Earnings per share (basic and diluted) in EUR 7.12 +41.6% 5.02 6.21 6.08 (1.05)
Book value per share in EUR 50.22 +21.8% 41.22 37.39 30.80 23.47
Dividend per share in EUR 2.60 1+0.40 2 +42.9% 2.10 2.30 2.10 –
We transact all lines of non-life and life and health reinsurance and are present on all continents with around 2,300 staff. The German business of the Hannover Re Group is transacted by our subsidiary E+S Rück.
Letter from the Chairman of the Executive Board 4 Executive Board of Hannover Re 8 The Hannover Re share 12 Our strategy 18
The financial strength of Hannover Re, which we were able to substantially reinforce in 2012, also showed a pleasing increase. The book value per share rose by more than 20 percent to EUR 50.22. Not only that, based on another highly positive cash flow from operating activities and the favourable development of valuation reserves, the volume of investments under own management grew by more than 10 percent to EUR 31.9 billion. Despite considerably higher shareholders’ equity we generated a very healthy return on equity of 15.6 percent.
We used the low level of interest rates in the year under review to further optimise our capital structure. In November we successfully placed a EUR 500 million subordinated bond on the European capital market at a very favourable coupon rate. Such debt instruments qualify as hybrid capital and enable us to keep our cost of capital low.
The high esteem in which your company is held on global reinsurance markets was also underscored in the year under review when the highly respected UK insurance daily “Insurance Day” crowned Hannover Re as Reinsurance Company of the Year in September. In its citation the jury highlighted the fact that in the difficult and costly 2011 financial year Hannover Re had recorded the lowest ratio of catastrophe losses among all professional reinsurers at 14 percent of net premium.
The favourable development of Hannover Re in 2012 was similarly reflected in the share price, which gained more than 50 percent in the year under review. This performance was significantly more positive than had been forecast by virtually all analysts at the beginning of the year. We also achieved our strategic objective of beating the Global Reinsurance Index and can therefore point to a better-thanaverage performance in the sector comprised of reinsurance undertakings.
Gross premium in non-life reinsurance grew by 13 percent year-on-year to EUR 7.7 billion. Adjusted for currency effects, this is equivalent to a pleasing increase of 9 percent. Growth was driven principally by markets in Asia and Australia that had suffered losses in 2011. We also recorded gratifying growth rates in our North American business and in our portfolio of facultative reinsurance. The combined ratio improved markedly from 104.3 percent to a good 95.8 percent, assisted not least by the substantially smaller burden of major losses than in 2011.
In our second business group, life and health reinsurance, we also continued to chart our expansionary course. Gross written premium climbed 15 percent to EUR 6.1 billion (10 percent adjusted for currency effects). Above-average growth was generated most notably in the United States, where we were able to make the most of the platform acquired from Scottish Re in 2009 in the context of the ING transaction. In addition, we booked very strong growth in Australia and in emerging markets, above all China and Latin America.
As already mentioned, profitability in life and health reinsurance was overshadowed in the year under review by a higher than expected mortality experience for some underwriting years in our risk-oriented US life reinsurance portfolio. The fact that we were still able to generate satisfactory Group net income can be attributed not only to a better than anticipated underwriting result in some markets – such as Europe – but also to a positive performance of the so-called ModCo derivatives. The latter contributed around EUR 52 million to the operating profit (EBIT) of EUR 291 million, which came in 34 percent higher than in the previous year. IFRS accounting requires us to establish ModCo derivatives in relation to the credit risk associated with certain securities deposits held by US clients on our behalf. Group net income grew by 27 percent to EUR 231 million.
Along with the strong ordinary income, the good investment performance was also boosted by higher realised gains. Yet the valuation reserves in our portfolio of fixed-income securities also increased appreciably. This is ultimately due to the fact that in 2012 the current interest rate level was again well below the average interest rate level of previous years. In addition to realising gains through regrouping within our bond portfolio, we realised some substantial increases in value in our US real estate portfolio in the third quarter. Despite this, we moved forward with the strategic expansion of our real estate allocation.
The unrealised gains and losses recognised in the statement of income – amounting on balance to EUR 89 million – also made a positive contribution to the very healthy investment income. This derived principally from changes in the fair values of the aforementioned ModCo derivatives and the performance of our inflation swaps. As we have reported in the past, we purchased inflation swaps to partially hedge the loss reserves in our technical account against the inflation risk.
All in all, we generated very pleasing investment income of EUR 1.3 billion from assets under own management; this figure, which corresponds to a net return on our investments of 4.3 percent, thus came in 24 percent higher than in the previous year. Income from funds withheld and contract deposits also climbed by 5 percent to EUR 355 million, causing total net investment income to grow by almost 20 percent to EUR 1.7 billion.
I would now like to turn briefly to the current financial year: competition in non-life reinsurance has intensified sharply. This is partly because, owing to the good results generated by the reinsurance industry as a whole, the capital available to reinsurers and hence also the capacity on offer has continued to grow. The supply of reinsurance protection has consequently outstripped demand. This is especially true of mature markets, where in some cases demand for reinsurance has actually contracted as larger insurance groups run higher retentions. The situation is more favourable in many emerging markets, however, where the increased volume of primary insurance business is stimulating growth on the reinsurance side too.
Despite this increasingly challenging market climate, we were very largely able to maintain the good price level of 2012 in the treaty renewals as at 1 January 2013. Indeed, we even obtained further rate increases in certain areas – principally those that had suffered losses. This was especially true of nonproportional marine reinsurance, which was heavily impacted in 2012 both by the wreck of the “Costa Concordia” cruise ship and by marine losses resulting from Hurricane Sandy. It was also due to the latter that prices for property catastrophe business at least remained stable. Thanks to our low administrative expense ratio compared to rival providers as well as our long-standing good business relationships with primary insurance clients, we are well equipped for the prevailing competitive climate. In 2013, therefore, it is our expectation that we shall again be able to generate growth in non-life reinsurance (after adjustment for currency effects). Given the present state of the market, however, what is more crucial is that we maintain our disciplined focus on writing business that meets our margin re quirements – also making allowance for the decline in the risk-free interest rate level.
In view of the protracted low level of interest rates, we must anticipate that the net return on our investments will fall to around 3.4 percent. On the other hand, we expect the portfolio of assets under own management to continue growing, which means that the reduced net return should not be entirely reflected in investment income. Overall, we are looking to post growth in the order of 5 percent (adjusted for currency effects) for 2013. Group net income is expected to come in around EUR 800 million.
I would like to thank you, our valued shareholders, most sincerely for your trust – also on behalf of my colleagues on the Executive Board. Furthermore, I would like to express my sincerest appreciation to all our employees for their successful efforts in the year under review. Going forward, as in the past, we shall do our utmost to continue to successfully grow Hannover Re’s business with an eye to the existing opportunities and risks. It is and will remain our goal to increase the value of your company on a sustainable basis.
Ulrich Wallin Chairman Business Opportunity Management Controlling Corporate Communications Corporate Development Human Resources Management Internal Auditing Risk Management
Dr. Michael Pickel Group Legal Services, Compliance Run-Off Solutions Target Markets in Non-Life Reinsurance
Standing from left to right: Dr. Klaus Miller, Jürgen Gräber, André Arrago, Dr. Michael Pickel
Seated from left to right: Claude Chèvre, Ulrich Wallin, Roland Vogel
Along with Copacabana Beach to the northeast, Ipanema is the most important beach in Rio de Janeiro
Latin America In South America population growth and rising prosperity are creating greater demand for life insurance and retirement provision products.
Capital markets in 2012 were again heavily under the shadow of the unfolding sovereign debt crisis in the European Monetary Union and found themselves at the mercy of political decisions to an extent seldom seen before. The German DAX share index started the year at 5,898 points and climbed to 7,100 points by the beginning of April. In the second quarter, however, speculation surrounding the outcome of Greek elections – with potentially critical implications for the Euro – and a swing to the left in France fanned new doubts about the single currency, as a consequence of which the DAX had slipped to below 6,000 points by June. It was only the announcement by the European Central Bank (ECB) to the effect that it would henceforth support countries in distress through unlimited bond purchases that brought quick relief to the financial markets. The DAX made good lost ground in the following months and closed the year with a gain of 29.1% at 7,612 points. The MDAX improved even more strongly over the same period, ending the year at 11,914 points – a twelve-month gain of 33.9%. The Japanese Nikkei index also closed the year in comfortably positive territory, rising by a somewhat more modest 22.9% to 10,395 points. Only the Dow Jones, dogged by the protracted depressed state of the US economy, had to settle for a significantly poorer performance. The Dow ended the year at 13,104 points, a gain of 7.3%.
At the end of the financial year the Hannover Re share was listed 53.8% higher at EUR 58.96. It thus comfortably outperformed the DAX and MDAX benchmark indices as well as the Global Reinsurance Index, which posted a gain of 23.6%. In a three-year comparison (see chart below) the Hannover Re share delivered a performance (including reinvested dividends) of 113.2%, again clearly beating the DAX (27.8%), MDAX (58.7%) and Global Reinsurance Index (51.8%).
Based on the year-end closing price of EUR 58.96, the market capitalisation of the Hannover Re Group totalled EUR 7.1 billion at the end of the 2012 financial year, an increase of EUR 2.5 billion or 53.8% compared to the previous year’s figure of EUR 4.6 billion. According to the rankings drawn up by Deutsche Börse AG, the company placed sixth in the MDAX at the end of December with a free float market capitalisation of EUR 3,468.7 million. Measured by trading volume over the past twelve months, the share came in at number 11 in the MDAX with a volume of EUR 2,673.7 million. The Hannover Re Group thus continues to rank among the 40 largest listed companies in Germany.
The Annual General Meeting of Hannover Re was held on 3 May 2012 at the HCC - Hannover Congress Centrum. Shareholders, shareholder and bank representatives as well as guests took up the invitation of the Executive Board and Supervisory Board in large numbers. Altogether, a good 76% of the share capital was represented. In his address to the meeting Chief Executive Officer Ulrich Wallin took the opportunity to look back once more on the 2011 financial year, in which Hannover Re had still been able to generate a pleasing result despite heavy major losses from floods in Australia and Thailand, earthquakes in New Zealand and the devastating seaquake off the coast of Japan and subsequent tsunami.
For the first time Hannover Re offered its shareholders the opportunity to exercise their voting rights at the Annual General Meeting by postal vote – in addition to the normally available options of personal voting on site as well as voting through an authorised representative or through a proxy nominated by the company. In the votes that were taken the Annual General Meeting adopted by a large majority the resolutions proposed by the Executive Board and Supervisory Board. Among other things, the Annual General Meeting approved the resolution to convert Hannover Re into a European limited company (SE). By taking this decision Hannover Re is not only modernising its legal form, it is also giving clearer expression to the company’s international dimension. At the same time, it will enjoy greater flexibility in being able to respond to future legal or regulatory requirements.
Despite relatively light losses and a rather unspectacular year overall, Hannover Re attracted strong interest from the capital market in 2012. This was due not least to the initial public offering announced by the parent company Talanx AG at the beginning of the year, which, as the year progressed, prompted a considerable need on the part of investors for dialogue about the implications for Hannover Re. Responding to these calls, we took part in altogether 14 capital market conferences (previous year: 14) and met locally with interested investors at 15 roadshows (previous year: 21). Our travel activities in 2012 were again focused on the financial centres of Frankfurt, London and New York, which we visited at least once a quarter. Along with Paris, Munich, Copenhagen, Geneva, Zurich, Lugano and Milan, our itinerary also included Toronto and San Francisco. Our 15th Investors’ Day, held on a rotating basis in London in 2012, was very well received. In total, some 60 analysts and institutional investors took the opportunity to engage in an intensive exchange of views with the Executive Board on current and future business prospects. The discussions focused on, among other things, management of our assets in the prevailing low interest rate environment as well as enterprise management based on the economic capital model and IVC (intrinsic value creation).
making this the most common, while “underweight” or “sell” recommendations were issued a total of seven times. The analysts’ average price target according to Bloomberg climbed steadily in the course of the year from EUR 42.52 at the outset to EUR 56.01 by year-end.
Market capitalisation at year-end in EUR million 7,110.4 4,621.9 4,840.2 3,944.7 2,713.4
Equity attributable to shareholders of Hannover Re in EUR million 6,055.8 4,970.6 4,509.0 3,714.4 2,830.1
Return on equity (after tax) 4 15.6% 12.8% 18.2% 22.4% (4.1%)
Quick, flexible and independent, we strive for excellence in our actions.
• E+S Rück: Rank among the top 2 reinsurers in Germany
• Promote and require a goal-oriented working approach among our staff
• Ensure protection of capital through quantitative and qualitative risk management
• Take into account the maturities of our liabilities and the liquidity requirements of our business
South Africa Still in its early years, the South African insurance market is continuously evolving. In general terms, the market is enjoying strong growth and becoming visibly more competitive.
Opportunity and risk report 60 Risk report 60 Value-based management 76
Enterprise management 80 Declaration on Corporate Governance 80 Remuneration report 83
Overshadowed by the European sovereign debt crisis and the crisis of confidence on financial markets, the expansion of the global economy lost further impetus in the year under review. Moves by the European Central Bank (ECB) and the US Federal Reserve (Fed) to intervene on the monetary policy side helped to lighten the mood on financial markets; they did not, however, bring about an economic recovery.
Industrialised nations pressed ahead with consolidation measures intended to reduce levels of debt. While in the United States this was especially true of the private sector, in the United Kingdom and in the Eurozone considerable efforts were made to consolidate public finances. The resulting slumps in growth and faltering demand triggered an economic slowdown among emerging nations. In China the pace of expansion had already slowed in the previous year. In Japan, where economic activity started the year at a brisk tempo, the economy began to cool from the spring onwards. All in all, therefore, the ifo Institute estimates that global output grew by just 3.0% (previous year: 3.8%).
The Eurozone was dominated by the sovereign debt crisis in 2012. Economic data therefore tended to be correspondingly weak: while economic output in Europe was initially flat, it contracted as the year progressed and ultimately plummeted in the last quarter. The situation deteriorated in almost all Eurozone countries. A payment default by Greece was prevented when supporters of the rigorous austerity measures proposed by the European Union (EU) and International Monetary Fund (IMF) prevailed in new elections. On the other hand, Spain and Italy slipped into a deep recession owing to urgently needed consolidation measures. France also showed clear signs of economic weakness. In Germany economic activity similarly declined appreciably in the year under review, although it is still better than average compared to other member countries of the EU Economic and Monetary Union. According to ECB calculations, GDP in the Eurozone contracted by 0.5% in 2012.
Following a favourable ruling by Germany’s Federal Constitutional Court the European Stability Mechanism (ESM) was able to begin its work in October 2012. With the launch of this permanent bailout fund and the ECB’s new outright monetary transactions (OMT) programme for buying government bonds, significant steps were taken in the year under review to stem the debt crisis. At the same time they signalise a clear commitment to the preservation of monetary union. Another important element for stabilising the financial markets was put in place in December 2012 with the agreement among EU finance ministers on the architecture of common Eurozone bank supervision: in future some 150 financial institutions are to be subject to the automatic control of the ECB. They include up to 30 German banks. Crisis-ridden banks will already be able to receive bailout funds directly from the ESM in the current year. The ECB is not, however, expected to fully assume its new banking supervisory role before March 2014 at the earliest.
The mood on capital markets in 2012 was once more dominated by the Euro debt crisis. For detailed remarks on the development of capital markets please see the “Investments” section on page 48 et seq.
On the economic policy side, the continued adherence to low interest rates caused concern in the major economic areas. This intervention has now come to represent a powerful control mechanism of a more sustained nature, which also puts increasing pressure on the insurance industry. This was reflected in 2012 in the ongoing reform efforts in matters of insurance industry policy and regulation – as exemplified in the US by continuing work on the “Solvency Modernization Initiative” (SMI) and in Europe by the regulatory process as part of Solvency II.
Implementation of the Solvency II Directive continued to be a central preoccupation for the European insurance industry. As things currently stand, the previously announced 2014 deadline for entry into force cannot be met. Solvency II envisages more demanding requirements for insurance undertakings with respect to capital resources, risk management and reporting obligations.
Increasingly exacting capital requirements are prompting stronger demand for reinsurance protection among primary insurers: in this way insurers are able to reduce possible risks associated with fulfilment of their minimum capital requirements. At the same time, they can retain the flexibility to adjust their capital resources through short contract periods.
Despite the ongoing uncertainty in the markets and the generally weak state of the economy, German insurers enjoyed a stable business development in 2012: premium income across all lines climbed by 1.5% in 2012 to EUR 180.7 billion. Indeed, German credit insurers could even chalk the year up as an alltime success: thanks to stronger demand for credit insurance coverage in the market they wrote 10% more contracts overall in credit, surety and fidelity insurance and boosted their gross premium by 2% to around EUR 1.6 billion.
Hannover Re completed several block assumption transactions for longevity risks in the 2012 financial year, including for example pension obligations for a UK industrial enterprise with a volume in the order of EUR 1 billion. We succeeded in enlarging our gross premium volume in total life and health reinsurance. With an increase of 14.9% (9.8% at constant exchange rates) or EUR 6.1 billion, we surpassed our growth target of 5% to 7%.
We are also highly satisfied with developments on the investment side. Our portfolio of assets under own management grew to EUR 31.9 billion (31 December 2011: EUR 28.3 billion). Ordinary investment income excluding income on funds withheld and contract deposits comfortably surpassed the previous year’s figure to reach EUR 1,088.4 million (EUR 966.2 million), despite the protracted low level of interest rates. This produced an annual return of altogether 3.6% (3.6%).
Once again, only very minimal impairments had to be taken in the reporting period. Income on funds withheld and contract deposits climbed from EUR 338.5 million to EUR 355.5 million.
Similarly, the equity attributable to shareholders of Hannover Re developed very favourably in the year under review, climbing from EUR 5.0 billion to EUR 6.1 billion. The book value per share was correspondingly positive at EUR 50.22 (EUR 41.22). The return on equity reached 15.6% (12.8%). The policyholders ’ surplus, consisting of shareholders equity, non-controlling interests and hybrid capital, rose sharply to EUR 9.0 billion (EUR 7.3 billion).
Accounting for 56.0% of our premium volume, non-life reinsurance is Hannover Re’s largest business group and one in which we are striving for further profitable growth. The strategy guiding our actions is active cycle management: we expand our business in individual lines if the rate situation is favourable and reduce it if we consider the prices to be inadequate.
In the non-life reinsurance renewals as at 1 January 2012 – the date when around two-thirds of our treaties in traditional reinsurance were renegotiated – we achieved better conditions and rates on average than in the previous year. Overall, the renewed premium volume grew by 6%; the increase in the comparable period of the previous year had been 2%.
