Dividend per share in EUR 3.00 + 1.25 2, 3 +41.7% 3.00 2.60 + 0.40 3 2.10 2.30
Share price at year-end in EUR 74.97 +20.2% 62.38 58.96 38.325 40.135
1 Adjusted pursuant to IAS 8 2 Proposed dividend 3 Dividend of EUR 3.00 plus special dividend of EUR 1.25 for 2014 as well as EUR 2.60 plus special dividend of EUR 0.40 for 2012 4 Including funds withheld 5 Hannover Re Group’s net share for natural catastrophes and other major losses in excess of EUR 10 million gross as a percentage of net premium earned (until 31 December 2011: in excess of EUR 5 million gross) 6 Excluding effects from ModCo derivatives and inflation swaps 7 Operating result (EBIT) / net premium earned
Policyholders’ surplus I 03 * in EUR million 1 Adjusted pursuant to IAS 8 2 Dividend of EUR 3.00 plus special dividend of EUR 1.25 for 2014 as well as EUR 2.60 plus special dividend of
EUR 0.40 for 2012 and EUR 1.80 plus special dividend of EUR 0.50 for 2007 3 Proposed dividend
Letter from the Chairman of the Executive Board 2 Executive Board of Hannover Rück SE 6 The Hannover Re share 8 Our strategy 12
Report by the Supervisory Board 240 Supervisory Board of Hannover Rück SE 243
Branch offices and subsidiaries of the Hannover Re Group abroad 244 Glossary 247 List of graphs, tables and charts * 252 Financial calendar 255 Contact information 256 Imprint 257 * Graphs, tables and charts are numbered and listed on page 252 et seq.
This gratifying business development enables us in turn to distribute to you, our valued shareholders, an attractive dividend. The Supervisory Board and Executive Board will propose to the Annual General Meeting that you should be paid a dividend of EUR 3.00 and a special dividend of EUR 1.25 per share. This is a reflection of the fact that your company’s capitalisation now comfortably exceeds the required capital. With this in mind, such a special dividend makes sense as a capital management measure. I would now like to explore below in greater detail the developments in our business groups of Property & Casualty reinsurance and Life & Health reinsurance as well as on the investments side.
Turning now to life and health reinsurance, it is particularly gratifying here that after the somewhat disappointing experience in 2013 we were able, as expected, to generate substantially better results. While the international market environment was thoroughly challenging on account of stubbornly low interest rates, our partnership-based relationships with our clients and our global presence nevertheless enabled us to act on sufficient opportunities for sustainable growth. This is especially true of our sizeable growth in the field of reinsurance solutions for longevity risks relating to pension liabilities from annuity policies. We have traditionally written this business mainly in the United Kingdom. Now, however, we are seeing lively interest in such reinsurance solutions outside the United Kingdom as well. In the financial year just ended, for example, we reinsured a substantial block of pension commitments in France for the first time. In addition, we successfully sustained our growth in Asia, and here especially China, in Australia and in US mortality business. Gross premium in life and health reinsurance consequently grew by a pleasing 5 percent – adjusted for currency translation effects – to EUR 6.5 billion.
The general environment facing reinsurers continues to be highly challenging in 2015. Little has changed, whether it comes to the fierce competitive intensity in property and casualty reinsurance or the ongoing very low interest rates and their dampening effect on investment income. Nevertheless, we remain convinced that we can generate another good result in the current year, provided major losses do not come in significantly over budget and as long as capital markets are spared any distortions.
When it comes to our total business, we expect the gross premium volume for the current year to remain stable or show low single-digit percentage growth after adjustment for exchange rate effects. We are targeting Group net income in the order of EUR 875 million. As always, these statements are subject to the proviso that major losses stay within the expected bounds of EUR 690 million and that there are no exceptionally adverse movements on capital markets.
In a three-year comparison the Hannover Re share delivered a performance (including reinvested dividends) of 125.2%. It therefore once again clearly outperformed the DAX (66.3%) and MDAX (90.2%) benchmark indices and the Global Reinsurance Index (94.3%).
With a book value per share of EUR 62.61 the Hannover Re share showed a price-to-book (P / B) ratio of 1.2 at the end of the year under review; compared to the average MDAX P / B ratio of 2.17 as at year-end the share thus continues to be very moderately valued.
