Investments (excl. funds held by ceding companies) 22,507.0 +11.8% 20,137.2 19,815.3 19,494.0 19,079.1
Share price at year-end in EUR 32.71 +45.4% 22.50 31.55 35.08 29.93
Large losses as percentage of net premium earned (non-life reinsurance)4 4.6% 10.7% 6.3% 2.3% 26.3%
Return on investment (excl. funds held by ceding companies) 4.0% 0.4% 4.6% 5.0% 4.4%
Notes 106 1. Company information 107 3. Accounting policies 110 4. Consolidated companies and consolidation principles 119 5. Major acquisitions, new formations and other corporate changes 124 6. Notes on the individual items of the balance sheet 127 7. Notes on the individual items of the statement of income 164 8. Other notes 172
The 2009 financial year closed with a very good result for your company,
Hannover Re. For the first time we generated an operating profit (EBIT) in excess of one billion euro. What is more, the fact that we were able to boost the shareholders' equity of Hannover Re by more than 30% in 2009 is of special significance to the sustainable positive development of your company.
Both business groups, namely non-life reinsurance and life/health reinsurance, were instrumental in driving this favourable development. The performance of life and health reinsurance was also assisted by positive non-recurring effects.
The reinsurance industry in general displayed remarkable fortitude in the face of the financial and economic crisis. This also served to make very evident the value of reinsurance covers for risk management purposes. And this, in turn, ultimately prompted stronger demand for reinsurance on both the non-life and life/health sides. Thanks to our robust financial strength and our good market position – also vis-à-vis our competitors – we were able to reap particularly rich rewards from this stronger demand. This is borne out by the above-average organic growth of more than 15% in both business groups. After several years of shrinking premium income, we were thus able to again markedly increase our premium in the year under review.
Target Markets, Specialty Lines and Global Reinsurance. In this context, we continue to systematically execute our strategy based on a sustainable, profitoriented business policy.
In the non-life reinsurance business group I would like to highlight above all the good underwriting result that we achieved without infringing on our principle of highly prudent loss reserving. This testifies, firstly, to the good quality of our business, although it was also assisted by the rather modest burden of catastrophe losses in the year under review. The most expensive loss events for our company in 2009 from natural disasters were the bushfires in
As you, our valued shareholders, are aware, the transfer of insurance risks to the capital market has also long played a special role for our company in the management of peak exposures. Although conditions on capital markets were still difficult in the year under review, we were able to renew our “Eurus”
catastrophe bond – issued for the first time in 2006 – with an increased volume. We use this transaction to protect our account against the risk associated with European windstorm events.
In addition, 2009 marked the first time that we transferred a portfolio of facultative reinsurance risks to the capital market. This did not involve the protection of our own portfolio, but rather the direct transfer of our clients' business to the capital market.
US life reinsurance risks additionally marked a milestone in our strategic orientation: the transaction with an annual premium volume in excess of one billion US dollars in the year under review and subsequent years considerably strengthens our business segment of risk-oriented reinsurance in the United
To all intents and purposes, the price has climbed back to the level seen prior to the outbreak of the financial crisis.
We assess our point of departure for the current financial year as highly favourable. We believe that our positioning gives us a thoroughly realistic opportunity to build on the good performance of 2009 – adjusted for non-recurring effects. This is, of course, conditional on the burden of catastrophe losses remaining within the expected bounds and subject to the capital market being spared any fresh distortions.
I would like to thank you, our valued shareholders, for your confidence in
Hannover Re. Rest assured: my colleagues and I on the Executive Board, working in concert with the staff of Hannover Re, will do everything in our power to equip your company to handle the opportunities and risks that lie ahead.
Marine, Offshore Energy as well as Credit, Surety and Political Risks)
respectively relative to the start of the year. The DAX put on 24% to close the year at 5,975 points. The MDAX performed even better with a gain of 34%.
DAX index. Even at the time, though, it was evident that inclusion in the DAX was due not only to our own strength, but more to the weakness of many major stocks as a consequence of the economic crisis.
In a three-year comparison (see chart) the Hannover Re share including reinvested dividends delivered a performance of +4.5%. It thus clearly surpassed the DAX and
MDAX. We fell only marginally short of our strategic objective of outperforming the weighted ABN Amro Global
The market capitalisation of the Hannover Re Group totalled EUR 3,945 million as at year-end. With a free float market capitalisation of EUR 1,945 million our company ranked eighth in the MDAX at the end of December, while our share came in at number 5 according to the criterion
Re share showed a price-to-book (P/B) ratio of 1.1 as at year-end 2009; compared to the average MDAX P/B ratio of 1.4 the share is thus quite moderately valued.
Ordinary General Meeting on 4 May 2010 that an amount of EUR 2.10 per share be distributed. Based on the yearend closing price of EUR 32.71, this produces a dividend yield of 6.4%.
The increased need to meet and talk with us felt by many analysts and investors as a consequence of the financial market crisis was reflected in lively attendance at our analysts' conferences, which we again held simultaneously in Frankfurt and London one day after the press briefing on the annual results.
A special highlight was the increased attendance at investor conferences; we also again took part in numerous roadshows in order to facilitate contacts between invest ors and our company's management. Along with multiple visits to
What is more, we again held a series of conference calls for analysts and investors with the management and hosted numerous visitors at our offices in Hannover for face-toface meetings.
Our annual Investors' Day was again well attended by analysts and investors alike in 2009. Topics covered in the year under review included the acquisition of the US ING
Re share as “buy” or “overweight”; another fourteen opinions were a “hold”, while only four recommendations to
Average analysts' price target Source: for the Hannover Re share Bloomberg 26/12/08 20/03/09 12/06/09 04/09/09 25/12/09 shareholding structure by countries (free float)
We fundamentally revamped and progressively updated our Investor Relations website in the year under review.
Most strikingly, along with a new design the structure was simplified, hence making more content accessible at a glance. Our newest service is the provision of information on the analysts' recommendations. Please visit http://
www.hannover-re.com/ir/share/consensus/index.html for continuously updated and interactive insights into the latest analysts' opinions and their expectations as to
Exchange listings: Germany: Listed on all German stock exchanges; XETRA, Frankfurt and Hannover in official trading USA: American Depositary Receipts (Level 1 ADR program; 2 ADR = 1 share)
Common shares as at 31 December 2009: EUR 120,597,134.00, divided into 120,597,134 no-par-value registered shares
Shareholding structure since February 2006: 50.2% Talanx AG, 49.8% free float
Market capitalisation at year-end in EUR million 3,944.7 2,713.4 3,804.8 4,230.5 3,609.5
Price-to-cash flow (P/CF) ratio7 2.3 1.9 4.2 2.5 2.3 1 XETRA daily closing prices from Bloomberg 2 EUR 1.80 + EUR 0.50 bonus 3 Earnings per share/average of book value per share at start and end of year 4 Dividend per share/year-end closing price 5 Year-end closing price/book value per share 6 Year-end closing price/earnings per share 7 Year-end closing price/cash flow (from operating activities) per share
We support meaningful and pragmatic Corporate Governance principles and recognise these as guidelines for our activities. Ethical corporate conduct towards our business partners, employees, shareholders and all other stakeholders constitutes a core element of our Corporate Governance principles. We apply high ethical standards at all times, both in our strategy and in our day-to-day business operations.
The business center strategies/service center strategies are derived from the Group and business group strategies.
Non-life reinsurance Not one of the largest, but one of the most profitable non-life reinsurers in the world – special attention paid to the correct assessment of risks – pricing and conditions guided by technical considerations and appropriate level of reserves
The United States experienced a steep decline in GDP of 2.4% in 2009. Gross investment in fixed assets was dramatically reduced and inventories scaled back as a consequence of the economic crisis. In addition, rising unemployment, loss of assets and much more restrictive access to credit caused private consumption to contract – despite tax relief measures and the “cash for clunkers” programme
(similar to the German car scrappage scheme). As the year progressed, however, the US too began to gather fresh momentum. In the third quarter GDP grew for the first time in a year, and an end to the recession was in sight.
Chinese economy developed extremely favourably. By the summer half-year it had already almost bounced back to its previous growth rates. Business activity was considerably boosted, not least thanks to an extensive economic stimulus programme implemented by the government.
In the aftermath of the historic price falls on international stock markets in 2008, many investors became far more risk-averse – safe government bonds and gold were preferred investment vehicles. At the end of the year risk premiums on the bond market reached a record level, although the framework conditions for the markets changed appreciably as the year progressed. With the situation in the banking sector also stabilising, investors became more willing
Driven by an expansionary monetary policy in the year under review, key interest rates fell to new record lows in the euro and pound sterling currency zones. In the United
The financial standing of market players has assumed even greater importance as a consequence of the crisis –
Despite the financial and economic crisis German insurers were well positioned in 2009 and remained on an expansionary course in the year under review. Against the backdrop of robust insurance demand, they were able to boost their premium income even in these difficult economic times. The most significant contribution in this regard was delivered by private health insurers. In this way the German insurance industry emerged as a stabilising factor for the economy in 2009. In the current year, too, the effects of the economic crisis on the insurance industry should be moderate.
With a view to averting any repetition of the financial market crisis, the federal government proposed the “Act for the Strengthening of the Supervision of Financial Markets and Insurance” in the year under review. The legislation gives the Federal Financial Supervisory Authority greater powers to regulate the financial market. The intention is to restore trust in the financial system and put in place a solid foundation going forward for business transactions between financial institutions.
The Solvency II Directive of the European Commission continues to be of great significance to the insurance industry. Solvency II is intended to provide Europe with a risk-based solvency system. The specifics are currently under consideration by various government bodies in consultation with the insurance industry. Many insurance undertakings are already preparing for implementation of the regulations that will apply in the future. In April 2009 the EU institutions – namely the European Parliament, the
Council and the Commission – agreed upon a compromise for the Solvency II Framework Directive. The insurance industry's various interest groups also see this political settlement as a major step towards a modern system of insurance supervision. The standards contained in the EU
As anticipated, the financial market crisis and the associated shortage of capital among primary insurers in the year under review had a stimulating effect on our operational business.
Our second business group, life and health reinsurance, developed exceptionally satisfactorily. Given the significantly weaker solvency position of life insurers, the need for reinsurance solutions continued to grow; demand thus increased in the year under review for risk- and financially oriented products.
The central event for our life and health reinsurance in the year under review was the acquisition of a large US life reinsurance portfolio. We have thus set a course for further profitable growth. The transaction strengthens our segment of risk-oriented reinsurance in the United States, in which we had hitherto been underrepresented. This acquisition served to improve the diversification of our revenue streams, since life reinsurance – noted for greater stability and less volatility – now accounts for an even greater share of the total portfolio.
primarily private equity and real estate funds. Given the minimal holding of equities, write-downs of just EUR 3.2 million (EUR 356.1 million) had to be taken here, while on fixed-income assets they were halved to EUR 45.4 million
In view of increased fair values, the write-downs were opposed by write-ups of EUR 20.1 million on fixed-income securities written down in previous periods. Further positive effects stemmed from the recognition of financial derivatives embedded in insurance contracts as well as from structured products subject to mandatory separation requirements, hence causing their fair values to rise by an amount of altogether EUR 100.6 million (–EUR 119.7 million ) that was recognised in income.
Even though we were not able to realise all the price rises that we had envisioned, the capital squeeze in the global insurance industry triggered by the financial market crisis stimulated demand for reinsurance. The treaty renewals as at 1 June and 1 July also passed off well for our company overall: prices were broadly commensurate with the risks, although the rate increases in some segments
In aviation reinsurance we were able to push through higher prices for both loss-impacted and loss-free programmes in the autumn 2009 treaty renewals owing to an above-average claims experience. We therefore stepped up our involvement. Capacities in credit and surety insurance shrank appreciably in the year under review against the backdrop of higher loss ratios prompted by the financial market crisis. We used the associated sharp price rises to selectively enlarge our portfolio. Premium increases were also recorded for structured products and in facultative reinsurance.
Gross Net Net expectancy for major losses1 1 Losses >EUR 5 million gross
Major loss trend1 Figures in EUR million access all services from a concentrated source. At the same time, it gives us an optimal platform to further expand our position in China.
Re is active in this sector as a reinsurance partner and also provides support, especially with its know-how. It is our expectation that micro-insurance products will continue to grow in importance going forward, and hence further cooperative ventures will follow.
Insurance-Linked Securities we transferred for the first time in the year under review a portfolio of facultative reinsurance risks – i.e. individual risks worldwide – to the capital market. As with our previous transaction of this type, what is at stake here is not the protection of our own portfolio, but rather the direct transfer of our clients' business. The “Fac Pool Re” transaction consists of a quota share cession and two non-proportional reinsurance ces-
After several years of premium declines, the gross premium volume for our non-life reinsurance business group climbed by 15.2% to EUR 5.7 billion (EUR 5.0 billion) in the year under review. At constant exchange rates, especially relative to the US dollar, growth would have come in at 13.4%. The level of retained premium rose from 88.9% to 94.1% as a consequence of lower retrocessions.
Total net expenditure on catastrophe losses and major claims in 2009 amounted to EUR 239.7 million (EUR 457.8 million), a figure less than the expected level. The combined ratio stood at 96.6% (95.4%) in the year under review.
(EUR 184.7 million). Net investment income improved markedly to EUR 563.2 million (EUR 11.1 million), having been impacted by the need to take heavy write-downs on equities in the previous year. The operating profit (EBIT)
EUR 731.4 million (EUR 2.3 million). Group net income grew to EUR 472.6 million (–EUR 160.9 million). Earnings per share amounted to EUR 3.92 (–EUR 1.33).
The modified responsibilities associated with the changes on the Executive Board presented an opportunity to restructure our non-life reinsurance business group. We now split our portfolio into three sections: target markets, specialty lines and global reinsurance. The following remarks reflect this revised breakdown.
We consider Germany and North America to be target markets. The development of business here was satisfactory. The premium volume grew to EUR 1,737.9 million
As the dedicated reinsurer for the German market, the company has for decades been a sought-after partner thank to its good rating, highly developed customer orientation and the continuity of its business relationships. E+S
Gross premium in non-life reinsurance 30.2% Target markets 38.9% Specialty lines 30.9% Global reinsurance
Geographical breakdown of non-life reinsurance 26.6% North America 20.9% Rest of Europe15.3% Germany 12.5% United Kingdom 12.5% Australasia 8.3% Other 3.9% Africa
needs not only a satisfactory underwriting performance but also good investment income – consequently came under pressure. The industrial insurance lines – such as business interruption, public liability or marine – also suffered losses of premium, since for the most part premiums are calculated on the basis of company turnover. An unremarkable loss situation had a positive effect on industrial business.
The German primary insurance market was dominated by sustained fierce competition in the year under review –
The state of the market in industrial fire and fire loss of profits insurance improved: the combined ratio nudged below 90% on the back of lower loss ratios year-on-year.
For the first time in quite a while we were therefore able to recoup the cost of capital. The situation in homeowners'
The loss situation in the engineering lines was satisfactory overall in the year under review, although the insurance of wind turbines has still to turn a profit on account of various serial losses.
Personal accident insurance, which remains one of our target lines, continued to develop favourably. Our clients again benefited from our product innovations in the year under review, including for example a combined personal accident annuity, a product designed to protect the insured 's livelihood that constitutes a cost-effective supplement to disability insurance. An innovative product for children was also unveiled on the market in 2009, with two further product launches pending. Yet it is not only in personal accident insurance that we are able to assist our clients; we also support them with our own self-developed tools, namely “ES HagelT” – for measuring the exposure of a motor portfolio to hail events – and “ES FluteT” – for calculating the flood risk to portfolios of residential property.
We succeeded in cementing our position as one of the leading reinsurers in the profitable German market in the year under review.
The North American (re)insurance market is the world's largest single market and currently the second-most important for Hannover Re's portfolio. It accounted for 14.8% of our premium volume in non-life reinsurance.
We welcome the efforts being made in the US to optimise oversight of the insurance industry and put in place a point of contact on the federal level for foreign agencies and associations. In view of the global financial crisis and constantly growing international integration, this is of special importance – not only for cooperation with the
International Association of Insurance Supervisors (IAIS), but also for negotiations over unilateral or mutual recognition of regulatory bodies. Similarly, we view the efforts of the National Association of Insurance Commissioners
In property business it was still possible to obtain appreciable rate increases in the first half-year, although the extent of the gains flattened off as the year under review progressed. The absence of catastrophe losses put an end to any further price rises.
Rates in casualty business are, in our assessment, broadly inadequate. Although price increases were possible in workers' compensation reinsurance, they were not sufficient; in the general liability lines and in professional indemnity business rates merely held stable. We therefore put any portfolio expansion on ice; the premium volume in general liability was largely maintained on a constant level. Having drastically scaled back our acceptances in the professional indemnity segment in recent years, we did not make any further reductions in the year under review. On the contrary, we made the most of opportunities to reshuffle our portfolio that emerged as a result of the effects of the financial market crisis.
No catastrophe loss events with a bearing on our company occurred in the United States. We were, however, affected by a hailstorm in the Canadian province of Alberta, which produced a net strain in the order of EUR 5 million for our account. The combined ratio stood at specialty lines
This segment includes marine and aviation business, credit/surety, structured products, ILS (Insurance-Linked
Securities), the London Market and direct business. The premium volume climbed from EUR 1,893.5 million to
Primary insurers were able to increase their premiums in 2009 following losses in previous years, hence prompting significant hardening of the airline sector. In general aviation and product liability prices stabilised on a low but nevertheless adequate level. On the reinsurance side, too, rates picked up in non-proportional business – by around 10% to 15%. In view of limited capacities for lower layers, prices here rose more sharply than under higher layers.
We stepped up our own involvement in non-proportional reinsurance and further improved the diversification of our portfolio through new acceptances in general aviation reinsurance.
Premium income climbed, while the exposure was reduced owing to lower passenger numbers.