The treaty renewals again showed the considerable importance attached by ceding companies to a reinsurer’s financial strength. A very good rating is indispensable for a reinsurer if it is to be offered and awarded the entire spectrum of business – a situation from which Hannover Re again benefited thanks to its excellent ratings.
Business in Germany fared better than expected for our company. The sustained price erosion in motor insurance was halted. The treaty renewals also passed off satisfactorily overall in our second target market, North America. In US casualty business, for example, it was possible to stop the rate erosion.
Non-life reinsurance: Geographical breakdown of gross written premium 23.4% North America 22.6% Rest of Europe 15.8% United Kingdom 12.4% Asia 11.2% Germany 8.0% Other
We were similarly satisfied with the treaty renewals in specialty lines. Rates in marine business were broadly stable, while increases were recorded in the offshore energy sector. Aviation reinsurance experienced rate erosion on account of good underwriting results, although the business remains attractive. In credit and surety business, too, rates declined modestly owing to the pleasing loss ratios of recent years.
All in all, non-life reinsurance offered attractive market opportunities; we achieved profitable growth and extended our market share. Details of developments in the individual markets are provided on the following pages.
The gross premium volume for our non-life reinsurance business group increased by 13.1% in the year under review to EUR 7.7 billion (EUR 6.8 billion). At constant exchange rates, especially against the US dollar, growth would have come in at 9.3%. The level of retained premium retreated slightly to 90.2% (91.3%). Net premium earned grew by 15.0% to EUR 6.9 billion (EUR 6.0 billion); growth would have been 11.4% at constant exchange rates. The increase in premium volume (at unchanged exchange rates) was thus stronger than anticipated; in our original forecast for 2012 we had anticipated growth in the range of 5% to 7%.
Unlike in the previous year, the major loss situation was comparatively moderate in the year under review. The largest single loss event for the international insurance industry – at a cost of more than USD 20 billion – was Hurricane Sandy, which caused death and considerable devastation along the East Coast of the United States. Our net strain from this event was EUR 257.5 million. Severe damage also resulted from two earthquakes in Italy, which produced a total loss of EUR 66.5 million for net account. Our marine business incurred a net loss of EUR 53.3 million from the wreck of the “Costa Concordia” cruise ship. Our portfolio of agricultural risks also suffered a large loss: the most severe period of drought in decades in the United States resulted in a net strain for our account of EUR 43.3 million. These events, together with other less sizeable major losses, combined to produce net expenditure for the year under review of EUR 477.8 million; the previous year’s figure had been EUR 980.7 million. We thus came in well below our expected level for 2012 of roughly EUR 560 million. Against this backdrop, the combined ratio improved from 104.3% in the previous year to 95.8%.
In the following pages we report in detail on our non-life reinsurance business group, which is split into three segments according to the areas of responsibility on the Executive Board: target markets, specialty lines and global reinsurance.
Contrary to the stagnant premium volume in the market as a whole, the personal accident insurance business in our portfolio posted vigorous growth, as a consequence of which we were once again highly satisfied with the development of this line. In this area we offer our cedants not only reinsurance covers, but also services such as training programmes and a Web-based version of our accident manual – thereby enabling clients to extensively finalise the processing of applications at the workplace or even at point of sale. Not only that, we offer comprehensive services for the management of bodily injury claims as well as enhanced accident products on the pricing side.
Non-life reinsurance: Breakdown of gross written premium in Germany by line of business 23.5% Property 34.6% Motor 37.2% Liability
Through our cooperation with a primary insurer we have brought to market covers against weather-related losses of revenue and profit; target customers for these products include the construction sector, regional energy suppliers and the automobile industry. Given the changing energy policy in Germany, the (re)insurance of wind farms will also play an ever greater role; this is true not least of highly complex offshore wind farms. Our premium volume in this new area of business is still relatively modest given the difficulty of assessing the risks.
Against this backdrop Hannover Re boosted its premium income in the original currency by 15% in the year under review; our expectation last year had been just 2%.
Non-life reinsurance: Breakdown of gross written premium in North America by line of business 39.5% Property 8.6% Motor 51.8% Liability
Hannover Re is also active in agency business. Both in the United States and Canada we have significantly expanded this segment with the aid of our Group companies and their extended licences.
The major loss situation in the 2012 financial year was crucially dominated by Hurricane Sandy, which ensured that losses from the hurricane season were not as light as in the previous year. Hannover Re incurred loss expenditure of EUR 258 million from this event. For further information please see the section entitled “Global catastrophe business” on page 41. The combined ratio stood at 102.5% after 110.8% in 2011. Essentially, we are thoroughly satisfied with the result of our business in North America.
Market capacities are in some cases exhausted owing to largevolume construction projects in the offshore sector and their considerable risk exposure. Reinsurers, too, are coming up against the limits of their capacity on account of the increases in value associated with existing oil platforms and the high exposures for construction risks arising out of the building of new platforms.
On the claims side the marine line was significantly impacted in the year under review. Particularly important here was the wreck of the “Costa Concordia” cruise ship, which resulted in an insured market loss in excess of EUR 1 billion. The burden from this loss event for Hannover Re amounted to EUR 53 million. Reactions on the original markets to these events were mixed: while hull insurers were restrained in their rate adjustments, very marked price increases are to be expected for Protection & Indemnity (P&I) covers on both the insurance and reinsurance side. We also incurred sizeable losses from Hurricane Sandy.
Aviation In international aviation reinsurance we similarly rank among the market leaders. Despite the difficult economic climate in Europe and North America, the situation facing airlines continued to stabilise in the year under review. Passenger numbers picked up slightly, which also benefited the (re)insurance industry. With deliveries of new large airliners on the rise, more and more policies are seeing increases in the indemnity limits purchased by airlines.
Claims expenditure in the aviation line has benefited from the use of aircraft fitted with state-of-the-art technology. The burden of losses has been below average for three years now. The major loss experience in the year under review proved to be better than expected. The largest single event for our portfolio was a satellite loss, resulting in a net strain of around EUR 9 million for our account.
With economic growth softening across a broad front, the number of insolvencies began to climb again. Whereas two to three years ago loss ratios were still below average, they rose in original business to a level that can be considered average over the cycle. The increase was particularly appreciable in surety business, where market consolidation began to set in either on account of declining earnings or due to overheating of the market. In the area of political risks, on the other hand, claims rates remained stable year-on-year at a good level.
Losses incurred in the year under review, including for example the insolvency of a large pharmacy chain in Germany, had a stabilising effect and served to minimise rate erosion. There were also indications that the decline in rates, especially in credit business, has at least been halted. In some countries, such as Spain and Italy, and in certain branches of industry that are under strain, rate increases could already be observed.
Structured reinsurance / Advanced Solutions Hannover Re is one of the two largest providers of structured reinsurance solutions in the world. Such products are designed, among other things, to reduce and optimise the cost of capital for our ceding companies. Thanks to our many years of experience and our actuarial, balance sheet, accounting and underwriting expertise, we were once again a sought-after partner in 2012 for innovative and tailored reinsurance solutions.
Demand for alternative reinsurance covers remains lively. This is prompted by the more exacting requirements placed on the capital resources of insurers in Europe as part of the preparations for adoption of Solvency II as well as by the implementation of risk-based capital requirements in various countries around the world. This trend includes aggregate excess of loss covers, which protect the net retention of our clients against significant loss scenarios with a low probability of occurrence.
The 2012 financial year was another successful one for our company. We boosted our volume and enlarged our customer base. We pressed ahead with our strategy geared to further regional diversification of our portfolio.
There were no major losses with a significant impact on our portfolio. We are satisfied with the result achieved for our alternative solutions business in the year under review.
In addition to protecting our own property catastrophe risks, we use the capital market to structure and package risks for our cedants. We also take the role of investor ourselves by investing in catastrophe bonds, the prices for which moved slightly higher at the beginning of the year under review in expectation of a lively US hurricane season. However, they softened sharply again in the course of the year for demand reasons and on account of the moderate – leaving aside “Superstorm Sandy” – hurricane season. While Sandy prompted price increases for US catastrophe bonds, it had little effect on the rest of the market.
The year under review brought another strong inflow of cash into the ILS market. Investors find this market interesting because it has scarcely any correlation to the other risks associated with the traditional capital market, such as interest rate risks, and it therefore promotes diversification of asset portfolios.
Our premium volume in the area of insurance-linked securities rose sharply in the year under review. Profitability was pleasing.
United Kingdom, London market and direct business Traditional reinsurance We are satisfied with the business that we write in the United Kingdom and on the London market. Particularly attractive market conditions opened up to us in non-proportional motor reinsurance. With US and Bermudan players partially withdrawing owing to changes in accounting requirements, capacity for middle and higher layers contracted. Rates consequently climbed sharply. We used this as an opportunity to substantially expand our portfolio.
Direct business Through two of our subsidiaries, International Insurance Company of Hannover Ltd. (Inter Hannover) in the United Kingdom and the South African company Compass Insurance Company Limited, a subsidiary of Hannover Reinsurance Africa Limited, we write direct business that complements our principal commercial activity as a reinsurer. This essentially involves acceptances concentrated on tightly defined portfolios of niche or other non-standard business.
After appreciable price increases in the previous year, premiums in private motor business lost momentum in the year under review – prompting us to scale back our premium volume in this sector. In industrial property business our involvement is concentrated on mid-sized clients, since in these cases we are able to exert a stronger influence on the structuring of the programmes.
Our underwriting policy remains concentrated on the casualty sector, especially medical malpractice. In builder’s risk insurance we are one of the leading players in France. The accident line is another focus of our activities.
The primary insurance market in the Netherlands was notable in the year under review for further mergers between smaller companies. Yet more sizeable providers – who received government assistance during the financial crisis – are also up for sale. Overall, clients purchased less reinsurance protection. In some lines, such as motor business, we were nevertheless able to enlarge our market share and expand our premium volume.
Covers for major risks such as natural catastrophes continued to attract growing demand. The stimulus here was provided by the more exacting requirements placed on risk management systems in connection with the preparations for Solvency II. Against this backdrop, rates for catastrophe business rose.
In contrast to the previous year, the loss situation on the Dutch market was moderate and we were therefore able to improve the result of our business.
Northern Europe The markets of Northern Europe are served by our branch in Stockholm. Thanks to the reinsurance capacities that we are able to offer as well as our very good ratings, we are one of the most prominent providers of reinsurance coverage in this region.
Central and Eastern Europe Compared with the primary insurance markets of Western Europe, growth rates in the countries of Central and Eastern Europe continue to be above average. As a result, competition remains fierce and original rates are declining in most countries and lines of business. On the reinsurance side, by contrast, rates and conditions were by and large stable.
Hannover Re regards the countries of Central and Eastern Europe as strategic growth markets. As forecast, we booked doubledigit growth in premium income here in the 2012 financial year.
In the 35 countries of Central and Eastern Europe we rank among the three largest providers of reinsurance protection. We quote business in all lines and markets. Our underwriting policy remains opportunistic, i. e. we are guided by the relevant profitability considerations. In the case of loyal clients, we are willing to extend our margin requirements over a longer period of time.
The 2012 financial year passed off successfully for our company, with rates reflecting the associated risks. Thanks to our selective underwriting policy and a favourable loss experience we were again able to generate satisfactory margins in the year under review.
Latin America Hannover Re is well-positioned in Latin America and a market leader in some countries. The most important markets for our company are Brazil – where a study found us to be one of the three most highly regarded reinsurers –, Mexico, Argentina, Colombia, Venezuela and Ecuador.
Latin American markets have enjoyed very vigorous growth in recent years. The Brazilian government, for example, again implemented a number of programmes in 2012 to stimulate the economy – including cutting taxes on new vehicle purchases. With an eye to the two upcoming major sporting events, namely the FIFA World Cup in 2014 and the 2016 Olympic Games, the country is investing heavily in its infrastructure and in power generation. These growth incentives continued to fan rising demand for (re)insurance covers in the year under review.
Non-life reinsurance: Breakdown of gross written premium in global reinsurance by line of business 22.2% Property 16.7% Motor 54.3% Liability
We ensure close business ties with our clients through our representative office in Brazil. We operate in this market as an “admitted reinsurer”. Although competition here is intensifying, this did not adversely affect our business. Thanks to our excellent financial standing we are a highly valued partner, especially for casualty covers. In view of the attractive opportunities we continued to expand our portfolio in this line and in motor business. No major losses were incurred in the year under review; the loss ratio came in lower than in the previous year and an improved result was posted for 2012.
New supervisory regulations introduced in Argentina placed limitations on the business opportunities available to foreign reinsurers that do not have a local branch. As a result, companies such as Hannover Re are now only able to assume covers for local reinsurers. We exceeded our target of preserving 70% of the existing portfolio in the year under review. We boosted our premium volume in Central America, Chile and the Caribbean. The most attractive line in these Latin American markets continues to be casualty business.
Owing to the limited scope to transact business in Argentina, our total premium volume in Latin America contracted in 2012. No major losses were incurred in the year under review. All in all, we are satisfied with the development of our business in Latin America.
The premium volume for our portfolio in Japan grew appreciably in the year under review. Results were thoroughly satisfactory.
Our goal was to reduce the proportion of catastrophe business and to regroup the portfolio away from treaty reinsurance and more heavily towards facultative coverage concepts. We successfully accomplished this objective. Vigorous growth was recorded in Thailand, where prices rose sharply owing to the severe floods of 2011. Conditions here also improved significantly. Limits of liability were implemented in proportional treaties across virtually all markets.
Prices in other regions remained stable, however, albeit on a level commensurate with the risks.
The development of our business in Southeast Asian markets was highly satisfactory. Our premium volume rose sharply in the year under review. In contrast to the previous year, no major losses were incurred in 2012, enabling us to generate a thoroughly pleasing result.
China The pace of the Chinese economy’s growth slowed appreciably in the year under review. Nevertheless, at around 15% growth rates in the insurance industry were still strong. In view of the relatively low insurance density as well as more stringent requirements governing the capital resources of insurance companies, we anticipate further vigorous growth here in the years ahead. With this in mind, all major reinsurers consider this country to be a target market – prompting an oversupply of reinsurance capacity in many lines of business.
Overall, business developed satisfactorily in the year under review. Conditions remained broadly stable and the major loss experience was unremarkable. Against this backdrop we booked a satisfactory underwriting result.
The dominant line in China continues to be motor insurance. Impending deregulation in this area – which means that foreign companies too will now be able to offer their own tariffs – is likely to result in softer market conditions in the profitable motor line. In the other lines the environment was again intensely competitive, and expanding our market share was therefore not a central concern for our company.
As anticipated, our business prospects enjoyed a further boost from the close support given to clients by our branch in Shanghai.
On the whole, we are satisfied with the development of our portfolio in the Chinese market. Our premium volume was further enlarged in the year under review.
Australia / New Zealand Hannover Re still ranks third in the Australian and New Zealand non-life reinsurance market. We write the entire spectrum of reinsurance in this region. For more than 25 years Hannover Re has been represented by a branch in Sydney, at which we have concentrated all our treaty reinsurance activities since November 2012. Our offerings in Australia are complemented by a primary insurance licence held by our subsidiary Inter Hannover.
Retakaful business We write retakaful business – that is to say, insurance transacted in accordance with Islamic law – in both Southeast Asia and on the Arabian Peninsula. We maintain a dedicated subsidiary for this business in Bahrain (Hannover ReTakaful) as well as a branch that bears responsibility for writing traditional reinsurance in the Arab world.
Hannover Re is strongly positioned in the Islamic world. The largest single market for our company continues to be Saudi Arabia, followed by Malaysia. Our strategy is to generate further profitable growth. The premium volume in treaty reinsurance climbed more than 10%, driven principally by extensive government spending on infrastructure and construction projects. In facultative reinsurance growth rates for property lines were even higher. On the other hand, prices for casualty covers fell sharply in a fiercely competitive environment. Nevertheless, we successfully maintained the leading position in our most important markets without neglecting our profitability requirements.
The focus of our underwriting policy in 2012 was on further optimising our portfolio. We systematically scaled back our shares in cases where we no longer considered the rates to be commensurate with the risks. In addition, we are working towards even more balanced diversification of our portfolio – both in terms of the geographical spread and the breakdown by lines of business. In this respect we are stepping up our involvement in livestock covers. The premium income for our total portfolio increased once again in the year under review.
The loss events that occurred in the agricultural risks sector will – as was already the case last year – lead to rate increases and improved conditions.
In view of broad-ranging demand for facultative covers, we made the most of the available business opportunities in the year under review to generate further profitable growth. We continued to optimise our portfolio structure and withdrew from business segments that did not meet our criteria. The latter include a number of casualty lines such as professional indemnity for lawyers and medical malpractice covers.
For years Hannover Re has been active in sports insurance – a sector which encompasses not only disability coverage for professionals engaged in a broad range of sporting careers but also liability and cancellation covers for large sporting events. In the year under review – with perfect timing for the European Football Championship – we wrote the lead share in the coverage taken out by FIFA for footballers playing on their national team. Clubs receive financial compensation if one of their players misses games after being injured playing for their country. This innovative insurance solution closed the previous gap in coverage existing between club sides and national teams.
Appreciable price increases could generally be obtained in the energy sector, especially in the mining industry.
The 2012 financial year was essentially spared major losses. Even Hurricane Sandy failed to have any dramatic repercussions on our facultative portfolio. The result for our facultative business was satisfactory.
As one of the five largest, internationally operating and established life and health reinsurers we offer our clients worldwide reinsurance protection in all lines of life and health insurance. With 23 units in 19 countries, we have an outstanding international network at our disposal and are present on all five continents.
Our operational market cultivation is organised into seven regional and three worldwide business centers. Hannover, Ireland and Bermuda are the main risk carriers in life and health reinsurance, ensuring efficient capital utilisation that benefits from the diversification effects of a broadly spread risk profile. We put special emphasis on our expertise in the longevity sector; for this reason we have set up a stand-alone “Longevity” Business Center in Hannover with global responsibility so as to concentrate the indepth experience that we have gathered worldwide over several decades. In order to cater even better to the considerable potential offered by Asia we have also created an “Asia” Business Center, which is extensively supported by our local offices.
Our clients value us not simply as a financially strong partner but also because of our customer orientation and flexible service. Customer needs are diverse and extremely varied in their nature. These needs range – along with conventional business – from financially oriented solutions through ideas on how to optimise their risk management to manifold forms of reinsurance service, including for example innovative product concepts, underwriting systems, actuarial research studies and seminars.
Thanks to our decentralised approach, our employees are available directly on the spot and are equipped with superb knowledge of the local (re)insurance market. They are usually native speakers closely familiar with the region’s culture. This local market know-how combined with our worldwide expertise enables us to deliver individually tailored and comprehensive customer support.
