Financial guarantees Structured transactions were entered into in the life and health reinsurance business group in order to finance statutory reserves (so-called Triple-X or AXXX reserves) of US ceding companies. In each case such structures necessitate the involvement of a special purpose entity. The special purpose entities carry extreme mortality risks securitised by the cedant above a contractually defined retention and transfer these risks by way of a fixed / floating swap with a ten-year term to a member company of the Hannover Re Group. The maximum capacity of the transactions is equivalent to EUR 1,137.9 million; an amount equivalent to EUR 848.1 million had been taken up as at the balance sheet date. The variable payments to the special purpose entities that are guaranteed by Hannover Re cover their payment obligations. By way of compensation agreements Hannover Re is reimbursed by the parent companies of the cedants for all payments resulting from the swap in the event of a claim. Under IAS 39 these transactions are to be recognised at fair value as financial guarantees. To this end Hannover Re uses the net method, according to which the present value of the agreed fixed swap premiums is netted with the present value of the guarantee commitment. The fair value on initial recognition therefore amounted to zero. The higher of the fair value and the amount carried as a provision on the liabilities side pursuant to IAS 37 is recognised at the point in time when utilisation is considered probable. This was not the case as at the balance sheet date. In this case the reimbursement claims from the compensation agreements are to be capitalised separately from and up to the amount of the provision.
Within the contractually agreed framework Talanx Asset Management GmbH performs investment and asset management services for Hannover Re and some of its subsidiaries. Assets in special funds are managed by AmpegaGerling Investment GmbH. Talanx Immobilien Management GmbH performs services for Hannover Re under a management contract. All transactions were effected at usual market conditions.
Talanx Reinsurance Broker AG grants Hannover Re and E+S Rückversicherung AG a preferential position as reinsurers of cedants within the Talanx Group. In addition, Hannover Re and E+S Rückversicherung AG are able to participate in the protection covers on the retention of Group cedants and share in the protection afforded by them. In certain circumstances Hannover Re and E+S Rück are obliged to assume unplaced shares of the reinsurance of Group cedants from Talanx Reinsurance Broker AG.
Business assumed and ceded in Germany and abroad in EUR thousand 2012 2011
The Group companies E+S Rückversicherung AG, Hannover Finance (Luxembourg) S.A., Hannover Re (Ireland) Plc and Hannover Re (Bermuda) Ltd. invested in a nominal amount of altogether EUR 150.0 million in a bearer debenture of Talanx AG with a term until 8 July 2013 and a coupon of 5.43%. The carrying amount of the instrument, which is recognised under fixed-income securities held to maturity, was EUR 153.0 million (EUR 153.9 million) and included accrued interest of EUR 3.9 million (EUR 3.9 million) as at the balance sheet date.
In December 2012 Hannover Re concluded a service agreement with Talanx AG, Hannover, regarding the purchase of services for operation of data acquisition software.
Furthermore, above and beyond the aforementioned remuneration as Supervisory Board members at Group companies, the members of the Supervisory Board were not in receipt of any remuneration or benefits for personally rendered services as defined by Item 5.4.6 Paragraph 3 of the German Corporate Governance Code.
All other information on the remuneration of the governing bodies, directors’ dealings and shareholdings as well as the structure of the remuneration system for the Executive Board is contained in the remuneration report from page 83 onwards. This remuneration report is based on the recommendations of the German Corporate Governance Code and contains information which also forms part of the notes to the 2012 consolidated financial statement as required by IAS 24 “Related Party Disclosures”. In addition, we took into account the more specific provisions of DRS 17 “Reporting on the Remuneration of Members of Governing Bodies”. 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 the remuneration report. Consequently, we have not provided any further explanation in the notes.
In the event of cancellation of the employment relationship or termination of the employment relationship as a consequence of a termination agreement or a set time limit, a holder of stock appreciation rights is entitled to exercise all such rights in the first exercise period thereafter. Stock appreciation rights not exercised in this period and those in respect of which the waiting period has not yet expired shall lapse. Retirement, disability or death of the member of management shall not be deemed to be termination of the employment relationship for the purpose of exercising stock appreciation rights.