The situation in credit and surety insurance was challenging on account of the recession. The effects were especially evident in countries that were either hard hit by the real estate crash, such as the US, Spain, Ireland and the
UK, or heavily dependent on exports, for example Germany and Japan. Some bottoming out was nevertheless observed in the fourth quarter.
Hannover Re ranks among the market leaders in international marine reinsurance business.
The contraction in marine volume prompted by the economic crisis led to sizeable losses of premium in Germany
– not only in cargo and carrier's liability insurance but also in hull insurance. A further factor was the rise in insurance expenditures, which ultimately caused profitability to deteriorate after the more relaxed climate of previous years.
cases it was even possible to obtain increases in the range of 50% to 100%. In surety business, too, rates picked up, although the average increases were less appreciable due to lower claims rates.
For the reinsurance industry the claims situation was similar to that seen in the primary sector, although nonproportional business was scarcely impacted by losses.
Hannover Re is one of the market leaders in worldwide credit and surety reinsurance. We concentrate, as we have in past years, exclusively on the core business of the credit and surety lines. We do not write financial guarantees or credit default swaps; peripheral business, such as shipbuilding guarantees, is avoided. We were also able to reduce the extent of our exposure in some areas. All in all, we wrote our business even more restrictively than before and improved the diversification of our portfolio – both by products (credit, surety and political risk) and regions. In the year under review we profited from higher premiums and improved conditions.
Regardless of the above, the credit line was overshadowed by claims rates that rose particularly sharply in the first half of the year. Rehabilitation measures served to reduce the claims frequency in the second half of the year. Compared to previous years, however, the year under review was notable for a substantially increased loss burden. Despite the difficult economic climate, a positive factor was that no single loss exceeded EUR 5 million. In credit
Claims rates here were largely acceptable. The premium income booked by many ceding companies fell in part due to reduced transaction numbers, but also owing to an appreciably more restrictive underwriting policy. We obtained premium increases averaging 5% to 10% in the surety line.
We made the most of the appreciable price increases in the year under review and enlarged our portfolio highly selectively. Gross premium in credit and surety reinsurance was substantially boosted. Even though the result only broke even on account of higher default rates and our prudent reserving policy, we expect to move back into the black in 2010 once loss ratios recover. The combined ratio stood at 104.2% in the year under review, reflecting the high claims frequency in trade credit insurance.
Federal Ministry of Finance brought about greater legal certainty regarding the handling of financial reinsurance contracts and hence generated new business potential.
tracts normalised in the United States. It nevertheless continued to grow at smaller companies, including for example mutual insurers.
EUR 150 million. Eurus II Ltd. covers severe windstorm events in Belgium, Denmark, Germany, France, the United Kingdom, Ireland and the Netherlands from 30 July 2009 to 31 March 2012. It protects our capital against events with a return period of 50 to 80 years. We thus retain our ability to offer our European clients protection against windstorm risks.
Further transactions are in the planning stage. What is more, the ILS fund managed by our subsidiary Hannover
Kingdom, and especially on Ireland. The building industry there saw a decline of some 30%, as a consequence of which less insurance coverage was purchased. In the UK
Our premium volume was slightly enlarged in the year under review. We were broadly satisfied with the development of our business.
The rate situation in this sector improved in the year under review. Prices in the UK climbed on the back of the effects of the financial market crisis and the flood damage of the previous year. Especially in the area of professional indemnity covers for financial institutions we booked vigorous rate increases.
Our second operation for specialty business, namely Compass Insurance Ltd., is one of the leading companies in this segment in South Africa. Its strategic objective, which was successfully accomplished in the year under review, is to expand profitable business with underwriting agencies. The reinsurance of this business is in large measure assumed by Hannover Re Africa. Through capital participations in most of the managing general agents we are able to incorporate our expertise into the business processes. Above and beyond the actual coverage of their risks, clients profit from our extensive expertise in –
The development of our markets within the global reinsurance segment gave grounds for satisfaction. The premium volume here was boosted by 18% to EUR 1,774.7 million.
Yet we are not aiming to gain market shares. Rather, our overriding goal is to avoid impairing the profitability of our portfolio. We make every effort to convert low-margin proportional business to a more profitable non-proportional basis.
Breakdown of gross written premium in global reinsurance 27.4% Facultative reinsurance 55,5% International treaty business 17.1% Catastrophe business
In the Netherlands we devote special attention to nonproportional business. Hannover Re's strategic objective is to increase the share of its Dutch business deriving from the casualty lines. In light of the favourable rates situation in long-tail casualty business, we therefore moderately enlarged our portfolio. The fierce competition prevailing in property business, however, remained undiminished.
We incurred a high frequency of property claims in the year under review, hence pushing up the loss ratio relative to the previous year.
Rates were largely stable in the Scandinavian markets. In the year under review we transferred our portfolio of business from the Nordic countries to our operation in Stockholm.
Eastern Europe as growth markets. Over the coming years we intend to continue generating above-average growth
– always assuming that we are able to write profitable business. First and foremost, therefore, we prefer nonproportional covers.
Hannover Re ranks among the top three players in the reinsurance industry in Central and Eastern Europe. In customer surveys we again received plus points for our know-how and security, and also for our undogmatic and quick decision-making. We are well positioned and quote our business in all lines and markets. In the year under review we observed growing demand for additional capacity for natural catastrophe covers as well as for higher limits in casualty business. Here, too, we successfully stepped up our involvement on the basis of profitable excess -of-loss covers.
The most important Latin American markets for our company are Mexico, Argentina, Brazil, Colombia, Venezuela and Ecuador. Along with the writing of agricultural risks, catastrophe covers are especially interesting here. In the latter segment we generally achieved price increases of around 10%, with the exception of Mexico and Central
America – where rates broadly held stable. In other property business and the casualty sector rates were steady, albeit on a level that was commensurate with the risks.
We boosted our premium volume from the Latin American markets in 2009, especially in casualty business which –
Conditions in property business – which is written predominantly on a proportional basis – continued to adequately reflect the risks. We obtained broadly stable prices for casualty covers. Our primary focus here was on the general liability line; our involvement in professional indemnity, on the other hand, was minimal. The most important single line for our company in Japan is natural catastrophe business, and we accept covers for the most part on a non-proportional basis. In the year under review we reduced our peak exposures as part of our risk management activities. For this reason, and also as a consequence of the rise of the Japanese yen, our premium volume contracted.
Hannover Re's main markets in Southeast Asia are Malaysia, India, the Philippines and Indonesia. Our portfolio here, which we further diversified in the year under review, is composed predominantly of property business.
Existing catastrophe-exposed proportional covers were significantly scaled back in the year under review; in India we completely withdrew from proportional business owing to a drastic rate slump in the original market. The area of micro-insurance products in hitherto relatively undeveloped markets is attracting increasing interest. In Pakistan we launched an initial project in cooperation with a locally based insurer. This means that low-income individuals in this country will now also be able to purchase insurance protection.
We slightly enlarged our premium volume in the year under review.
Both the Philippines and Indonesia were impacted by natural disasters, although the effects on our underwriting result were only minimal. Altogether, losses remained in the low double-digit million euro range.
China continues to rank as the most prominent growth market in Asia. Government subsidy programmes helped to drive sales of domestically built motor vehicles sharply higher. As a result, considerable growth in motor insurance – the dominant line in China – was recorded in the year under review.
In view of the fierce competition among local insurers, market conditions remained soft overall. The number of insurers is consistently rising, while at the same time an oversupply of reinsurance capacity prevails on the market.
Regulatory Commission) in the year under review to write non-life reinsurance from our existing Shanghai branch.
Hannover Re still ranks third in the Australian non-life reinsurance market. For almost 25 years we have been represented by a branch office in Sydney. Our clients value us as an attractive and reliable partner on account of this local presence as well as our very good rating.
Both the repercussions of the financial market crisis and a series of natural disasters took a toll on the insurance
Our strategic objective was to grow selectively and strengthen our market position, without neglecting our high profitability standards. We were successful in achieving this goal. It remains the case that we are the leading provider of natural catastrophe covers and in the field of medical malpractice.
Our premium volume grew somewhat more strongly than anticipated in the year under review. The claims situation was very strained, with the largest single event being the devastating bush fires in southeast Australia.
The bulk of Hannover Re's catastrophe business is written out of Bermuda, which is considered the centre of competence for this line worldwide. Along with the expertise of our local team, our financial strength and excellent rating have made us a particularly highly sought-after partner for ceding companies and brokers for a number of years.
The movement of the yen was one of the major factors shaping the situation on the Japanese market. Many reinsurers responded to its resurgence by scaling back their involvement there, as a consequence of which reduced capacities ultimately pushed rates higher. For the purposes of our own risk management we too substantially scaled back our peak exposures in Japan.
The devastating bush fires in Australia cost almost 200 people their lives. Hannover Re incurred loss expenditure of EUR 34.7 million in this regard. In April the Italian region of Abruzzo was struck by a severe earthquake. The medieval city of L'Aquila was almost entirely destroyed, and many residents perished. The cost of this event to our company was EUR 11.2 million. Hurricane events were the exception in the year under review and had no bearing on our technical account.
Agricultural risks have taken on greater importance in our portfolio in recent years. While the insurance density in western industrial nations is relatively high – 80% of agricultural land in the United States is insured, for example
– where we are one of the market leaders – we have also gained shares.
Chile as well as the damage caused in South America by extreme drought conditions.
“I prefer to be at home, where a market is developing.”
In contrast to obligatory reinsurance, which covers an insurer 's entire portfolio, a reinsurer underwrites primarily individual risks in facultative business. The general environment in the various markets was, however, for the most part comparable in the year under review.
In facultative (re)insurance, too, we noted stronger demand in some areas as a consequence of the financial market crisis. Competition in virtually all segments remained fierce. The picture on the reinsurance side was a mixed one: rates and conditions generally remained stable, while in certain markets – such as Asia and the
In some Latin American countries, on the other hand, premiums increased.
Asia nor in Europe was the scarcity of capacity in industrial insurance reflected in higher prices. The rate increases anticipated for 2009 consequently only partially materialised. We made the most of the opportunities that presented themselves, for example in US professional indemnity covers for small and mid-sized enterprises and in motor business. Generally speaking, we were able to improve our market penetration in these lines in the United
Internationally, we strengthened our market position – in some cases significantly – in our focus markets of the
France; yet we also made appreciable progress in the key emerging markets of Greater China and India.
above all on the systems side – as well as 130 professional staff at locations in Charlotte/North Carolina and Denver/
In the area of Sharia-compliant products, which are marketed through our subsidiary Hannover ReTakaful in Bahrain, we are similarly making good advances. In this context we provide reinsurance in the countries of the Gulf region for so-called family takaful products, mostly on a group basis. Such products are designed to satisfy various family protection needs, including for example ensuring that education expenses for children can be paid.
Breakdown of gross premium by business centers before consolidation 24% HLR International 23% HLR Germany 22% HLR Ireland 19% HLR America 5% HLR Australasia 3% HLR United Kingdom 2% HLR Bermuda 2% HLR Africa
Within the four specialty segments we observed particularly dynamic growth in the European bancassurance sector and in the area of new markets – and in the latter case especially with respect to UK enhanced annuities.
We are also thoroughly satisfied with the financial solutions segment, in which we were able to close several small and mid-sized transactions at attractive conditions in the United States, United Kingdom, Germany, South
Africa and Hong Kong. Demand for reinsurance solutions of this type reached a level in the year under review that we had never experienced in the past 20 years.
In the traditional business segment Asian markets – and above all Greater China – as well as South Africa showed vigorous growth, while Central European markets were more sluggish.
Systematic Customer Relationship Management plays a central role in this context, reinforced by the regular sharing of experiences among our managers with regional sales responsibility.
The morbidity risk spectrum, which encompasses above all US senior health Medicare Supplement products, longterm care covers in German-speaking countries and some
Breakdown of gross written premium according to the five Pillar model 44% Conventional reinsurance 12% Multinationals 25% New markets 10% Bancassurance 9% Financial solutions
Gross premium incl. premium deposits 6,861.0 +29.1% 5,315.6 3,937.4 3,959.8 2,733.2
Net premium incl. premium deposits 6,204.5 +26.3% 4,911.8 3,579.0 3,457.8 2,532.1
Earnings per share in EUR 2.45 0.65 1.57 0.85 0.49 1 Operating result (EBIT)/net premium earned
In this context developments on international financial markets – especially with respect to the valuation of fixedincome securities in the US and UK – took on a particular relevance in the year under review.
The risk situation as regards the three biometric risk categories of mortality, morbidity and longevity was satisfactory overall, although we did observe increased mortality rates in some sub-portfolios in the United Kingdom and a higher claims frequency in disability annuity business in
The structural risks associated with the persistency of the business in force as well as the counterparty risk were subjected to a stress test in the context of the worldwide financial market crisis. Especially in German-speaking markets, in which we operate as a leading reinsurer of unit-linked life and annuity products, we observed sharply higher lapse rates in the first half of 2009, in particular, although they stabilised towards year-end. Our actuarial analyses in this regard showed that moderate additional reductions in the deferred acquisition costs were advisable under certain contracts.
Of relevance to the financial solutions pillar is the counterparty risk, which would manifest itself in the inability of a specific client to amortise the prefinancing that it had received; this has not had any impact to date on our worldwide portfolio of ceding companies.
Developments on financial markets had far-reaching implications in the year under review, especially with respect to fair value adjustments for securities deposits fur-
ModCo derivatives). Unlike in the previous year, however, the effects on the income statement were very positive this time with an overall amount of EUR 121.8 million recognised in the operating result.
Total investment income came in at EUR 520.1 million; this was equivalent to an increase of 111.8%. Of this amount, EUR 280.2 million was generated by assets under own management and EUR 239.9 million derived from amounts credited on deposits with ceding companies.
The operating profit (EBIT) climbed to a new record high of EUR 372.2 million, generating an EBIT margin of 9.1%.
If we factor out the non-recurring special effects associated with assumption of the ING life reinsurance portfolio as well as with the fair value adjustments taken on reinsurance deposits furnished to cedants in the United States and
While German life insurers were largely able to steer clear of the direct balance sheet repercussions of the global financial market meltdown, the crisis had appreciable effects on customer behaviour, hence triggering a significant shift on the level of supply and demand.
At the same time, there was a resurgence of interest in traditional life and annuity insurance products, under which a certain level of interest income – currently 2.25%
per annum – is guaranteed for customers. These guarantees are supplemented by annual bonuses, which at most companies are in the range of 1.75% to 2.50% – hence producing an attractive overall return in the order of
New business benefitted in the year under review from single premiums, which reached a record level with growth of around 60% year-on-year. Altogether, the premium income booked by German life and annuity insurers totalled EUR 81.2 billion according to provisional figures released by the German Insurance Association (GDV); this represents growth of 6.7%.
Our life reinsurance activities in the German market are led by E+S Rück, which generated premium income of some EUR 390 million. The slight rise in premium volume year-on-year despite the prevailing difficult market climate was attributable to the acquisition of two new clients, thereby boosting the total number of German clients to 41 companies. In the German market, too, we noted stronger demand for reinsurance solutions geared towards the capital market.
With net premium of EUR 344.5 million and given the favourable experience of the biometric risks of mortality and morbidity, another gratifying operating result (EBIT)
In the UK life and annuity insurance market, Europe's largest reinsurance market, we continue to operate through our subsidiary HLR United Kingdom as a fullservice provider in the conventional market segment, with a focus on risk-oriented covers (protection business).
For a number of years now the UK life market has been characterised by exceptionally fierce cut-throat competition, which has carried over into the reinsurance market.
Against this backdrop HLR UK pursues a conservative underwriting policy which concentrates on maintaining existing customer relationships and promotes innovative types of coverage – such as the new generation of critical illness policies with graded benefits according to the severity of the disease. We also stepped up our activities in the area of individual UK disability covers and intensified our marketing efforts in Ireland in the year under review.
When translating the financial data to our balance sheet currency (the euro), it is important to bear in mind the abrupt fall of the pound sterling, which from a 12-month perspective lost 12.3% of its value against the euro.
In light of this devaluation, the gross premium income booked by HLR UK of EUR 182.5 million (EUR 186.1 million ) and the company's operating profit of EUR 19.7 million (EUR 22.8 million) are highly satisfactory. The EBIT
From our Home Office in Hannover we cover the specialised UK sectors of enhanced annuities with a reduced payment period and – to an increasing extent – the reinsurance of the longevity risk associated with acceptances of existing pension funds. Both segments enjoyed vigorous growth in the year under review, in part due to new customer relationships and partly through the expansion of existing accounts. Our premium income consequently rose by 78.3% to EUR 656.9 million.
Re, 19.9% to HLR Ireland, 16.4% to HLR UK and 3.4% to
This market region – which also includes French-speaking Canada – is served by our Paris branch. The development of business was very pleasing.
Scandinavian markets including the three Baltic countries as well as Turkey and Israel are served by our branch in Stockholm.
In conjunction with the portfolio we also took over a number of underwriting and administration systems together with the relevant databases and offered a new working home to a group of 130 expert reinsurance professionals in Charlotte and Denver. With a portfolio of more than four million individual policies and annual premium income in excess of USD 1.0 billion, we are in a position to immediately realise appreciable economies of scale for the future run-off.
The assumed portfolio of cedant relationships was a complementary benefit: previously, HLR America had itself only been able to establish relationships with five of the forty most prominent cedants included in the acquired portfolio. Looking ahead, then, this group of cedants will offer outstanding opportunities to enlarge new business in the conventional US mortality market.
EUR 1.0 billion (EUR 613.6 million) in the year under review, while net premium earned increased by around 8.6% to EUR 262.5 million.
