § 315 Para. 4 German Commercial Code (HGB).
For the disclosures arising out of IAS 1 “Presentation of Financial Statements” with regard to the management of capital, the reader is referred to page 51 of the “Financial position” section of the management report.
Treasury shares IAS 1 “Presentation of Financial Statements” requires separate disclosure in shareholders’ equity of treasury shares and transactions with owners acting in their capacity as such. By a resolution of the Annual General Meeting of Hannover Rückversicherung AG adopted on 4 May 2010, the company was authorised until 3 May 2015 to acquire treasury shares of up to 10% of the share capital existing on the date of the resolution.
Of the impairments totalling EUR 11.4 million (EUR 22.0 million), an amount of EUR 5.8 million (EUR 14.0 million) was attributable to alternative investments and EUR 2.2 million (EUR 1.6 million) to real estate and real estate funds. The impairments on fixedincome securities of EUR 0.6 million (EUR 5.4 million) were taken predominantly on structured assets. An impairment loss of EUR 2.2 million (EUR 0.9 million) was recognised on equities whose fair value had fallen significantly – i.e. by at least 20% – or for a prolonged period – i.e. for at least nine months – below acquisition cost. Other impairments totalling EUR 0.5 million (EUR 0.2 million) were taken. This contrasted with write-ups of EUR 2.7 million (EUR 36.8 million) on investments that had been written down in previous periods. Of this total volume, EUR 0.6 million (EUR 17.3 million) was attributable to alternative assets and EUR 2.0 million (EUR 16.9 million) to fixed-income securities. The portfolio did not contain any overdue, unadjusted assets as at the balance sheet date since overdue securities are written down immediately.
Financial assets – at fair value through profit or loss 2,895 6,571
The net gains and losses on investments held to maturity, loans and receivables and the available-for-sale portfolio shown in the following table are composed of interest income, realised gains and losses as well as impairments and appreciation. In the case of the fixed-income securities at fair value through profit or loss designated in this category and the other financial assets, which include the technical derivatives, changes in unrealised gains and losses are also recognised.
Making allowance for the other investment expenses of EUR 96.4 million (EUR 70.3 million), net income from assets under own management of altogether EUR 1,300.2 million (EUR 1,045.5 million) was recognised in the year under review.
Commissions and brokerage, change in deferred acquisition costs in EUR thousand 2012 2011
Expenses from contracts recognised in accordance with the deposit accounting method 11,369 7,877
The decrease in the other interest income derived principally from the interest portion of the tax refund arising out of the Federal Fiscal Court (BFH) decision of 2010, which was booked in the previous year. Please see our explanatory remarks in Section 7.5 “Taxes on income”.
Deferred tax liabilities on profit distributions of significant affiliated companies are established in the year when they are received.
Domestic / foreign breakdown of recognised tax expenditure / income in EUR thousand 2012 2011
Deferred tax liabilities 1,351,880 1,040,377 1 Thereof on tax loss carry-forwards: -EUR 43,228 thousand (-EUR 42,760 thousand) 2 Including reinsurance recoverables on benefit reserve; previous year was adjusted pursuant to IAS 1 in an amount of EUR 38,174 thousand charged to the other technical provisions.
The deferred tax assets and deferred tax liabilities are shown unoffset in the above table. The deferred taxes are recognised as follows in the balance sheet after appropriate netting: Netting of deferred tax assets and deferred tax liabilities in EUR thousand 2012 2011
The actual and deferred taxes recognised directly in shareholders ’ equity in the financial year increased by -EUR 174.5 million to -EUR 207.3 million (-EUR 32.8 million) against the backdrop of unrealised gains and losses on investments.
Reconciliation of the expected expense for income taxes with the actual expense in EUR thousand 2012 2011
The tax burden in the 2012 financial year rose sharply year-onyear by EUR 302.8 million to EUR 368.2 million (EUR 65.5 million ). The increase can be attributed partly to a higher pre-tax profit in the year under review and partly to tax refunds in the previous year based on a decision of the Federal Fiscal Court
(BFH) from 2010 regarding the taxation of investment income generated by the Group’s reinsurance subsidiaries domiciled in Ireland as foreign-sourced income. The tax ratio amounted to 28.3% (8.8%).
No deferred taxes were established on assets-side taxable temporary differences amounting to EUR 107.5 million (EUR 38.9 million) and liabilities-side temporary differences of EUR 70.7 million (EUR 108.2 million) in connection with interests in Group companies because the Hannover Re Group can control their reversal and will not reverse them in the foreseeable future.