Waiting period 4 years 4 years 2 years 2 years 2 years 2 years 2 years
Provisions at 31.12.2012 (in EUR million) 0.94 5.08 6.21 2.6 0.27 0.08 0
Expense in the 2012 financial year (in EUR million) 0.94 3.38 2.8 2.94 0.69 1.08 0
Number of options at 31.12.2006 – – – – – 190,263 452,604
2,714 stock appreciation rights from the 2003 allocation year, 116,085 stock appreciation rights from the 2004 allocation year, 225,952 stock appreciation rights from the 2006 allocation year, 603,379 stock appreciation rights from the 2007 allocation year and 563,518 stock appreciation rights from the 2009 allocation year were exercised. The total amount paid out stood at EUR 15.7 million.
On this basis the aggregate provisions – included in the sundry non-technical provisions – amounted to EUR 15.2 million for the 2012 financial year (EUR 19.1 million). The expense totalled altogether EUR 11.8 million (EUR 5.2 million).
Share Award Plan With effect from the 2011 financial year the Supervisory Board of Hannover Re implemented a “Share Award Plan” for the members of the Executive Board of Hannover Re; this provides for the granting of stock participation rights in the form of virtual shares (referred to as “share awards”). The Executive Board of Hannover Re decided to adopt a Share Award Plan for certain management levels at Hannover Re as well with effect from the 2012 financial year.
The Share Award Plan replaces the Stock Appreciation Rights Plan that was cancelled with effect from the year under review. Please see our remarks under “Stock Appreciation Rights Plan” in this section. The share awards do not establish any claim against Hannover Re to the delivery of stock, but merely to payment of a cash amount in accordance with the conditions set out below.
The share awards are granted automatically without any requirement for a declaration by Hannover Re or the eligible recipient. 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. This value is calculated according to the provisions of the preceding paragraph.
The eligible recipient shall be paid an amount that corresponds to the sum total of the values of the share awards calculated at the disbursement date for which the vesting period of four years has expired. The amount is to be paid in the month after expiry of the determinative period for calculating the value per share according to the preceding paragraphs. Any taxes and social security contributions payable shall be deducted.
In the event that the Board mandate or service relationship with the member of the Executive Board or the employment relationship with the manager ends, the eligible recipient shall retain his claims to payment of the value of already granted share awards after expiry of the applicable vesting period, unless such termination is based on resignation of office / voluntary termination on the part of the member of the Executive Board or voluntary termination on the part of the manager or dismissal by Hannover Re for a compelling reason. In the event of death the claims arising out of the already granted and / or still to be granted share awards pass to the heirs. All share awards including the dividend shall be paid out to the eligible party irrespective of any remaining vesting period at a disbursement date to be determined once the status as heir has been documented to Hannover Re. The value of all share awards shall be determined by the value per share of Hannover Re calculated as at this disbursement date.
The Share Award Plan is recognised as share-based payment with cash settlement.
The provisional fair value for the 2012 allocation year is measured according to the market price of the share on the valuation date of 28 December 2012 and amounts to EUR 58.96 (EUR 38.325) per share award. The probable allocation for the members of the Executive Board amounts to altogether 16,053 (24,390) share awards and for managers altogether 12,329 (0) share awards, in each case plus the total present value of the dividend entitlements acquired until the end of the period. No allowance is made for anticipated dividend payments.
For the 2011 allocation year the members of the Executive Board were ultimately awarded 22,232 share awards after adjustment of the fair value of EUR 38.325 recognised in the consolidated financial statement to the unweighted mean of EUR 42.09. Entitlements from dividends arose in the year under review as at the balance sheet date only for the share awards granted to the members of the Executive Board in an amount of EUR 45,5 thousand.
The personnel expense from share awards to members of the Executive Board is spread on an accrual basis across the period of the service contracts, while the personnel expense from share awards received by managers is spread across the four-year term of the share awards. Personnel expenses of EUR 0.8 million (EUR 0.2 million) in the case of the Executive Board and EUR 1.4 million (EUR 0) in the case of managers were allocated to the provision for share awards in the year under review in the context of the proportionate write-up of fair values.