The Executive Board and Supervisory Board intend to propose to the Annual General Meeting on 6 May 2015 that a dividend of EUR 3.00 plus a special dividend of EUR 1.25 per share should be distributed. At around 52%, the proposed distribution thus surpasses the strategically planned payout ratio of 35% to 40% of Group net income after tax for the fourth year in succession. Based on the year-end closing price of EUR 74.97, this produces a dividend yield of 5.7%.
In addition, in the year just ended we again provided information about our achievements as a responsible enterprise in the form of a stand-alone sustainability report drawn up in accordance with the internationally recognised reporting standards of the Global Reporting Initiative (GRI). Based on this structured reporting format, which was presented for the third year in succession, Hannover Re’s sustainability performance was also assessed by the rating agency Oekom Research. Our aboveaverage fulfilment of industry-specific requirements was recognised with the award of “Prime” status. Furthermore, Hannover Re was added to the worldwide FTSE4Good Index Series for the first time in the year under review by the FTSE4Good Advisory Committee. Inclusion was based on our sustainability rating according to ESG (environmental, sustainability and governance) criteria in 2014.
In total, around 270 analyst recommendations were published for Hannover Re and the insurance sector in the 2014 financial year. By the end of the year 33 analysts had handed down opinions on Hannover Re: six analysts (eleven) recommended the Hannover Re share as “buy” or “overweight”; as in the previous year, altogether 20 opinions were a “hold”, making this the most common, while “underweight” or “sell” recommendations were issued a total of seven (three) times. The analysts ’ average price target climbed slightly in the course of the year from EUR 63.18 at the outset to EUR 66.34 at year-end.
Shareholding structure as at 31 December 2014 I 11 8.3% Private investors 41.5% Institutional investors 50.2% Talanx AG
Shareholding structure by countries / regions as at I 12 31 December 2014 (free float) 1 0.5% France 0.8% Asia 7.5% Benelux 15.4% United Kingdom 13.4% United States 57.6% Germany 1.4% Other
Equity attributable to shareholders of Hannover Rück SE in EUR million 7,550.8 5,888.4 6,032.5 4,970.6 4,509.0
Earnings per share (basic and diluted) 8.17 7.43 7.04 5.02 6.21
We strive for an optimal balance between stability and yield of our investments
• Achieve the target return – risk-free interest rate plus cost of capital
• Generate an IFRS return on equity of at least 900 basis points above the risk-free interest rate
Management, in the area of “Life and health reinsurance South Africa”
Dr. Ole Hanekop works as a Senior Actuarial Analyst at Hannover Re in the field of natural hazards modelling
Business model • As the third-largest reinsurer in the world, we transact all lines of property & casualty and life & health reinsurance with the goal of achieving the most balanced possible regional and line-based diversification
• Competitive advantages due to our low cost of capital and administrative expense ratio • Financial strength secured through rigorous risk management
The business models in both property & casualty and life & health reinsurance support our Group’s paramount mission, namely: “Long-term success in a competitive business”. Our entire business operations are geared to our goal of being the best option for our business partners when they come to choose their reinsurance provider. It is for this reason that our clients and their concerns form the focus of our activities.
We generate competitive advantages to the benefit of our clients and shareholders by conducting our insurance business with lower capital costs and administrative expenses than our rivals. In this way we deliver above-average profitability while at the same time being able to offer our customers reinsurance protection on competitive terms.
In life and health reinsurance we are recognised – as customer surveys confirm – as one of the top players and the leading provider of innovative solutions. We have achieved this standing by opening up new markets and by fulfilling future customer requirements through the identification and forecasting of emerging trends.
1 Adjusted pursuant to IAS 8 2 Average annual growth, otherwise weighted averages 3 Excluding effects from ModCo derivatives and inflation swaps 4 After tax; target value: 750 basis points above the 5-year average return on 10-year German government bonds 5 Growth in book value per share including dividends paid 6 Average over the reinsurance cycle at constant exchange rates 7 Including major loss budget of EUR 670 million 8 EBIT / net premium earned 9 Excess return on allocated economic capital 10 Organic growth only; annual average growth (5 years); at constant exchange rates 11 Reclassification of treaties
Management by Objectives The targets that emerge out of the planning process are integrated into the individual agreements on objectives with managers.