Initially planned for 2013, the adoption of Solvency II continues to be delayed, prompting debate as to whether uncontroversial parts of the new capital rules – such as those relating to risk management and reporting requirements – should be implemented earlier on a gradual basis in the intervening period. We have engaged intensively with all areas of the new Solvency II requirements and we believe that we and our clients are well prepared for their implementation. Going forward, we will be at our clients’ side as an expert partner to assist them with individual reinsurance solutions.
Markets in the United States, United Kingdom, Germany, France and Australia continue to play a pivotal role for our company. In the US we remain focused first and foremost on the areas of mortality solutions and senior markets, together with financial solutions business – which enjoyed particularly vigorous growth in the year under review. In European markets we have concentrated increasingly on the area of longevity, retirement provision and long-term care, in which growing demand is evident.
In view of the range and broad diversification of our portfolio, our result is subject to numerous influencing factors. In this context, the experience of the biometric risks of mortality, longevity and morbidity is one of the most significant. Rather along the lines of 2011, our risk experiences in the financial year just ended were shaped by contrasting effects. Our US portfolio fell short of our expectations owing to increased claims payments for major risks. The business is also impacted by elevated suicide rates, which peaked between 2008 and 2009 during the financial crisis and have since been falling. From a global perspective, the claims experiences were within the bounds of our expectations and indeed in some markets – most notably in Europe – biometric risks actually developed better than forecast.
Life and health reinsurance: Breakdown of gross premium by risk types 46.6% Mortality 25.4% Financial Solutions
Life and health reinsurance: Breakdown of gross premium by risk types 49.8% Mortality 21.2% Financial Solutions
• developments on international capital markets (fluctuations in exchange rates between EUR and the most relevant foreign currencies Australian dollar (AUD), pound sterling (GBP), US dollar (USD) and South African rand (ZAR))
We do not normally carry any investment risk with respect to cedants outside the United States. In this case, a fixed interest rate is usually agreed for the deposited securities across the entire duration – irrespective of movements in market interest rates.
We generated an operating profit (EBIT) of EUR 291.1 million (EUR 217.6 million) in the financial year just ended, hence improving the EBIT margin to 5.4% (4.5%).
Net premium incl. premium deposits 7,311.6 +14.1% 6,408.6 6,068.6 6,204.5 4,911.8
The EBIT margins delivered by Financial Solutions and Longevity business of 2.5% and 3.1% respectively beat the target mark of 2.0%. Mortality business also boosted our result with a superb EBIT margin of 10.6%. Morbidity business, which reported an EBIT margin of -4.2%, still has room for improvement. Going forward, it is our assumption that all reporting lines will generate positive results – in excess of the targeted return – and hence play their part in the profitability of life and health reinsurance.
An increasing focus on biometric risks is to be anticipated in the German life insurance market, which continues to be overshadowed by the challenging economic climate in Europe. This trend will be supported by the progressive ageing of the population. In particular, we have observed stronger demand for long-term care and disability covers. Greater awareness of the need to provide for retirement is reflected in the steadily increasing prominence of these products.
France and the Middle East The business volume written by our life branch in Paris – which bears responsibility not only for France but also for other Frenchspeaking countries and countries in the Middle East – surpassed the EUR 500 million mark for the first time in the year under review. The main growth driver in these regions continues to be protection against biometric risks in the area of consumer and mortgage credit. The quality of this premium volume was borne out by a very pleasing result.
United Kingdom In the UK life reinsurance market we are an expert and soughtafter business partner on account of our long-standing experience and extensive market knowledge. The environment was, however, extraordinarily challenging for the reinsurance industry in the year under review. This can be attributed not only to the high pressure and density of competition, but also to declining sales of traditional risk-oriented products. The development of our portfolio in the financial year just ended was exceptionally pleasing owing to extremely favourable claims experiences, and we are confident of being able to meet future requirements with our selective and targeted underwriting policy.
North America We serve the North American market with units in Orlando (head office), Charlotte, Denver and New York. In contrast to the general development of the US risk-oriented life reinsurance market, which further contracted in the year under review, we have been able to increase our market share by double-digit percentages over four consecutive years. It is our expectation that this thoroughly positive trend will be sustained in 2013.
We substantially boosted our premium volume and improved profitability in the financial year just ended. This was due in particularly large measure to the favourable development of the Financial Solutions market. The risk experience in the area of Mortality Solutions, on the other hand, again lagged behind our expectations. The underlying business is impacted by protracted elevated suicide rates, although these reached their highest point between 2008 and 2009 during the financial crisis and have since been falling. The business was also adversely influenced by unusually high expenditures on peak risks.
Life and health reinsurance: Geographical breakdown of gross premium in EUR million
Australia Business in Australia and New Zealand is written by our Sydney- based life subsidiary. A special feature of our Australian unit is its primary insurance licence. We make successful use of the associated opportunities and have already built up a respectable portfolio of primary insurance. Primary business is an important component of our portfolio in the Australian market, as reflected in the level of premium income. It makes a major contribution to total business, delivering around half of the total premium volume.
In the year under review we generated pleasing double-digit percentage increases in premium income. The principal growth drivers were group covers and direct business. We thus generated gratifying net income after tax and see considerable potential for further growth in the coming year, especially in the primary market and group business.
Business in China, Hong Kong and Japan has fared very well thanks to the continuous need for reinsurance solutions in the areas of capital and solvency management. Going forward, we continue to see thoroughly attractive prospects based on sustained strong demand for reinsurance solutions.
Africa Our African subsidiary in Johannesburg has a mandate for all countries south of the Sahara, a region in which it has been an established business partner for many years. Despite the large number of countries served, more than 90% of our premium in the 2012 financial year derived from ceding companies in South Africa. Our focus in this market is on life reinsurance for individual policies, an area in which we are the marketleading reinsurer. In addition, we use our resources to assist start-up companies.
In the financial year just ended we again generated pleasing growth in our gross premium volume. Net income after tax was satisfactory despite sharply increased claims payments in the case of one client. The African market continues to offer favourable growth opportunities going forward and will remain an important reinsurance market for our company. Our goal is to enlarge our portfolio and cultivate new business sectors, especially in countries outside South Africa.
Capital markets in 2012 remained heavily under the shadow of the euro debt crisis and an expansionary monetary policy was again evident in our principal currency areas. The European Central Bank (ECB) further trimmed the key interest rate for the Eurozone in the middle of the year from 1.00% to its current level of 0.75%, while the US Federal Reserve (Fed) left the US dollar prime rate unchanged in the low range of 0.00% to 0.25%. Over the year US treasuries as well as German and UK government bonds experienced modest falls in yields in the maturity segments relevant to our company, while French government bonds saw more pronounced yield declines in some instances. The return on 10-year German government bonds, for example, fell to a historically low 1.16% as the year progressed and had rallied only slightly to 1.30% by year-end. This yield was facilitated not only by a monetary policy geared to a vigorous supply of liquidity, but also by the investor preference for government bonds of the highest quality. The government bonds issued by most European countries, which had come under increasing pressure in 2011 owing to the inadequate steps taken towards fiscal consolidation, posted gains in 2012. US treasuries also touched historic lows with yields of less than 1.4%. The United States continues to profit from the greenback ’s status as the global reserve currency and the reputation of US treasuries as a safe haven investment. Risk premiums on European and US corporate bonds also decreased across all rating categories, sometimes appreciably so.
We are thoroughly satisfied with the development of our investments in the year under review. Thanks chiefly to a positive operating cash flow, our portfolio of assets under own management grew to EUR 31.9 billion; this is equivalent to an increase of 12.5% relative to the end of the previous year (EUR 28.3 billion).
Ordinary investment income excluding income from funds withheld and contract deposits comfortably surpassed the previous year at EUR 1,088.4 million (EUR 966.2 million) even though interest rates remained low. This was due principally to the growth in assets under own management, although the substantial expansion of the asset classes of corporate bonds and asset-backed securities over the past two years also played a part here. We have now almost reached the envisaged target allocation in these areas. Income from funds withheld and contract deposits improved on the previous year, rising to EUR 355.5 million (EUR 338.5 million).
Impairments totalling just 21.7 million (EUR 31.0 million) were taken. EUR 5.8 million thereof was attributable to alternative investments, while EUR 2.2 million was taken on equities. Scheduled depreciation taken on directly held real estate amounted to EUR 10.4 million (EUR 9.0 million). These write-downs contrasted with write-ups of EUR 2.7 million (EUR 36.8 million).
With a view to protecting our future investment income against the effects of inflation, we took out inflation-linked USD and EUR government bonds – in addition to the inflation swaps – in the fourth quarter in a nominal amount of EUR 605 million.
Holdings of alternative investment funds increased slightly. As at 31 December 2012 an amount of EUR 566.6 million (EUR 510.1 million) was invested in private equity funds, a further EUR 427.1 million (EUR 430.7 million) predominantly in high-return bond funds and loans and altogether EUR 178.8 million (EUR 162.4 million) in structured real estate investments. The uncalled capital with respect to the aforementioned alternative investments totalled EUR 575.9 million (EUR 451.9 million).
Despite the aforementioned disposals in our portfolio of US real estate, we were again able to slightly increase our real estate allocation in the course of the year. Various properties in Germany and the United States were acquired for this purpose; further projects are under review, and the real estate allocation will therefore keep rising steadily as planned. It currently stands at 2.2% (2.1%).
Net investment income in EUR million 2012 + / – previous year
The technical provisions and liabilities shown above, which include funds withheld / contract deposits and reinsurance payable, make up 78.2% (80.0%) of the balance sheet total and are more than covered by our investments, (assets-side) funds withheld / contract deposits, accounts receivable and reinsurance recoverables.
The equity including non-controlling interests at 12.3% (11.2%) of the balance sheet total as well as the loans and – especially – subordinated capital at 4.4% (3.9%) of the balance sheet total represent our most important sources of funds.
The policyholders’ surplus totalled EUR 8,973.3 million (EUR 7,338.2 million) as at the balance sheet date, an increase of 22.3% in the year under review.
Hannover Re uses “Intrinsic Value Creation” (IVC) as its central value-based management tool. With the aid of this tool we apply the principles of economic allocation of equity and efficient use of debt as an equity substitute in order to achieve the lowest possible weighted cost of capital. This concept as well as the objectives and principles in accordance with which we conduct our enterprise management and capital management are described in greater detail in our remarks on value-based management on page 76 et seq. of this report.
After adjustment for non-controlling interests, it increased by EUR 1,085.2 million to EUR 6,055.8 million. The book value per share increased accordingly by 21.8% to EUR 50.22. The changes in shareholders’ equity were shaped chiefly by the following developments: Net unrealised gains on investments recognised in the other reserves reached EUR 987.9 million, a figure EUR 534.8 million higher than at the beginning of the year under review. This rise derived, on the one hand, from the decline in yields on bonds of various European countries such as Germany, France and the United Kingdom as well as on bonds issued by semi-governmental entities. Most significantly, however, the sometimes appreciable narrowing of credit spreads on corporate bonds and asset-backed securities played a considerable part in the rise in hidden reserves, especially in view of the increased holdings of these asset classes in recent years.
In addition, a change in equity from hedging instruments had to be recognised directly in equity for the first time in an amount of -EUR 9.5 million; this resulted from forward exchange contracts held in the year under review to hedge currency risks from long-term investments in foreign operations.
Non-controlling interests in Group shareholders’ equity grew by EUR 48.4 million to EUR 684.5 million as at 31 December 2012. This increase was attributable primarily to the non-controlling interests in E+S Rückversicherung AG in an amount of EUR 39.4 million and in Secquaero ILS Funds Ltd. in an amount of EUR 14.5 million. The non-controlling interest in Hannover Re Real Estate Holdings Inc., on the other hand, decreased by EUR 6.6 million.
In addition to the financing effect of the changes in shareholders’ equity described above, debt financing on the capital market is a key component of Hannover Re’s financing. It was essentially composed of subordinated bonds issued to ensure lasting protection of our capital base – in part also in observance of rating requirements. The total volume of debt and subordinated capital stood at EUR 2,400.8 million (EUR 1,934.4 million) as at the balance sheet date.
Our subordinated bonds supplement our equity with the aim of reducing the cost of capital and also help to ensure liquidity at all times. In the year under review we issued further subordinated debt with a nominal volume of EUR 500.0 million and a maturity of approximately 30 years. As at the balance sheet date four subordinated bonds had been placed on the European capital market through Hannover Finance (Luxembourg) S.A.
Sureties in the form of letters of credit have been furnished by various financial institutions as collateral for our technical liabilities. Both bilateral agreements and an unsecured syndicated guarantee facility existed as at the balance sheet date with a number of financial institutions for this purpose. We report in detail on existing contingent liabilities in the notes, Section 6.12 “Debt and subordinated capital” in our remarks on other financial facilities, page 176 et seq., and Section 8.7 “Contingent liabilities and commitments”, page 199.
Hannover Finance (Luxembourg) S.A., subordinated debt, EUR 500 million; 2012 / 2043 20.11.2012 5.00 496.6 –
Hannover Finance (Luxembourg) S.A., subordinated debt, EUR 500 million; 2010 / 2040 14.9.2010 5.75 498.0 497.9
Hannover Finance (Luxembourg) S.A., subordinated debt, EUR 750 million; 2004 / 2024 26.2.2004 5.75 748.8 748.0
Liquidity We generate liquidity primarily from our operational reinsurance business, investments and financing measures. 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 116 et seq.
Cash and cash equivalents at the beginning of the period 507.0 475.2 1
Change in cash and cash equivalents according to cash flow statement 65.2 31.7
Cash flow from operating activities The cash flow from operating activities, which also includes inflows from interest received and dividend receipts, amounted to EUR 2,637.2 million in the year under review as opposed to EUR 2,522.9 million in the previous year. The principal driver of the higher net inflow year-on-year of EUR 114.3 million (+EUR 286.9 million after factoring out the special effect associated with the Federal Fiscal Court decision in the previous year) – along with the rise in net premium and improved ordinary investment income of EUR 122.2 million – was the increased cash inflow from the protection cover programme for major losses.
The appointment and recall of members of the Executive Board are determined by §§ 84 et seq. Stock Corporation Act. Amendment of the Articles of Association is governed by §§ 179 et seq. Stock Corporation Act in conjunction with § 16 Para. 2 of the Articles of Association of Hannover Re.
The powers of the Executive Board with respect to the issue and repurchase of shares are defined in Hannover Re’s Articles of Association as well as in §§ 71 et seq. Stock Corporation Act. In this connection the Annual General Meeting authorised the Executive Board on 4 May 2010 pursuant to § 71 Para. 1 No. 8 Stock Corporation Act to acquire treasury shares on certain conditions for a period of five years, ending on 3 May 2015.
The following paragraphs explain major agreements concluded by the company that are subject to reservation in the event of a change of control, inter alia following a takeover bid, and describe the resulting effects. The letter of credit lines extended to Hannover 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 176.
In addition, retrocession covers in non-life and life business contain standard market change-of-control clauses which in each case grant the other contracting party a right of termination if a significant change occurs in the ownership structure and participation ratios of the affected contracting party.
Diversity within the organisation refers to the social diversity of the workforce, usually in relation to gender, ethnicity, age and disability. Diversity management denotes the approach adopted so as to ensure that this diversity is positively valued as well as to make constructive use of it for corporate success.
In the 2012 / 2013 implementation cycle five mentee-mentor tandems will initially pass through the programme, which – along with the regular face-to-face dialogue – also encompasses impulse seminars and opportunities for networking. The fact that the identified mentees and mentors were all willing to participate without exception shows how positively this personnel development tool has been received and demonstrates that both female employees and managers can see a benefit in it for themselves and the company.
This specially designed training measure is internationally oriented and seeks to address and individually enhance the situational negotiating skills of our already successful team of underwriters. The programme offers fresh approaches to the increasingly complex requirements of our clients and markets in order to enable underwriters to respond in a client-oriented manner and in keeping with our strategy going forward, as they have in the past.
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 pursued them with motivation. 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.
We additionally include the management of our investment portfolio under product responsibility. The goal of our investment strategy is to generate a commensurate market return in the interests of our clients, institutional investors and private investors. In this context we pay attention not only to traditional financial considerations but also to environmental, social and governance (ESG) criteria. Since 2012 our investment policy has been guided specifically by the ten principles of the United Nations Global Compact and thus also factors in aspects relating to human rights, working conditions, the environment and anti-corruption.
Hannover Re is committed to keeping negative environmental impacts of its business operations as low as possible. With this in mind, the focus of our efforts is on reducing carbon dioxide (CO2) emissions as we move towards climate neutrality by the year 2015. A major step towards achieving this goal was the implementation of our Environmental Management System at Hannover Home Office in 2012. Shortly after launch it was successfully certified according to DIN EN ISO 14001.
In addition, we again participated last year in the Carbon Disclosure Project (CDP) by reporting at length on our consumption of resources that affect climate change – a report which we also published for the first time. This information is taking on growing significance for capital market players when they come to make their investment decisions.
Hannover Re’s carbon dioxide emissions at the Hannover Home Office location amounted to 4,984 tonnes in 2012. Compared to the previous year, CO2 pollution was cut by 3,139 tonnes or 38.6%. This saving was attributable principally to our changeover at the beginning of 2012 to electricity generated exclusively from renewable sources. Furthermore, despite the increased size of its workforce Hannover Re was again able to reduce the number of kilometres travelled on business. This was made possible, among other things, by greater use of video conferences.
Principles for the handling of opportunities and risks Our objective is to consolidate and further extend our position as one of the world’s leading globally operating reinsurance groups of above-average profitability. With a view to accomplishing this aim we enter into a broad variety of risks which, on the one hand, open up opportunities for profit but, on the other hand, can also have adverse implications for our company. Our goal is to make optimal use of opportunities while at the same time adequately controlling and managing the risks associated with our commercial activities. Through our global orientation and our operations in all lines of reinsurance we achieve extensive risk equalisation. In particular, diversification between our non-life and life / health reinsurance business groups enables us to effectively deploy our capital. As a reinsurance specialist, we also transact primary insurance business in selected niche markets on a complementary basis to our traditional reinsurance activities. Of material significance to all segments are the underwriting results and the investment of the premium payments.
Overall, crucial importance attaches to the qualitative and quantitative elements of our risk management. The parameters and decisions of the Executive Board with respect to the risk appetite of the Hannover Re Group are fundamental to the acceptance of risks. The risk strategy derived from the corporate strategy constitutes the basis for our handling of opportunities and risks. We act on opportunities only by weighing up the associated risks. The risk strategy and the guidelines derived from it, such as the Framework Guideline on Risk Management and the central system of limits and thresholds, are subject to regular review. In this way, we ensure that our assumptions and hence also our risk management system are kept up-todate.
and internal corporate approaches and consider ourselves wellequipped to provide the markets with tailored products. Thanks to our broad Group diversification, we enjoy the advantage of being able to offer our clients attractive solutions for improved utilisation of their own capital resources. For Hannover Re itself, the minimum capital requirements imposed under Solvency II are unlikely to present an obstacle, since our internal capitalisation targets (confidence level of 99.97%) go well beyond the regulatory requirements (confidence level of 99.5%).