Staff The average number of staff at the companies included in the consolidated financial statement of the Hannover Re Group during the reporting period was 2,263 (2,210). As at the balance sheet date altogether 2,312 (2,217) staff were employed by the Hannover Re Group, with 1,164 (1,110) employed in Germany and 1,148 (1,107) working for the consolidated Group companies abroad.
Number of employees (excluding Board members) 2,228 2,266 2,293 2,312 2,263 2,217 2,210
Expenditures on personnel The expenditures on insurance business, claims expenses (claims settlement) and expenditures on the administration of investments include the following personnel expenditures: Personnel expenditures in EUR thousand 2012 2011 a) Wages and salaries 197,664 171,362 b) Social security contributions and expenditure on provisions and assistance ba) Social security contributions 18,295 15,201 bb) Expenditures for pension provision 20,369 23,134 bc) Expenditures for assistance 3,840 3,254
The earnings per share is calculated by dividing the net income attributable to the shareholders of Hannover Re by the weighted average number of shares outstanding within the period under review.
Neither in the year under review nor in the previous reporting period were there any dilutive effects. The weighted average of the issued shares was, as in the previous year, slightly lower than the value of the shares in circulation on the balance sheet date. In the context of the employee share option plan Hannover Re acquires treasury shares and sells them at a later date to eligible employees. For further details please see our comments in Section 6.13 “Shareholders’ equity, non-controlling interests and treasury shares”.
Dividend per share A dividend of EUR 253.3 million (previous year: EUR 277.4 million ) was paid in the year under review for the 2011 financial year.
As part of our business activities we hold collateral available outside the United States in various blocked custody accounts and trust accounts, the total amount of which in relation to the Group’s major companies was EUR 2,314.4 million (EUR 2,017.4 million) as at the balance sheet date.
The securities held in the blocked custody accounts and trust accounts are recognised predominantly as available-for-sale investments.
In addition, we keep own investments with a book value of EUR 67.3 million (EUR 37.4 million) in blocked custody accounts as collateral provided under existing derivative transactions. We received collateral with a fair value of EUR 9.5 million (EUR 5.2 million) for existing derivative transactions.
Hannover Re enters into contingent liabilities as part of its normal business operations. A number of reinsurance treaties concluded by Group companies with outside third parties include letters of comfort, guarantees or novation agreements under which the parent company guarantees the liabilities of the subsidiary in question or enters into the rights and obligations of the subsidiary under the treaties if particular constellations materialise.
Operating leasing contracts produced expenditures of EUR 6.0 million (EUR 6.6 million) in the year under review.
An expense of altogether EUR 3.2 million (EUR 2.0 million) was incurred in the year under review for the fee paid to the appointed auditor of the consolidated financial statement as defined by § 318 German Commercial Code (HGB). Of this total amount, EUR 1.5 million (EUR 1.3 million) was attributable to the fee for auditing services in relation to the financial statement, EUR 0.5 million (EUR 0.6 million) to other assurance services, EUR 0.1 million (previous year: minimal amount) to tax consultancy services and EUR 1.1 million (previous year: minimal amount) to other services.
Sizeable major loss events were recorded in non-life reinsurance at the beginning of 2013 in connection with floods along the east coast of Australia – caused in particular by Tropical Cyclone Oswald – and the failed launch of the communications satellite Intelsat 27. Hannover Re anticipates losses in the low double-digit million euros from both events.
The Annual General Meeting of Hannover Rückversicherung AG on 3 May 2012 adopted a resolution to convert the company to a European limited company (Societas Europaea or SE). The SE will be created upon entry in the commercial register, which is expected to take place in the first quarter of the 2013 financial year.
To the best of our knowledge, and in accordance with the applicable reporting principles, the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the Group management report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal opportunities and risks associated with the expected development of the Group.
Asia / China Over the next ten years market watchers expect property and casualty insurance in China to grow by at least 15% annually on average.