The development of the mortality risk – also with respect to the portfolio assumed effective 1 January 2009 – was satisfactory, and profitability in the area of financially oriented covers was excellent once the US capital market had largely normalised. What is more, here, too, the aforementioned non-recurring effects were a positive factor. The operating profit (EBIT) consequently improved substantially to EUR
40.7 million, following a loss of EUR 17.7 million in the previous year. This was equivalent to an EBIT margin of 15.5%. Net income after tax climbed to EUR 25.3 million.
This pre-tax result is identical to the net income after tax.
Africa Our subsidiary Hannover Life Re Africa, which is based in Johannesburg, bears responsibility for life business in
Central and south America Reinsurance acceptances from these markets are written from Hannover Home Office with the support of our offices in Mexico City (for Central American markets) and
Malucelli Re, the first Brazilian reinsurer after IRB to have received a licence on the basis of the new insurance law, is bearing initial fruit in the market.
Asia As in previous years, Hannover Life Re divides the Asian markets between its two regional centres in Kuala Lumpur and Hong Kong. While our Malaysian branch handles the
ASEAN markets and South Asia, Hong Kong serves Greater China as well as the key life markets of Korea and Japan.
Asian markets in the year under review, enabling us to write four contracts with clients in Hong Kong, China and
147.2 million. Despite fiercer competition among international reinsurers, further exacerbated by some local reinsurers from Japan, Korea, China and Malaysia, the results posted by Hannover Life Re remain gratifying.
Australia and new Zealand Business written in Australia and New Zealand is the responsibility of our subsidiary Hannover Life Re Australasia. The company focuses on risk-oriented business in the context of life, critical illness and various disability covers.
The company also supports new marketing models in Australia and New Zealand which are designed to directly address policyholders and handle the purchase of policies quickly and efficiently through call centres.
European Central Bank lowered its prime rate incrementally as the year progressed from 2.50% to 1.00%.
comparable development was also observed for European government bonds, although in this case the increase from 2.9% to 3.4% was more moderate. Differences in the yield trends of the two currency zones were evident in the short and medium-dated maturity segments. While interest rates on European instruments in this maturity range tended to decline, their US counterparts saw increases. In the area of corporate bonds sharp falls in risk premiums were noted across virtually all credit rating classes and industries in the year under review.
< 1% Equities 1.7% Private equity 8.0% Short-term investments and cash 1.6% Other 1.2% Real estate
Having scaled back our exposure to listed equities to a marginal holding in the previous year and refrained from any investments whatsoever in this asset class during the year under review, stock market volatility obviously had a very limited effect on our investment income.
The euro moved slightly higher against the US dollar and pound sterling – after substantial fluctuations within the year –, although it lost ground heavily against the Canadian and Australian currencies.
In so doing, it must be ensured that we are able to meet our payment obligations at all times – always making allowance for the positive cash flow from our technical account.
Thanks to a positive cash flow from the technical account and the investments, and assisted by the development of our fixed-income investments, our portfolio of assets under own management grew to EUR 22.5 billion (EUR 20.1 billion).
Result from participations in associated companies (5.0) –218.4% 4.2 11.0 6.3 3.9
Net investment income from assets under own management 843.6 78.9 901.6 967.0 764.3
Net investment income from funds withheld 276.8 +38.7% 199.6 220.1 221.9 351.6 1 Excluding expenses on funds withheld and contract deposits 2 Including depreciation/impairments on real estate 3 Portfolio at fair value through profit or loss and trading
were taken on securities. Of this total amount, EUR 92.6 million (EUR 26.9 million) were attributable to alternative investments – principally private equity and real estate funds. Owing to the minimal holding of equities, writedowns of a mere EUR 3.2 million (EUR 356.1 million)
were taken here. In the area of fixed-income assets they were halved to EUR 45.4 million (EUR 96.9 million).
on fixed-income securities and funds that had been written down in prior periods. Net gains of EUR 113.0 million were realised on disposals, as against a net loss of
We were able to substantially boost our net investment income to more than EUR 1.1 billion (EUR 278.5 million)
EUR 19.7 billion (EUR 17.9 billion), first and foremost due to inflows of cash from the technical account. The funds were invested predominantly in government bonds and corporate bonds. Yet we also tapped into opportunities that opened up in the area of asset-backed securities. Hidden reserves for fixed-income securities recognised in shareholders' equity totalled EUR 252.3 million (EUR
101.7 million). This increase was also similarly reflected as an increase in the shareholders' equity recognised in the balance sheet. The spread of asset classes naturally shifted towards sovereign risks at the expense of semigovernmental bonds owing to the numerous state guarantees invoked in the public financial sector. The quality of the bonds – measured in terms of rating categories – was maintained on a consistently high level. The proportion of securities rated “A” or better – at 91.7% – was slightly lower than in the previous year (92.9%).
We held a total amount of EUR 1.8 billion (EUR 1.2 billion)
Holdings of alternative investments remained on a broadly stable level. As at 31 December 2009 an amount of EUR
The combination of the results of the internal and external surveys gave rise to an “employer value proposition”, i.e.
an answer to the question of why a qualified candidate should join Hannover Re rather than a competitor and, what is more, an answer that is tailored to specific target groups. The following criteria, among others, emerged as crucial strengths of Hannover Re – and at the same time as important requirements on the part of jobseekers: • Hannover Re offers attractive jobs and further training activities.
• The working environment is modern, flexible and offers individual development opportunities.
In order to embed the project more deeply into the company and leverage our staff's strong identification with
Hannover Re, we decide to use only “real” employee photos and quotations in the Internet and in brochures. Hannover
Re stepped out with its new look for the first time in November 2009 at Germany's most prestigious recruiting fair, the graduate job fair (“Absolventenkongress”) held in
The goal of competency management is to effectively leverage the potential available to our company thanks to the talents of its staff, to sort this potential with an eye to the future and on this basis to draw up the competency profiles needed for sustainable competitiveness. Competency management forms an important part of any undertaking 's strategic human resources planning and development. It will enable us to render the increasingly complex and imponderable external and internal framework conditions more easily manageable and controllable – provided competency management is closely dovetailed with corporate strategy.
For many years Hannover Re's personnel development programme has offered a broad range of internal training measures that reflect our aspiration to optimally qualify employees for their duties and promote lifelong learning.
The Executive Board would like to thank all employees for their dedication in the past year. At all times the workforce identified with the company's objectives and purposefully pursued them. We would also like to express our appreciation to the representatives of staff and senior management who participated in our co-determination bodies for their critical yet always constructive cooperation.
Successful, responsible and above all sustainable business management forms the basis for playing a positive role in society. It also establishes the foundation that enables our company to continuously foster and advance its staff and support projects that are in the public interest.
The basic idea underlying this project is to combine economic profit with ecological benefit through preventive environmental protection. The energy-saving successes already achieved by our company are regularly publicised in the relevant project publications. In the year under review we were once again a recognised Ecoprofit operation.
In the year under review we cut the power consumption of our computer centre and approved a videoconferencing concept that – once implemented in 2010 – is intended to reduce the carbon emissions caused by staff travelling on business trips.
Since 2008 we have compensated for the CO2 pollution caused by business flights through voluntary offsetting payments to the international organisation “atmosfair”, thereby supporting selected climate protection projects in developing and emerging countries. We pay similar voluntary offsets for train travel too.
All in all, we reduced and offset 833 tonnes of carbon emissions (calculated for the Hannover Home Office location ) in the year under review relative to 2008. The CO2 pollution of 9,000 tonnes caused in 2009 was 98% offset.
Yet our assistance is not limited to Germany alone, but is instead geographically wide-ranging. A variety of projects around the world are run under the auspices of individual subsidiaries and branch offices that collect donations for social causes through various staff activities. In Florida, for example, our subsidiary's workforce supports the
“New Hope for Kids” campaign: children and their families who find themselves in difficult life situations are assisted with cash donations or through the personal efforts of our staff.
In Africa, too, Hannover Re has been active for a number of years, inter alia in the project “Food for homeless children ”: twice a week employees at our South African subsidiary donate food to a centre for homeless children.
We also consider it part of our social responsibility to offer internships as a means of career orientation that are appropriately compensated, but are in no way intended to replace full-time positions. Our equitable approach to placing interns is certified by the “Fair Company” quality seal which we were awarded by the magazine “karriere”.
E+S Rück, the subsidiary of Hannover Re with responsibility for the German market, organises so-called examination concerts in cooperation with Hannover University of Music and Drama. Since the first concert was held some twelve years ago E+S Rück has assisted three or four of the university's “master students” each year as they seek to embark on their career as soloists; at the same time the company is able to offer its clients a musical highlight as part of its “Hannover Forum” seminar event. The involvement of E+S Rück gives graduating students the rare opportunity to play with the accompaniment of a large orchestra.
The risk strategy derived from the company strategy constitutes the basis for our handling of risks and opportunities. The parameters and decisions of the Executive
• Separation of functions between divisions that enter into and manage risks, on the one hand, and those that monitor risks (Group Risk Management), on the other
The interplay of the individual functions and bodies within the overall system is vital to an efficient risk management system. Hannover Re has clearly defined roles and responsibilities in order to ensure smooth interaction.
for key performance indicators and balance sheet variables, such as company profit and shareholders' equity, in light of all major internal and external influencing factors, such as the insurance and investment portfolio, tax ratio and capital market developments. In so doing, the model draws on statistical, stochastic and actuarial methods and practices in order to ensure the most realistic possible representation of the company and its environment. The risk capital is calculated on the basis of a Value at Risk
(VaR) with a confidence level of 99.97% (default probability of 0.03%) for an observation period of one year. As a vital subsidiary condition, this level of confidence also ensures that we exceed future regulatory capital requirements (e.g. the required confidence level of 99.5%).
The available capital rose sharply in the course of the year under review. Owing to the enlarged business volume, the required risk capital also increased. There was an increase in the diversification effect – a measure of risk spreading –, due particularly to the acquisition of the ING
The available economic capital is composed of the three components of IFRS shareholders' equity (including minority interests), valuation reserves and hybrid capital. The valuation reserves for non-life reinsurance business primarily involve the difference between the nominal loss reserves according to IFRS and their discounted value, increased by the cost of capital needed to cover the fluctuation
Executive Board • Overall responsibility for risk management • Definition of the risk strategy • Responsible for the proper functioning of risk management
• Decision-making power is within the bounds of the risk strategy defined by the Executive Board
Chief Risk Officer • Responsibility for holistic risk monitoring across business groups (systematic identification and assessment, control/monitoring and reporting of risks) of all material assets- and liabilities-side risks from the Group perspective
Group Risk Management • Process-integrated risk monitoring function • Methodological competence, inter alia for – development of processes/methods for risk assessment, management and analysis, – risk limitation and reporting, – risk monitoring and determination of the required risk capital across the
• The task is performed on the basis of the guidelines set out by Group Risk Management
Required and available risk capital for the 99.97% vaR in EUR million
Of special significance to our company is the overarching diversification between our business segments and lines.
As a result, we are able to enhance the efficiency of the allocated capital while at the same time reducing the required capital adequacy. 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.
Committee and Executive Board is supplemented as necessary by immediate internal reporting on material risks that materialise at short notice.
Within our central system of limits and thresholds key ratios have been specified for steering and monitoring the material risks of the Hannover Re Group – within the meaning of the materiality concept defined in the risk
Cre di t s ur et y & po lit ica l r isk s
In the area of Group accounting, processes with integrated controls ensure the completeness and accuracy of the consolidated financial statement. These 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 documented and are subject to regular review. All internal Group accounting principles are collated in an Accounting Manual that is available in IT-supported form to all relevant organisational units and all staff of the Hannover Re
Risks emanating from non-life reinsurance are of crucial significance to our business operations. We make a fundamental distinction here 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). The catastrophe risk is especially important in the latter case.
IBNR reserve established by the Hannover Re Group amounted to EUR 3,537.8 million in the year under review. Especially with respect to asbestos- and pollutionrelated claims, the calculation methods are complex. 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. At the end of the year under review our survival ratio stood at 24.3 years.
Catastrophe losses and major claims in EUR million 2009 gross 2009 net
Damage to an oil drilling platform in Australia, 20 August 19.4 16.9
Explosion at a hydroelectric plant in Russia, 17 August 11.9 11.9
Licensed scientific simulation models, supplemented by the expertise of our own specialist departments, are used to assess our material catastrophe risks from natural hazards (earthquake, windstorm). Furthermore, we establish the risk to our portfolio from various scenarios (e.g. hurricanes in the US, windstorms in Europe, earthquakes in the US) in the form of probability distributions. The monitoring of the natural hazards exposure of the Hannover
Re portfolio (accumulation control) is rounded out by the progressive inclusion of realistic extreme loss scenarios.
Board and the body responsible for steering non-life reinsurance are kept regularly updated on the degree of capacity utilisation.
As part of our holistic approach to risk management across business groups, we take into account numerous relevant scenarios and extreme scenarios, determine their effect on key balance sheet variables and performance indicators, evaluate them in relation to the planned figures and identify alternative courses of action.
The price/premium risk lies in the risk of incomplete or inaccurate estimation of future claims, especially over time. Regular and independent reviews of the models used for treaty quotation as well as the implemented practices, e.g. our compulsory central and local underwriting guidelines, are vital management components. In addition,
Limits for the 100- and 250-year aggregate annual loss as well as utilisation thereof: Natural catastrophes and aggregate annual loss in EUR million Limit 2009 Actual utilisation (July 2009)
All risks directly connected with the life of an insured person are referred to as biometric risks (especially the miscalculation of mortality, life expectancy, morbidity and occupational disability); they constitute material risks for our company in the area of life and health reinsurance.
By monitoring compliance with the relevant underwriting guidelines, we minimise the potential counterparty risk stemming from an inability to pay or deterioration in the credit status of cedants. Regular reviews and holistic analyses (e.g. with an eye to lapse risks) are carried out with respect to new business activities and the assumption of international portfolios. The interest guarantee risk, which is important in life business in the primary insurance sector, is of only minimal risk relevance to our company owing to the structure of our contracts. The actuarial reports and documentation required by local regulators ensure regular scrutiny on the level of the subsidiaries.
The Market Consistent Embedded Value (MCEV) is a measure used to evaluate life insurance and reinsurance business; it is calculated as the present value of the future shareholders' earnings from the worldwide life and health reinsurance portfolio plus the allocated capital. The calculation makes appropriate allowance for all risks underlying the covered business. The resulting Market Consistent Embedded Value is established on the basis of the principles of the CFO Forum published in June 2008. For the 2006 and 2007 financial years the European Embedded
Based on the latest available data published on 5 May 2009
2008 and its sensitivity to selected scenarios in comparison with the corresponding sensitivities of the EEV 2007.
The moderate change in the MCEV under the scenarios shown is in line with our risk-bearing capacity in this area and reflects our portfolio's high degree of diversification.
The consolidated MCEV before minority interests amounted to EUR 1,652.0 million (EEV 2007: EUR 1,715.1 million)
as at 31 December 2008. Making allowance for the different calculation methods, this represents an increase of 4.3% (12.3%) since the embedded value for 2007 comparable with the MCEV 2008 stood at EUR 1,583.7 million.
stress tests for natural catastrophes after retrocessions in EUR million 2009 2008 effect on forecast net income 100-year loss European windstorm (114.7) (203.3)
Changes in these risk premiums, which are traded on the market, similarly result – analogously to changes in pure market yields – in changes in the fair values of the securities concerned.
especially if there is a currency imbalance between the technical liabilities and the investments. By systematically adhering to matching currency coverage, i.e. extensive matching of currency distributions on the assets and liabilities side, we are able to reduce this risk.
Real estate risks may result from unfavourable changes in value either directly or through units held in real estate funds. This may be caused by a deterioration in the particular qualities of the property or a general downslide in market values (as seen with the US real estate crash). Real estate risks are of subordinate importance for our company owing to our relatively modest real estate portfolio.
(VaR) is a vital tool used for monitoring and managing market price risks. The VaR is determined on the basis of historical data, e.g. for the volatility of the fair values and the correlation between risks. As part of these calculations a decline in the fair value of our portfolio is simulated with a given probability and within a certain period.
sensitivity analysis of the Market Consistent embedded value (MCev) and european embedded value (eev)1
The model takes into account the following market risk factors: • Interest rate risk
calculations. In addition, tightly defined tactical duration ranges are in place, within which the portfolio can be positioned opportunistically according to market expectations. The parameters for these ranges are directly linked to our calculated risk-bearing capacity.
We use derivative financial instruments to optimise our portfolio in light of risk/return considerations. The primary purpose of these derivative financial instruments is to hedge against potentially adverse situations on capital markets. In the year under review we made very limited use of forward exchange transactions to hedge cash flows from the insurance business.
value at Risk1 for the investment portfolio of the Hannover Re Group in %
Jan. 09 Feb. 09 March 09 Apr. 09 May 09 June 09 July 09 Aug. 09 Sep. 09 Oct. 09 Dec. 09Nov. 09 1 VaR upper limit according to Hannover Re's investment guidelines: 1.5%
Since the business that we accept is not always fully retained, but instead portions are retroceded as necessary, the credit risk is material for our company – especially in non-life reinsurance. Our retrocession partners are carefully selected in light of credit considerations in order to keep this risk as small as possible. This is also true of our broker relationships, under which risks may occur inter alia through the loss of the premium paid by the cedant to the broker or through double payments of claims. We reduce these risks, inter alia, by reviewing all broker relationships once a year with an eye to criteria such as the existence of professional indemnity insurance, payment performance and proper contract implementation. The
The Group Protections unit is responsible for the Hannover Re Group's ongoing cession management. This process is supported by our “Cession Limits” Web-based risk management application, which specifies cession limits for the individual retrocessionaires participating in protection cover programmes and determines the capacities still available for short-, medium- and long-term business
pected run-off duration of the reinsured business, the selection of reinsurers takes into account not only the minimum ratings of the rating agencies Standard & Poor's and A. M. Best but also internal and external (e.g. market information from brokers) expert assessments. Overall, retrocessions conserve our capital, stabilise and optimise our results and enable us to derive maximum benefit from a “hard” market (e.g. following a catastrophe loss event).