In this connection we aspire to a rating from the rating agencies most relevant to our industry that opens up and secures access for our company to all attractive business worldwide. Hannover Re is analysed by the rating agencies Standard & Poor’s and A.M. Best by way of an interactive rating process; this means that both rating agencies are also granted access to confidential information about Hannover Re. The current financial strength rating from Standard & Poor’s (S&P) is “AA-” (“Very Strong”, stable outlook) and the rating from A.M. Best is “A+” (“Superior”, stable outlook). Hannover Re’s risk management is assessed by Standard & Poor’s as “Strong”, the second-best S&P rating. The evaluations highlighted, among other things, the very good risk management, the continuous and systematic implementation of the corporate strategy by the management team and the company ’s excellent capital resources.
Executive Board • Overall responsibility for Group-wide risk management • Responsibility for the proper functioning of risk management • Definition of the risk strategy
Risk Committee • Operational risk management, monitoring and coordinating body • Implementation and safeguarding of a consistent Group-wide risk management culture
• Methodological expertise in the development of processes and methods for risk analysis, assessment and management as well as for risk limitation and reporting
Internal Auditing • Process-independent and Group-wide supervision on behalf of the Executive Board 1 Treaty / regional departments and service departments in the non-life and life and health reinsurance business groups as well as the investments sector
The required risk capital of the Hannover Re Group increased in the year under review from EUR 5,484.7 million to EUR 5,967.9 million. The increase in market risks derives from a rise in investments and a rise in the proportion of corporate bonds and asset-backed securities combined with a reduction in the proportion of short-term investments and a decrease in securities with a “AAA” rating. The enlarged business volume in nonlife reinsurance led to a rise in the risk capital for this business group. The increased credit risk derives, inter alia, from the rise in reinsurance recoverables due to the use of retrocession in the financial year. The decrease in risk capital in the life and health reinsurance business group is attributable above all to improvements in the mapping of future cash flows.
The available economic capital increased in the period under review from EUR 8,758.7 million to EUR 10,379.7 million. This was due principally to the positive business result for 2012 and the issue of new hybrid bond. The change in the economic environment in 2012 – with higher credit spreads and further declines in interest rates – resulted in a rise in the valuation reserves for investments. The valuation adjustment for nonlife reinsurance decreased above all owing to a higher risk premium, which reflects the increased capital requirements in this business group. The valuation reserves for life and health reinsurance climbed primarily on account of the positive development of new business.
Hannover Re calculates the economic equity as the difference between the market-consistent value of the assets and the market-consistent value of the liabilities. While fair values are available for most investments, the market-consistent valuation of reinsurance treaties necessitates a specific valuation model. We establish the market-consistent value of technical items as the present value of projected future payments using actuarial methods. This is adjusted by a risk loading that factors in the fluctuation in future payments. Such fluctuations result from risks that cannot be hedged by means of capital market products, such as underwriting risks. For the life reinsurance line we additionally use valuation principles similar to those set out by the Chief Financial Officer Forum for the calculation of the Market Consistent Embedded Value (MCEV). This valuation method discloses the capital reserves that are not revealed by the measurement rules under IFRS. The valuation reserves for investments show the difference between the market values and book values of our assets under own management, which under IFRS are recognised at book value. Other valuation adjustments relate inter alia to deferred taxes in connection with the valuation adjustments.
Diversification effect within the non-life reinsurance business group Risk capital per line of business for the 99.5% VaR in EUR million
Internal control system Another key element of the overall system is the Framework Guideline on the Internal Control System (ICS). The purpose of this set of rules is to systematically steer and monitor the execution of our corporate strategy. We therefore always organise our business activities in such a way that they are in conformity with all legal requirements. In accordance with these principles, the Framework Guideline puts in place a consistent understanding of controls as well as a uniform procedure and standards for implementation of the ICS across all organisational units of Hannover Re.
Technical risks in non-life reinsurance Risk management in non-life reinsurance is geared to the following strategic objectives: • We maximise our risk capacities in accordance with the parameters of the Hannover Re Group’s risk management system and make limited use of retrocessions to reduce volatility and conserve capital.
• Given that the establishment of inadequate reserves constitutes our greatest risk, we take care to maintain a conservative reserving level.
Share price risk Interest rate risk Real estate risk Currency risk Credit spread risk
Hannover Re has taken out inflation swaps (USD and EUR zero coupon swaps) to partially hedge inflation risks. Portions of the loss reserves are hedged against inflation risks by means of these derivative financial instruments. An inflation risk exists particularly inasmuch as the liabilities (e. g. loss reserves) could develop differently than assumed at the time when the reserve was constituted because of inflation. Inflation protection was purchased for the first time in the second quarter of 2010 with terms of 4 and 5 years; it was increased in the first quarter of 2011 (term of 8 years). In addition to the inflation swaps, in the fourth quarter we purchased inflation-linked USD- and euro-denominated sovereign bonds in a nominal amount of EUR 605 million in order to protect our future investment income against inflation effects.
Licensed scientific simulation models, supplemented by the expertise of our own specialist departments, are used to assess our material catastrophe risks from natural hazards (especially earthquake, windstorm and flood). Furthermore, we establish the risk to our portfolio from various scenarios in the form of probability distributions. The monitoring of the risks resulting from natural hazards is rounded out by realistic extreme loss scenarios. Within the scope of this process, the Executive Board defines the risk appetite for natural perils once a year on the basis of the risk strategy by specifying the portion of the economic capital that is available to cover risks from natural perils. This is a key basis for our underwriting approach in this segment. 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 portfolio and performance data, evaluate them in relation to the planned figures and identify alternative courses of action.
Stress tests for natural catastrophes after retrocessions in EUR million 2012 2011
Effect on forecast net income 100-year loss European windstorm (101.3) (63.2)
“Costa Concordia” shipwreck off the coast of Italy 13 January 132.7 53.3
The price / premium risk lies primarily in the possibility of a random claims realisation that diverges from the claims expectancy on which the premium calculation was based. Regular and independent reviews of the models used for treaty quotation as well as central and local underwriting guidelines are vital management components. In addition, Hannover Re’s regional and treaty departments prepare regular reports on the progress of their respective renewals. The reporting in this regard makes reference inter alia to significant changes in conditions, risks (such as inadequate premiums) as well as to emerging market opportunities and the strategy pursued in order to accomplish targets. The development of the combined ratio in non-life reinsurance is shown in the table below.
Technical risks in life and health reinsurance Risk management in life and health reinsurance is geared to the following strategic objectives: • In order to be able to reliably meet future expectations arising out of our long-term customer relationships and – as part of the Hannover Re Group – with a view to diversifying risks globally and across risk drivers, we strive for a balanced mix of risks. Our risk management is concentrated on those risks that are material Group-wide, although we give consideration to all risks according to their significance.
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. Counterparty, lapse and catastrophe risks are also material since we additionally prefinance our cedants’ new business acquisition costs. As in non-life reinsurance, the reserves are essentially calculated according to information provided by our clients and are also determined on the basis of secure biometric actuarial bases.
By monitoring compliance with these underwriting guidelines we minimise the risk of an inability to pay or deterioration in the financial status of cedants. Regular reviews and holistic analyses (e. g. with an eye to lapse risks) are carried out with respect to new business activities and the assumption of international portfolios. The interest rate risk, which in the primary sector is important in life business owing to the guarantees that are given, is of only minimal relevance to our company thanks to the structure of our contracts. The actuarial reports and documentation required by local regulators ensure that regular scrutiny also takes place on the level of the subsidiaries.
The Market Consistent Embedded Value (MCEV) is a ratio used for the valuation of life insurance and reinsurance business; it is calculated as the present value of the future shareholders’ earnings from the worldwide life and health reinsurance portfolio plus the allocated capital. The calculation makes allowance as far as possible for all risks included in this business. The Market Consistent Embedded Value is established on the basis of the principles of the CFO Forum published in October 2009. The table shows the MCEV 2011 and its sensitivities in comparison with the corresponding sensitivities of the MCEV 2010. For more detailed information please see the Market Consistent Embedded Value Report 2011, which in a departure from the system used here shows the figures after noncontrolling interests.
Sensitivity analysis of the Market Consistent Embedded Value (MCEV) 1, 2
1 More extensive information can be obtained from the MCEV reports published on our website. The presentation is based on the principles for publication of the MCEV defined by the CFO Forum. The CFO Forum is an international organisation of Chief Financial Officers from major insurance and reinsurance enterprises.
gains in the year under review, as a consequence of which our early-warning system consistently remained above the escalation levels (cf. graph above).
market price risks that are not directly explained by the multifactor model) can be determined through back-calculation and are incorporated into the overall calculation.
Despite the sometimes difficult capital market environment, the volatility of high-quality assets and hence the market price risks decreased in the year under review relative to the previous year. Based on continued broad risk diversification and the orientation of our investment portfolio, our Value at Risk of 0.8% (1.2%) as at the end of the reporting period was clearly below the Value at Risk upper limit defined in our investment guidelines.
1 VaR upper limit according to Hannover Re’s investment guidelines: 1.5%
Scenarios for changes in the fair value of material asset classes in EUR million Scenario Portfolio change on a fair value basis
Share price risks derive from the possibility of unfavourable changes in the value of equities, equity derivatives or equity index derivatives held in the portfolio. We have made such new investments only on a very modest scale as part of strategic participations. The scenarios for changes in equity prices consequently have only extremely slight implications for our portfolio. We spread the risks through systematic diversification. Please see our comments in Section 6.1 of the notes, “Investments under own management”, page 146 et seq.
The portfolio of fixed-income securities is exposed to the interest rate risk. Declining market yields lead to increases and rising market yields to decreases in the fair value of the fixedincome securities portfolio. The credit spread risk should also be mentioned. The credit spread refers to the interest rate differential between a risk-entailing bond and risk-free bond of the same quality. Changes in these risk premiums, which are observable on the market, result – analogously to changes in pure market yields – in changes in the fair values of the corresponding securities.
We use derivative financial instruments only to a very limited extent. The primary purpose of such financial instruments is to hedge against potentially adverse situations on capital markets. In the year under review we took out inflation swaps to hedge part of the inflation risks associated with the loss reserves in our technical account. In addition, as in the previous year, a modest portion of our cash flows from the insurance business was hedged using forward exchange transactions. Currency risks were also hedged using FX forwards in cases where currency matching could not be efficiently established. The contracts are concluded solely with first-class counterparties and exposures are controlled in accordance with the restrictive parameters set out in the investment guidelines so as to avoid credit risks associated with the use of such transactions. The remaining exposures are controlled according to the restrictive parameters set out in the investment guidelines.
Credit risks The credit risk consists primarily of the risk of complete or partial failure of the counterparty and the associated default on payment.
Alongside traditional retrocessions in non-life reinsurance we also transfer risks to the capital market. Yet credit risks are relevant to our investments and in life and health reinsurance, too, because we prefinance acquisition costs for our ceding companies. Our clients, retrocessionaires and broker relationships as well as our investments are therefore carefully evaluated and limited in light of credit considerations and are constantly monitored and controlled within the scope of our system of limits and thresholds.
• 42.0% of our recoverables from reinsurance business are secured by deposits or letters of credit. What is more, for the majority of our retrocessionaires we also function as reinsurer, meaning that in principle recoverables can potentially be set off against our own liabilities.
Retrocession gives rise to claims that we hold against our retrocessionaires. These reinsurance recoverables – i. e. the reinsurance recoverables on unpaid claims – amounted to EUR 1,538.2 million (EUR 1,550.6 million) as at the balance sheet date. The following chart shows the development of our reinsurance recoverables – split by rating quality – due from our retrocessionaires. Recent years are clearly trending lower with an average reduction of 7.3% per year.
Further remarks on technical and other assets which were unadjusted but considered overdue as at the balance sheet date as well as on significant impairments in the year under review are provided in Section 6.4 “Technical assets”, page 160 et seq., Section 6.6 “Other assets”, page 163 et seq. and Section 7.2 “Investment result”, page 180 et seq.
Credit risks from investments may arise out of the risk of a failure to pay (interest and / or capital repayment) or a change in the credit status (rating downgrade) of issuers of securities. We attach equally vital importance to exceptionally broad diversification as we do to credit assessment conducted on the basis of the quality criteria set out in the investment guidelines.
Corporate bonds Covered bonds / asset-backed securities in % in EUR million in % in EUR million in % in EUR million in % in EUR million 1 Securities held through investment funds are recognised pro rata with their corresponding individual ratings 2 Including government-guaranteed corporate bonds
On a fair value basis EUR 3,526.8 million of the corporate bonds held by our company were issued by entities in the financial sector. Of this amount, EUR 2,841.5 million was attributable to banks. The vast majority of these bank bonds (almost 68.8%) are rated “A” or better. Our investment portfolio under own management does not contain any written or issued credit default swaps.
Business process risks are associated with the risk of inadequate or deficient internal processes, e. g. as a consequence of poor data quality. Data quality is a critical success factor, especially in risk management, because all enterprise processes are based on the information made available. The overriding goal of our data quality management is to bring about sustainable improvement and to safeguard data quality within the Hannover Re Group, for example by way of regular data quality checks. In addition, as part of our process management, overarching and company-wide processes are continuously optimised and standardised.
Fraud risks refer to the risk of intentional violations of laws or regulations by members of staff (internal fraud) and / or by externals (external fraud). This risk is reduced by the processintegrated internal control system as well as by the audits conducted by Internal Auditing on a Group-wide and line-independent basis.
The proper functioning and competitiveness of the Hannover Re Group can be attributed in large measure to the expertise and dedication of our staff. In order to minimise personnel risks, we pay special attention to the skills, experience and motivation of our employees and foster these qualities through outstanding personnel development and leadership activities. Regular employee surveys, the monitoring of turnover rates and the holding of exit interviews ensure that such risks are identified at an early stage and scope to take the necessary actions is created.
When it comes to reducing business interruption risks, the paramount objective is the quickest possible return to normal operations after a crisis, for example through implementation of existing contingency plans. Guided by internationally accepted standards, we have defined the basic framework conditions for the Hannover Re Group and – among other measures – we have assembled a crisis team to serve as a temporary body in the event of an emergency. The system is complemented by regular exercises and tests.
The partial or complete outsourcing of functions and / or services may give rise to associated risks. Regulatory and binding internal rules serve to minimise such risks. All risks associated with any instance of outsourcing must be identified, evaluated (e. g. by way of a performance assessment) and appropriately steered and controlled.
The liquidity risk refers to the risk of being unable to meet our financial obligations when they become due. The liquidity risk consists of the refinancing risk, i. e. the necessary cash cannot be obtained or can only be raised at increased costs, and the market liquidity risk, meaning that financial market transactions can only be completed at a poorer price than expected due to a lack of market liquidity. Core elements of the liquidity management of our investments are, in the first place, management of the maturity structure of our investments on the basis of the planned payment profiles arising out of our technical liabilities and, secondly, regular liquidity planning as well as the asset structure of the investments.
Above and beyond the foreseeable payments, unexpected and exceptionally large payments may pose a threat to liquidity. Yet in reinsurance business significant events (major losses) are normally paid out after a lead time that can be reliably planned. As part of our liquidity management we have nevertheless defined asset holdings that have proven to be highly liquid – even in times of financial stress such as the 2008 financial crisis. Our holdings of unrestricted German, UK and US government bonds as well as cash during the year under review were larger than possible disbursements for assumed extreme scenarios, which means that our liquidity is assured even in the unlikely case of financial crises coinciding with an extreme event that needs to be paid out quickly. The liquid asset reserve stood at more than EUR 2.2 billion as at the balance sheet date. In addition, we manage the liquidity of the portfolio through ongoing monitoring of the liquidity of the instruments contained therein; liquidity is verified on a monthly and ad hoc basis. These measures serve to effectively reduce the liquidity risk.
Assessment of the risk situation 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. Individual and especially accumulation 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 conception of risk, since it is always the case that we only enter into those risks that go hand-in-hand with opportunities. Our management and monitoring tools as well as our organisational and operational structures ensure that we are able to identify risks in a timely manner and maximise our opportunities. The pivotal element in this regard is our effective system of qualitative and quantitative risk management that we have put in place Group-wide. We are of the opinion that our risk management system affords us a transparent overview of the current risk situation at all times and that our overall risk profile is appropriate. Our assessment is reinforced by various developments and key data: the increase of more than 100% in our shareholders’ equity (including noncontrolling interests) since 2008, our strong market position as one of the world’s leading reinsurers and our very good credit ratings (Standard & Poor’s: “AA-” (Very Strong, stable outlook); A.M. Best: “A+” (Superior, stable outlook).
Based on our currently available insights arrived at from a holistic analysis of the risk situation, the Executive Board of Hannover Re cannot 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. For additional information on the opportunities and risks associated with our business please see the Forecast contained in the management report on page 101 et seq.
Profitable growth has been at the heart of our business activities for many years and hence remains a crucial objective of our Group strategy. We are striving to cement and further extend our position as one of the leading globally operating reinsurance groups of above-average profitability.
Management Reporting The annual Management Reporting presents in detail the degree of goal attainment for each individual operational unit and for the Group as a whole. On this basis appropriate performance controlling is carried out, potential scope for improvement and refinement is identified and performance-oriented remuneration components defined in the context of Management by Objectives are established.
The adjusted operating profit (EBIT) is comprised of two factors: the IFRS Group net income recognised after tax and the change in the balancing items for differences between economic valuations and amounts stated in the IFRS balance sheet. By way of the latter we make allowance for changes in the fair values of assets not recognised in income under IFRS, discount effects of the loss reserves and the Embedded Value Not Recognised (EVNR) in life / health reinsurance. In addition, interest on hybrid capital already recognised in the IFRS Group net income and the non-controlling interest in profit and loss are included back in the calculation.
Intrinsic Value Creation and excess return on capital allocated in EUR million 2012 2011
The allocated capital consists of three components: the IFRS shareholders’ equity including non-controlling interests, the balancing items for differences between economic valuations and amounts stated in the IFRS balance sheet and the hybrid capital. In this context, capital that is not at risk (excess capital ) is disregarded, i. e. it is not allocated. Capital is allocated to the profit centres as described above according to the risk content of the business in question. A systematic distinction is made here between the assumption of underwriting risks, on the one hand, and investment risks, on the other. Under the IVC calculation, therefore, only risk-free interest income on the generated cash flows is allocated to the business segments of non-life and life / health reinsurance. The investment income above and beyond risk-free is allocated in its entirety to the functional area of investments and included in the IVC after deduction of the risk-appropriate cost of capital and the administrative expenses.
In addition to the intrinsic value creation, we also take into consideration traditional performance indicators (balance sheet ratios) as summarised in our target matrix for the Group and the business groups.