The change in equity from hedging instruments in an amount of -EUR 9.5 million that is recognised directly in equity pursuant to IAS 39 results exclusively from forward exchange contracts taken out within the year to hedge currency risks from long-term investments in foreign operations. Ineffective components of the hedge amounting to EUR 6.1 million were expensed under other expenses.
Hannover Re holds derivative financial instruments to hedge interest rate risks from loans connected with the financing of real estate; these gave rise to recognition of other liabilities in an amount of EUR 3.9 million (EUR 3.2 million).
Hannover Re’s portfolio contained derivative financial instruments as at the balance sheet date in the form of forward exchange transactions predominantly taken out to hedge cash flows from reinsurance contracts. These transactions gave rise to recognition of other liabilities in an amount of EUR 16.8 million (EUR 20.7 million).
Hannover Re also holds derivative financial instruments to hedge inflation risks associated with the loss reserves in the technical account. These transactions resulted in the recognition of other liabilities amounting to EUR 4.9 million (EUR 32.5 million) and other financial assets at fair value through profit or loss in an amount of EUR 13.1 million (EUR 12.2 million).
The net changes in the fair value of these instruments improved the result of the financial year by EUR 27.4 million (EUR 19.8 million).
Derivative financial instruments in connection with reinsurance A number of treaties in life and health reinsurance meet criteria which require application of the prescriptions in IFRS 4 “Insurance Contracts” governing embedded derivatives. These accounting regulations require that certain derivatives embedded in reinsurance contracts be separated from the underlying insurance contract (“host contract”), reported separately at fair value in accordance with IAS 39 “Financial Instruments: Recognition and Measurement” and recognised under investments. Fluctuations in the fair value of the derivative components are to be recognised in income in subsequent periods.
Within the scope of the accounting of “modified coinsurance” and “coinsurance funds withheld” (ModCo) reinsurance treaties, under which securities deposits are held by the ceding companies and payments rendered on the basis of the income from certain securities of the ceding company, the interestrate risk elements are clearly and closely related to the underlying reinsurance arrangements. Embedded derivatives consequently result solely from the credit risk of the underlying securities portfolio.
All in all, application of the standards governing the carrying of derivatives in connection with the technical account led to recognition of assets totalling EUR 47.7 million (EUR 8.8 million ) as well as recognition of liabilities from the derivatives resulting from technical items in an amount of EUR 60.9 million (EUR 13.0 million) as at the balance sheet date. Increases in investment income amounting to EUR 52.0 million (EUR 8.8 million) as well as charges to income of EUR 7.1 million (EUR 56.4 million) were recognised in the year under review from all separately measured derivatives in connection with the technical account.
HDI Haftpflichtverband der Deutschen Industrie V.a.G. (HDI) holds an unchanged majority interest of 50.22% in Hannover Re through Talanx AG.
Companies belonging to the Talanx Group granted the Hannover Re Group insurance protection inter alia in the areas of public liability, building, group accident, business travel collision and construction all risk. Divisions of Talanx AG also performed services for us in the areas of taxes and general administration. All transactions were effected at usual market conditions.
In October 2012 Funis GmbH & Co. KG acquired 30% of the shares in the Liechtenstein-based ASPECTA Assurance International AG from Talanx International AG for a purchase price of EUR 1. At the same time the remaining shares were sold by Talanx International AG to an investor outside the Group. The negative difference of EUR 0.7 million resulting from netting of the purchase price with the proportionate shareholders’ equity was recognised in income.
In the 2007 financial year Hannover Re (Bermuda) Ltd. extended a loan due on 31 May 2012 with a coupon of 4.98% to Talanx AG, the volume of which as at the balance sheet date of the previous year was EUR 51.5 million. The carrying amount included accrued interest of EUR 1.5 million. The loan was repaid by Talanx AG on schedule.
Under long-term lease arrangements companies belonging to the Hannover Re Group rented out business premises in 2012 to Talanx Service AG, Hannover, which also entered into the existing lease agreements. In the year under review a lease arrangement with Talanx Service AG was taken over with the purchase of the office building at Karl-Wiechert-Allee 57. Under this agreement Hannover Re rents out office space to Talanx Service AG at normal market conditions. In addition, lease agreements exist with Talanx Service AG for use of a portion of the space in our data-processing computer centre.
Actuarial opinions with respect to the pension commitments given to staff are drawn up for Hannover Re and E+S Rückversicherung AG by Talanx Pensionsmanagement AG and HDI Lebensversicherung AG under an actuarial service contract.
The total remuneration of the Supervisory Board of Hannover Re amounted to EUR 0.8 million (EUR 0.9 million). There are no pension commitments to former members of the Supervisory Board or their surviving dependants.