• Since 2005 we have reduced the level of recoverables by altogether 63%.
Retrocession gives rise to claims that we hold against our retrocessionaires. These reinsurance recoverables – i.e.
We attach vital importance to credit assessment conducted Secured AAA AA A ≤ BBB, NR
Reinsurance recoverables as at the balance sheet date in EUR million -19.5% p.a.
on the basis of the quality criteria set out in the investment guidelines.
In our understanding, this category encompasses 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. The operational risk also extends to legal risks. Operational risks exist, inter alia, in relation to the risk of business interruptions or system failures or may derive from unlawful or unauthorised acts. Given the broad spectrum of operational risks, there is a wide range of different management and monitoring measures tailored to individual types of risk.
Core elements of risk management – for example with an eye to business interruptions and the failure of technical systems – are our contingency plans designed to ensure the continuity of mission-critical enterprise processes and systems (recovery plans, back-up computer centre). The flexible working model of alternating telecommuting adopted by Hannover Re is, among other things, also a risk-reducing measure inasmuch as alternative workplaces and the requisite infrastructure are kept available locally. At the same time, we are thus able to offer the possibility of a healthy work/family balance. An important element of our human resources management policy, teleworking also reduces the risk of potentially losing key personnel by facilitating an attractive working environment.
As far as possibly unlawful or unauthorised acts are concerned, we enable our staff and partners to report certain serious breaches of the law pertaining to Hannover Re anonymously through our electronic whistleblower system.
Hannover Re's Compliance Office so that it can investigate potentially suspicious circumstances. All tips are handled in the strictest confidence.
Of material importance to our company in the category of other risks are primarily emerging risks, strategic risks, reputational risks and liquidity risks.
Strategic risks derive from the risk of an imbalance between the corporate strategy and changing general conditions in the business environment. Such an imbalance might be caused, for example, by incorrect strategic policy decisions or a failure to consistently implement the defined strategies. We therefore review our company strategy and risk strategy annually and adjust our processes as and when required.
The liquidity risk refers to the risk of being unable to convert investments and other assets into cash in order to meet our financial obligations when they become due. The liquidity risk consists of the refinancing risk, i.e. the necessary cash cannot be obtained or can only be raised at increased costs, and the market liquidity risk, meaning that financial market transactions can only be completed at a poorer price than expected due to a lack of market liquidity.
Our regular liquidity planning and liquid asset structure are core elements of our ability to manage this risk. These measures ensure that Hannover Re is able to meet its payment obligations at all times without reservation. We manage the liquidity risk inter alia by allocating a liquidity code to every security. Adherence to the limits defined in our investment guidelines for each liquidity class is subject to daily control. The spread of investments across the various liquidity classes is recorded in the monthly investment reports and managed/monitored by way of appropriate limits.
The above remarks describe the diverse spectrum of risks to which we, as an internationally operating reinsurance company, are exposed as well as the steps taken to manage and monitor them. The specified risks can potentially have a significant impact on our assets, financial position and net income. Yet consideration solely of the risk aspect does not fit our holistic conception of risk, since risks always go handin -hand with opportunities. Our effective management and monitoring tools as well as our organisational and operational structures ensure that we are able to identify our risks in a timely manner and maximise our opportunities.
Contrary to a very clear opinion expressed by tax attorneys, the revenue authority is of the view that not inconsiderable investment income generated by the Group's reinsurance subsidiaries domiciled in Ireland is subject to additional taxation at the parent companies in Germany on the basis of the provisions of the Foreign Transactions
Based on our currently available insights arrived at from a holistic analysis of the risk situation, the Executive Board of Hannover Re cannot at present discern any risks that could jeopardise the continued existence of our company in the short or medium term or have a material and lasting effect on our assets, financial position or net income.
In order to achieve this objective we have developed tools that enable us, on the one hand, to measure in light of value-based considerations how close we are to accomplishing our goal and, on the other, to break the goal down to the level of individual profit centres.
PE check is carried out at closed-door meetings of the individual units.
The planning process spans the three levels of results, risks and resources, which are closely interrelated. Results, risks and resources are planned by the responsible officers with the support of Group Controlling Services and Corporate Development and they are reconciled by the Executive Board. Key pivot points are the detailed strategies and activity plans drawn up by all treaty departments and service units. The planning is approved by the Executive Board and subsequently communicated within the Group.
1 At the Global Management Forum (GMF) all senior managers of the worldwide Hannover Re Group come together once a year to define aspects of strategic orientation. The parameters elaborated here serve as the basis for the subsequent planning process.
The targets that emerge out of the planning process are integrated into the individual agreements on objectives with managers. When defining targets the participants take into account not only profit-oriented but also nonfinancial goals, including for example the activity planning.
We use the following formula to calculate the IVC (Intrinsic Value Creation): Adjusted operating result (EBIT) − (capital allocated x weighted cost of capital) = IVC
The adjusted operating profit (EBIT) consists principally of the reported Group net income after tax and the change in the balancing items for differences between present values and amounts stated in the balance sheet (one adjustment for non-life and one for life/health reinsurance).
5 The MCEV as at 31 December 2009 will be published on our website at the same time as the financial report for the first quarter of 2010.
Non-life reinsurance Combined ratio ≤ 100% 96.6% 95.4% 99.7% 100.8% 112.8%
Life and health reinsurance Gross premium growth 12–15% 44.5% 1.7% 10.4% 15.2% 11.4%
Growth in earnings per share ≥ 10% (117.6%) 8.3%8 942.7% (82.4%)
In calculating the cost of capital, our assumption for the cost of shareholders' equity – based on a Capital Asset
Value is created in excess of this return. The definition of our targeted minimum return on equity as 750 basis points above “risk-free” thus already contains a not insignificant target value creation. Interest is calculated on the balancing items for present value at the underlying interest rates, and on debt capital at the actually paid interest for our hybrid capital. Weighted according to the composition of the allocated capital defined above, the weighted cost of capital applicable to all profit centres is calculated from these interest rates. We allocate equity sparingly and make efficient use of hybrid capital as well as other equity substitutes; our weighted cost of capital is consequently low, not only in absolute terms but also relative to our competitors (6.8% in 2008).
When seeking to identify these value drivers, it is first necessary to break the IVC down into individual decision fields. Even in the case of performance measurements, e.g. in connection with management by objectives, this approach makes it possible to take as a basis only those
IVC consists of six levels; its degree of detail varies according to Home Office and our foreign companies as well as between non-life and life/health reinsurance: 1. IVC from gross underwriting (current business)
The technical provisions and liabilities shown, which include funds withheld/contract deposits and reinsurance payable, make up 81.3% (82.1%) of the balance sheet total and are more than covered by our investments, funds withheld/contract deposits, accounts receivable and reinsurance recoverables.
The equity including minorities at 10.1% (8.9%) of the balance sheet total as well as the loans and – especially
– subordinated capital at 3.5% (3.8%) of the balance sheet total represent our most important sources of funds.
In view of the thoroughly favourable result, the development of the shareholders' equity of the Hannover Re Group was highly gratifying. Compared to the position as at 31
Regular liquidity planning and a liquid investment structure ensure that Hannover Re is able to make the necessary payments at all times. Hannover Re's cash flow is shown in the consolidated cash flow statement on page 99 et seq.
The net inflow results not only from investment income but also from the positive experience of our reinsurance business and is notable, in particular, for appreciably lower claim payments than in the previous year.
Hannover Re's debt financing on the capital market was essentially composed of subordinated bonds issued in past years to ensure lasting protection of our capital base.
In addition, several Group companies have taken up longterm debt – principally in the form of mortgage loans –
Stock Corporation Act. In this connection the Annual General Meeting authorised the Executive Board on 5 May 2009 pursuant to § 71 Para. 1 No. 8 Stock Corporation Act to acquire treasury shares on certain conditions.
The following paragraphs explain major agreements concluded by the company that are subject to reservation in the event of a change of control, inter alia following a takeover bid, and describe the resulting effects. The letter of credit lines extended to Hannover Re contain standard market change-of-control clauses that entitle the banks to require early repayment if Talanx AG loses its majority interest or drops below the threshold of a 25 percent participation or if a third party acquires the majority interest in Hannover Rückversicherung AG. For details of the letter of credit lines please see our explanatory remarks on other financial facilities in the notes, Section 6.12 “Debt and subordinated capital”, page 160.
Standard & Poor's (S&P) and A.M. Best, the rating agencies of greatest relevance to the insurance industry, assess the financial strength of Hannover Re on the basis of an interactive rating process and have awarded it very good ratings. The rating agencies highlight in particular the strength of the Hannover Re Group's competitive position, its capitalisation and risk management.
ate Governance of the Company as defined by § 289 a
Para. 1 Commercial Code (HGB): In the previous year Hannover Re was not in compliance with one recommendation of the German Corporate Gov­
ed 6 June 2008 and 18 June 2009 again diverges in one respect. In each case the recommendation in question re­
fers to the inclusion of a cap on severance payments when concluding or renewing an Executive Board contract. The reason for this divergence is set out in the following Dec­
Declarations of Conformity of the company are published on its website (
Commission” published by the Federal Ministry of Justice or to explain which recommendations of the Code were/
suant to § 161 Stock Corporation Act (AktG) that in its implementation of the German Corporate Governance
Management Board contracts: Premature termination of a service contract without seri­
ous cause may only take the form of cancellation by mu­
sibility of negotiations also extending to the severance cap in the event of a member leaving the Executive Board.
Para. 4, it is, however, open to question whether qualified candidates for a position on the company's Executive
Board would accept appropriate clauses. In addition, the scope for negotiation over a member leaving the Executive
Board would be restricted, which could be particularly disadvantageous in cases where there is ambiguity sur­
Board and Supervisory Board: Hannover Rückversicherung AG will comply with the rec­
ommendation to agree a deductible of at least 10% of the loss up to at least the amount of one and a half times the fixed annual compensation of the Management Board member under the directors' & officers' (D&O) insurance taken out by the company within the deadline set out in §
(EGAktG) (1 July 2010). This shall also apply accordingly to members of the Supervisory Board.
Hannover Re's objective is to further expand its position as a major, optimally diversified reinsurance group of above-average profitability with a fast, flexible and undog­
novation and the quality of our services we strive to be one of the three most profitable reinsurers in the world by boosting our profit and the value of the company by a double-digit percentage every year. All other goals, such as profitable growth, the protection of capital, motivated staff and a lean organisation, are derived from this over­
Governance Code was amended and its recommendations and suggestions were revised. These codifications were essentially a response to shortcomings in corporate gov­
Berlin Center of Corporate Governance on acceptance of the Code's recommendations and suggestions found that
Hannover Re once again – as in previous years – ranked as one of the leaders among DAX- and MDAX-listed com­
Governance Code as amended 6 June 2008 which was used in the survey, Hannover Re fulfilled the recommen­
dations to a level of 98.8% with one divergence and there­
The above-average level of compliance alone testifies to the considerable importance that Hannover Re attaches to good enterprise management and supervision in the spir­
mittees underwent a thorough revision with an eye to the amendments of the German Corporate Governance Code in 2009. The full Supervisory Board reviewed and ap­
Board, including the major contractual components, and defined the total remuneration of the individual members of the Executive Board.
naire. The aim here is to further optimise the cooperation between the Executive Board and Supervisory Board.
venting breaches of the law and to safeguard integrity in the behaviour of staff and officers of Hannover Re, irre­
spective of whether the issues involved relate to anti­trust law, compliance with national or international embargo restrictions or equal treatment / non-discrimination. Com­
cording of all risks that from the current standpoint could conceivably jeopardise the company's profitability and continued existence. Further details in this regard may be obtained from the risk report contained in the Annual Re­
portance such as the approval of strategic principles and objectives, the planning of the annual results or the adop­
visory Board is kept informed on a regular and timely basis of the business development, the execution of stra­
tegic decisions, material risks and planning as well as relevant compliance issues. The Chairman of the Super­
visory Board stays in regular contact with the Chairman of the Executive Board in order to discuss with him the company's strategy, business development and risk man­
ing areas of responsibility) is set out on page 6, the com­
orated and implemented for the company in accordance with its strategic objectives. Within the framework of a consistent business policy, special importance attaches to the principle of “delegation of responsibility”. In the in­
terests of shareholders, importance is expressly attached to an organisation that facilitates cost-effective, quick and unbureaucratic decision processes. Open and trusting co­
sibility within the bounds of the resolutions adopted by the Executive Board. Only persons under the age of 65 may be appointed to the Executive Board. The term of appointment shall be determined such that it expires no later than the end of the month in which the member of the Executive Board turns 65.
The Rules of Procedure of the Supervisory Board provide inter alia that each member of the Supervisory Board must have the knowledge, skills and professional experience required for orderly performance of their tasks and that the Supervisory Board must have a sufficient number of independent members. At least one independent member shall have technical expertise in the fields of accounting and the auditing of financial statements. Persons sug­
Supervisory Board participates in less than half of the meetings of the Supervisory Board in a financial year, this shall be noted in the Supervisory Board's report. No more than two former members of the company's Executive
petence and take decisions in lieu of the Supervisory Board within the scope of competence defined by the Rules of
ing process and the effectiveness of the internal control system, the risk management system and the internal au­
Board and discusses the interim reports as well as the semi-annual report prior to their publication. It prepares the Supervisory Board's examination of the annual finan­
cial statement, management report and proposal for the appropriation of profit as well as of the consolidated finan­
text, the Finance and Audit Committee receives detailed information on the auditor's view of the net assets, finan­
urement principles on the net assets, financial position and results of operations together with available alterna­
tion­related content as well as resolutions regarding 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 equiva­
lent 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.
tion Act in lieu of the Supervisory Board and – in coop­
eration with the Executive Board – ensures that long-term succession planning is in place.
The Nomination Committee is tasked with proposing to the Supervisory Board appropriate candidates for the nominations that it puts forward to the Annual General
Board committees please see the explanations provided in the Supervisory Board Report on pages 192 to 195.
Information regarding the following items is provided in the remuneration report: • Remuneration report for the Executive Board and indi­
• Information on share-based payment pursuant to Item 7.1.3 of the German Corporate Governance Code is pro­
ceived by the Executive Board in the 2009 financial year on the basis of the Board members' work for Hannover Re and its affiliated companies. Furthermore, we set out the changes agreed upon as a consequence of the Act on the
stAG), which entered into force on 5 August 2009. The Act on the Adequacy of Management Board Remuneration envisages inter alia that the remuneration structure at listed enterprises shall be oriented towards sustainable development of the company. In future, therefore, variable remuneration components shall have a multi­year meas­
Board members shall also be commensurate with their tasks and performances as well as with the position of the company.
tains information which forms part of the notes to the 2009 consolidated financial statement as required by IAS
24 “Related Party Disclosures”. In addition, we took into account the more specific provisions of DRS 17 “Report­
ies”. Under German commercial law, too, this information includes data specified as mandatory for the notes (§ 314
tion in the notes of the information discussed in the remu­
bility for determination of the amount of the remuneration paid to Hannover Re’s Executive Board to the Standing
At its meeting on 4 November 2009 the Supervis ory Board amended the Rules of Procedure of the committee with immediate effect. Pursuant to Item 3.2 of the Rules of Pro­
sory Board on the content, formation, modification and termination of employment contracts with the members of the Executive Board with the exception of remunera­
tion-related content. The latter shall be decided upon at a full meeting of the Supervisory Board.
Executive Board according to their scope of activity and responsibility. In this context, an appropiate variable por­
ments, are guided by the professional experience and area of responsibility of the Board member in question.
The content of the stock option plan is based solely on the
The internal performance criterion is satisfied upon achievement of the target earnings per share (EPS) calcu­
The external performance criterion is the increase in the value of the Hannover Re share. The benchmark used to measure this increase in value is the weighted ABN Amro
ance of the Hannover Re share. The amount paid out is limited to a maximum calculated as a quotient of the total volume of compensation to be granted in the allocation year and the total number of stock appreciation rights
awarded in the year in question. The waiting period before these virtual stock options may be exercised was two years until 31 December 2009. With the aim of making greater allowance for the long­term effect in the remuneration structure, the waiting period was extended to four years with effect from the 2010 allocation year. At the end of this remuneration report we explain in greater detail the changes decided upon by the Supervisory Board with ef­
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 components that resulted in a charge in the financial year concerned, irrespective of whether they accrued to the relevant Board member. Pecuniary advantages from non-cash compensation are also included. The stock ap­
cised in an amount of EUR 0.1 million (EUR 0.4 million).
May 2006 resolved by a voting majority of 85.5% to avail itself until 31 December 2010 of the option contained in the Act on the Disclosure of Management Remuneration
retirement provision The pension agreements of the members of the Executive
sion stood at EUR 8.4 million (EUR 9.9 million) as at 31
Change in the value of stock appreciation rights already awarded 704.2 (1,375.7) (490.0)
exercised stock appreciation rights 146.8 449.7 433.8 1 at the balance sheet date, no Board resolution had yet been passed on the amounts to be paid for 2009. the amount shown for the variable bonuses is based on estimates and the corresponding provisions constituted.
The remuneration of the Supervisory Board is determined by the Annual General Meeting of Hannover Re and regu­
Board for the financial year in question, allowance is made for the relevant reserve allocations in light of any fractional amounts. Value-added tax payable upon the re­
tendance allowance of EUR 500 for their participation in each meeting of the Supervisory Board and the Commit­
In the year under review no payments or benefits were granted to members of the Supervisory Board in return for services provided individually outside the committee work described above, including for example consulting or mediation services, with the exception of the remu­
Board or Supervisory Board or their dependants with the approval of the Supervisory Board.