Value of New Business (VNB) growth ≥ 10% n. a. 61.2% 89.2% -44.2% 41.4%
EBIT margin 6 1 Excluding inflation swaps and ModCo derivatives 2 750 basis points above the 5-year average return on 10-year German government bonds after tax 3 Growth in book value per share including dividends paid 4 Average over the reinsurance cycle 5 Including major loss budget of EUR 625 million 6 EBIT / net premium earned 7 Excess return on allocated economic capital 8 Organic growth only 9 EBIT margin for total life and health reinsurance
Declaration of Conformity pursuant to § 161 Stock Corporation Act (AktG) regarding compliance with the German Corporate Governance Code at Hannover Rückversicherung AG: The German Corporate Governance Code sets out major statutory requirements governing the management and supervision of German listed companies. It contains both nationally and internationally recognised standards of good and responsible enterprise management. The purpose of the Code is to foster the trust of investors, clients, employees and the general public in German corporate governance. Under § 161 Stock Corporation Act (AktG) it is incumbent on the management board and supervisory board of German listed companies to provide an annual declaration of conformity with the recommendations of the “German Corporate Governance Code Government Commission ” published by the Federal Ministry of Justice or to explain which recommendations of the Code were / are not applied.
The Executive Board and Supervisory Board declare pursuant to § 161 Stock Corporation Act (AktG) that in its implementation of the German Corporate Governance Code Hannover Rückversicherung AG diverges in three respects from the recommendations contained in the version of the Code dated 15 May 2012: Code Item 4.2.3 Para. 4; Caps on severance payments in management board contracts
Premature termination of a service contract without serious cause may only take the form of cancellation by mutual consent. Even if the Supervisory Board insists upon setting a severance cap when concluding or renewing an Executive Board contract, this does not preclude the possibility of negotiations also extending to the severance cap in the event of a member leaving the Executive Board. Whilst it is true that the legal literature discusses structuring options that would permit the legally secure implementation of the recommendation contained in Item 4.2.3 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 surrounding the existence of serious cause for termination. In the opinion of Hannover Rückversicherung AG, it is therefore in the interest of the company to diverge from the recommendation contained in Item 4.2.3 Para. 4.
The current Chairman of the Supervisory Board of Hannover Rückversicherung AG served as the company’s Chief Financial Officer in the period from 1994 to 2002. During this time he acquired superb knowledge of the company and he is equipped with extensive professional expertise in the topics that fall within the scope of responsibility of the Finance and Audit Committee. With this in mind, the serving Chairman of the Supervisory Board is optimally suited to chairing the Audit Committee. In the opinion of Hannover Rückversicherung AG, it is therefore in the interest of the company to diverge from the recommendation contained in Item 5.2 Para. 2.
The current Chairman of the Audit Committee is at the same time also the Chairman of the Board of Management of the controlling shareholder and hence cannot, in the company’s legal assessment, be considered independent. As already explained above in the justification for divergence from Code Item 5.2 Para. 2, the current Chairman of the Supervisory Board is, however, optimally suited to chairing the Audit Committee. This assessment is also not cast into question by the fact that the Committee Chairman cannot therefore be considered independent within the meaning of the German Corporate Governance Code. Furthermore, since his service as Chief Financial Officer of Hannover Rückversicherung AG already dates back ten years, it is also the case that the reviews and checks performed by the Finance and Audit Committee no longer relate to any period in which he himself was still a member of the
Statement of enterprise management practices Hannover Re’s objective continues to be the consolidation and further expansion of its position as one of the leading, globally operating reinsurance groups of above-average profitability.
When it comes to our staff, we pay special attention to their skills, experience and motivation, which we foster through our attractive workplaces, personnel development activities and leadership practices. Based on our strategic human resources planning, we align the size and qualifications of our workforce with the current and future requirements of our global market presence. We put our trust in the greatest possible delegation of tasks, authorities and responsibility and thereby establish the conditions needed to be able to respond quickly and flexibly. We lead on the basis of Management by Objectives, we enable our employees to participate in our sustained success and we expect our managers to encourage the self-reliance of their staff ( / about / strategy / index.html).
Corporate Governance We support sensible and pragmatic Corporate Governance principles and recognise their central importance in guiding our activities. The principles of responsible and good enterprise management constitute the core of our Corporate Governance principles ( com / resources / cc / generic / CGprinciples-e.pdf). Our efforts are intended to ensure integrity at all times in our dealings with business partners, staff, shareholders and other stakeholder groups. On this basis Hannover Re supports the principles of value-based and transparent enterprise management and supervision as defined in the German Corporate Governance Code (DCGK). This is not contradicted by the fact that for the first time in the year under review we did not comply with three recommendations of the Code, since a well justified deviation from the recommendations of the Code may – as in the present case – be in the interests of good corporate governance (cf. Foreword to the DCKG). Based on what is still a high degree of fulfilment of the recommendations and suggestions of the DCGK, Hannover Re continues to rank very highly among the companies listed on the DAX and MDAX.
Compliance The revised Code of Conduct adopted in November 2010 remains in force ( / resources / cc / generic / codeofconduct -e.pdf). The rules defined therein reflect the high ethical and legal standards that guide our actions worldwide. It is our belief that integrity in dealings with our stakeholders constitutes the foundation of a successful enterprise. In both our strategic planning and our day-to-day business activities, we therefore aspire to consistently apply the highest ethical and legal standards; for our actions and the way in which every single one of us presents and conducts himself or herself are crucial in shaping the image of the Hannover Re Group.
The compliance report for the 2012 calendar year setting out the structure and diverse range of activities of Hannover Re in this regard was submitted to the Finance and Audit Committee in March 2013. After in-depth examination of topics such as directors’ dealings, ad hoc and other reporting requirements, the insider register, adherence to internal guidelines, consulting agreements, data protection, international sanctions and the Group-wide whistleblower system, the report concludes that two circumstances of lesser importance have been identified which point to breaches of relevant compliance standards. After detailed exploration of these incidents, the necessary safeguards were put in place to ensure that in future the Hannover Re Group will be in full compliance with the external requirements for its business activities.
Risk monitoring and steering The risk management system applicable throughout the entire Hannover Re Group is based on the risk strategy, which in turn is derived from the company strategy. A core component is the systematic and comprehensive recording 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 opportunity and risk report contained in the Annual Report on page 60 et seq.
of information to the Supervisory Board. The findings will be explained and discussed at the first Supervisory Board meeting of 2013.
The Nomination Committee is tasked with proposing to the Supervisory Board appropriate candidates for the nominations that it puts forward to the Annual General Meeting for election to the Supervisory Board.
For further details of the activities of the Supervisory Board committees please see the explanations provided in the Supervisory Board Report on pages 206 to 208.
As has been the case since 2009, the Standing Committee continues to decide in lieu of the Supervisory Board on the content, formation, modification and cancellation as well as termination of service contracts with the members of the Executive Board, but it no longer decides upon remuneration-related content. The latter has been decided upon at a full meeting of the Supervisory Board since 2009.
Objective, structure and system of Executive Board remuneration The current remuneration model for the Executive Board of Hannover Re has been applicable since the 2011 financial year and was revised against the backdrop of regulatory developments with the involvement of an independent firm of consultants specialising in the field of remuneration systems. In this way, it is ensured that the total remuneration and the split into fixed and variable components conform to regulatory requirements – especially the provisions of the Act on the Adequacy of Management Board Remuneration (VorstAG) and the Regulation on the Supervisory Law Requirements for Remuneration Schemes in the Insurance Sector (VersVergV).
The amount and structure of the remuneration of the Executive Board are geared to the size and activities of the company, its economic and financial position, its success and future prospects as well as the customariness of the remuneration, making reference to the benchmark environment and the remuneration structure otherwise applicable at the company. The remuneration is also guided by the tasks of the specific member of the Executive Board, his or her individual performance and the performance of the full Executive Board.
Group return on equity (RoE); x individual basic amount (graduated according to area of responsibility and professional experience) for each 0.1 percentage point by which the average RoE of the past three financial years exceeds the risk-free interest rate of 2.8%; Cap max: 200% Cap min: -100% (penalty); Change in the risk-free interest rate by one percentage point or more necessitates adjustment of the bonus calculation; RoE calculation: IFRS Group net income (excluding non-controlling interests) ./. arithm. mean of IFRS Group shareholders’ equity (excluding non-controlling interests) at the beginning and end of the financial year.
Proportion of variable remuneration: Board members except for Chief Executive Officer / Chief Financial Officer: 25%
Measurement of the Intrinsic Value Creation (IVC)1 of the business groups in the respective area of responsibility; Primary IVC criteria: relative change year-on-year, absolute amount, comparison with target value, dividend payout or profit transfer ratio, general market environment; 100% = amount x = targets achieved in full Cap max: 200% Cap min: EUR 0; Initial application in 2013, until then refinement of the IVC concept and resolution of the Supervisory Board according to its best judgement.
Personal qualitative, quantitative targets; individual contribution to the overall result, leadership skills, innovative skills, entrepreneurial skills, specific features of area of responsibility. 100% = amount x = targets achieved in full Cap max: 200% Cap min: EUR 0
Fixed annual salary The fixed annual salary is paid in twelve equal monthly instalments – on the last occasion for the month in which the service contract ends. The salary is reviewed at two-year intervals.
Non-cash compensation / fringe benefits The company insures the members of the Executive Board against accidents in an appropriate amount until the end of their appointment to the Executive Board and takes out an adequate level of luggage insurance for them.
Measurement of the variable remuneration The profit- and performance-based variable remuneration is contingent on certain defined results and the attainment of certain set targets. The set targets vary according to the function of the Board member in question. The variable remuneration consists of a profit bonus and a performance bonus. In the event of goal attainment of 100%, the share of the variable remuneration attributable to the profit bonus amounts to 70% for the Chief Executive Officer and Chief Financial Officer and 50% for the members of the Executive Board with business group responsibility. The performance bonus accounts for the remaining 30% or 50%.
In so doing, the Supervisory Board pays special attention to the following five criteria: relative change in the IVC in the remuneration year, absolute amount of the IVC in the remuneration year, IVC in the remuneration year relative to the target value, payout ratio or profit transfer ratio of the business group relative to the target value and the general market environment. Upon complete fulfilment of the criteria the amount stipulated in the service contract for 100% goal attainment is awarded. The lowest business group bonus amounts to EUR 0, while the highest is equivalent to double the bonus upon complete fulfilment of the criteria.
Total amount of variable remuneration The total amount of variable remuneration is arrived at by adding the amounts for the individual remuneration components. If addition of the individual amounts gives rise to a negative amount, the variable remuneration is EUR 0. A negative amount is, however, taken into consideration when calculating the bonus bank (cf. next section “Payment of the variable remuneration”).
The variable remuneration is defined at the Supervisory Board meeting that approves the consolidated financial statement for the financial year just-ended.
Payment of the variable remuneration Payment arrangements Of the total amount of defined variable remuneration, a partial amount of 60% is paid out in the month following the Supervisory Board meeting that approves the consolidated financial statement. The remaining amount of 40% is initially withheld. With a view to encouraging long-term value creation, half of the withheld portion (i. e. 20% of the total amount of defined variable remuneration) is allocated to a “bonus bank”, while the other half is granted in the form of Hannover Re share awards (HR-SAs) in accordance with the rules explained in the following sections.
Variable remuneration under the old remuneration structure (until 2011) The virtual stock option plan with stock appreciation rights existing under the old remuneration structure remains in force for all members of the Executive Board until all stock appreciation rights have been exercised or have lapsed. In the 2012 financial year no further stock appreciation rights were granted to active Board members. Of the stock appreciation rights granted in previous years, active and former Board members exercised amounts totalling EUR 4.3 million (EUR 1.1 million) in 2012.
As at 31 December 2012 active members of the Executive Board had at their disposal a total of 391,891 (722,090) granted, but not yet exercised stock appreciation rights with a fair value of EUR 3.2 million (EUR 4.9 million).
Continued payment in the event of disability / death In the event of temporary incapacity for work the fixed annual salary shall continue to be paid in the same amount, at most until termination of the service contract. Contracts from 2009 onwards count any disability benefits paid to the eligible recipient by HDI Unterstützungskasse towards the continued salary payment.
If the Board member dies during the period of the service contract, his widow – or alternatively the eligible children – shall be entitled to continued payment of the fixed annual salary for the month in which the Board member dies and the six months thereafter, at most until termination of the service contract.
Financial year Non-performance-based remuneration Performance-based remuneration 1 Performance-based remuneration 1 Total Number of share awards 8 2011 = Actual 2012 = Estimate
Variable remuneration payable Bonus bank Share awards Stock appreciation rights 60% 3 Remuneration from seats with Group bodies 4 in EUR thousand
9 The appointment of Dr. Becke ended on age grounds on 31 December 2011. He was therefore subject to the remuneration structure existing prior to 2011, i. e. the bonus bank and Hannover Re share awards components do not apply. The non-cash compensation for Dr. Becke in 2012 relates to telephone expenses arising out of his active service on the Executive Board that had still to be reimbursed.
10 For the 2010 annual bonus altogether EUR 55,200 more was paid out than reserved. The total amount for the variable remuneration payable in 2011 was increased accordingly.
Total remuneration received by active members of the Executive Board pursuant to DRS 17 (amended 2010)
2 The non-cash compensation has been carried in the amounts established for tax purposes. 3 In 2012 altogether EUR 3,200 more in variable remuneration was paid out to Board members for 2011 than had been reserved. 4 Remuneration from seats with Group bodies netted with the variable remuneration payable. 5 The nominal amount is stated; full or partial payment in 2016, depending on the development until such time of the balance in the bonus bank.
3 Dr. Becke left the company on 31 December 2011. An expense in connection with the stock appreciation rights of Dr. Becke is therefore no longer recognised with respect to the active members of the Executive Board.
The early granting (before reaching the age of 65) of retirement pay upon termination / non-extension of the service contract is conditional upon at least eight years of service on the Executive Board. In addition, the member of the Executive Board may not have declined an extension of the contract on at least equivalent terms and there cannot have been any grounds for termination without notice on the part of the company.
Contribution-based pension commitment (appointment from 2009 onwards) The commitments given to members of the Executive Board from 2009 onwards are based on a defined contribution scheme. An indirect commitment is granted by HDI Unterstützungskasse. A precondition for benefits (retirement pension, disability pension and surviving dependants’ pension) is that the Board member must consent to insurance cover being taken out for the pension commitments.
Surviving dependants’ benefit (in the case of a final-salary pension commitment) If the member of the Executive Board dies after pension payments begin, the surviving spouse and alternatively the dependent children shall receive continued payment of the retirement pension for the month of death and the following six months.
The widow’s pension amounts to 60% of the retirement pay that the Board member received or would have received if he had been incapacitated for work at the time of his death. There shall be no entitlement to a widow’s pension if the spouse is more than 25 years younger or the marriage was entered into after the occurrence of the pensionable event or solely in order to substantiate a benefit entitlement in favour of the spouse.
Widow’s and orphan’s benefits combined may not exceed the amount of the retirement pay; otherwise, the orphan’s pensions are reduced pro rata by the excess amount. If a widow’s or orphan’s pension ceases to apply, orphan’s pensions that have been reduced are increased accordingly.
The surviving children receive an orphan’s pension. The orphan’s pension for each half-orphan amounts to 15% (30% for each full orphan) of the pension that the deceased Board member received or would have received if he had been incapacitated for work at the time of his death.
The orphan’s pension is paid until the age of 18. A child who is still attending school or undergoing vocational training at this time shall continue to receive the orphan’s pension until completion of such education, although only for as long as
Continued salary payments rendered by Hannover Re are counted towards the pension benefits.
The projected benefit obligation for Board-funded pension commitments of active members of the Executive Board amounted to EUR 0.1 million (EUR 1.5 million) as at 31 December 2012; the corresponding projected benefit obligation for former members of the Executive Board totalled EUR 0.3 million (EUR 0.8 million) as at 31 December 2012.
DBO 31.12. Personnel expense 1 Mr. Vogel was appointed as a member of the Executive Board effective 1 April 2009. He was first granted a pension commitment on the basis of his service to the company prior to 2001; the earned portion of the commitment from the Unterstützungskasse is therefore established as a proportion (in the ratio [currently attained service years since entry] / [attainable service years from entry to exit age]) of the final benefit. Measurement under IFRS therefore uses the defined benefit method. An annual premium of EUR 80,000 (25% of the pensionable income) was paid for Mr. Vogel in 2011 and 2012. The guaranteed interest rate of his commitment is 3.25%.
Remuneration of the Supervisory Board The remuneration of the Supervisory Board is determined by the Annual General Meeting of Hannover Re and regulated by the Articles of Association.
In accordance with § 12 of the Articles of Association as amended on 3 May 2011, the members of the Supervisory Board receive fixed annual remuneration of EUR 30,000 per member in addition to reimbursement of their expenses. Furthermore, each member of the Supervisory Board receives variable remuneration measured according to the average earnings per share (EPS) of the company over the past three financial years preceding the Annual General Meeting at which the actions of the Supervisory Board for the last of these three years are ratified. The variable remuneration amounts to EUR 330 for each EUR 0.10 average earnings per share (EPS) of the company. The measurement of this performance-based remuneration component according to the average earnings per share of the last three financial years ensures that the variable remuneration is geared to sustainable corporate development.
The variable remuneration is limited to an annual maximum of EUR 30,000. The Chairman of the Supervisory Board receives twice the aforementioned remuneration amounts and the Deputy Chairman of the Supervisory Board receives oneand -a-half times the said amounts.
Herbert K. Haas 2 Chairman of the • Supervisory Board • Standing Committee • Finance and Audit Committee • Nomination Committee
Wolf-Dieter Baumgartl Member of the • Supervisory Board • Standing Committee • Finance and Audit Committee • Nomination Committee
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 remuneration paid to employee representatives on the basis of their employment contracts.
Loans to members of the management boards and contingent liabilities In order to avoid potential conflicts of interest, Hannover Re or its subsidiaries may only grant loans to members of the Executive Board or Supervisory Board or their dependants with the approval of the Supervisory Board.
Members of the Supervisory Board and Executive Board of Hannover Re as well as their spouses or registered partners and first-degree relatives hold less than 1.0% of the issued shares. The total holding as at 31 December 2012 amounted to 0.056% (0.055%) of the issued shares, i. e. 67,118 (65,862) shares.
Members of staff on the levels of Chief Manager, Senior Manager and Manager are also able to participate in a variable remuneration system through the Group Performance Bonus (GPB). The Group Performance Bonus (GPB) is a remuneration model launched in 2004 that is linked to the success of the company. This tool is geared to the minimum return on equity of 750 basis points above the risk-free interest rate and the return on equity actually generated. For those participating in the GPB 14.15 monthly salary payments are guaranteed; a maximum of 16.7 salary payments is attainable. Since its launch the maximum amount of the GPB was paid out in 2006, 2007, 2009 and 2010.