Management Reporting The annual Management Reporting presents in detail the degree of target attainment for each individual treaty / regional department and service unit as well as for the two business groups of Property & Casualty and Life & Health 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 IVC (Intrinsic Value Creation) is calculated according to the following formula: Adjusted operating profit (EBIT) − (capital allocated x weighted cost of capital) = IVC
Intrinsic Value Creation and excess return on capital allocated M 03 in EUR million 2014 2013
1 Adjustment based on amended allocation of economic effects (property and casualty reinsurance / investments) and final MCEV calculation (life and health reinsurance)
A number of IFRS-based financial performance indicators are also embedded in our strategic system of targets and coordinated with our parameters for value creation derived from the economic capital model. We use these indicators for operational management within the year, in part because they are available promptly and also because they already provide initial pointers as to whether we are likely to achieve our higherorder strategic objectives. These are for both business groups the growth in gross premium, for property and casualty reinsurance the combined ratio, for life and health reinsurance the EBIT margin and for the Group as a whole the return on investment. Non-financial performance indicators, on the other hand, are not used for operational management within the year.
Eduardo Llorente Aguilera is a Senior Underwriter with Hannover Re working in the area of “Personal Accident, Sports and Entertainment / Contingency”
Sport and entertainment Sport has grown into an important economic factor, as evidenced by the rising number of investors buying up football clubs from the richest leagues. Yet business success is dependent not only on sporting success but also on good risk management, especially when it comes to major events faced with the possibility of cancellation or relocation due to terrorist attacks, severe weather, boycotts, political unrest etc.
Top-flight football clubs increasingly have a vested interest in protecting their balance sheets by taking out coverage for their human capital so as to be compensated for the equivalent value if one of their players is incapacitated due to accident or illness.
Karin Fröhling is a General Manager with responsibility for the longevity business written by Hannover Re worldwide
Macroeconomic climate and industry-specific environment • Global economy shows patchy growth; deflation concerns in Europe • Sustained low interest rates remain a challenge for insurers • Solvency II Directive set for Europe-wide implementation in 2016 • Modest losses from natural disasters
The global economy grew by 3.4% in 2014, a figure slightly higher than in the previous year (3.2%). From a medium-term perspective this represents a moderate growth rate. Within the year, however, the development of the world’s economy can be split into two phases: after only a very restrained increase in output during the first six months of the year, it picked up sharply in the second half. Global trade also moved in step with output.
Economic developments in emerging markets gave more grounds for satisfaction in 2014, although the underlying tendency remains muted. China and India saw the onset of a lowlevel revival during the course of the year. This was also true of Latin America, where Brazil turned the corner after sinking to an economic low point. While Russia did not experience the anticipated decline in total economic output thanks to a record grain harvest, the political crisis in relation to Ukraine cast an increasingly dark shadow over its investment climate.
United States The US economy was able to put its upward trend on a stable footing: gross domestic product (GDP) recorded a growth rate of 2.2%, just as in the previous year. The economy in the US thus expanded more vigorously than virtually any other industrialised nation. Exports picked up, but other sectors of the economy also showed impressive gains. Along with increased investment by companies and higher consumer spending, the state also played its part in growth – boosting arms spending, for example, to an extent not seen for years. Gainful employment continued to rise on the labour market, causing the jobless rate to fall to its lowest level in a long time in October at 5.8%.
Germany Buoyed by the mild winter weather, the economy in Germany got off to a good start in 2014. However, the investment climate soon began to cool appreciably during the spring. It was not until the end of the year that signs of a recovery began to emerge again. For the year as a whole gross domestic product grew by 1.5%. Private consumption was a major driver of the upswing, with low interest rates and modest energy prices further helping to boost consumption. The overall economic development was also helped by foreign trade: exports grew more strongly than imports during the six summer months. All in all, though, it was the domestic economy that remained the most significant growth engine. The recovery on the labour market was sustained over the year as a whole, with the working population reaching a record level of 43.1 million in November (+1.0%).
Prices in Germany continued to trend higher in 2014, although low energy costs put a significant brake on inflation. Consumer prices rose by 1.0%. On the domestic producer side prices for intermediate, capital and consumer goods moved higher, while the upsurge in the cost of construction work was sustained. The increase in residential property prices was comparatively moderate.