Individual remuneration received by the members of the Supervisory Board in eUr thousand 2009 2008 name Function remuneration
Herbert K. Haas Chairman (from 5 may 2009) of the – supervisory Board – standing Committee – Finance and audit Committee – nomination Committee member (until 4 may 2009) of the – supervisory Board – standing Committee – Finance and audit Committee – nomination Committee
Variable remuneration 198.8 29.1 remuneration for committee work 53.9 7.4 attendance allowances 7.5 6.0
Karl Heinz midunsky member of the – supervisory Board – nomination Committee
Otto müller1 member of the supervisory Board Fixed remuneration 10.0 10.0
Dr. immo Querner member of the supervisory Board Fixed remuneration 15.0 15.0
ners and first-degree relatives hold less than 1.0% of the issued shares. As at 31 December 2009 the total holding amounted to 0.055% (0.058%) of the issued shares, i.e.
With an eye to § 87 Para. 1 Stock Corporation Act as amend­
muneration, the full Supervisory Board undertook for the first time a review of the fixed emoluments of individual members of the Executive Board. In view of the changes in the legal situation, the profit bonuses for the members of the Executive Board were also restructured and the condi­
Wilhelm Zeller purchase Bond Xs0187043079 24.03.2009 361 63.562 22,880.16 1 the bonds have a nominal value of eUr 1,000.00 each 2 rounded, the average price was eUr 63.556 3 rounded, the average price was eUr 64.585
At its meeting on 4 November 2009 the Supervisory Board considered the restructuring of the profit bonus. Among other things, the calculation of the “Earnings per Share
EPS of the last three financial years and the elimination of the guaranteed portion of the profit bonus were de­
preciation rights granted from the 2010 allocation year onwards. Upon expiry of this waiting period a maximum 60 percent of the stock appreciation rights granted for an allocation year may be exercised. The waiting period for a further 20 percent of the stock appreciation rights awarded for this allocation year is another year. Stock ap­
Short-term remuneration components performance bonus individual contribution to the overall performance Leadership skills innovative skills entrepreneurial skills accomplishment of personal objectives accomplishment of objectives annually in following year
The remuneration of Associate Directors (second management level) is based on a split into 70% fixed and 30%
Following a relatively vigorous surge in gross domestic product (GDP) in the United States, this is likely to flatten off over the course of the year. The strains caused by the crisis in the financial system are heavy. 2010 is expected to bring a decline in consumer spending and a rise in the savings rate. Incomes have also been hit hard by the sharp climb in unemployment. Overall output in the US is actually expected to contract in 2010. Despite this trend, however, the United States will not slip back into recession, although its weakness will be a drag on the global economy. The ifo Institute for Economic Research estimates real growth in GDP for 2010 at 1.8%.
The upswing in Germany is likely to be only modest in 2010. Endogenous stimulating factors will gradually gain in strength again, although flanking economic stimulus programmes are slowly being wound up. New capital investment and job creation are being hampered by restrictive lending practices. The upsurge in exports should remain moderate, since the economy is scarcely improving in key buyer countries. The import trend presents a similar picture. The average figure for real growth in GDP
GBP participants: Managerial levels up to the rank of Chief 459 total participants 532
Movements on international bond markets will be shaped in 2010 by prudent steering against the current of the prevailing expansionary monetary policy on the part of central banks. Furthermore, market players will have to focus on increased sovereign default risks and it remains to be seen whether the early phase of economic easing in developed countries will be sustained for the long term.
In the first half of the year the economic ratios for the major currency zones will likely lead to a slight increase in long-term yields. As the year progresses the anticipated slowdown in growth as well as inflationary expectations
The renewals as at 1 January 2010 – the date on which a good two-thirds of our treaties were renegotiated – passed off largely in line with expectations. We are satisfied with the achieved results. Insurers and reinsurers alike have overcome the repercussions of the financial market crisis rather quickly and for the most part rebuilt the lost capital. Sufficient capacity was therefore available, and prices broadly held stable. They even softened slightly in lossfree segments; rate increases were observed in lines that had seen heavy losses, such as aviation reinsurance.
That prices largely remained stable is a reflection of the underwriting discipline practised among reinsurers. Given that the returns obtainable on investments are lower on account of the reduced interest rate level, greater attention is now directed towards the underwriting result.
We anticipate that a combined ratio of less than 97% is attainable in non-life reinsurance for 2010, provided catastrophe losses remain within the bounds of our assumptions.
In our acceptances we concentrate particularly on segments in which risk-adequate premiums can still be obtained or where prices are rising. The latter is especially true of aviation as well as credit and surety reinsurance.
In light of the equity requirements arising out of “Solvency II”, reinsurance is taking on even greater significance as a tool for insurers – and we therefore anticipate modest growth in premium income.
Rück generated a highly satisfactory result in its domestic market. We expanded our customer base by establishing new business relationships, thereby extending our leading position in the lucrative German market.
The treaty renewals in North America were satisfactory overall and unspectacular; there was relatively little movement in the market. We expect that our portfolio will at least stay on a stable level. An increase in premium income in the original currency is certainly still attainable; the outcome of further renewal phases remains to be seen, since these dates are of greater significance in US business than in other markets.
Price movements in original business in the property lines were less attractive, prompting us to limit our proportional acceptances. Rates in non-proportional business, on the other hand, were stable. During the renewals we were able to gain market shares in the segment comprised of mid-sized enterprises.
As far as our specialty lines are concerned, the round of treaty renewals as at 1 January 2010 offered a mixed picture: as expected, slight rate reductions were observed in marine business after very good results in 2009. In the face of falling prices in the energy sector we scaled back our exposures. Our goal is to further improve the regional diversification of the portfolio and to act on business opportunities in countries outside Western Europe and the United States. Overall, we expect the premium volume in marine business to contract slightly in 2010.
The rate trend in aviation reinsurance was favourable, with increases in the lower double digits virtually across the board. These were, however, expected in view of the significant major claims experience in the year under review. We stepped up our acceptances with major airlines and thereby improved our position overall. In general aviation business rates were stable, albeit on a low level.
In the space segment they have now come under pressure following the profitable performance in 2009. We expect to generate rising premium income for our total aviation portfolio in the current financial year.
Rate movements in credit and surety reinsurance remain positive, and our premium volume will thus increase again in 2010. This is true of credit and surety business as well as political risks. In view of the challenging economic climate we are nevertheless standing by our cautious underwriting strategy: our acceptances are concentrated on existing clients, and we only write larger shares in areas where conditions are highly attractive or promise considerable improvement.
Following on from the reductions already achieved in proportional credit business in the year under review, further cuts in reinsurance commissions were possible in the treaty renewals for 2010. All in all, it may be stated that cedants rewarded our client-oriented approach while credit business was experiencing a difficult phase. Conditions in surety business held stable during the 2010 renewals, and commissions improved again on 2009. Since
We are thoroughly satisfied with the development of our structured reinsurance products. Given the likelihood of more exacting capital adequacy requirements under Solvency II, further growth will be possible in Europe. Potential for surplus relief contracts is opening up in emerging markets, since here too risk-based capital models are increasingly being adopted. While rates in the US and UK
The treaty renewals in the United Kingdom were broadly satisfactory. In motor insurance rates moved slightly higher and are still adequate. Rates in liability business and workers' compensation insurance held stable or declined slightly, but they improved in the financial institutions sector.
In direct business we anticipate good business conditions and rising premium volume for 2010. Our new branch of
South Africa, too, we expect to see growth in premium income. In this market the upcoming Soccer World Cup should also have a positive effect on the business climate with an eye to increasing liabilities.
Overall, we see very good opportunities in the global reinsurance segment, both in retakaful business – i.e. reinsurance transacted in accordance with Islamic law – and in facultative reinsurance. The markets of Central and
Contrary to expectations, prices in original business did not increase in China. Despite this, we were able to push through reduced commissions in some instances. We expect our premium volume to grow slightly in the current financial year. In this respect, our new branch in Shanghai offers the optimal platform for further expanding our position in China. In other Southeast Asian markets such as Malaysia we are looking to generate moderate premium growth. In the Japanese market – where treaties are for the most part renewed on 1 April – the premium volume should remain stable.
In 2010 we can look back on our Australian branch's 25 years of successful development. Rising prices in nonproportional business combined with opportunities arising out of the reinsurance of new agency business will likely generate further premium growth.
As expected, rates in worldwide catastrophe business came under pressure in the treaty renewals as at 1 January 2010. This can be attributed to the fact that primary insurers were able to rebuild the capital lost as a consequence of the financial market crisis more quickly than had been anticipated. Another factor here was the untroubled catastrophe loss experience in the year just-ended.
“Klaus”, and rates were either unchanged or even rose in some areas. The increased claims frequency caused prices in Central and Eastern Europe to move higher – while exposures were at the same time reduced.
In view of the conditions on the markets, we are satisfied with the outcome of the renewals in worldwide catastrophe business. In Japan, another major market for natural catastrophe covers, treaties are renewed on 1 April rather
The retakaful segment continues to show considerable promise. We anticipate further premium increases in the coming years. In 2010 growth is to be expected above all in engineering business in Saudi Arabia and Abu Dhabi.
In the area of facultative reinsurance, i.e. the underwriting of individual risks, only around 40% of our portfolio is renewed as at 1 January. We achieved largely stable rates here. In Europe we enlarged our market shares in certain segments, such as French casualty business. While prices similarly remained unchanged in US casualty business, marked premium erosion was witnessed in property business. Premiums in Asia grew, and we are looking to further extend our participation here. Expectations of improved rates in the energy sector have so far failed to materialise. On the whole, it is our assumption that the premium volume in facultative reinsurance will grow.
Hannover Life Re's “Five Pillar” model demonstrated its resilience even during the volatile years of 2008/2009, and we shall therefore persevere systematically with this strategic approach. Areas of concentration for the year ahead will be the US mortality market (part of the “conventional reinsurance” pillar) as well as UK annuity and pension business (part of the “new markets and products”
On the demand side we expect the strong international interest in financially oriented reinsurance solutions to be sustained because other models for strengthening the solvency base of primary insurers – such as direct capital increases or securitisations – have not yet attracted sufficient attention from shareholders or the financial markets.
We consider the expansion of our infrastructure, which in recent years led to the establishment of new locations in
Bermuda, Shanghai, Seoul, Mumbai and Rio de Janeiro, to be largely completed.
For the German and Australian markets we anticipate moderate growth rates, while we are looking to comfortable double-digit percentage increases annually for major emerging markets such as Greater China – not only in the short but also the medium term.
The general framework conditions in international life and health reinsurance can in principle be described as favourable for the coming two to three years. In developed insurance markets such as the United States, Japan, United Kingdom and Germany this assessment is coloured by the demographic trend, i.e. the ageing of the population, as reflected in heightened risk awareness. This is of particular benefit to annuity and health insurance products.
Increasing urbanisation in leading emerging markets such as China, India and Brazil is fostering a rapidly growing middle class, which to a greater extent than before is clamouring for insurance solutions designed to protect surviving dependants and afford individual retirement provision for policyholders.
In view of the low yield level on government bonds and the reduced risk premiums on corporate bonds, we do not anticipate any significant improvements in investment income. What is more, we believe that there is an increased probability of a rise in yield curves, as a consequence of which equity impairments from medium- to long-dated bonds are possible.
For non-life reinsurance we anticipate net premium growth of around 4% in the original currencies as well as a healthy profit contribution. In life and health reinsurance we are planning to grow net premium by roughly 10% in the current year. In terms of the operating profit
Bearing in mind the favourable market conditions described above in non-life and life/health reinsurance as well as our strategic orientation, we are looking forward to another good financial year in 2010. We expect our gross and net premium volume in total business to grow by about 5%.
For the 2010 financial year one positioning is such that we have a thoroughly realistic chance of building on the good performance of 2009 – adjusted for non-recurring effects.
As things currently stand, we anticipate a return on equity of at least 15%. This is subject to the premise that the burden of catastrophe losses does not significantly exceed the expected level of around EUR 500 million and that there are no drastically adverse movements on capital markets. As in past years, we are aiming for a dividend in the range of 35% to 40% of Group net income.
Looking beyond the current financial year, we expect continuing favourable conditions in our two business groups of non-life reinsurance and life/health reinsurance.
In non-life reinsurance we are guided exclusively by profit rather than growth targets. Our goal here is to achieve an EBIT margin of at least 10% each year.
On the Group level our return-on-equity target is at least 750 basis points above the risk-free interest rate. Both the earnings per share and the book value per share also constitute central management ratios and performance indicators for our company. Our strategic objective is to increase these key figures – together with the operating profit (EBIT) – by double-digit margins every year.
“you can look forward to some surprising moves, incisive passing and good finishing.”
Fixed-income securities – at fair value through profit or loss 6.1 235,149 254,528
Total assets 42,264,219 37,490,214 1 Adjusted on the basis of IAS 8. For details please see Section 3.1 “Changes in accounting policies“.
Liabilities in EUR thousand Notes 31. 12. 2009 31. 12. 20081
Commission and brokerage, change in deferred acquisition costs 7.3 2,011,344 1,635,941
Total income and expense recognised after tax 23,481 127,705 (151) 731,185 42,477 924,697
Board for insurance enterprises, we adopted the indirect method of presentation. The amounts taken into consider ation are limited to cash and cash equivalents shown under the balance sheet item “Cash”.
The parent company Hannover Rückversicherung AG (“Hannover Re”) and its subsidiaries (collectively referred to as the “Hannover Re Group”) transact all lines of non-life and life/health reinsurance. The Group maintains business relations with more than 5,000 insurance companies in about 150 countries. With gross premium of approximately EUR 10.3 billion, Hannover Re is one of the largest reinsurance groups in the world. The company’s global network consists of more than 100 subsidiaries, affiliates, branches and representative offices in around 20 countries. The
Group’s German business is conducted exclusively by the subsidiary E+S Rückversicherung AG.
The consolidated financial statement reflects all IFRS in force as at 31 December 2009 as well as all interpretations issued by the International Financial Reporting Interpretations Committee
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
The declaration of conformity required pursuant to § 161 German Stock Corporation Act (AktG)
regarding compliance with the German Corporate Governance Code has been submitted and, as described in the Declaration of the Executive Board regarding the Corporate Governance of the
The revised IAS 1 (rev. 2007) “Presentation of Financial Statements” is aimed at improving users’
is the modified presentation of the total comprehensive income of the reporting period, which is composed of the profit or loss for the said reporting period as well as other comprehensive income and expenses recognised directly in equity. The significant change in IAS 1 (rev. 2007) lies in the clear separation between changes in other comprehensive income resulting from transactions with owners in their capacity as such and non-owner changes in equity. Non-owner changes in equity must be disclosed in a separate new component of the financial statement, the consolidated statement of comprehensive income, with only the total shown in the consolidated statement of changes in shareholders’ equity. The tax effects must be disclosed separately in relation to each component of the other comprehensive income. The option – which has not been exercised by Hannover Re – continues to be available to rename individual components of the financial statements and to publish a single statement of comprehensive income combining the existing consolidated statement of income and the consolidated statement of comprehensive income.
In March 2009 the IASB published “Improving Disclosures about Financial Instruments – Amendments to IFRS 7”. By way of the Regulation (EC) No. 1165/2009 the European Commission adopted the amendments in European law on 27 November 2009. The amendments principally involve new
standards or changes in standards that have not yet entered into force or are not yet applicable
The IASB has issued the following standards, interpretations and amendments to existing standards with possible implications for the consolidated financial statement of Hannover Re, application of which is not yet mandatory for the year under review and which are not being applied early by
Hannover Re: In November 2009 the IASB published the revised IAS 24 “Related Party Disclosures”. A major new feature of IAS 24 (rev.) is the requirement for disclosures of “commitments”, for example guarantees, undertakings and other commitments, which are dependent upon whether (or not) a particular event occurs in the future. The definition of a related entity or a related person is also clarified. The standard, the implications of which for Hannover Re are currently under review, has not yet been ratified by the European Union.
In November 2009 the IASB also issued IFRS 9 “Financial Instruments” on the classification and measurement of financial instruments. IFRS 9 is the first step in a three-phase project intended to replace IAS 39 “Financial Instruments: Recognition and Measurement” with a new standard.
Transactions”, which have not yet been ratified by the European Union. The amendments relate to the scope of application of IFRS 2, and also clarify that the term “group” in IFRS 2 has the same meaning as in IAS 27; they will probably not have any implications for Hannover Re.
This offsetting was omitted in the consolidated financial statement for the 2008 financial year.
The contractual relationship referred to above commenced on 1 October 2008. The correction therefore has no implications for the opening balance sheet of the 2008 financial year or the balance sheets of reporting periods prior to 2008.
Financial assets: as a basic principle we recognise the purchase and sale of directly held financial assets including derivative financial instruments as at the settlement date. The recognition of fixedincome securities includes apportionable accrued interest.
Impairments: As at each balance sheet date we review our financial assets with an eye to object ive, substantial indications of impairment. Permanent impairments on all invested assets are recognised directly in the statement of income. In this context we take as a basis the same indicators as those discussed below for fixed-income securities and securities with the character of equity.
When held-to-maturity instruments measured at amortised cost as well as loans and receivables
112 Hannover Re Group annual report 2009NOtes 3.2 SuMMARy OF MAjOR ACCOunTInG POLICIES
With respect to impairments on securities with the character of equity, IAS 39.61 states, in addition to the aforementioned principles, that a significant or prolonged decrease in fair value below acquisition cost constitutes objective evidence of impairment. Hannover Re considers securities to be impaired under IAS 39 if their fair value falls significantly, i.e. by at least 20%, or for a prolonged period, i.e. at least nine months, below acquisition cost. In accordance with IAS 39.69 the reversal of impairment losses on equities to the statement of income once impairment has been taken is prohibited, as is adjustment of the cost basis. Impairment is tested in each reporting period using the criteria defined by Hannover Re. If a security is considered to be impaired on the basis
Present-value method equities unlisted equities Theoretical price Acquisition cost, cash flows, EBIT multiples, as applicable book value net Asset Value method
113Hannover Re Group annual report 2009 3.2 SuMMARy OF MAjOR ACCOunTInG POLICIES NOtes of these criteria, IAS 39.68 requires that a value adjustment be recognised in the amount of the fair value less historical cost and less prior value adjustments, meaning that depreciation is taken on the fair value as at the closing date – if available, on the publicly quoted stock exchange price.