Group of participants and total number of eligible participants in variable remuneration systems Valid: 31 December 2012
Managing Director E1MD Management level 2 Cash bonus and Share Award Plan
Hannover Re Group All 147 Group senior executives worldwide receive a cash bonus upon corresponding goal attainment. 146 of them participate in the Share Award Plan.
Home Office Hannover 547 staff (excl. seconded employees) out of the altogether 1,146 at Hannover Home Office (incl. 89 senior executives) are GPB-eligible.
Mature national economies will be dominated in 2013 by the consolidation efforts undertaken in the private and public sector and their fundamentally restraining effect on economic activity. This tendency will be assisted above all by a monetary policy set on keeping interest rates extremely low. If governments act systematically on their moves towards reform, the trust of investors, the business community and households in the stabilisation of the Eurozone will likely begin to grow again. In the United States output is expected to trend higher, accompanied by stronger domestic demand. In many emerging markets, too, the measures taken in the areas of monetary and fiscal policy will likely make themselves felt and have a favourable effect on the economy. Disposable incomes will probably rise, thereby stimulating private consumption. The Kiel Institute for the World Economy estimates growth of 3.4% in global real GDP.
USA At the beginning of the year a looming recession in the United States was narrowly averted after Democrats and Republicans found a last-minute solution to the budget wrangling over the fiscal cliff. The debt level and deficit reduction will nevertheless continue to be the issues which shape economic policy. However, the debate about raising the debt ceiling and the question of automatic spending cuts will require further negotiations between the parties. An economic upturn early in 2013 is unlikely because uncertainties in US fiscal policy are still hampering the willingness of companies to commit to capital expenditures. Nevertheless, as the year goes on the upswing in investment in residential construction and favourable effects on the labour market could stimulate private consumption and give fresh impetus to the tame pace of economic growth. The export sector is expected to deliver only minimal stimuli, since weak demand from key US trading partners – such as in the Eurozone – is hindering any rise in exports. Demand for imports in the US will probably also remain low as a consequence of the ongoing consolidation efforts. Overall, exports may pick up slightly. According to the calculations of the Ifo Institute, GDP will likely grow by 1.6% in 2013.
China, India, Japan Additional stimulus packages will likely be approved in China so as to enable the country to achieve its growth targets. The Ifo Institute anticipates an increase of 9.0% in GDP. Driven by rising exports to China and the United States, the Indian economy could also see further modest expansion. GDP in India will likely grow by 4.6% overall. In Japan, on the other hand, the economy is hampered by weak demand for exports; an increase of just 0.8% in GDP is expected.
Capital markets In 2013 international bond markets will probably still be shaped by low interest rates. In the relevant currency areas for our company we expect at most marginal increases in key interest rates. After the European Central Bank had further cut interest rates in 2012 on account of the tense economic situation, hikes in key rates will likely only be seen in 2013 if there is a sharp rise in prices. Given the current state of the economy and the unemployment numbers, the US Federal Reserve Board can probably only take initial steps towards a more restrictive monetary policy late in 2013 at the earliest. Against the backdrop of the sustained expansionary fiscal policy and the uncertainty stemming from the Eurozone debt crisis, German and US government bonds will remain persistently on a low level. Yields may, however, pick up slightly in longer maturity segments. Sovereign debt with high credit spreads issued by member states of the single European currency that are currently under the spotlight may see some stabilisation in 2013. Last but not least, the incremental strategy adopted for solving the Euro debt crisis will lead to further volatility on capital markets. The necessary consolidation of public finances will continue to drag on the economic climate.
The German insurance industry anticipates a robust development in 2013. Assuming that the economy as a whole does not deteriorate, the German Insurance Association (GDV) expects premium income to build on 2012 with another moderate increase.
Although prices declined in markets and lines that had suffered few losses in 2012 – such as aviation –, the business is still profitable. In regions and lines that had incurred significant losses, it was possible to push through sometimes appreciable price increases. The most substantial hikes were obtained in marine reinsurance: in view of the losses from the wreck of the “Costa Concordia” cruise ship as well as from Hurricane Sandy, rates in marine business moved sharply higher under both loss-impacted programmes and those that had been spared any loss expenditures. We also booked further sizeable price increases for non-proportional motor liability covers in the United Kingdom.
Target markets As far as primary insurance business in Germany is concerned, we expect premium income to grow. The business volume in our portfolio is likely to remain virtually stable owing to changes in the reinsurance structure. With the implementation of Solvency II postponed again until probably after 2016, the expected surge in demand for reinsurance protection will be delayed – although in certain isolated cases we did see our clients decide to increase their purchasing of reinsurance protection.
The situation in motor insurance should continue to improve. As regards the loss-making state of affairs in fire and fire loss of profits insurance we are also seeing efforts to rehabilitate the business in the current year. Overall, given the protracted low level of interest rates and the associated difficulties in generating sufficient investment income, it is our expectation that the discipline shown on the technical pricing side will be maintained.
The treaty renewals as at 1 January 2013 for our portfolio in North America delivered a pleasing outcome in terms of the rate level. Demand for high-quality reinsurance protection continued to rise in these markets too. Rates in US property business were broadly stable, although increases were obtained owing to the effects of Hurricane Sandy. The trend towards an adequate rate level should also be sustained on the casualty side in 2013. We shall continue to benefit from this as the year progresses, since barely half of our North American portfolio was renewed on 1 January 2013. In some areas, including for example professional indemnity, we noted a trend towards clients carrying higher retentions. In Canada we are seeing a stable market environment with indications of further improvements in rates, and we are therefore looking to expand our portfolio here.
In marine business we expect premium volume to rise in the current year. Given the loss events of 2012, including the wreck of the “Costa Concordia” cruise ship, increased prices and improved conditions are anticipated for marine business. Higher sums insured for offshore risks will be reflected in moderate price increases in this area too. In the other lines, such as hull, cargo and marine liability, the rate environment is likely to remain broadly stable, although higher prices should be attainable under loss-impacted programmes. We continue to strive for further diversification in international markets. Price increases are particularly likely in Protection & Indemnity (P&I) business. The heavy losses caused by Hurricane Sandy helped to improve rates.
Based on our very good positioning we also see good business prospects in aviation reinsurance. Although rates softened slightly in the renewals, the business is still very attractive. We further enlarged our client base, most notably in the BRIC countries. Gross premium volume is expected to grow in the current financial year.
We anticipate a further rise in premium income for our nonproportional reinsurance business in the United Kingdom in 2013. In the other lines we expect the price level to remain stable. Our involvement in non-proportional motor reinsurance will be expanded. While our Irish portfolio is currently still modest, we are seeking to further enlarge it in the years ahead. Our direct business in South Africa is also expected to deliver an increased premium volume.
In the Netherlands, where more mergers are likely, we expect to see a stable premium level in catastrophe business, slight erosion for casualty covers and a rate decline for property business. With that in mind, a modest contraction in gross premium volume is anticipated.
In most Latin American countries we expect reinsurance conditions to worsen and rates to fall on the back of the low losses recorded in the previous year. The premium volume should, however, remain stable. Rates in Brazil are expected to remain broadly unchanged. Demand for (re)insurance covers is likely to continue rising here, driven by extensive construction activity and energy projects in the run-up to the 2014 FIFA World Cup and the Olympic Games two years later. In the next four years alone, for example, 50 hydroelectric power plants are to be built. Not only that, all the needs of a growing middle class will help to further boost demand for insurance products. In Argentina the regulatory restrictions placed on foreign reinsurers are continuing to hamper premium growth in this market.
In view of the more exacting local capital requirements we expect to see rising demand in Japan. Rates for catastrophe covers should stabilise on a high level. Our premium volume will likely show a modest increase in the current financial year.
The region of Southeast Asia is expected to deliver an enlarged premium volume for our portfolio. Appreciable growth in business with agricultural risks is likely in India, although this line is also developing very well in the markets of Indonesia, Malaysia and Vietnam. Further growth stimuli are anticipated from the implementation of risk-based capital models and the associated more demanding solvency requirements.
Market conditions in China continue to be competitive, and rates must therefore be expected to soften. With this in mind, we are writing our business highly selectively. Growth potential is evident in the areas of agricultural risks, aviation and credit / surety, where we are looking to further enlarge our portfolio.
Premiums and conditions for the markets of Australia and New Zealand are expected to be adequate in the current financial year. Higher capital requirements should be reflected in greater demand for capacity. Overall we expect a slightly larger premium volume from this region.
In the area of agricultural covers we obtained stable or slightly higher prices in the treaty renewals as at 1 January 2013. Under programmes that had incurred losses rates increased accordingly and conditions improved. In view of the growing demand for food and with weather conditions becoming increasingly extreme, we can anticipate a continued rise in demand for agricultural covers; further significant premium growth is therefore likely in 2013 and 2014. We shall stand by our strategy of geographical diversification in the years ahead.
Retakaful business will again be heavily influenced in the current year by major investments in infrastructure and in the energy and construction sectors, first and foremost in relation to sports. We shall remain focused on expanding profitable business; this includes construction risks and liability covers in Qatar and Abu Dhabi as well as participations in energy business. The gross premium volume for our total portfolio of retakaful business should rise in 2013.
Global facultative reinsurance Given the varied nature of demand for facultative covers, we believe that the current year offers further good prospects for generating profitable growth. Market conditions are favourable overall, and we expect rates to hold broadly stable. In the area of energy production, however, rates are likely to come under increasing pressure. Price increases should be possible under treaties that suffered losses. Both in Latin America and in Europe we are looking to enlarge our profitable catastrophe business and non-proportional property business. The premium volume for our total portfolio of facultative covers is expected to rise.
In our assessment, considerable lasting growth potential is offered above all by the emerging markets of Asia as well as of Central and Eastern Europe. The prospects in these dynamic markets are highly promising, because a vigorously growing economy and the associated improvements in living standards have created a middle class with purchasing power that is taking an increasing interest in protecting against life’s risks as well as providing for retirement and safeguarding the family. In the Islamic world, too, which often presents an attractive business climate, Sharia-compliant insurance concepts – retakaful business – are coming to play an ever more prominent role. For a number of years now we have successfully responded to the challenge of offering Sharia-compliant reinsurance solutions and we are confident of our ability to consistently expand this business.
Furthermore, we have observed an increased interest in service offerings among our primary insurance customers. Along with the provision of reinsurance protection, clients are looking for holistic service and support. In 2013, therefore, we shall again pay close attention to our continued development and to evaluating just which activities are necessary in order to remain the reliable and trusted reinsurance partner to which our clients are accustomed.
Two major trends emerged in the demand for reinsurance protection in the year under review. Firstly, financially strong insurers are raising their retentions and carrying a larger share of the risk themselves. As a result, the proportion of administrative expenses caused by basic losses has been reduced for reinsurers. Secondly, diversification considerations are continuing to take on added importance when it comes to buying reinsurance, in part against the backdrop of risk management aspects. As these developments gather momentum they entail risks for reinsurers, but also offer opportunities.
The continued strained economic state of some member countries of the single European currency, combined with the protracted low level of interest rates, is stepping up the pressure on investment income. Many fixed-income investments made in years when the yield curve was higher are gradually maturing. For companies seeking to achieve their earnings targets primarily by eliminating reserve redundancies, the protracted low interest rate environment is increasingly becoming a critical factor as the volumes available for reserve releases dwindle from period to period. These effects serve to ratchet up even further the demands placed on a profit-oriented underwriting policy – a situation which in 2012 was again reflected in a stable price level. Price increases, however, could only be pushed through in light of the supply environment, which was characterised by sufficient availability of reinsurance capacity. This underscores the significance attached to a high service quality and sustainable innovation management.
Nevertheless, life and health reinsurance is subject to technical and economic risks. The most significant economic risks are the interest rate risk, counterparty / default risk and exchange rate risk, which are influenced principally by the international economic environment and developments on financial markets. The technical risks include, above all, mortality, longevity, morbidity, disability and lapse. If the actual loss experience of the individual risks contained in the portfolio diverges from the previously calculated assumptions, this can have adverse implications for the performance of the underlying business. We counter this risk by adequately and appropriately selecting the basic arithmetical assumptions and by systematically and continuously reviewing the biometric actuarial bases. In addition, we take care to ensure adequate and complete reserving of all technical liabilities and we take into account the diversification of the portfolio as a whole, both geographically and in terms of risk types. We attach extraordinarily great importance to our risk management and thereby safeguard corporate profitability.
On account of regulatory rules imposing more rigorous capital requirements and solvency standards on primary insurers, particularly promising business opportunities will be available going forward when it comes to optimising their capital, liquidity and risk management. The implementation of Solvency II will also play a pivotal role in this regard, and individual reinsurance solutions designed to reduce the risk capital that insurers are required to hold to cover risks will attract growing attention.
Investments Against the backdrop of the European debt crisis – which has still to be overcome – and the associated uncertainties, we shall maintain the conservative orientation of our investment portfolio. Similarly, with regard to our holdings of corporate bonds from the financial sector we shall continue to attach considerable importance to broad diversification. The share of these instruments in our total portfolio will be kept largely unchanged. What is more, we shall strive for a neutral maturity structure of assets and liabilities.
We expect the further enlargement of the investment portfolio to positively affect investment income, although the average return will decline owing to the protracted low level of interest rates. In view of the low returns on secure investments, we shall step up our investments in products with attractive risk premiums and selectively enlarge our portfolio in the areas of alternative investments and real estate.
Given the present economic expectations and high capital requirements, our cautious stance on investments in listed equities remains unchanged.
In the life and health reinsurance business group we are aiming for further organic growth. An increase of 5% to 7% in gross premium is anticipated for 2013.
The expected positive cash flow that we generate from the technical account and our investments should – subject to stable exchange rates – lead to further growth in our asset portfolio. We are targeting a return on investment of 3.4%.
Assuming that the burden of major losses does not significantly exceed the expected level of EUR 625 million and that there are no downturns on capital markets, Hannover Re expects to generate Group net income in the order of EUR 800 million for the 2013 financial year.
Matters of special significance arising after the closing date for the consolidated financial statements are discussed in Section 8.11 of the notes “Events after the balance sheet date” on page 201.
In the coming years, as in recent years, organic growth of between 5% and 7% should be attainable in life and health reinsurance. We expect an EBIT margin of at least 6% for the areas of mortality and morbidity business; in financial solutions and longevity business an EBIT margin of at least 2% is anticipated.
The return on investment of 3.4% targeted for 2013 is, however, likely to decrease further in 2014.
Our strategic objective on the Group level is to achieve a return on equity at least 750 basis points above the risk-free interest rate. We also seek to increase both the earnings per share and the book value per share (including dividends paid) by at least 10% annually
Life and health reinsurance Gross premium growth 8 5 – 7%
1 Excluding inflation swaps and ModCo derivatives 2 750 basis points above the 5-year average return on 10-year German government bonds after tax 3 Growth in book value per share including dividends paid 4 Average over the reinsurance cycle 5 Including major loss budget of EUR 625 million 6 EBIT / net premium earned 7 Excess return on allocated economic capital 8 Organic growth only
Other financial assets – at fair value through profit or loss 6.1 60,835 21,026
Consolidated statement of income 2012 in EUR thousand Notes 1.1. – 31.12.2012 1.1. – 31.12.2011
Profit / loss from investments in associated companies 7.2 10,415 3,088
Income / expense on funds withheld and contract deposits 7.2 355,486 338,538
Changes in ownership interest with no change of control status – – – – – – 15 15 179 194
Changes in the consolidated group – – – – – – – – 15 15
Acquisition / disposal of treasury shares – – – – – – (380) (380) – (380)
Changes in ownership interest with no change of control status – – (150) (35) – – (1,434) (1,619) 1,685 66
Capital increases / additions – – – – – – – – 13,586 13,586
Acquisition / disposal of treasury shares – – – – – – (363) (363) – (363)
Total income and expense recognised in equity – – 540,670 (27,740) (9,455) (8,658) – 494,817 31,869 526,686
Capital repayments – – – – – – – – (8) (8)
Total income and expense recognised directly in equity – – 81,021 64,513 – (12,103) – 133,431 (5,439) 127,992
Cash and cash equivalents at the end of the period 572,188 506,963
1 Thereof cash and cash equivalents of EUR 27,474 thousand of the companies of Clarendon Insurance Group, Inc., Wilmington, recognised as a disposal group 2 In the year under review the supplementary information on the cash flow statement was expanded to include dividend receipts as well as a breakdown of interest received and paid. The figures for the previous year were recalculated in this context. The income taxes as well as dividend receipts and interest received are included entirely in the cash flow from operating activities. The interest paid is attributable in an amount of EUR 107,543 thousand (EUR 107,964 thousand) to the cash flow from financing activities and in an amount of EUR 26,357 thousand (EUR 24,519 thousand) to the cash flow from operating activities.
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 and maintain business relations with more than 5,000 insurance companies on every continent. With gross premium of approximately EUR 13.8 billion, Hannover Re is one of the largest reinsurance groups in the world. The company’s network consists of more than 100 subsidiaries, affiliates, branches and representative offices worldwide with a total workforce of roughly 2,300. The Group’s German business is conducted by the subsidiary E+S Rückversicherung AG (“E+S Rück”). The parent company is a joint-stock corporation, the registered office of which is located at Karl-Wiechert-Allee 50, 30625 Hannover, Germany.
Pursuant to EU Regulation (EC) No. 1606 / 2002, the present consolidated financial statement and group management report of Hannover Re have been drawn up in accordance with the International Financial Reporting Standards (IFRS) that are to be applied within the European Union. In addition, we have made allowance for the regulations that are also applicable pursuant to § 315a Para. 1 German Commercial Code (HGB) and the supplementary provisions of the parent company’s Articles of Association as amended on 3 May 2011.
The consolidated financial statement reflects all IFRS in force as at 31 December 2012 as well as all interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), application of which was mandatory for the 2012 financial year. IFRS 4 “Insurance Contracts” requires disclosures on the nature and extent of risks stemming from reinsurance contracts, while IFRS 7 “Financial Instruments: Disclosures” requires similar information on risks from financial instruments. Additionally, § 315 Para. 2 Number 2 German Commercial Code (HGB) also contains requirements for insurance undertakings with regard to information on the management of technical and financial risks that is to be provided in the management report. The disclosures resulting from these requirements are included in the risk report. We have dispensed with an additional presentation of the same content in the notes. In order to obtain a comprehensive overview of the risks to which Hannover Re is exposed it is therefore necessary to consider both the risk report and the relevant information in the notes. We refer the reader accordingly to the corresponding remarks in the risk report and the notes.