Asia After showing marked weakness in the first half of 2014, production rallied in most major emerging economies in the second half of the year. In China the recovery had already set in during the spring, although the full-year growth figure of 7.4% was moderate by that country’s standards. What is more, it was assisted by temporary economic policy stimuli. On the market side the Chinese economy benefited from particularly lively foreign demand; it came under strain, on the other hand, from the downturn on the property market. This depressed prices for residential accommodation and curtailed the impetus for higher consumer prices.
India extended its growth rate year-on-year to 5.9%, although the pace of the increase in industrial output was already slowing towards year-end.
Major equity markets moved higher in the course of the year, in some cases soaring to new record highs, although only the US market was able to book appreciable price gains over the year as whole. In contrast, European indices were, if anything, left treading water year-on-year. Here, too, markets were influenced by the continued expansionary monetary policy pursued by central banks and by the quest among investors for highreturn investments. Ultimately, though, the elevated price levels could only partially be explained by the underlying fundamentals.
The development of the world’s economy continues to be subject to a broad range of uncertainties and risks. Most notably, the global patchwork of differing economic developments and local flashpoints such as in Ukraine may be mentioned as causal factors here. These disparities are being further exacerbated by the precipitous fall in the price of oil, which has a beneficial economic effect on countries with a large appetite for energy but jeopardises the budgets of oilproducing nations.
The euro dropped sharply year-on-year against the US dollar from USD 1.38 to USD 1.22. It similarly depreciated considerably against the pound sterling as well as the Australian and Canadian dollar, especially in the second half of the year. This can be attributed in large measure to the prevailing low level of returns offered by the euro area, but also reflects the minimal expectations as to a recovery any time soon.
In addition, (re)insurers were heavily preoccupied in the year under review with the impending implementation of the Solvency II Directive – which is now planned for 2016. Most significantly, the preparations for the new requirements presented companies with considerable challenges: in 2014, for example, a stress test was conducted under Solvency II conditions by the European regulator EIOPA (European Insurance and Occupational Pensions Authority) – supported inter alia by Germany’s Federal Financial Supervisory Authority (BaFin) – as a form of dress rehearsal for insurance undertakings. The participants on the German side included property / casualty as well as life and health insurers. It was evident from the test that the reinsurance industry, in particular, meets and in some cases comfortably surpasses all requirements to the necessary extent.
The announced reform of the UK Pensions Act by the Chancellor of the Exchequer in March of the year under review caused a stir in that country’s pensions market. For the longevity (re) insurance industry, it means that the current tried and tested insurance solutions will have to be reworked and modified in line with the changed conditions and requirements.
Generally speaking, though, the favourable development of longevity business in Europe – including for example in France, Spain and Scandinavia – has given grounds for satisfaction. Stronger demand for reinsurance protection in this segment has reaffirmed our expectation that due to shifts in demographics the insurance market for longevity risks offers a promising business potential which extends well beyond the borders of the United Kingdom.
In 2014 the industry incurred relatively slight insured losses from extreme weather events. A winter storm that impacted Japan in February was the most expensive natural catastrophe for the (re)insurance sector, measured by the total economic losses. In Europe storm Ela, which swept across France, Belgium and western Germany over the Pentecost weekend, caused the heaviest losses.
We are thoroughly satisfied with the development of our business in the year under review. We further improved on the record profit of 2013 and – at EUR 985.6 million – achieved the highest ever Group net income in company history. This is especially gratifying in view of the fact that market conditions for reinsurers in the financial year just ended were even more challenging than in the comparable period and the protracted low level of interest rates has curtailed opportunities to generate returns on the investment side.
The operating profit (EBIT) normalised in the reporting period and reached a level of EUR 263.8 million (EUR 150.5 million). The sharp rise of 75.3% year-on-year was due largely to reduced strengthening of reserves as well as lower losses in Australian disability business. The EBIT margin for mortality and morbidity business consequently developed favourably in the reporting period compared to the previous year, but at 4.8% it still fell short of our 6% target. Financial solutions and longevity business, on the other hand, which delivered EBIT margins of 6.5% and 2.9% respectively, comfortably beat their 2% target and clear reflected the pleasing profitability of the underlying business.
Despite the sustained low level of interest rates, ordinary investment income excluding interest on funds withheld and contract deposits came in at EUR 1,068.4 million, a slightly higher level than in the previous year (EUR 1,041.3 million). Interest on funds withheld and contract deposits improved to EUR 376.1 million (EUR 357.3 million).