Netting of financial instruments: financial assets and liabilities are only netted and recognised in the appropriate net amount where expressly permitted in law (reciprocity; similarity and maturity ), in other words if the intention is to offset such items on a net basis and this offsetting can be effected simultaneously.
Other invested assets are for the most part recognised at nominal value. Insofar as such financial assets are not listed on public markets (e.g. participating interests in private equity firms), they are carried at the latest available “net asset value” as an approximation of the fair value. Loans included in this item are recognised at amortised cost.
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.
Funds withheld are receivables due to reinsurers from their clients in the amount of the cash deposits contractually withheld by such clients; they are recognised at acquisition cost (nominal amount). Appropriate allowance is made for credit risks. IFRS 4 in conjunction with FASB
ASC 944–20–15 (the relevant provisions were previously contained in SFAS 113 “Accounting and
Contract deposits: under this item we report contract deposits under insurance contracts that satisfy the test of a significant risk transfer to the reinsurer as required by IFRS 4 but fail to meet the risk transfer required by US GAAP. Since the risk transfer under these 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/expenses. The payment flows resulting from these contracts are reported in the cash flow statement under operating activities.
Accounts receivable: the accounts receivable under reinsurance business and the other receivables are carried at nominal value; value adjustments are made where necessary on the basis of a caseby -case analysis. We use adjustment accounts for value adjustments taken on reinsurance accounts receivable, while all other write-downs are booked directly against the underlying position.
115Hannover Re Group annual report 2009 3.2 SuMMARy OF MAjOR ACCOunTInG POLICIES NOtes
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.
Financial liabilities at fair value through profit or loss: Hannover Re does not make use of the fair value option provided by IAS 39 to classify financial liabilities in this category upon first-time recognition.
Shareholders’ equity: the items “common shares” and “additional paid-in capital” are comprised of the amounts paid in by the parent company’s shareholders on its shares. In addition to the statutory reserves of the parent company and the allocations from net income, the retained earnings consist
116 Hannover Re Group annual report 2009NOtes 3.3 SEGMEnTATIOn of reinvested profits generated by the Hannover Re Group companies in previous periods. What is more, in the event of a retrospective change of accounting policies, the adjustment for previous periods is recognised in the opening balance sheet value of the retained earnings and comparable items of the earliest reported period. Unrealised gains and losses from the fair value measurement of financial instruments held as available for sale are carried in cumulative other comprehensive income under unrealised price gains/losses from investments. Translation differences resulting from the currency translation of separate financial statements of foreign subsidiaries are recognised under gains and losses from currency translation.
Disclosures about financial instruments: IFRS 7 “Financial Instruments: Disclosures” requires more extensive disclosures according to classes of financial instruments. In this context, the term
Hannover Re’s segmental report is based on IFRS 8 “Operating Segments” and on the principles set out in German Accounting Standard No. 3 “Segment Reporting” (GAS 3) of the German Accounting Standards Board as well as the requirements of GAS 3–20 “Segment Reporting of Insurance
117Hannover Re Group annual report 2009 3.4 Major discretionary decisions and estiMates Notes
The segmentation in non-life reinsurance and life/health reinsurance and the segment information presented follow the system used for internal reporting purposes, on the basis of which the full
Executive Board regularly evaluates the performance of the segments and decides on the allocation of resources to the segments.
119Hannover Re Group annual report 2009 4. COnSOLIDATED COMPAnIES AnD COnSOLIDATIOn PRInCIPLES NOtes 4. Consolidated companies and consolidation principles
Hannover Rückversicherung AG is the parent company of the Group. The consolidated financial statement includes 15 (14) German and 19 (19) foreign companies, as well as three (three) foreign subgroups. Three (three) German and two (two) foreign associated companies were consolidated using the equity method.
In conformity with Item 7.1.4 of the recommendations of the German Corporate Governance Code as amended on 18 June 2009, the following table also lists major participations in unconsolidated third companies.
With regard to the major acquisitions and disposals in the year under review please see our remarks in Section 5 “Major acquisitions, new formations and other corporate changes”.
Hannover Finance (uK) Limited, Virginia Water/united Kingdom1 100.00 GBP 131,107 GBP (12)
Hannover Life Reassurance Company of America, Orlando/uSA7 100.00 uSD 139,932 uSD (6,586)
Hannover Life Reassurance (uK) Ltd., Virginia Water/united Kingdom1 100.00 GBP 40,970 GBP (2,988)
Hannover Life Re of Australasia Ltd., Sydney/Australia1 100.00 AuD 225,297 AuD 34,386
Hannover Re Advanced Solutions Ltd., Dublin/Ireland6 100.00 EuR 31 EuR –
Hannover Services (uK) Ltd., Virginia Water/united Kingdom1 100.00 GBP 779 GBP 129
International Insurance Company of Hannover Ltd., Bracknell/united Kingdom1 100.00 GBP 108,148 GBP 3,937
Secquaero ILS Fund Ltd., George Town, Grand Cayman/Cayman Islands1,7 100.00 uSD 51,445 uSD 1,205
Hannover Finance, Inc. compiles its own subgroup financial statement in which the following major company is included: Clarendon Insurance Group, Inc., Wilmington/uSA1,8 100.00 uSD (6.655) uSD (77,737)
Hannover Reinsurance Group Africa (Pty) Ltd. compiles its own subgroup financial statement in which the following major companies are included: Hannover Life Reassurance Africa Ltd., johannesburg/South Africa1 100.00 ZAR 235,134 ZAR 82,877
Hannover Reinsurance Africa Ltd., johannesburg/South Africa1 100.00 ZAR 713,748 ZAR 70,141
Hannover Re Real Estate Holdings, Inc., Orlando/uSA7 95.17 uSD 196,317 uSD (24,899)
WPG CDA IV Liquidation Trust, Grand Cayman/Cayman Islands10,11 27.28 uSD 444 uSD (461)
6 Company is inactive and does not compile an annual report 7 IFRS figures 8 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.
Financial Statements”. Subsidiaries are consolidated as soon as Hannover Re acquires a majority voting interest or de facto controlling influence. The same is true of special purpose entities, the consolidation of which is discussed separately below.
Only subsidiaries of minor importance for the net assets, financial position and result of operations of the Hannover Re Group are exempted from consolidation. For this reason 16 companies at home and abroad, the business object of which is primarily the rendering of services for reinsurance companies within the Group, were not consolidated in the year under review.
122 Hannover Re Group annual report 2009NOtes 4. COnSOLIDATED COMPAnIES AnD COnSOLIDATIOn PRInCIPLES
Companies over which Hannover Re is able to exercise a significant influence (“associated companies ”) are normally consolidated “at equity” with the proportion of the shareholders’ equity attributable to the Group. A significant influence is presumed to exist if a company belonging to the Hannover Re Group directly or indirectly holds at least 20% – but no more than 50% – of the voting rights. Income from investments in associated companies is recognised separately in the consolidated statement of income.
Under IFRS this transaction is to be recognised as a financial instrument.
5 million and additionally assuming losses that exceed the capacity of “Fac Pool Re”. A number of
In 2007 the Hannover Re Group transferred risks from reinsurance recoverables to the capital market. By way of this securitisation, which has a term of five years, the default risk associated with reinsurance recoverables is reduced. The portfolio of recoverables underlying the transaction has a nominal value of EUR 1.0 billion and is comprised of exposures to retrocessionaires. On the basis of this reference portfolio a volume in a nominal amount of EUR 95.0 million was securitised above and beyond the first EUR 60.0 million. The securities serving as collateral are issued through the special purpose entity Merlin CDO I B.V. A payment to Hannover Re is triggered by the insolvency of one or more retrocessionaires as soon as Hannover Re’s contractually defined cumulative deductible of EUR 60.0 million over the term of the contract is exceeded. As at the balance sheet date Hannover Re had purchased securitisations issued by Merlin with a nominal value of altogether EUR 33.9 million (EUR 10.5 million) on the secondary market, which it holds in its asset portfolio. Hannover Re does not derive the majority of the economic benefits or risks arising out of the special purpose entity’s activities through any of its business relations.
Hannover Re participates – primarily through the companies Secquaero ILS Fund Ltd., Hannover
Insurance-Linked Securities GmbH & Co. KG and Hannover Re (Bermuda) Ltd. – in a number of special purpose entities for the securitisation of catastrophe risks by taking up certain capital market securities known as “disaster bonds” (or “CAT bonds”). Since Hannover Re does not exercise a controlling influence in any of these transactions either there is no consolidation requirement.
124 Hannover Re Group annual report 2009NOtes 5.1 ACquISITIOnS AnD nEW FORMATIOnS
Hannover Re is the company’s managing limited partner and holds a capital contribution of EUR
100,000, which had not been paid in as at the balance sheet date. The capital contribution was paid on 25 January 2010. The company’s business object is to hold, acquire and sell participating interests in other companies.
On 13 July 2009 GLL HRE Core Properties L. P. based in Wilmington, Delaware/United States, commenced business operations. The company is 99.9% owned by Hannover Re Real Estate Holdings,
Inc., Orlando/United States and is fully consolidated in the latter’s sub-group financial statement.
(HLRUS), and Hannover Life Reassurance (Ireland) Ltd., Dublin (HLRIr). Within the scope of the transaction the two aforementioned companies assumed the technical liabilities associated with this portfolio and, in return, received the necessary assets to fund the said liabilities. The reinsurance contracts were concluded effective 1 January 2009; no purchase price was paid.
Following completion of the provisional recognition, the adjusted assets and liabilities of the acquired business as at the time of initial consolidation are as follows: In connection with the acquisition of the life reinsurance portfolio, an intangible asset was carried in accordance with IFRS 4 in conjunction with the standards of US GAAP relevant to the recognition of items of the technical account; this amount represents the present value of future cash flows from the assumed reinsurance contracts (known as the “present value of future profits/PVFP” or
In accordance with the requirements of IFRS 3 as applicable to this reinsurance and asset purchase transaction, the directly allocable incidental costs of the entire transaction – i.e. including fees for consulting and audit services rendered by third parties – are counted towards the acquisition costs.
In June 2009 Hannover Re acquired a 23.6% stake in the capital of PlaNet Guarantee (SAS),
129Hannover Re Group annual report 2009 6.1 InVESTMEnTS unDER OWn MAnAGEMEnT NOtes 1 Including accrued interest 2 Including short-term investments and cash
Held to maturity due in one year 106,788 117,125 12,087 9,803 due after one through two years 280,725 290,471 29,736 30,260 due after two through three years 469,248 490,878 197,804 206,450 due after three through four years 521,196 542,714 255,693 267,561 due after four through five years 298,115 315,856 297,477 304,497 due after five through ten years 1,259,917 1,319,098 673,498 728,460 due after ten years 17,500 15,852 8,907 8,978
Hannover Re reclassified fixed-income securities at fair values of altogether EUR 1.5 billion from the available-for-sale to the held-to-maturity portfolio. The securities gave rise to cumulative unreal ised losses of EUR 9.7 million, which as a consequence of reclassification are to be amortised in the statement of income across the maturities of the instruments. These securities are permanently available to the relevant companies of the Hannover Re Group in light of cash flow projections. The intention and ability to hold them until maturity enables the companies to reduce balance sheet volatility.
Government debt securities of Eu member states 323,510 3,065 946 6,854 332,483
Debt securities issued by semi-governmental entities 685,126 30,212 2,052 12,932 726,218
Government debt securities of Eu member states 41,342 3,181 – 641 45,164
Debt securities issued by semi-governmental entities 1,148,549 8,579 2,597 11,531 1,166,062
Debt securities issued by semi-governmental entities 300,795 7,069 1,045 4,174 310,993
Debt securities issued by semi-governmental entities 3,755,392 94,194 6,731 53,603 3,896,458
134 Hannover Re Group annual report 2009NOtes 6.1 InVESTMEnTS unDER OWn MAnAGEMEnT
Analysis of the fair value changes in the portfolio of fixed-income securities at fair value through profit or loss indicated that an amount of –EUR 5.1 million was due to changes in the ratings of callable bonds.
For further information please see the explanatory remarks in Section 8.1 “Derivative financial instruments”.
135Hannover Re Group annual report 2009 6.1 InVESTMEnTS unDER OWn MAnAGEMEnT NOtes
Transfer of gains/losses from the fair-value measurement of the available-for-sale portfolio to the result for the period (86,910) (360,132)
136 Hannover Re Group annual report 2009NOtes 6.1 InVESTMEnTS unDER OWn MAnAGEMEnT
Fixed-income securities – loans and receivables 1,047,059 972,062 499,329 109,637 161 – – 73,583 2,701,831
Fixed-income securities – loans and receivables 410,388 568,548 640,766 53,009 161 21 – 7,964 1,680,857
Fixed-income securities – at fair value through profit or loss 4,863 11,828 68,541 40,072 101,670 23,325 4,229 – 254,528 total fixed-income securities incl. derivatives 10,476,743 3,050,654 3,093,846 886,061 140,718 126,330 59,527 26,904 17,860,783
137Hannover Re Group annual report 2009 6.1 InVESTMEnTS unDER OWn MAnAGEMEnT NOtes
Fixed-income securities – loans and receivables – 6,094 2,172,073 17,188 – 483,745 – 22,731 2,701,831
Other financial assets – at fair value through profit or loss – – 26,161 29,553 – 2,559 – – 58,273
138 Hannover Re Group annual report 2009NOtes 6.1 InVESTMEnTS unDER OWn MAnAGEMEnT
Figures in EuR thousand 2009 2008 net book value at 31 December of the previous year 128,680 170,839
Balance at 1 january of the year under review 128,884 170,083
Public price listings are not available for companies valued at equity. The net book value of associated companies includes goodwill in the amount of EUR 17.9 million (EUR 17.9 million). For further details of our major participating interests please see Section 4 “Consolidated companies and consolidation principles”.
139Hannover Re Group annual report 2009 6.1 InVESTMEnTS unDER OWn MAnAGEMEnT NOtes
Gross book value at 31 December of the year under review 190,212 45,258
Cumulative depreciation at 31 December of the year under review 27,600 23,640
Net book value at 31 December of the previous year 21,618 16,962
Net book value at 1 January of the year under review 21,485 17,245
In addition, we held indirect real estate investments in the year under review in an amount of EUR
The fair value of investment property amounted to EUR 167.3 million (EUR 23.9 million) as at the balance sheet date. The market value of the real estate was determined using the discounted cash flow method.
The additions to this item are attributable to the sharply increased investment activities of Hannover Re Real Estate Holdings, Inc.
The other invested assets consisted largely of participating interests in partnerships measured at fair value in an amount of EUR 522.6 million (EUR 622.6 million). The amortised cost of these participations amounted to EUR 424.7 million (EUR 504.6 million); in addition, unrealised gains of
For the purposes of the disclosure requirements pursuant to IFRS 7.27 B, the financial instruments to be 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.
– Level 2: Inputs used for measurement that are based on observable market data and are not included within level 1. This level includes, in particular, prices for comparable assets and liabilities, prices on markets that are not considered active as well as inputs derived from such prices or market data.
– Level 3: Inputs used for measurement that are not based on observable market data (unobservable inputs).
Net book value at 31 January of the year under review 131,453 350 576,807
The funds withheld by ceding companies totalling EUR 11,589.6 million (EUR 9,264.6 million)
The breakdown of income and expenses recognised in the statement of income in the financial year in connection with financial instruments included in level 3 is as follows:
142 Hannover Re Group annual report 2009Notes 6.4 Technical asseTs 6.3 Contract deposits (assets)
EUR 288.8 million to EUR 625.5 million. The increase was attributable principally to specific new contracts in the area of life reinsurance.
FASB ASC 944-30-25-1 (previously included in SFAS 60 “Accounting and Reporting by Insurance
In the case of reinsurance treaties for unit-linked life insurance policies classified as “universal life-type contracts” pursuant to FASB ASC 944-20-15-26 to -30 (previously included in SFAS 97
“Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments”), the capitalised acquisition costs are amortised on the basis of the estimated gross profit margins from the reinsurance treaties, making allowance for the period of the insurance contracts. A discount rate based on the interest for medium-term government bonds was applied to such contracts. In the case of annuity policies with a single premium payment, these values refer to the expected policy period or period of annuity payment.
Development of deferred acquisition costs in eUR thousand 2009 2008 net book value at 31 December of the previous year 1,860,783 1,807,143 currency translation at 1 January 40,977 (100,923)
Balance at 1 January of the year under review 1,901,760 1,706,220 changes in consolidated group – (77)
Changes in value adjustments cumulative value adjustments at 31 December of the previous year 125,573 127,733 currency translation at 1 January of the year under review (2,351) 2,011
Cumulative value adjustments at 31 December of the year under review 72,258 125,573
Gross book value of accounts receivable at 31 December of the year under review 2,942,132 2,927,335
Net book value of accounts receivable at 31 December of the year under review 2,869,874 2,801,762
Development of goodwill in EuR thousand 2009 2008 net book value at 31 December of the previous year 42,833 45,438
This item principally included the goodwill from the acquisition of E+S Rückversicherung AG as well as from acquisition transactions within the subgroup of Hannover Reinsurance Group Africa
(Pty.) Ltd. For further information on the method used to test impairment the reader is referred to our explanatory remarks in Section 3.2 “Summary of major accounting policies”.