The annual financial statements included in the consolidated financial statement were for the most part drawn up as at 31 December. Pursuant to IAS 27 “Consolidated and Separate Financial Statements” there is no requirement to compile interim accounts for Group companies with diverging reporting dates because their closing dates are no earlier than three months prior to the closing date for the consolidated financial statement. Allowance has been made for the effects of significant transactions between the diverging reporting dates and the closing date for the consolidated financial statement.
In October 2010 the IASB published “Disclosures – Transfers of Financial Assets (Amendments to IFRS 7)“ to enhance the disclosures for transactions involving transfers of financial assets. The amendments increase the disclosure requirements in order to understand the relationship between transferred financial assets that are not derecognised or not derecognised in their entirety and the associated liabilities, such as the nature of the remaining risks and rewards of ownership.
The amendments published in December 2010 “Deferred Tax: Recovery of Underlying Assets (Amendments to IAS 12)“ introduce a rebuttable presumption that the carrying amount of investment property will be recovered entirely through sale. This is intended to simplify the distinction as to whether the carrying amount of an asset is recovered through use or sale. Under the transitional provisions of the standard, the effective date of the amendments of IAS 12 is for annual periods beginning on or after 1 January 2012. The new requirements do not have any significant implications for the assets, financial position or net income of the Group.
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 May 2011 the IASB published five new or revised standards governing consolidation, the accounting of investments in associated companies and joint ventures and the related disclosures in the notes.
In this connection IFRS 10 “Consolidated Financial Statements ” and IFRS 11 “Joint Arrangements” replaced the previous standards governing consolidated financial statements and special purpose entities (IAS 27 “Consolidated and Separate Financial Statements” and SIC-12 “Consolidation – Special Purpose Entities”) as well as the standards governing the accounting of interests in joint ventures (IAS 31 “Interests in Joint Ventures” and SIC-13 “Jointly Controlled Entities – NonMonetary Contributions by Venturers”).
The major new feature of IFRS 10 is that it identifies control as the single basis for verifying the consolidation requirement, irrespective of whether control is substantiated in company law, contractually or economically.
In June 2012 the IASB issued “Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance – Amendments to IFRS 10, IFRS 11 and IFRS 12“. These amendments clarify that the effective date of IFRS 10 is 1 January 2013, if the financial year coincides with the calendar year. The requirement to provide adjusted comparative information is limited upon initial application to only the immediately preceding period; retrospective adjustments for subsidiaries sold in the comparative period are not required. Furthermore, it is not necessary to provide comparative information on unconsolidated structured entities upon initial application of IFRS 12.
In October 2012 the IASB issued “Investment Entities (Changes to IFRS 10, IFRS 12 and IAS 27)“. Insofar as the parent company meets the definition of an investment entity, an exception is provided in relation to the consolidation of subsidiaries required under IFRS 10. Rather than consolidate them, such parent companies measure their investments in particular subsidiaries at fair value through profit or loss in accordance with IFRS 9 “Financial Instruments” or IAS 39 “Financial Instruments: Recognition and Measurement”.
In November 2009 the IASB issued IFRS 9 “Financial Instruments ” on the classification and measurement of financial instruments. IFRS 9 is the first step in a three-phase project intended to replace IAS 39 “Financial Instruments: Recognition and Measurement” with a new standard. IFRS 9 introduces new requirements for classifying and measuring financial assets. The provisions of IFRS 9 were expanded in October 2010 with an eye to financial liabilities for which the fair value option is chosen. The standard has not yet been ratified by the EU.
Unlisted bond funds Theoretical price Audited net asset values (NAV) Net asset value method
Private equity Theoretical price Acquisition cost, cash flows, EBIT multiples, market prices
Investments in associated companies are valued at equity on the basis of the proportionate shareholders’ equity attributable to the Group. Under IAS 28 “Investments in Associates”, which requires the application of the equity method based on the investor’s share of the results of operations of the investee, the goodwill apportionable to the associated companies must be recognised together with the investments in associated companies. The year-end result of an associated company relating to the Group’s share is included in the net investment income and shown separately. The shareholders’ equity and net income are taken from the associated company’s latest available financial statement.
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.
Deferred tax assets: IAS 12 “Income Taxes” requires that assets-side deferred taxes be established if assets have to be recognised in a lower amount or liabilities in a higher amount in the consolidated balance sheet than in the tax balance sheet and if these temporary differences will lead to reduced tax burdens in the future. In principle, temporary differences result from the valuation differences between the tax balance sheets drawn up in accordance with national standards and the IFRS balance sheets of the companies included in the consolidated financial statement drawn up in accordance with uniform group standards as well as from consolidation processes. Deferred tax assets and liabilities are not established if they arise out of assets or liabilities, the carrying amount of which upon firsttime recognition diverges from their initial tax base.
The individual companies’ statements of income prepared in the local currencies are converted into euro at the average rates of exchange and transferred to the consolidated financial statement. The conversion of foreign currency items in the balance sheets of the individual companies and the transfer of these items to the consolidated financial statement are effected at the mean rates of exchange on the balance sheet date. In accordance with IAS 21 “The Effects of Changes in Foreign Exchange Rates” differences from the currency translation of financial statements of foreign Group companies must be recognised in the consolidated financial statement as a separate item in shareholders’ equity. Currency translation differences resulting from long-term loans or lendings without specified maturity between Group companies and for which a settlement is neither planned nor likely to occur are similarly recognised outside the statement of income in a separate item of shareholders ’ equity.
Taxes: the taxes are comprised of the actual tax load on corporate profits of the Group companies, to which the applicable local tax rates are applied, as well as changes in deferred tax assets and liabilities. Income and expenses arising out of interest or penalties payable to the revenue authorities are shown under other income and expenses. The calculation of the deferred tax assets and liabilities is based on tax loss carry-forwards, unused tax credits and temporary differences between the carrying amounts of assets and liabilities in the consolidated balance sheet of the Hannover Re Group and their tax values. Further information on deferred taxes is provided in our remarks on deferred tax assets and liabilities.
Non-current assets held for sale and discontinued operations: in accordance with IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”, non-current assets and disposal groups are classified as held for sale if the relevant carrying amount is realised largely through sale rather than through continued use. Components of an entity that can be clearly distinguished from the rest of the entity for operational and accounting purposes and were classified as sold or for sale are recognised as discontinued operations. Measurement is at the lower of carrying amount and fair value less costs to sell. Scheduled depreciation is not taken on non-current assets classified as held for sale. Impairment losses on fair value less costs to sell are recognised in profit or loss; a gain for any subsequent increase in fair value less costs to sell leads to the realisation of profit up to the amount of the cumulative impairment. If the impairment loss to be taken on a disposal group exceeds the carrying amount of the corresponding non-current assets, the need to establish a provision within the meaning of IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” is reviewed.
In order to measure the “ultimate liability” in non-life business the expected ultimate loss ratios are calculated for all lines. Actuarial methods such as the “chain ladder” method provide the starting point for these calculations. The best possible estimated future settlement amount is recognised in the balance sheet. The development until completion of the runoff is projected on the basis of statistical triangles from the original notifications of ceding companies. In this context it is generally assumed that the future rate of inflation of the loss run-off will be analogous to the average rate of the past inflation contained in the data. The more recent underwriting years in actuarial projections are of course subject to greater uncertainty, although this can be considerably reduced with the aid of a variety of additional information on improvements in the rates and conditions of the business written and on loss trends. The amounts arrived at as the difference between the ultimate losses and the reported losses are set aside as the IBNR reserve for losses that have been incurred but are not yet known or have still to be reported.
The projections, which cover various model scenarios (“conservative assumptions” versus “best estimate”), constitute the starting point for numerous areas of application encompassing quotation, the determination of carrying values and embedded values as well as contract-specific analyses, e.g. regarding the appropriateness of the recognised reinsurance liabilities (“liability adequacy test”). In this context we would refer the reader to our comments on technical assets and provisions in Section 3.2 “Summary of major accounting policies” and on the liability adequacy tests in Section 6.7 “Technical provisions”.
In determining the carrying values for certain financial assets it is sometimes necessary to make assumptions in order to calculate fair values. In this regard we would refer the reader to our remarks in Section 3.2 “Summary of major accounting policies” concerning financial assets at fair value through profit or loss and securities held as available for sale. Assumptions concerning the appropriate applicability criteria are necessary when determining the need for impairments on non-monetary financial assets held as available for sale. In this regard we would again refer the reader to our explanatory remarks in Section 3.2 “Summary of major accounting policies”.
Capital consolidation The capital consolidation complies with the requirements of IAS 27 “Consolidated and Separate 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 which are of minor importance – both individually and in their entirety – for the net assets, financial position and results of operations of the Hannover Re Group are exempted from consolidation. Hannover Re assesses whether a subsidiary is of minor importance on the basis of the company ’s total assets and net income relative to the corresponding values for the Group as a whole on average over the last three years. For this reason 16 (15) companies at home and abroad were not fully consolidated in the year under review. A further 16 (15) companies were not included at equity in the consolidated financial statement for the same reason. The business object of these altogether 32 (30) companies is for the most part the rendering of services for reinsurance companies within the Group.
Consolidation of business transactions within the Group Receivables and liabilities between the companies included in the consolidated financial statement were offset against each other. Profits and expenses from business transactions within the Group were also eliminated. Transactions between a disposal group and the continuing operations of the Group were similarly eliminated in accordance with IAS 27 “Consolidated and Separate Financial Statements”.
In addition to Hannover Rückversicherung AG as the parent company of the Group, the scope of consolidation of the Hannover Re Group encompasses the companies listed in the table below.
The following list of shareholdings is provided in full in the present Group annual financial report in accordance with § 313 German Commercial Code (HGB) as amended by the Act on the Modernisation of Accounting Law (BilMoG).
Funis GmbH & Co. KG, Hannover / Germany 3 100.00 EUR 24,353 (10,687)
HAPEP II Holding GmbH, Hannover / Germany 3 95.28 EUR 30,305 8,638
HAPEP II Komplementär GmbH, Hannover / Germany 3 81.84 EUR 27 –
Hannover Re Euro PE Holdings GmbH & Co. KG, Hannover / Germany 3 90.92 EUR 83,826 1,219
Hannover Re Euro RE Holdings GmbH, Hannover / Germany 4 81.84 EUR 181,975 1,163
E+S Rückversicherung AG, Hannover / Germany 1 63.69 EUR 733,413 142,000
HEPEP II Holding GmbH, Cologne / Germany 3 57.50 EUR 4,539 4,508
Hannover Finance (Luxembourg) S.A., Luxembourg / Luxembourg 1 100.00 EUR 30,475 (1,304)
Hannover Finance (UK) Limited, Virginia Water / United Kingdom 1 100.00 GBP 131,102 19
Hannover Life Reassurance Bermuda Ltd., Hamilton / Bermuda 100.00 EUR 202,559 29,928
Hannover Re (Ireland) Public Limited Company, Dublin / Ireland 1, 6 100.00 EUR 1,318,616 106,336
Hannover Life Reassurance (UK) Limited, Virginia Water / United Kingdom 1 100.00 GBP 38,751 2,834
Hannover Services (UK) Limited, Virginia Water / United Kingdom 100.00 GBP 666 4
International Insurance Company of Hannover Limited, Bracknell / United Kingdom 1 100.00 GBP 121,759 6,259
Inter Hannover (No.1) Limited, London / United Kingdom 1 100.00 GBP (4,265) 1
Integra Insurance Solutions Limited, Bradford / United Kingdom 8 74.99 GBP 509 636
Hannover Finance, Inc., Wilmington / USA 9 100.00 USD 509,913 9,087
Atlantic Capital Corporation, Wilmington / USA 9, 10.11 100.00 USD (111,867) –
Hannover Reinsurance Group Africa (Pty) Ltd. compiles its own subgroup financial statement in which the following companies are included: Consolidated companies
Hannover Reinsurance Mauritius Ltd., Port Louis / Mauritius 100.00 MUR 50,178 3,785
Transit Underwriting Managers (Pty) Ltd., Cape Town / South Africa 51.00 ZAR 991 185
MUA Insurance Acceptances (Pty) Ltd., Cape Town / South Africa 40.80 ZAR 2,207 (2,168)
Hospitality Industrial and Commercial Underwriting Managers (Pty) Ltd., Johannesburg / South Africa 36.82 ZAR 2,375 2,472
SUM Holdings (Pty) Ltd., Johannesburg / South Africa 36.82 ZAR 19,068 3,418
Gem & Jewel Acceptances (Pty) Ltd., Johannesburg / South Africa 30.60 ZAR 974 3,116
Construction Guarantee (Pty) Ltd., Parktown / South Africa10 30.60 ZAR – 6,969
Woodworking Risk Acceptances (Pty) Ltd., Pietermaritzburg / South Africa 30.60 ZAR 540 (970)
Film & Entertainment Underwriters SA (Pty) Ltd., Johannesburg / South Africa 26.01 ZAR (1,444) 35
Clarendon Transport Underwriting Managers (Pty) Ltd., Johannesburg / South Africa 1 16.66 ZAR 21,400 44,794
Clarenfin (Pty) Ltd., Johannesburg / South Africa 12 16.66 ZAR – –
5115 Sedge Boulevard, LP, Chicago / USA 9, 11 95.10 USD (1,574) (1,622)
Nashville (Tennessee) West, LLC, Wilmington / USA 9 95.00 USD 30,611 (217)
Oval Office Grundstücks GmbH, Hannover / Germany 1 50.00 EUR 59,657 1,804
International Hannover Holding AG, Hannover / Germany 12 100.00 EUR 44 (3)
International Mining Industry Underwriters Limited, London / United Kingdom 1 100.00 GBP 480 70
Hannover Re Services Japan K.K., Tokyo / Japan 1 100.00 JPY 94,533 1,683
Hannover Re Consulting Services India Private Limited, Mumbai / India 8 100.00 INR 58,620 7,973
Hannover Life Re Consultants, Inc., Orlando / USA 4 100.00 USD 201 2
Hannover Re Services USA, Inc., Itasca / USA 100.00 USD 872 27
Hannover Rückversicherung AG Escritório de Representação no Brasil Ltda., Rio de Janeiro / Brazil 4 100.00 BRL 320 (58)
L&E Holdings Limited, London / United Kingdom 1 100.00 GBP 9 82
Glencar Underwriting Managers, Inc., Itasca / USA 4 95.90 USD 1,789 (713)
Secquaero Re Vinyard IC Ltd., St Peter Port / Guernsey 5 74.09 USD 2,075 –
Hannover Care AB, Stockholm / Sweden 4 30.00 SEK 446 (1,363)
Energi, Inc., Peabody / MA, USA 4 28.50 USD 6,758 (884)
Energi of Canada Ltd., Toronto / Canada 14 28.50 CAD – –
Energi Re, LLC, Dover / USA 4 28.50 USD 336 86
Hurst Holme Insurance Company Limited – account 2009-01 SCC, Hamilton / Bermuda 4 28.50 USD 2,577 1,000
XS Direct Holdings Limited, Dublin / Ireland 4 25.00 EUR 1,741 (3,129)
Indemnity Guarantee Company Limited, Dublin / Ireland 4, 10 25.00 EUR (6) –
Retrocessions and Insurance-Linked Securities (ILS) Since 2010, as part of its extended Insurance-Linked Securities (ILS) activities, Hannover Re has written a number of socalled collateralised fronting arrangements under which risks assumed from ceding companies are passed on to institutional investors outside the Group using special purpose entities. The purpose of such transactions is to directly transfer clients’ business. Due to the lack of a controlling influence over the special purpose entities involved, there is no consolidation requirement for Hannover Re with respect to these structures.
In connection with the sale of the operational companies of the subgroup Clarendon Insurance Group, Inc. (CIGI), Wilmington, to Enstar Group Ltd., Hamilton / Bermuda, in July 2011, a partial portfolio of CIGI was retroceded to a special purpose entity. The term of the retrocession arrangement runs until the underlying obligations have been finally settled. Since Hannover Re is not the major beneficiary of the special purpose entity and does not exercise either indirect or direct control over it, there is no requirement to consolidate this special purpose entity.
In September 2012 Hannover Re issued another catastrophe (“CAT”) bond for the purpose of transferring to the capital market peak natural catastrophe exposures deriving from European windstorm events. The term of the CAT bond, which has a volume of nominally EUR 100.0 million, runs until 31 March 2016; it was placed with institutional investors from Europe, North America and Asia by Eurus III Ltd. Eurus III Ltd. is a special purpose entity domiciled in Hamilton / Bermuda that was registered in August 2012 as a “special purpose insurer” under the Bermuda Insurance Act 1978. The retrocessions concluded with the special purpose entity under the transaction afford Hannover Re, E+S Rückversicherung AG and Hannover Re (Bermuda) Ltd. protection against the aforementioned catastrophe risks. Since Hannover Re does not exercise a controlling influence over Eurus III Ltd., there is no consolidation requirement for the special purpose entity.
By way of its “K” transactions Hannover Re has raised further underwriting capacity for catastrophe risks on the capital market. The “K Cession” (formerly “K6”), which was placed with investors in North America, Europe and Asia, involves a quota share cession on worldwide natural catastrophe business as well as aviation and marine risks. The volume of this securitisation, which was increased in the year under review, was equivalent to EUR 268.0 million (EUR 258.8 million) as at the balance sheet date. The transaction henceforth has an indefinite term and can be cancelled annually by the investors. Kaith Re Ltd., a special purpose entity domiciled in Bermuda, is being used for the securitisation.
Hannover Re also uses the special purpose entity Kaith Re Ltd. for various retrocessions of its traditional covers to institutional investors. In accordance with SIC-12 Kaith Re Ltd. is included in the consolidated financial statement.
Life and health reinsurance assumed Some transactions in the life and health reinsurance segment necessitate the involvement of ceding special purpose entities as contracting parties that are established by parties outside the Group and from which member companies of the Hannover Re Group assume certain underwriting and / or financial risks in respect of which the probability of occurrence of a loss for Hannover Re is to be categorised as low in each case. The transactions largely serve the purpose of financing statutory reserves (so-called Triple-X or AXXX reserves) and transferring extreme mortality risks above a contractually defined retention. Since
Hannover Re participates – primarily through the companies Secquaero ILS Fund Ltd. (Secquaero) and Hannover InsuranceLinked Securities GmbH & Co. KG (HILS) – in a number of special purpose entities for the securitisation of catastrophe risks by investing in “disaster bonds” (or “CAT bonds”). While HILS will continue to manage its portfolio, future new business in this area will be written by the Leine Investment companies. In this connection please see also our remarks on the companies Leine Investment General Partner S.à. r.l. and Leine Investment SICAV-SIF in Section 4.3 “Major acquisitions and new formations ”. Since Hannover Re cannot exercise a controlling influence in any of these transactions either there is no requirement to consolidate the relevant special purposes entities.