In our function as the Supervisory Board we considered at length during the 2012 financial year the position and development of the company and its major subsidiaries. We advised the Executive Board on the direction of the company and monitored the management of business on the basis of written and verbal reports from the Executive Board. The Supervisory Board held four regular meetings and one constituent meeting in order to adopt the necessary resolutions after appropriate discussion. A resolution was adopted by a written procedure with respect to one matter requiring attention at short notice. We received quarterly written reports from the Executive Board on the course of business and the position of the company and the Group. These reports describe, inter alia, the current planned and expected figures for the company and the Group as a whole and the individual business groups. The quarterly reports with the quarterly financial statements and key figures for the
Hannover Re Group constituted a further important source of information for the Supervisory Board. We received an analysis of the 2011 results in non-life and life and health reinsurance as well as a presentation from the Executive Board covering the profit expectations for the 2012 financial year and the operational planning for the 2013 financial year. In addition, the Chairman of the Supervisory Board was constantly advised by the Chairman of the Executive Board of major developments and impending decisions as well as of the risk situation within the company and the Group. All in all, we were involved in decisions taken by the Executive Board and assured ourselves of the lawfulness, regularity and efficiency of the company’s management as required by our statutory responsibilities and those placed upon us by the company’s Articles of Association. No audit measures pursuant to § 111 Para. 2 Sentence 1 German Stock Corporation Act were required in the 2012 financial year.
As in every year, we were given a description of the major pending legal proceedings. We were regularly updated on the work of the Supervisory Board committees, received an analysis of the direct insurance business transacted by the Hannover Re Group as well as reports on the pre-application phase for approval of the internal model, on the merger of the Hannover Re Group’s Irish subsidiaries, on potential acquisitions as well as on the measures taken to reduce exchange rate volatility in the statement of income. In addition, we gave intensive consideration to the restructuring of the strategic objectives (target matrix) and – in the course of several meetings – the establishment of a Societas Europaea (SE) and we adopted the necessary resolutions. The operational planning for 2013 and the medium-term outlook until 2017 as well as the develop ment and status of the Market Consistent Embedded Value in life and health reinsurance were also considered at length. Another focus of our deliberations was the adoption of a resolution regarding the refinancing of hybrid capital, as a consequence of which a new subordinated bond with a volume of EUR 500 million was placed in the European capital market in mid-November 2012 through Hannover Finance
(Luxembourg) S.A. In the context of the annual review of the investment guidelines, the work concentrated on the redefinition of the issuer limit system, changes with regard to real estate investments and the allocation of various limits. Furthermore, corporate social responsibility (CSR) standards were incorporated into the investment guidelines for the first time as part of the Group-wide sustainability concept. The full Supervisory Board considered the determination of the performance bonuses of the members of the Executive Board with an eye to § 87 Para. 1 Sentence 1 German Stock Corporation Act as well as the appropriateness of the remuneration system for the members of the Executive Board pursuant to § 3 Para. 1 Sentence 3 of the Regulation on the Supervisory Law Requirements for Remuneration Schemes in the Insurance Sector. The fixed remuneration of members of the Executive Board as at 1 January 2013 was also reviewed. At a constituent meeting of the Supervisory Board the Chairman of the Supervisory Board and his deputy as well as the members and Chairman of the Finance and Audit Committee and the members of the Standing Committee and the Nomination Committee were elected.
Of the committees formed by the Supervisory Board within the meaning of § 107 Para. 3 German Stock Corporation Act, the Finance and Audit Committee met on four occasions and the Standing Committee met twice. The Standing Committee adopted a resolution by a written procedure with respect to one matter requiring attention at short notice. The Chairman of the Supervisory Board updated the full Supervisory Board on the major deliberations of the committee meetings at its next meeting and provided an opportunity for further questions.