Development of the present value of future profits (PVFP) on acquired life reinsurance portfolios in EuR thousand net book value at 31 December of the previous year 1,823 2,911
Net book value at 31 December of the year under review 99,881 1,823 6.6 Other assets 6.5 Goodwill
Present value of future profits on acquired life reinsurance portfolios 99,881 1,823
Cumulative depreciation at 31 December of the previous year 62,808 69,571
Cumulative depreciation at 31 December of the year under review 72,581 62,808
Net book value at 31 December of the previous year 26,302 25,781
The portfolio of own-use real estate was measured at cost of purchase less scheduled straight-line depreciation over useful lives of 10 to 50 years. The fair values were calculated using the discounted cash flow method.
Effective 1 July 2003 Hannover Re took out insurance for pension commitments. The commitments involve deferred annuities with regular premium payment under a group insurance policy. In accordance with IAS 19 they were carried as a separate asset at fair value as at the balance sheet date in an amount of EUR 52.0 million (EUR 45.5 million).
The item includes EUR 7.2 million (EUR 7.9 million) for self-provided software and EUR 36.6 million (EUR 39.9 million) for purchased software as at the balance sheet date. Scheduled depreciation is taken over useful lives of three to ten years. The additions can be broken down into EUR 5.9 million (EUR 4.9 million) for purchased software and EUR 0.3 million (EUR 9.1 million) for advance payments on self-provided software.
Gross book value after currency translation 165,983 154,690 change in consolidated group – 497 currency translation at 31 December (1,335) (2,067)
Net book value at 31 December of the previous year 61,310 56,390
Net book value at 31 December of the year under review 56,871 61,310
Loss and loss adjustment expense reserve in EuR thousand 2009 2008
In the previous year technical provisions were discounted at interest rates of between 6.5% and 8.5% with respect to a certain group of contracts relating to the Hannover Re Advanced Solutions division. The interest rates were determined by the contractual agreements. The period from inception to expiry of these contracts was at least four years. No further discounting was taken for the year under review because the contracts will be terminated in less than four years.
The run-off triangles show the run-off of the reserve established as at each balance sheet date, this reserve comprising the provisions constituted in each case for the current and preceding occurrence years.
cumulative payments for the year in question and previous years eight years later 6,785.1 8,610.9 10,533.4 nine years later 6,915,0 8,891.4
Ten years later 7,073.1 loss and loss adjustment expense reserve (net) for the year in question and previous years plus payments made to date on the original reserve eight years later 7,212.2 8,935.7 11,261.7 nine years later 7,267.8 8,933.1
Of which currency exchange rate differences (0.6) (4.4) (13.4) (2.7) 6.0 7.8 1.1 2.5 8.1 (8.7)
net run-off result excluding currency exchange rate differences as percentage of original loss reserve 0.1 (0.1) (0.5) 0.2 0.7 0.7 0.4 0.2 0.3 (1.2)
IFRS 4.38 in conjunction with 4.39(d) requires information which helps to clarify the amount and timing of cash flows expected from reinsurance contracts. In the following tables we have shown the future maturities of the technical reserves broken down by the expected remaining times to maturity. As part of our maturity analysis we have directly deducted the deposits put up as security for these reserves, since the cash inflows and outflows from these deposits are to be allocated directly to the ceding companies. For further explanation of the recognition and measurement of the reserves please see Section 3.2 ”Summary of major accounting policies“.
Due after five through ten years 2,756,500 333,179 2,423,321 267,938 7,600 260,338
Due after ten through twenty years 1,952,551 140,255 1,812,296 452,295 5,541 446,754
Due after ten through twenty years 1,869,407 190,691 1,678,716 481,841 4,403 477,438
The average maturity of the loss and loss adjustment expense reserves was 5.7 years (5.5 years), or 5.8 years (5.7 years) after allowance for the corresponding retrocession shares. The benefit reserve had an average maturity of 13.0 years (14.2 years) – or 13.3 years (14.4 years) on a net basis.
The provisions are based on the Group companies‘ information regarding mortality, interest and lapse rates.
Net book value at 31 December of the previous year 5,913,075 159,151 5,753,924 6,143,460 255,076 5,888,384 reserve at 1 January of the year under review 5,989,691 156,926 5,832,765 5,660,078 251,970 5,408,108 changes in the consolidated group 981,850 – 981,850 – – –
Net book value at 31 December of the year under review 7,952,640 104,868 7,847,772 5,913,075 159,151 5,753,924
For further details of the recognition of funds withheld please see our explanatory remarks in
153Hannover Re Group annual report 2009 6.10 PrOvisiOns FOr PensiOns anD OTher POsT-emPlOymenT BeneFiT OBliGaTiOns Notes 6.9 Contract deposits (liabilities)
Pension commitments are given in accordance with the relevant version of the pension plan as amended. The 1968 pension plan provides for retirement, disability, widows’ and orphans’ benefits.
From 1997 onwards it has been possible to obtain pension commitments through deferred compensation. Following the merger with Gerling-Konzern Lebensversicherungs-AG, Cologne, the employeefunded commitments included in the provisions for accrued pension rights are protected by an insurance contract with HDI-Gerling Lebensversicherung AG, Cologne, at unchanged conditions.
HDI-Gerling Pensionskasse AG. The benefits provided by HDI-Pensionskasse AG are guaranteed for its members and their surviving dependants and comprise traditional pension plans with bonus increases as well as unit-linked hybrid annuities.
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 2009 2008
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 highestrated 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 defined by Talanx AG and subject to local economic conditions.
The calculation of the provisions for pensions is based upon the following assumptions: Measurement assumptions in % 2009 2008
Projected long-term yield on plan assets – 7.50 7.00 rate of compensation increase 3.00 – 5.00 3.00 – 4.50
The expected long-term return on plan assets was derived from the anticipated long-term yields of the individual asset classes and weighted pro rata.
Defined benefit obligations at the end of the year under review 93,462 79,908
expense for the year under review 7,260 7,367 amounts paid during the year (143) (348)
Fair value at the beginning of the year under review 7,051 9,372 expected return on plan assets 532 544 actuarial gain/loss (43) (1,830)
Fair value of plan assets at the end of the year under review 9,317 7,051
156 Hannover Re Group annual report 2009Notes 6.10 PrOvisiOns FOr PensiOns anD OTher POsT-emPlOymenT BeneFiT OBliGaTiOns
Present value of defined benefit obligation 93,462 79,908 79,135 77,400 85,233
experience adjustments on plan liabilities (6,647) (649) (3,410) (8,633) 458 experience adjustments on plan assets – – (374) 34 (196)
The following amounts were recognised for the year under review and prior years under the accounting of defined benefit plans: The components of the net periodic pension cost for benefit plans were as follows: Net periodic pension cost in eUr thousand 2009 2008 current service cost for the year under review 2,506 2,789 interest cost 4,679 4,054 expected return on plan assets 478 607 recognised actuarial gain/loss (538) (1,116)
4.0 million (EUR 2.6 million), of which only a minimal amount was due to obligations to members of staff in key positions.
Development of sundry non-technical provisions in eUr thousand Balance at currency translation at 1 January
Partial retirement arrangements and early retirement obligations 5,911 (18) 5,893 holiday entitlements and overtime 3,706 87 3,793 anniversary bonuses 1,761 – 1,761
The other liabilities include sundry non-technical provisions of EUR 69.1 million (EUR 57.6 million ), which developed as shown in the following table.
160 Hannover Re Group annual report 2009Notes 6.12 DeBT anD sUBOrDinaTeD caPiTal 6.12 Debt and subordinated capital
Effective 31 March 2009 Hannover Re exercised the call option allowed under the bond conditions – permitting scheduled redemption of the debt at nominal value for the first time – for the subordinated debt issued by Hannover Finance, Inc., Wilmington/USA, in the amount of USD 20.0 million that was still outstanding at that date. The debt was thus repurchased in full and cancelled in the year under review.
Re on 26 February 2014 at the earliest and at each coupon date thereafter. If the bond is not called at the end of the tenth year, the coupon will step up to a floating-rate yield of quarterly EURIBOR
Re in 2001 – which has a term of 30 years and may be called in prior to maturity by the issuer on 14 March 2011 – were offered an opportunity to exchange their existing issue for holdings in the new bond. Participation in the exchange was nominally EUR 211.9 million, corresponding to
EUR 240.5 million of the new bond issue. The cash component of the new bond in the amount of nominally EUR 259.5 million was placed predominantly with institutional investors in Europe. The remaining volume of the bond issued in 2001 after the exchange was unchanged at EUR 138.1 million and carries a fixed coupon of 6.25 % until March 2011. If Hannover Re does not exercise its right of early cancellation on this date, the coupon will step up to a floating-rate yield of quarterly
161Hannover Re Group annual report 2009 6.12 DeBT anD sUBOrDinaTeD caPiTal Notes
The carrying amount of this item corresponds to cost or amortised cost.
The rise of EUR 73.1 million in the debt to EUR 116.3 million results from increased borrowing requirements as a consequence of the investment activities of Hannover Re Real Estate Holdings,
Inc. The largest debt with a volume of EUR 75.0 million and a term until 1 December 2012 was taken up by the company on 25 November 2009.
Fair value hannover Finance, inc., Usa var. UsD 14,309 (5,616) 9 8,702
162 Hannover Re Group annual report 2009Notes 6.12 Debt anD suborDinateD capital
The ordinary expenses include interest expenses of EUR 76.7 million (EUR 77.4 million) resulting from the subordinated debt placed through Hannover Finance (Luxembourg) S.A. in the years from 2001 to 2005. In addition, interest expenditures from the portions of the floating-rate loan issued by Hannover Finance, Inc., Wilmington/USA remaining in the portfolio until 31 March 2009 are recognised here.
In order to protect against possible future major losses Hannover Re had taken out a new credit line of EUR 500.0 million in 2004 in the form of a syndicated loan. The facility, which had a term of five years and ended in August 2009, was not used.
Facilities exist with various financial institutions for letters of credit, including two syndicated guarantee facilities from 2005 and 2006 each in an amount equivalent to EUR 1,395.1 million. 50
life business. For further information on the letters of credit provided please see our explanatory remarks in Section 8.6 “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 74 on the information pursuant to § 315 Para. 4
More than twenty years no maturity other long-term liabilities – – 86 – – – –
163Hannover Re Group annual report 2009 6.13 ShareholderS‘ equity, minority intereStS and treaSury ShareS Notes
Five to ten years ten to twenty years more than twenty years no maturity other long-term liabilities
1 excluding derivatives 6.13 shareholders’ equity, minority interests and treasury shares
For the disclosures arising out of IAS 1 with regard to the management of capital that were previously provided here, the reader is referred to the “Financial position” section on page 69 et seq.
IAS 1 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
A similarly worded resolution was adopted at the Annual General Meeting on 5 May 2009 for a period until 31 October 2010. As part of this year’s employee share option plan Hannover Re acquired altogether 26,176 treasury shares in the course of the third quarter of 2009 and delivered them to eligible employees at preferential conditions. These shares are blocked until 31 July 2013.
The following table shows the breakdown of the gross written premium according to regional origin.
Investment income in eUr thousand 2009 2008 income from real estate 4,762 1,460 interest income 793,269 736,629
Profit or loss on shares in associated companies (4,970) 4,199 appreciation 20,076 –
realised gains on investments 182,897 379,202 realised losses on investments 69,885 492,756
Net income from assets under own management 843,609 78,872 interest income on funds withheld and contract deposits 455,722 336,554 interest expense on funds withheld and contract deposits 178,948 136,967 total investment income 1,120,383 278,459
Financial assets – at fair value through profit or loss 17,004 8,808
The net gains and losses on investments held to maturity, loans and receivables and the availablefor -sale portfolio shown in the following table are composed of interest income, realised gains and losses and impairments. 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.
Of the unscheduled impairments totalling EUR 141.4 million (EUR 479.9 million), an amount of
by at least 20% – or for a prolonged period – i.e. for at least nine months – below acquisition cost.
This contrasted with write-ups of EUR 20.1 million on investments that had been written down in previous periods. Of this total volume, EUR 10.8 million was attributable to alternative assets and
Making allowance for the other investment expenses of EUR 53.1 million (EUR 41.4 million), net income from assets under own management of altogether EUR 843.6 million (EUR 78.9 million)
Claims and claims expenses 6,548,093 4,702,127 change in benefit reserve 562,256 420,918
Net change in benefit reserve 562,668 421,342 change in deferred acquisition costs (52,990) 124,164 change in provision for contingent commissions (13,529) (28,728)
Net technical result (100,432) 69,620 other technical income in eUr thousand 2009 2008
Commissions and brokerage, change in deferred acquisition costs in eUr thousand 2009 2008 commissions paid (gross) 2,055,809 2,048,951 reinsurance recoverables 83,926 260,118 change in deferred acquisition costs (gross) (122,719) 199,213 reinsurance recoverables (69,729) 75,049 change in provision for contingent commissions (gross) (15,745) (31,429)
commissions and brokerage, change in deferred acquisition costs (net) 2,011,344 1,635,941 7.3 Reinsurance result
168 Hannover Re Group annual report 2009Notes 7.5 Taxes other technical expenses in eUr thousand 2009 2008
Other technical expenses (net) 38,788 12,166 7.4 other income/expenses other income/expenses in eUr thousand 2009 2008 other income exchange gains 112,533 52,381 reversals of impairments on receivables 95,879 32,960 income from the recognition of negative goodwill 92,652 –
Other interest income 1,904 3,513 sundry income 24,823 42,955 other expenses
Other interest expenses 48,757 17,346 exchange losses 35,107 155,420 separate value adjustments 35,022 78,589 expenses for the company as a whole 33,690 43,362 expenses for services 9,698 6,366 sundry expenses 82,389 53,738
Of the separate value adjustments, an amount of EUR 23.9 million (EUR 47.8 million) was attributable to accounts receivable, EUR 10.4 million (EUR 27.0 million) to reinsurance recoverables on unpaid claims and EUR 0.7 million (EUR 3.8 million) to other receivables.
Tax-relevant bookings on the Group level are generally made using the Group tax rate of 32%
Funds withheld 590 513 accounts receivable/reinsurance payable 88,440 84,666 valuation differences relating to investments 21,739 51,067 contract deposits 30,533 51,579
Deferred tax liabilities loss and loss adjustment expense reserves 15,494 8,798
Deferred acquisition costs 380,562 389,712 accounts receivable/reinsurance payable 125,006 119,864 valuation differences relating to investments 138,533 132,942
Netting of deferred tax assets and deferred tax liabilities in eUr thousand 2009 2008
Profit before income taxes 1,063,302 70,626 expected tax rate 32% 32%
Availability of loss carry-forwards and tax credits that have not been capitalised: expiry of loss carry-forwards in eUr thousand
Derivatives are financial instruments, the fair value of which is derived from an underlying instrument such as equities, bonds, indices or currencies. We use derivative financial instruments to a limited extent in order to hedge parts of our portfolio against interest rate and market price risks, optimise returns or realise intentions to buy/sell. In this context we take special care to limit the risks, select first-class counterparties and adhere strictly to the standards defined by investment guidelines.
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 re insurance contracts. These transactions gave rise to recognition of other financial assets at fair value through profit or loss in an amount of EUR 0.3 million (previous year: none) and other liabilities in an amount of EUR 17.8 million (EUR 0.5 million). They can be broken down as follows according to the maturities of the underlying forward transactions.
The net changes in the fair value of these instruments produced a charge of EUR 17.1 million for the result of the financial year.
A small number of treaties in life and health reinsurance meet criteria which require application of the prescriptions in IFRS 4.7 to 4.9 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
Hannover Re calculates the fair value of the embedded derivatives in ModCo treaties using the market information available on the valuation date on the basis of a “credit spread” method. Under this method the derivative is valued at zero on the date when the contract commences and its value then fluctuates over time according to changes in the credit spreads of the securities. The derivative had a value of EUR 31.9 million as at the balance sheet date and was recognised under other financial assets at fair value through profit or loss (EUR 89.1 million recognised under other liabilities).
3.9 million recognised under other financial assets at fair value through profit or loss) as at the balance sheet date. Measurement resulted in a charge to investment income of EUR 5.4 million
The “Merlin” transaction also gives rise to a derivative, the fair value of which as at the balance sheet date was EUR 16.2 (EUR 29.6 million) and which we recognised under other financial assets at fair value through profit or loss. Measurement of this derivative resulted in a charge to investment income of EUR 13.3 million (improvement of EUR 23.8 million in investment income) in the year under review. We would refer the reader to the explanatory remarks in Section 4 “Consolidated companies and consolidation principles” regarding the securitisation of reinsurance risks.
HDI Haftpflichtverband der Deutschen Industrie V.a.G. (HDI) holds an unchanged majority interest of 50.22 % in Hannover Re through Talanx AG.
Within the contractually agreed framework AmpegaGerling Asset Management GmbH performs investment and asset management services for Hannover Re and some of its subsidiaries. Assets in special funds are managed by Ampega-Gerling Investment GmbH. AmpegaGerling Immobilien
The reinsurance relationships with related parties in the year under review are summarised in the following table.
175Hannover Re Group annual report 2009 8.2 relaTeD ParTy DisclOsUres Notes
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 was EUR 51.5 million (EUR 51.5 million). The carrying amount includes accrued interest of EUR 1.5 million (EUR
As at 31 December 2009 Hannover Reinsurance (Ireland) Ltd. recognised loan receivables due from Aspecta Lebensversicherung AG and Aspecta Assurance International Luxembourg S.A. in an amount of altogether EUR 259.6 million (EUR 255.9 million). The loans result from a group of reinsurance contracts for which Talanx AG had furnished guarantees, which in 2007 were transferred to Hannover Reinsurance (Ireland) Ltd. In accordance with IAS 39 the contracts in question were classified as financial instruments with the character of loans and receivables measured at amortised cost, and the corresponding changes in income are recognised in ordinary investment income.
As part of long-term lease arrangements companies belonging to the Hannover Re Group rented out business premises in 2009 to HDI Direkt Versicherung AG, Hannover. In addition, IT and management services were performed for both HDI Direkt Versicherung AG and Protection Reinsurance
Actuarial opinions are drawn up for Hannover Re and E+S Rück by HDI-Gerling Pensionsmanagement AG under an actuarial service contract with respect to the pension commitments given to staff.