Gross premium growth (Group) stable to slightly higher gross premium volume 1
+1.2% at constant exchange rates +1.1% not adjusted for currency effects
+4.9% at constant exchange rates +5.1% not adjusted for currency effects
Group net income ≈ EUR 850 million 4 EUR 985.6 million 1 At constant exchange rates 2 Organic growth only 3 Excluding inflation swaps and ModCo derivatives 4 Assuming stable capital markets and / or major loss expenditure in 2014 that does not exceed EUR 670 million
• Highest-ever Group net income of EUR 829.1 million • Major loss expenditure significantly below expectations at EUR 425.7 million • Pleasing combined ratio of 94.7% • Currency-adjusted premium growth of +1.2% according to plan
Executive Board, as a result of which the composition of our Board areas of responsibility – “Target markets”, “Specialty lines worldwide” and “Global reinsurance” – differs somewhat from the previous year in terms of markets and regions.
Key figures for Property & Casualty reinsurance M 06 in EUR million previous year
Earnings per share in EUR 6.88 +2.7% 6.70 5.68 3.78 4.82 1 Adjusted pursuant to IAS 8 2 Operating result (EBIT) / net premium earned 3 Including expenses on funds withheld and contract deposits
Geographical breakdown of gross written premium M 08 in 2014 3.5% Africa 24.8% North America 20.3% Rest of Europe 16.1% Asia 13.3% United Kingdom 12.4% Germany 7.4% Latin America
1 Natural catastrophes and other major losses in excess of EUR 10 million gross (until 31 December 2011: in excess of EUR 5 million gross)
Even though the hurricane season in North America and the Caribbean again passed off thoroughly innocuously, the year under review still saw a number of natural catastrophe events. In Western Europe the heaviest losses were caused by storm Ela, with a net strain of EUR 49.1 million for Hannover Re’s account. These and other major losses (see also page 88) resulted in net loss expenditure for our company totalling EUR 425.7 million (EUR 577.6 million), a figure well below our expected level of EUR 670 million.
We improved further on the good combined ratio of the previous year (94.9%) to post a figure of 94.7% in the year under review, once again comfortably beating the target mark of 96%. The underwriting result including administrative expenses also showed another modest improvement to reach EUR 351.5 million (EUR 335.5 million).
Investment income in the Property & Casualty reinsurance group climbed in the year under review by a very pleasing 8.0% to EUR 843.6 million (EUR 781.2 million). The operating profit (EBIT) increased by 12.2% to EUR 1,190.8 million, clearly demonstrating that profitability was maintained on a high level even in such a competitive environment. Group net income for the Property & Casualty reinsurance business group, which had been positively influenced by a tax effect in the previous year, improved again to EUR 829.1 million (EUR 807.7 million); this is the highest figure ever recorded. Earnings per share stood at EUR 6.88 (EUR 6.70) for this business group.
On the following pages we report in detail on developments in the individual markets and lines of our Property & Casualty reinsurance group, which is split into the three areas of Board responsibility referred to at the beginning of this section.
Property & Casualty reinsurance: Key figures for individual markets and lines in 2014 M 12
Credit, surety and political risks 531.4 -10.3% 592.5 87.2 92.2% 96.0%
UK, Ireland, London market and direct business 442.0 -21.2% 561.2 (12.8) 110.3% 95.5%
Structured reinsurance and Insurance-linked securities 917.7 48.6% 617.8 102.6 94.1% 99.4%
The pressure on rates similarly intensified in US casualty business in the year under review. Under proportional programmes conditions also deteriorated for reinsurers. This included instances of coverage extensions, more limits of liability or increased cost reimbursements.
Even though no particularly notable loss events occurred in the casualty sector, the greater awareness of cyber-risks – given the topicality of this issue – will trigger stronger demand in this area.
Continental Europe We group together the markets of Northern, Eastern and Central Europe as Continental Europe. The largest single market here is Germany. The premium volume for our business in Continental Europe in the year under review came in at EUR 1,406.1 million (EUR 1,456.9 million). The combined ratio stood at 93.1% (106.1%). The operating profit (EBIT) improved to EUR 249.4 million (EUR 40.7 million).