The Finance and Audit Committee considered inter alia the consolidated annual and quarterly financial statements drawn up in accordance with IFRS and the corresponding individual financial statements of the parent company Hannover Re drawn up in accordance with the German Commercial Code (HGB) and discussed with the independent auditors their reports on these financial statements. As in the previous year, an expert opinion on the adequacy of the loss reserves in non-life reinsurance was noted, and a review of the accumulated prefinancing volume in life reinsurance including a comparison of the expected return flows with the repayments actually made, the risk reports, the compliance report / report on adherence to Corporate Governance principles and reports on the major subsidiaries were received and discussed. In addition, the Committee examined the investment structure and investment income – including the stress tests with regard to the investments and their implications for net income and the equity base – and defined the audit concentrations for the 2012 financial year. The Committee received a detailed description of the organisation of risk management in life and health reinsurance with a specific focus on the system for controlling reserves, received a report on the adequacy of the reserves constituted in life and health reinsurance and a report on the current situation and likely development of the UK subsidiary International Insurance Company of Hannover, which complements the core business of the Hannover Re Group – reinsurance – by writing direct business in selected markets. In addition, the Committee received an explanation of the European Commission’s legislative proposals for reform of the audit sector and a detailed report on the audits conducted by the Internal Auditing unit as well as a summary presentation of key audit findings – including the implementation of measures arising out of audit reports – and a description of the audit plan for 2012.
The Standing Committee dealt with the adequacy of the system of remuneration for the members of the Executive Board, the review of the fixed remuneration with respect to those members of the Executive Board for whom a review was due, the determination of the performance bonuses of the members of the Executive Board for the 2011 financial year, the stock participation rights to be awarded and the definitive maximum amount for the 2011 allocation year. In all these cases the Committee drew up corresponding recommendations for the full Supervisory Board. Substantial time was devoted to discussing and adopting a resolution on the individual targets for 2013 of the members of the Executive Board in accordance with their service contracts. The Committee also discussed at length the revised arrangements for the business group bonus in the service contracts of the members of the Executive Board and recommended to the full Supervisory Board the reappointment of Dr. Michael Pickel.
The Supervisory Board once again devoted considerable attention to the issue of Corporate Governance. The Supervisory Board considered the various new items contained in the German Corporate Governance Code (DCKG) as amended on 15 May 2012 and defined the appropriate number of independent Supervisory Board members within the meaning of Item 5.4.2 of the Code. This also resulted in an adjustment to the Rules of Procedure of the Supervisory Board. The Rules of Procedure of the Executive Board were revised and the value limits for measures and transactions requiring the approval of the Supervisory Board were adjusted to reflect the increased business volume. In addition, the Supervisory Board adopted an Information Policy in which the Executive Board’s duties to provide information and reporting obligations with respect to the Supervisory Board are specified in greater detail. Furthermore, the Supervisory Board was advised by the Executive Board of a concept to promote the advancement of female employees. Despite the high importance that the Supervisory Board attaches to the standards of good and responsible enterprise management defined in the German Corporate Governance Code, the Supervisory Board decided not to comply with the recommendations contained in Code Item 4.2.3 Para. 4 concerning a cap on severance payments in management board contracts, in Code Item 5.2 Para. 2 concerning the Chair of the Audit Committee and in Code Item 5.3.2 concerning the independence of the Chair of the Audit Committee. The justification in these respects is provided in the Declaration of Conformity pursuant to § 161 German Stock Corporation Act regarding compliance with the German Corporate Governance Code, which is reproduced in this Annual Report in the context of the Corporate Governance declaration. Further information on the topic of corporate governance is available on Hannover Re’s website.
Board thanked Mr. Kramp for his many years of valuable work on the Supervisory Board.
Board would like to express its special appreciation to the Executive Board and all the employees for their efforts in the year under review.
Berg Chairman of the Supervisory Board of Talanx AG Chairman of the Supervisory Board of HDI Haftpflichtverband der Deutschen Industrie V.a.G.