Business assumed and ceded in Germany and abroad in eUr thousand 31.12.2009
In May 2009 Hannover Re acquired shares of a non-Group financial services enterprise in the amount of EUR 12.5 million from HDI-Gerling Lebensversicherung AG, Cologne, and sold them again at short notice to Talanx Beteiligungs-GmbH & Co. KG, Hannover.
With regard to this information please see in general the remuneration report included as part of our Corporate Governance report, in particular page 81 et seq.
The remuneration report is based on the recommendation of the German Corporate Governance
(first tranche of each allocation year) the waiting period is two years; for each additional 20 % of the stock appreciation rights (tranches two to four of each allocation year) the waiting period is extended by one year. Each exercise period lasts for ten trading days, in each case commencing on the sixth trading day after the date of publication of the quarterly report of Hannover Rückversicherung AG.
Re share on the last twenty trading days prior to the first day of the relevant exercise period.
Provisions at 31.12.2009 (in eUr million) 3.72 4.45 1.71 0.48 0.09 0.01 amounts paid out in the 2009 financial year (in eUr million) – – 0.01 0.64 0.05 0.04 expense in the 2009 financial year (in eUr million) 2.93 2.82 1.03 0.63 0.05 0.03
179Hannover Re Group annual report 2009 8.2 relaTeD ParTy DisclOsUres Notes
Development of the stock appreciation rights of Hannover Re allocation year
180 Hannover Re Group annual report 2009Notes 8.3 sTaFF anD exPenDiTUres On PersOnnel
for the 2002 allocation year, 1.96% for the 2003 allocation year, 2.29% for the 2004 allocation year, 2.83% for the 2006 allocation year and 3.06 % for the 2007 allocation year.
The average fair value of each stock appreciation right was EUR 5.49 for the 2000 allocation year,
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 2009 2008 a) wages and salaries aa) expenditures on insurance business 118,495 101,065 ab) expenditures on the administration of investments 9,742 10,115 b) social security contributions and expenditure on provisions and assistance ba) social security contributions 17,327 15,261 bb) expenditures for pension provision 11,819 12,644 bc) expenditures for assistance 1,922 2,059 8.4 earnings per share and dividend proposal
The earnings per share could potentially be diluted in future through the issue of shares or subscription rights from the authorised or conditional capital.
182 Hannover Re Group annual report 2009Notes 8.6 cOnTinGenT liaBiliTies anD cOmmiTmenTs 8.5 Lawsuits
Effective 31 March 2009 Hannover Re repaid in full a subordinated debt issued in the 1999 financial year by Hannover Finance, Inc., Wilmington/USA. The guarantee given by Hannover Re to secure the debt was thus also terminated.
The guarantees given by Hannover Re for the subordinated debts attach if the issuer in question fails to render payments due under the bonds. The guarantees cover the relevant bond volumes as well as interest due until the repayment dates. Given the fact that interest on the bonds is partly dependent on the capital market rates applicable at the interest payment dates (floating rates), the maximum undiscounted amounts that can be called cannot be estimated with sufficient accuracy.
Hannover Re does not have any rights of recourse outside the Group with respect to the guarantee payments.
In July 2004 Hannover Re and the other shareholders sold the participation that they held through
As security for technical liabilities to our US clients, we have established a master trust in the
(EUR 2,352.8 million). The securities held in the master trust are shown as available-for-sale investments. Further collateral exists in an amount of EUR 309.6 million (EUR 269.3 million) in the form of so-called “single trust funds”.
183Hannover Re Group annual report 2009 8.8 renTs anD leasinG Notes
As security for our technical liabilities, various financial institutions have furnished sureties for our company in the form of letters of credit. The total amount as at the balance sheet date was
Operating leasing contracts produced expenditures of EUR 5.4 million (EUR 2.7 million) in the year under review.
Group companies must be recognised in the consolidated financial statement as a separate item in shareholders’ equity. Currency translation differences resulting from long-term loans or lendings without specified maturity between Group companies are similarly recognised outside the statement of income in a separate item of shareholders’ equity.
Of this total amount, EUR 2.5 million (EUR 2.2 million) was attributable to the fee paid to the appointed auditor of the consolidated financial statement as defined by § 318 German Commercial
Based on early estimates, Hannover Re anticipates loss expenditure of around EUR 25.0 million as a consequence of the severe earthquake in Haiti in January 2010.
In a press release dated 27 January 2010 we announced that we had increased the “K6” trans action launched in the year under review with effect from 1 January 2010 by the maximum targeted amount of EUR 106.0 million to a total volume of EUR 229.5 million. The new tranches were taken up by both new and existing investors.
According to initial estimates, an explosion at a power plant under construction in the United
States on 7 February 2010 will result in loss expenditure of approximately EUR 10.0 million for
AG, Hannover – comprising the consolidated balance sheet, consolidated income statement, consoli dated statement of comprehensive income, notes to the consolidated financial statements, consolidated cash flow statement, consolidated statement of changes in equity and segmental report – as well as the group management report for the business year from 1 January to 31 December 2009.
Our responsibility is to express an opinion on the consolidated financial statements and on the group management report based on our audit.
Group and expectations as to possible misstatements are taken into account in the determin ation of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the consolidated financial statements and the group management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual financial statements of those entities included in consolidation, the determination of entities to be included in consolidation, the accounting and consolidation principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and group management report. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on the findings of our audit, the consolidated financial statements comply with IFRS, as adopted by the EU, and the additional requirements of German commercial law pursuant to § 315a Abs. 1 HGB and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. The group management report is consistent with the consolidated financial statements and as a whole provides a suitable view of the Group’s position and suitably presents the opportunities and risks of future development.
The Supervisory Board obtained information about pending legal proceedings, the relevance of ratings to reinsurance business as well as special capital market risks on the underwriting side in life reinsurance. We considered the currently existing collateral structures for reinsurance obligations and adopted the necessary resolutions to be in a position going forward, as in the past, to be able to respond flexibly to additional collateral requirements in connection with reinsurance business. Within the scope of the annual review of the investment guidelines, the revisions concentrated in particular on the distortions on the capital market caused by the subprime crisis and the associated fundamental revaluations of securities and investments covered by securities. Considerable attention was also devoted to discussions of the future risk-oriented positioning on the underwriting side as well as risk management in the area of investments, including the organisational integration of the investment guidelines into Hannover Re’s system of limits and thresholds.
Corporation Act as amended by the Act on the Adequacy of Management Board Remuneration, the full Supervisory Board undertook for the first time a review of the fixed remuneration of individual members of the Executive Board. In light of the changes in the legal situation, the profit bonus for members of the Executive Board was also restructured, and the conditions of the stock option plan for members of the Executive Board were adjusted to the new legal framework conditions. Furthermore, the personnel changes on the company’s Executive Board in the year under review were the subject of intense discussion.
Of the committees formed by the Supervisory Board within the meaning of § 107 Para. 3 German
Stock Corporation Act, the Finance and Audit Committee as well as the Standing Committee each met on four occasions. The Standing Committee took one decision by way of a written procedure.
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.
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 2009 financial year. The discussion of the quarterly financial statements for the Hannover Re Group, the measures taken to reduce the volatility of results and the risk exposure as well as the findings of the audits conducted by the Internal
The Standing Committee dealt with the determination of the performance bonuses of the members of the Executive Board for the 2008 financial year and defined the basic number of stock participation rights to be awarded in total to the Executive Board for the 2009 financial year. Recommendations regarding the restructuring of the profit bonus and the modification of the virtual stock option plan were drawn up for the full Supervisory Board. In addition, recommendations were formulated for the specification of the target performance (target EPS) and the total volume of remuneration payable for the 2010 financial year. What is more, recommendations were submitted to the full Supervisory Board in the context of the review of the fixed remuneration of members of the Executive Board. The Standing Committee considered at length the impending changes on the company’s Executive Board and submitted the appropriate recommendations to the full Supervisory Board.
The Supervisory Board once again devoted considerable attention to the issue of Corporate Governance. The Rules of Procedure for the Supervisory Board, the Standing Committee and the Finance and Audit Committee were modified with an eye to the revised version of the German Corporate
Governance Code (DCGK) as amended 18 June 2009. The full Supervisory Board examined and approved the remuneration system for the Executive Board including the material contractual elements. In addition, an interim activity report on compliance matters for 2009 was discussed, and the Supervisory Board agreed upon an efficiency audit of the Supervisory Board’s work using a questionnaire that was significantly expanded in comparison with previous surveys.
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 – as in the previous year – not to comply with the recommendation in Code
Item 4.2.3 Para. 4 of the German Corporate Governance Code concerning a cap on severance payments in management board contracts. The justification in this respect 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.
Supervisory Board of the outcome of its examination. The audit reports were distributed to all members of the Supervisory Board and scrutinised in detail – with the participation of the auditors
“Having audited the report in accordance with our professional duties, we confirm that 1. its factual details are correct; 2. in the case of the transactions detailed in the report, the expenditure of the company was not unreasonably high.”
We have examined a) the annual financial statements of the company and the management report prepared by the
There were no changes in the composition of the Supervisory Board in the year under review.
Mr. Herbert K. Haas as Chairman of the Supervisory Board as well as of the Supervisory Board’s
Finance and Audit Committee with effect from the above date until the end of the company’s Annual General Meeting in 2012. Since the aforementioned date Mr. Baumgartl has served as an ordinary member on the Supervisory Board and its committees.
Mr. Ulrich Wallin was appointed as the new Chief Executive Officer of the company with effect from 1 July 2009. At the same meeting the decision was taken to terminate the mandate of Dr. Elke
König as a member of the company’s Executive Board on the most amicable terms effective 31 March 2009. The Supervisory Board expressed its thanks and appreciation to Dr. König for her considerable personal dedication and her successful work on behalf of the company and the Hannover Re
Group. Mr. Roland Vogel was appointed to succeed Dr. König as a deputy member of the Executive
Hannover Rückversicherung AG Australian Branch – Chief Agency The re centre level 21 australia square 264 George street sydney nsw 2000 G. P. O. Box 3973 sydney nsw 2001
Hannover Rückversicherung AG Bahrain Branch al Zamil Tower, 17th Floor Government avenue manama center 305 manama
Bermuda Hannover Life Reassurance Bermuda Ltd. victoria Place, 2nd Floor, 31 victoria street hamilton, hm 10
Canada Hannover Rückversicherung AG Canadian Branch – Chief Agency 3650 victoria Park avenue, suite 201 Toronto, Ontario m2h 3P7
Hannover Rückversicherung AG shanghai Representative office suite 1707, United Plaza 1468 nan Jing xi lu 200040 shanghai
Hannover Rückversicherung AG Hong Kong Branch 2008 sun hung Kai centre 30 harbour road wanchai, hongkong Tel. +852 25193208 Fax +852 25881136 General Manager: Gerd Obertopp
Colombia Hannover Rückversicherung AG Bogotá Representative office calle 98 no. 21–50 Office number 901 centro empresarial 98 Bogotá
India Hannover Re Consulting services India Private Limited 215 atrium ‚c‘ wing, Unit 616, 6th Floor andheri-Kurla rd, andheri (east) mumbai 400069
Japan Hannover Re services Japan KK 7th Floor, hakuyo Building 3-10 nibancho chiyoda-ku Tokio 102-0084
Korea Hannover Rückversicherung AG Korea Branch room 414, 4th fl. Gwanghwamoon Officia B/D 163, shinmunro-1ga, Jongro-gu seoul, 110-999
Malaysia Hannover Rückversicherung AG Malaysian Branch suite 31-1, 31st Floor wisma UOa ii no. 21 Jalan Pinang 50450 Kuala lumpur
General Manager: Guadalupe covarrubias south Africa Compass Insurance Company Limited P. O. Box 37226 Birnam Park 2015 Johannesburg www.compass.co.za Managing Director: angela mhlanga
Fax +27 11 4843330/32 Managing Director: achim Klennert spain HR Hannover Re Correduría de Reaseguros, s.A. Paseo del General martínez campos 46 28010 madrid
General Manager: eduardo molinari sweden Hannover Rückversicherung AG tyskland filial hantverkargatan 25 P. O. Box 22085 10422 stockholm
International Insurance Company of Hannover Ltd. england filial hantverkargatan 25 P. O. Box 22085 10422 stockholm
United Kingdom Hannover Life Reassurance (UK) Limited hannover house virginia water surrey GU25 4aa
Hannover services (UK) Limited hannover house virginia water surrey GU25 4aa
International Insurance Company of Hannover Limited 1st Floor l’ avenir Opladen way Bracknell Berkshire rG12 0Pe
UsA Clarendon Insurance Group, Inc. suite 1900 466 lexington avenue new york, ny 10017
Hannover Life Reassurance Company of America 800 n. magnolia avenue suite 1400 Orlando, Florida 32803-3268
Hannover Re services UsA, Inc. 500 Park Blvd., suite 1360 itasca, illinois 60143
American Depositary Receipt (ADR): share certificates written by US banks on foreign shares deposited there.
Block assumption transaction (BAT): proportional reinsurance treaty on a client‘s life or health insurance portfolio, by means of which it is possible, inter alia, for our clients to realise in advance the future profits so as to be able to efficiently ensure the attainment of corporate objectives, e.g. in the areas of financial or solvency policy.
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 marketspecific 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.
It shows the changes in liquid funds separated into cash flows from operating, investing and financing activities.
agement and supervision of enterprises and is intended to foster the trust of investors, clients, employees and the general public in companies.
Derivatives, derivative financial instruments: these are financial products derived from underlying primary in­
mined on the basis of an underlying security or other ref­
erence asset. Notable types of derivatives include swaps, options and futures.
responding discount factor. In the case of the loss reserves this is necessary because of the new profit calculation methods for tax purposes applicable to German joint­stock corporations.
Diversification: orientation of business policy towards vari ous revenue streams in order to minimise the effects of economic fluctuations and stabilise the result. Diversi­
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 di­
luted earnings per share is based on the number of shares including subscription rights already exercised or those that can still be exercised.
Earnings retention: non­distribution of a company‘s profits leading to a different treatment for tax purposes than if profits were distributed.
holders‘ interests in the earnings distributable from assets allocated to the covered business after sufficient allow­
Fair value: price at which a financial instrument would be freely traded between two parties.
International Accounting Standards Board (IASB): committee in the EU whose task is to determine and improve upon the international standards of accounting and reporting.
International Financial Reporting Standards (IFRS): standards published by the International Accounting Standards
Intrinsic value creation (IVC): the IVC is calculated according to the following formula: real operating value creation
= adjusted operating profit (EBIT) – (capital allocated x weighted cost of capital). IVC is a tool of value-based enterprise management used to measure the accomplishment of long-term targets on the level of the Group, the individual business groups and the operating units (profit centres).
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.
Letter of credit (LOC): bank guarantee; at the request of the guaranteed party, the bank undertakes to render payment to the said party up to the amount specified in the
LOC. This method of providing collateral in reinsurance business is typically found in the USA.
Market Consistent Embedded Value (MCEV): a refinement and closer specification of the previous principles of
Mark-to-market valuation: the evaluation of financial instruments to reflect current market value or fair value.
Non-proportional reinsurance: reinsurance treaty under which the reinsurer assumes the loss expenditure in excess of a particular amount ( priority) (e.g. under an excess of loss treaty). This is in contrast to proportional reinsurance.
Obligatory (also: treaty) reinsurance: reinsurance treaty under which the reinsurer participates in a cedant‘s total, precisely defined insurance portfolio. This is in contrast to facultative reinsurance.
Other securities, available-for-sale: securities that are not classified as „trading“ or „held-to-maturity“; these securities can be disposed of at any time and are reported at their market value at the balance sheet date. Changes in market value do not affect the statement of income.
The members undertake to write certain risks only within the scope of the insurance pool. They include such risks
– while maintaining their commercial independence – in the insurance pool against a commission fee. Each insurer participates in the profit or loss of the insurance pool according to its proportionate interest. Reinsurance is often ceded or accepted in order to further diversify the risk.
Pools can be divided into two types: coinsurance pools, in which all members take the role of primary insurers according to their interests, and reinsurance pools, in which a primary insurer writes the risks and then spreads them among the participating insurers by way of reinsurance.
Portfolio: a) all risks assumed by an insurer or reinsurer in a defined sub-segment (e.g. line of business, country)
Priority: direct insurer‘s loss amount stipulated under non-proportional reinsurance treaties; if this amount is exceeded, the reinsurer becomes liable to pay. The priority may refer to an individual loss, an accumulation loss or the total of all annual losses.
This principle applies in all lines of property and casualty insurance.
Proportional reinsurance: reinsurance treaties on the basis of which shares in a risk or portfolio are reinsured under the relevant direct insurer‘s conditions. Premiums and losses are shared proportionately on a pro-rata basis. This is in contrast to non-proportional reinsurance.
Protection cover: protection of segments of an insurer‘s portfolio against major losses (per risk/per event), primarily on a non-proportional basis.
reinsurer does not reinsure, i.e. shows as net (retention ratio: percentage share of the retention relative to the gross written premiums).
Statement of Financial Accounting Standards, SFAS (also: Financial Accounting Standards, FAS): the accounting and reporting standards published by the Financial Accounting Standards Board; since 15 September 2009 superseded by FASB ASC.
Spread loss treaty: treaty between an insurer and a reinsurer that covers risks of a defined portfolio over a multiyear period.
Structured products: reinsurance with limited potential for profits and losses; the primary objective is to strive for risk equalisation over time and to stabilise the cedant‘s balance sheet.
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.
(re-)insurance risks and classifying those selected in order to charge the proper premium for each. The purpose of underwriting is to spread the risk among a pool of (re-)
insureds in a manner that is equitable for the (re-) insureds and profitable for the (re-)insurer.