The impact of moves to rehabilitate the motor own damage line was curtailed in the face of heavy losses from storm Ela in June – which also left its mark on homeowners insurance – as well as belatedly reported claims from the storms of the previous year. Yet the line closed in the black for the first time since 2007. Given the increased frequency of extreme weather events in Germany and the associated higher loss expenditure, there is now greater awareness of the resulting risks. Using highly specialised analysis programmes, we assist our customers with the individual exposure mapping of their own damage portfolios and draw on these insights to develop bespoke reinsurance solutions.
Motor liability insurance continued to stabilise in the year under review on the back of tariff increases. Allowing for the run-off from previous years, the combined ratio for the year as a whole is likely to reach a level of 96% market-wide. General liability business in Germany will similarly see the technical income statement close in positive territory.
Once again we made personal accident business a special focus of our attention. In the year under review, for example, we successfully completed development work on our functional disability insurance product for children. Children aged four or older now have access to comprehensive accident and disability coverage encompassing an accident annuity, an annuity for diminished organ function, pension benefits due to the loss of one or more basic skills and pension benefits based on a need for long-term care from care level 1 or higher (LTC annuity). With the aid of the “EsmerIT” underwriting tool that we have developed in-house and make available to our ceding companies free of charge, quick and uncomplicated underwriting can be performed directly at the point of sale.
Property & Casualty reinsurance: Breakdown of gross M 14 written premium in North America by line of business 8.5% Motor 49.6% Property 41.9% Liability
Property & Casualty reinsurance: Breakdown of gross M 15 written premium in Continental Europe by line of business 9.9% Other 36.0% Property 23.5% Liability 30.6% Motor
The loss situation in Germany was once again notable in the year under review for a number of extreme weather events. The largest such loss event was storm Ela in June 2014, which cost the German insurance industry some EUR 650 million.
Rest of Continental Europe European markets are still intensely competitive; this is true not only of countries in Central and Eastern Europe but also of most mature markets such as France. Along with difficult economic conditions, surplus capacities put the insurance industry under strain; rate reductions and poorer conditions were therefore once again a feature of the French market, especially in the industrial lines. We nevertheless succeeded in maintaining our market share, in part by increasing our shares with selected cedants and also by writing additional business in less competitive lines. Hailstorm Ela caused sizeable losses in France and Belgium as well, both in the property lines and in motor own damage.
In Northern European countries the competition was less intense in retail lines than in large industrial programmes, where rates were under pressure. In terms of losses, the region was impacted by another series of extreme weather events in the year under review after experiencing several violent storms in 2013.
Developments in Central and Eastern Europe varied: compared to Western European primary markets, growth rates here are still better than average. Competition therefore remains intense and original rates in most markets are under pressure. On the reinsurance side, however, it was again possible to obtain riskappropriate rates and conditions in the year under review and hence we were able – as forecast – to enlarge our premium volume. On the claims side the region was impacted by numerous small and mid-sized events. In addition, more sizeable losses resulted from an explosion at a refinery in Russia, flooding in Southeast Europe and a hailstorm in Bulgaria.
The premium volume for specialty lines contracted in the year under review from EUR 2,716.8 million to EUR 2,575.6 million. The combined ratio deteriorated from 93.0% to 100.2%. The operating profit (EBIT) for specialty lines fell to EUR 169.4 million (EUR 339.6 million).
Marine After years of heavy expenditure on major losses such as the wrecked cruise ship “Costa Concordia” and Superstorm Sandy, which had led to marked rate increases, marine business now finds itself at the onset of a soft market phase. In the case of offshore energy risks, where the last significant major losses date back even further, the rate decline was consequently even more appreciable.
Surplus capacities were especially prevalent in the hull market in the year under review. Cargo covers, which had long been rather profitable for most ceding companies, proved less attractive in the financial year just ended. Declining profitability was evident in the energy offshore segment: after the low loss burdens and associated good results recorded in recent years, rates here saw marked decreases running into doubledigit percentages.
The loss situation in the year under review was dominated above all by the removal of the wreck of the “Costa Concordia”, which led to a significantly increased market loss of around EUR 1.5 billion. In view of this, we strengthened our reserves by an additional EUR 23 million to almost EUR 82 million in total. The loss expenditure for the wrecked container vessel “Rena” similarly came in higher than originally estimated.