Secquaero has established a special purpose entity which is used to transform underwriting risks for the capital market and in which it holds all the voting rights. Given that the scale of the business relations with the special purpose entity is of minor significance to the consolidated financial statement of Hannover Re, the company is not consolidated.
Leine Investment General Partner S.à. r.l. and Leine Investment SICAV-SIF, both based in Luxembourg, were established in September 2012. The companies, all shares of which are held by Hannover Re companies, were consolidated for the first time with effect from the third quarter of 2012. Leine Investment General Partner S.à. r.l. is the managing partner of the asset management company Leine Investment SICAVSIF, the business object of which is to build, hold and manage a portfolio of insurance-linked securities (catastrophe bonds) – including for third-party investors outside the Group. The company had not yet made any investment transactions as at the balance sheet date.
Advanced Solutions Ltd., Dublin, which had been inactive since 2004, were of minor significance overall to the consolidated financial statement of Hannover Re.
With a view to streamlining the Group structure, Hannover Re transferred all the business of its subsidiary Hannover Life Reassurance (UK) Ltd., Virginia Water, to a newly established branch of the parent company Hannover Re with the same registered office effective 1 January 2013 by way of a so-called “Part VII transfer”. The branch, which was still inactive as at the balance sheet date, will trade under the name Hannover Re UK Life Branch and was registered on 3 December 2012 under the Companies Act 2006. Hannover Life Reassurance (UK) Ltd. was deleted from the Commercial Register on 8 January 2013.
Income / expense on funds withheld and contract deposits 13,754 14,239
Commission and brokerage, change in deferred acquisition costs and other technical income / expenses 1,573,976 1,367,299
Held to maturity due in one year 908,601 916,267 486,965 491,332 due after one through two years 606,525 629,138 926,846 942,245 due after two through three years 1,089,354 1,171,603 613,913 643,263 due after three through four years 532,996 577,930 1,097,347 1,161,746 due after four through five years 150,735 162,378 562,175 597,596 due after five through ten years 315,208 350,218 461,311 462,789 due after more than ten years 2,537 3,198 7,532 8,091
Amortised cost, unrealised gains and losses and accrued interest on the portfolio of investments classified as held to maturity as well as their fair value in EUR thousand 2012
Amortised cost, unrealised gains and losses and accrued interest on the portfolio of investments classified as held to maturity as well as their fair value in EUR thousand 2011
The carrying amount of the portfolio held to maturity is arrived at from the amortised cost plus accrued interest.
Debt securities issued by semi-governmental entities 4,199,653 245,014 2,779 53,405 4,495,293
Covered bonds / asset-backed securities 79,634 67,849 – – 79,634 67,849
Hannover Re recognised in this category as at the balance sheet date derivative financial instruments in an amount of EUR 60.8 million (EUR 21.0 million) that are originally allocable to this item as well as fixed-income securities amounting to EUR 147.4 million (EUR 161.1 million) designated in this category.
Participating interests and other i nvested assets, real estate funds 1,134,257 7,157 1,075,051 15,569
Fixed-income securities – held-to-maturity 1,775,632 1,783,998 478,168 118,291 – – – – 4,156,089
Fixed-income securities – loans and receivables 1,598,652 1,676,610 132,617 70,559 5,302 4,242 – 36,753 3,524,735
The maximum credit risk of the items shown here corresponds to their carrying amounts.
Fixed-income securities – held to maturity – 140,753 1,894,495 148,900 – 1,421,808 – – 3,605,956
Fixed-income securities – loans and receivables – 6,990 2,478,119 43,136 – 781,591 – 105,351 3,415,187
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 18.3 million (EUR 18.3 million).
Real estate Real estate is divided into real estate for own use and thirdparty use (investment property). The investment property in the portfolio which is used to generate income is shown under the investments.
Real estate is valued at cost of acquisition less scheduled depreciation with useful lives of at most 50 years.
Net book value at 31 December of the previous year 397,037 303,422
The fair value of investment property amounted to EUR 511.3 million (EUR 397.2 million) as at the balance sheet date.
Real estate which is held for sale as defined by IFRS 5 is recognised separately in the consolidated balance sheet. The gross book values of the properties amounted to EUR 14.4 million (EUR 5.0 million) and the cumulative depreciation totalled EUR 8.0 million (EUR 2.6 million) at the time of reclassification to assets held for sale. The measurement of real estate at fair value less cost to sell gave rise to an impairment of EUR 0.9 million in the financial year just ended. This was recognised in investment income.
Other invested assets The other invested assets consisted largely of participating interests in partnerships measured at fair value in an amount of EUR 881.4 million (EUR 833.8 million). The amortised cost of these participations amounted to EUR 619.5 million (EUR 612.8 million); in addition, unrealised gains of EUR 267.8 million (EUR 222.9 million) and unrealised losses of EUR 5.9 million (EUR 1.9 million) were recognised from these participations.
Short-term investments This item comprises investments with a maturity of up to one year at the time of investment.
• 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).
Fair value hierarchy of financial instruments recognised at fair value in EUR thousand 2012
Other financial assets – at fair value through profit or loss 36,641 24,194 – 60,835
Other financial assets – at fair value through profit or loss – 21,026 – 21,026
Currency translation at 31 December of the year under review 173 – (2,380) –
Net book value at 1 January of the year under review 82,464 11 779,592 –
Net book value at 31 December of the year under review 38,190 8 875,401 –
Income and expenses from level 3 financial instruments in EUR thousand 2011
If models are used to measure financial instruments included in level 3 under which the adoption of reasonable alternative inputs leads to a material change in fair value, IFRS 7 “Financial Instruments: Disclosures” requires disclosure of the effects of these alternative assumptions. Of the financial instruments included in level 3 with fair values of altogether EUR 1,089.3 million (EUR 913.6 million) as at the balance sheet date, Hannover Re measures financial instruments with a volume of EUR 990.4 million (EUR 863.5 million) using the net asset value method, in respect of which alternative inputs within the meaning of the standard cannot reasonably be established. For the remaining financial instruments included in level 3 with a volume of EUR 98.9 million (EUR 50.1 million), the effects of alternative inputs and assumptions are immaterial.
The contract deposits on the assets side increased by EUR 13.5 million in the year under review from EUR 109.7 million to EUR 123.3 million.
Net book value at 31 December of the previous year 1,926,570 1,834,496
Age structure of overdue accounts receivable in EUR thousand 2012 2011
Within the scope of our management of receivables we expect to receive payment of accounts receivable within three months of the date of creation of the debit entry – a period for which we also make allowance in our risk analysis. Please see our comments on the credit risk within the risk report on page 71 et seq.
Cumulative value adjustments at 31 December of the previous year 35,665 35,768
Cumulative value adjustments at 31 December of the year under review 40,703 35,665
Gross book value of accounts receivable at 31 December of the year under review 3,106,367 3,174,992
Net book value of accounts receivable at 31 December of the year under review 3,065,664 3,139,327
Net book value at 31 December of the previous year 59,289 45,773
This item principally included the goodwill from the acquisition of E+S Rückversicherung AG as well as from the acquisition of a 75% interest in Integra Insurance Solutions Ltd.
For the purposes of the impairment test, the goodwill was allocated to the cash-generating units (CGUs) that represent the lowest level on which goodwill is monitored for internal management purposes. In the instances of goodwill recognised as at the balance sheet date, the CGUs are the respective business units / legal entities. The recoverable amount is established on the basis of the value in use, which is calculated using the discounted cash flow method. In this context, the detailed planning phase draws on the planning calculations of the CGUs / companies covering the next five years. These planning calculations represent the outcome of a detailed planning process in which all responsible members of management are involved. The subsequent perpetuity phase is guided by the profit margins and revenue growth rates that management believes can be sustainably generated. The capitalisation rate is based on the Capital Asset Pricing Model (CAPM) as well as growth rates that are considered realistic. The risk-free basic interest rate is determined, where possible, using corresponding yield curve data from the respective national banks. If this data cannot be obtaining or can only be obtained with a disproportionately high effort, reference is made to the yields of the respective 30-year government bonds. The selection of the market risk premium is guided by the current recommendations of the Institut der Wirtschaftsprüfer in Deutschland e.V. (IDW). The beta factor is calculated for Hannover Rückversicherung AG on the basis of publicly accessible capital market data.
The following capitalisation rates and growth rates were recognised for the individual cash-generating units: Capitalisation rate
Of this, other assets of EUR 4.0 million (EUR 6.3 million) are attributable to affiliated companies.
Net book value at 31 December of the year under review 92,100 94,985
Insurance for pension commitments 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 “Employee Benefits” they were carried as a separate asset at fair value as at the balance sheet date in an amount of EUR 64.6 million (EUR 62.5 million).
Gross book value at 31 December of the previous year 113,487 107,445
Gross book value at 31 December of the year under review 121,815 113,487
Cumulative depreciation at 31 December of the year under review 97,804 86,966
Net book value at 31 December of the previous year 26,521 31,808
Gross book value at 31 December of the previous year 175,867 167,593
Cumulative depreciation at 31 December of the previous year 140,195 127,794
Cumulative depreciation at 31 December of the year under review 152,589 140,195
Net book value at 31 December of the previous year 35,672 39,799
The item includes EUR 4.5 million (EUR 5.7 million) for selfcreated software and EUR 25.2 million (EUR 28.5 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 7.9 million (EUR 6.4 million ) for purchased software and EUR 0.9 million (EUR 0.9 million ) for capitalised development costs for self-created software.
As in the previous year, the other receivables do not include any items that were overdue but unadjusted as at the balance sheet date. Value adjustments were taken on other receivables in a minimal amount (EUR 0.6 million) in the year under review on the basis of specific impairment analyses.
Loss and loss adjustment expense reserve 21,610,698 1,538,215 20,072,483 20,767,317 1,550,587 19,216,730
Loss and loss adjustment expense reserve in EUR thousand 2012 2011 gross retro net gross retro net
Net book value at 31 December of the previous year 20,767,317 1,550,587 19,216,730 18,065,395 1,025,332 17,040,063
Net book value after currency translation 20,650,643 1,529,144 19,121,499 18,292,739 1,042,632 17,250,107
In the 2012 financial year the run-off triangles provided by the reporting units were also shown for the first time after adjustment for the currency effects arising out of translation of the respective transaction currency into the local reporting currency. The run-off triangles of the reporting units delivered in foreign currencies are translated to euro at the current rate on the balance sheet date in order to show run-off results after adjustment for currency effects. In cases where the originally estimated ultimate loss corresponds to the actual ultimate loss in the original currency, it is ensured that after translation to the Group reporting currency (EUR) a run-off result indicated purely by currency effects is not shown.
The following table shows the net loss reserve for the non-life reinsurance business group in the years 2002 to 2012 as well as the run-off of the reserve (so-called run-off triangle). The figures reported for the 2002 balance sheet year also include the amounts for previous years that are no longer shown separately in the run-off triangle. The run-off results shown reflect the changes in the ultimate loss arising in the 2012 financial year for the individual run-off years.
As percentage of original loss reserve 0.7 0.1 0.3 0.5 0.5 0.6 1.1 0.6 (0.7) -1.0
Maturities of the technical reserves IFRS 4 “Insurance Contracts” requires information which helps to clarify the amount and timing of cash flows expected from reinsurance contracts. In the following tables we have shown the future maturities of the technical provisions broken down by the expected remaining times to maturity. As part of our maturity analysis we have directly deducted the deposits put up as 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 3,121,946 212,126 2,909,820 546,495 12,739 533,756
The benefit reserve is established in accordance with the principles set out in FASB ASC 944-40-30 and -35. The provisions are based on the Group companies’ information regarding mortality, interest and lapse rates.
Development of the benefit reserve in EUR thousand 2012 2011 gross retro net gross retro net
Net book value at 31 December of the previous year 10,309,066 380,714 9,928,352 8,939,190 347,069 8,592,121
Net book value at 31 December of the year under review 10,974,570 507,257 10,467,313 10,309,066 380,714 9,928,352
Net book value at 31 December of the previous year 2,215,864 91,823 2,124,041 1,910,422 83,224 1,827,198
Net book value after currency translation 2,207,322 90,837 2,116,485 1,930,312 83,678 1,846,634
The contract deposits on the liabilities side increased by EUR 789.7 million in the year under review from EUR 5,008.2 million to EUR 5,797.9 million. The contract deposits item on the liabilities side essentially encompasses balances deriving from non-traditional life insurance contracts that are to be carried as liabilities. The rise was due principally to growth in new business in the area of life reinsurance.
As at 1 July 2000 the 2000 pension plan came into force for the entire Group. Under this plan, new employees included in the group of beneficiaries are granted an indirect commitment from HDI Unterstützungskasse. The pension plan provides for retirement, disability and surviving dependants’ benefits.
Effective 1 December 2002 Group employees have an opportunity to accumulate additional old-age provision at unchanged conditions by way of deferred compensation through membership of HDI Pensionskasse AG.
Projected benefit obligation at the beginning of the year under review 106,618 109,962
Projected benefit obligation from wholly or partially funded plans (before deduction of fair value of plan assets) 16,971 14,888
The fair value of the plan assets developed as follows: Change in plan assets in EUR thousand 2012 2011
Fair value of plan assets at 31 December of the year under review 14,979 11,525
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. The plan assets consist exclusively of qualifying insurance policies as defined by IAS 19.
Reconciliation of the net provision for pensions in EUR thousand 2012 2011
The recognised provision for pensions developed as follows in the year under review: Change in the provisions for pensions in EUR thousand 2012 2011
Net provisions for pensions at 31 December of the previous year 88,299 81,657
As in the previous year, no actuarial gains were recognised in other comprehensive income as at the balance sheet date.
The following amounts were recognised for the year under review and prior years under the accounting of defined benefit plans: Amounts recognised
Surplus / (deficit) in the plan (126,126) (95,093) (99,498) (84,145) (72,857)
EUR 12.8 million (EUR 11.3 million), of which EUR 1.1 million (EUR 0.8 million) was due to obligations to members of staff in key positions and EUR 5.8 million (EUR 5.5 million) to contributions to the statutory pension insurance scheme in Germany.
Of this, other liabilities of EUR 7.8 million (EUR 4.4 million) are attributable to affiliated companies.
Development of sundry non-technical provisions in EUR thousand Balance at 31.12.2011
Audits and costs of publishing the annual financial statements 5,888 (19) 5,869 – – 4,908 4,588 534 (9) 5,646
As at the balance sheet date the sundry non-technical provisions were attributable in an amount of EUR 66.0 million to maturities of less than one year, in an amount of EUR 49.0 million to maturities of one through five years and in an amount of EUR 5.8 million to maturities of more than five years. The sundry non-technical provisions with no maturity amounted to EUR 4.4 million.
Partial retirement arrangements and early retirement obligations 5,885 33 5,918 – – 286 1,006 – 24 5,222
On 14 September 2010 Hannover Re placed a subordinated bond on the European capital market through its subsidiary Hannover Finance (Luxembourg) S.A. This subordinated debt of nominally EUR 500.0 million has a maturity of 30 years with a first scheduled call option after ten years. The bond carries a fixed coupon of 5.75% in the first ten years, after which the interest basis changes to a floating rate of 3-month EURIBOR +423.5 basis points.
On 26 February 2004 subordinated debt in the amount of EUR 750.0 million was placed through Hannover Finance (Luxembourg ) S.A. on the European capital markets. The bond has a final maturity of 20 years and for the first ten years carries a fixed coupon of 5.75%. It may be redeemed by Hannover 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 3-month EURIBOR +263 basis points.
1 Excluding minority interests in partnerships; the maturities of derivative financial instruments and sundry non-technical provisions are broken down separately.
The ordinary expenses principally include interest expenses of nominally EUR 99.8 million (EUR 98.5 million) resulting from the subordinated debt placed through Hannover Finance (Luxembourg) S.A.
Non-controlling interests in the shareholders’ equity of the subsidiaries amounted to EUR 684.5 million (EUR 636.0 million) as at the balance sheet date. They were principally attributable to non-controlling interests in the shareholders’ equity of E+S Rückversicherung AG in an amount of EUR 651.0 million (EUR 611.6 million).
As part of this year’s employee share option plan Hannover Re acquired altogether 23,160 treasury shares in the course of the second quarter of 2012 and delivered them to eligible employees at preferential conditions. These shares are blocked until 31 May 2016. This transaction reduced the retained earnings by EUR 0.4 million. The company was no longer in possession of treasury shares as at the balance sheet date.
Other technical expenses (net) 4,575 8,954 7.4 Other income / expenses
Income from contracts recognised in accordance with the deposit accounting method 58,683 49,374
The separate value adjustments were attributable principally to accounts receivable in an amount of EUR 26.9 million (EUR 9.2 million) as well as to reinsurance recoverables on unpaid claims in an amount of EUR 0.4 million (EUR 2.2 million) and other receivables in a minimal amount (EUR 0.6 million).
Domestic taxes on income, comparable taxes on income at foreign subsidiaries as well as deferred taxes in accordance with IAS 12 “Income Taxes” are recognised under this item.
Breakdown of taxes on income The breakdown of actual and deferred income taxes was as follows: Income tax in EUR thousand 2012 2011
Change in deferred taxes due to changes in tax rates (2,969) (324)
Deferred tax assets and deferred tax liabilities of all Group companies in EUR thousand 2012 2011
Present value of future profits on acquired life reinsurance portfolios (PVFP) 11,513 11,873
Availability of loss carry-forwards that have not been capitalised: Expiry of non-capitalised loss carry-forwards in EUR thousand One to five years
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 positive value of EUR 39.8 million as at the balance sheet date and was recognised under other financial assets at fair value through profit or loss (EUR 12.9 million under other liabilities).
In the course of the year the change in the fair value of the derivative gave rise to a positive profit contribution of EUR 51.8 million before tax (negative profit contribution of EUR 55.4 million).
A number of transactions concluded in the life and health reinsurance business group in 2012, under which Hannover Re companies offer their contracting parties coverage for risks from possible future payment obligations arising out of hedging instruments, are also to be classified as derivative financial instruments. The payment obligations result from contractually defined events and relate to the development of an underlying group of primary insurance contracts with statutory reserving requirements. The contracts are to be categorised and recognised as stand-alone credit derivatives pursuant to IAS 39. These derivative financial instruments were carried in equity on initial recognition because receivables recognised under other assets were to be carried in the same amount. Please see Section 6.6 “Other assets”. The fair value of these instruments on the balance sheet date was EUR 54.8 million, which was recognised under other liabilities. The change in value in subsequent periods is dependent upon the risk experience.
The derivative components of another group of contracts in the area of life and health reinsurance were measured on the basis of stochastic considerations. The measurement produced a positive derivative value of EUR 7.5 million (EUR 8.2 million) on the balance sheet date. The derivative was recognised under other financial assets at fair value through profit or loss. The valuation resulted in a charge against investment income of EUR 0.7 million (EUR 1.1 million) as at 31 December 2012.