Hannover Rückversicherung AG Australian Branch – Non-Life Office Level 12 20 Bond Street Sydney NSW 2000
Hannover Rückversicherung AG Canadian Branch – Facultative Office 130 King Street West Suite 2125 Toronto, Ontario M5X 1A4
Hannover Rückversicherung AG Hong Kong Branch 2008 Sun Hung Kai Centre 30 Harbour Road Wanchai, Hong Kong Tel. +852 2519-3208 Fax +852 2588-1136 General Manager: Wilbur Lo
Hannover Re Consulting Services India Private Limited C&B Square Sangam Complex Unit 502, 5th Floor Andheri-Kurla Rd, Andheri (East) Mumbai 400059
Hannover Re (Ireland) Public Limited Company No. 4 Custom House Plaza, IFSC Dublin 1
Hannover Rückversicherung AG Korea Branch Room 414, 4th fl. Gwanghwamoon Officia B / D 163, Shinmunro-1ga, Jongro-gu Seoul, 110-999
Hannover Rückversicherung AG Malaysian Branch Suite 31-1, 31st Floor Wisma UOA II No. 21 Jalan Pinang 50450 Kuala Lumpur
Hannover Services (UK) Limited Hannover House Station Parade Virginia Water Surrey GU25 4AA
Hannover Re Services USA, Inc. 500 Park Blvd., Suite 1360 Itasca, Illinois 60143
Charlotte Office 13840 Ballantyne Corporate Place, Suite 400 Charlotte, North Carolina 28277
American Depositary Receipt (ADR): share certificates written by US banks on foreign shares deposited there. Instead of trading the foreign shares directly, US stock exchanges trade the ADRs.
Capital asset pricing model (CAPM): the CAPM is used to explain the materialisation of prices / returns on the capital market based on investor expectations regarding the future probability distribution of returns. Under this method, the opportunity cost rate for the shareholders’ equity consists of three components – a risk-averse interest rate, a market-specific risk loading and an enterprise-specific risk assessment, the beta coefficient. The cost of shareholders’ equity is therefore defined as follows: risk-averse interest rate + beta * enterprise-specific risk assessment.
Coinsurance Funds Withheld (CFW) Treaty: type of coinsurance contract where the ceding company retains a portion of the original premium at least equal to the ceded reserves. Similar to a Modco contract the interest payment to the reinsurer reflects the investment return on an underlying asset portfolio.
Derivatives, derivative financial instruments: these are financial products derived from underlying primary instruments such as equities, fixed-income securities and foreign exchange instruments, the price of which is determined on the basis of an underlying security or other reference asset. Notable types of derivatives include swaps, options and futures.
Earnings per share, diluted: ratio calculated by dividing the consolidated net income (loss) by the weighted average number of shares outstanding. The calculation of the diluted earnings per share is based on the number of shares including subscription rights already exercised or those that can still be exercised.
Exposure: level of danger inherent in a risk or portfolio of risks; this constitutes the basis for premium calculations in reinsurance.
Gross / Retro / Net: gross items constitute the relevant sum total deriving from the acceptance of direct insurance policies or reinsurance treaties; retro items constitute the relevant sum total deriving from own reinsurance cessions. The difference is the corresponding net item (gross – retro = net, also: for own account).
Hybrid capital: debt structure which because of its subordination bears the character of both debt and equity
Leader: if several (re-)insurers participate in a contract, one company assumes the role of leader. The policyholder deals exclusively with this lead company. The lead (re-)insurer normally carries a higher percentage of the risk for own account.
Non-life business: by way of distinction from operations in our life and health reinsurance business group, we use this umbrella term to cover our business group comprised essentially of property and casualty reinsurance, specialty lines and structured reinsurance products.
Premium: agreed remuneration for the risks accepted from an insurance company. Unlike the earned premiums, the written premiums are not deferred.
Price earnings ratio (PER): a valuation ratio of a company’s share price compared to its per-share earnings.
Reinsurer: company which accepts risks or portfolio segments from a direct insurer or another reinsurer in exchange for an agreed premium.
Securitisation instruments: innovative instruments for transferring reinsurance business to the capital markets with the goal of refinancing or placing insurance risks.
Spread loss treaty: treaty between an insurer and a reinsurer that covers risks of a defined portfolio over a multi-year period.
Surplus reinsurance: form of proportional reinsurance under which the risk is not spread between the insurer and re insurer on the basis of a previously agreed, set quota share. Instead, the insurer determines a maximum sum insured per risk up to which it is prepared to be liable. Risks that exceed the ceding company’s retention (surpluses) are borne by the reinsurer. The reinsurer’s lines thus vary according to the level of the retention and the sum insured of the reinsured contract. The reinsurer’s liability is generally limited to a multiple of the ceding company’s retention.