The sum total of airline losses far exceeded the corresponding annual premium. Despite this, the ensuing rate increases fell short of expectations owing to both existing and new capacities. Depending on the risk, original business in the airline segment presented a very mixed picture that ranged from stable premiums to significant rate increases. Nor could a single unambiguous trend be discerned in general aviation business, although further rate declines under existing business were largely avoided. Given recent loss events, expectations for price increases were especially high when it came to war covers. While we did observe premium increases in this segment, they did not match up to our expectations.
In terms of our underwriting strategy, we retained a clear focus on non-proportional business; we operate here as one of the market leaders, contrasting with the selective approach that we adopt in our underwriting of proportional business.
The premium volume for our total aviation portfolio contracted sharply to EUR 364.0 million (EUR 401.7 million).
Credit, surety and political risks Hannover Re ranks among the market leaders in worldwide credit and surety reinsurance.
Although the prevalence of mid-sized losses in the surety line was considerably diminished in the year under review compared to 2012 and 2013, the losses recorded in previous years failed to bring about a fundamental improvement in conditions owing to the intensely competitive climate. Under loss-free programmes conditions came under pressure, and a trend towards rising retentions was evident.
Direct business We also write direct business through our subsidiary in the United Kingdom, International Insurance Company of Hannover SE (Inter Hannover). This essentially involves tightly defined portfolios of niche or other non-standard business that complements our principal commercial activity as a reinsurer.
Compared to 2013, the economic climate in the United Kingdom once again failed to show any significant improvement. The brisk competition among insurers and reinsurers writing business in this market continued to intensify. Inevitably, this was reflected in a declining rate level in many lines. Most lines suffered under rate erosion, including not only motor insurance but also private homeowners insurance and commercial covers for small and mid-sized businesses. We responded by further trimming our exposures from agency acceptances in these areas in 2014.
Inter Hannover’s business written in Sweden again performed satisfactorily overall in 2014 despite a number of sizeable losses in the aviation sector. The development of business at the branches in Australia and Canada – markets which are highly competitive – was in line with expectations.
The gross premium booked from the United Kingdom, London market and direct business contracted from EUR 561.2 million to EUR 442.0 million. The combined ratio stood at 110.3% (105.9%). The operating result (EBIT) slipped into negative territory at -EUR 12.8 million (EUR 6.8 million).
Price drops were most marked in property business, as in the case of fire and construction risks, and in the energy lines. Less significant decreases were recorded in liability business and in specialty lines such as personal accident and sports covers.
The premium volume increased in the year under review by 9,8% to EUR 2,708.4 million (EUR 2,466.9 million). This is in line with our forecast of continuous and stable growth. The combined ratio deteriorated slightly from 90.8% to 91.6%. The operating profit (EBIT) improved from EUR 444.3 million to EUR 513.8 million.
Asia-Pacific region The Asia-Pacific countries continue to be a growth region for Hannover Re, and with this in mind we further expanded our position in the year under review. Developments in the individual markets varied widely; the region was the scene of increasing competition on account of the available growth opportunities. Although the loss expenditure incurred in certain markets was striking, it can still be assessed as satisfactory overall.
In Japan, a key market for our company, continued market consolidation led to a contraction in ceded reinsurance premiums – a trend which also impacted Hannover Re. Thanks to our broadly diversified product range and our long-standing loyalty to our Japanese cedants, however, we successfully set ourselves apart from our competitors. Conditions came under pressure after the light losses incurred in both 2012 and 2013, but they are still adequate. Our premium volume was down slightly as planned.
The Chinese insurance market again delivered double-digit percentage growth in the year under review. Hannover Re, which is present in the country with a locally licensed branch, was able to successfully pursue the strategy that it had followed in previous years – namely consolidating its business relationships with selected clients. The development of our Chinese portfolio received a boost from discussions surrounding the adoption of a nuanced system of solvency requirements (C-ROSS), which will benefit local reinsurance placements going forward. All in all, the market remained highly competitive, as reflected not only in original business but also in conditions for reinsurance treaties. Our selective underwriting policy nevertheless enabled us to further enlarge the premium volume. Given the absence of sizeable losses, we are satisfied with the result in the year under review.
In South and Southeast Asia we were again able to significantly improve our market penetration. Almost all the primary markets in this region are growing disproportionately strongly compared to the more mature Asian markets. Key drivers here are, above all, the rising insurance density and urbanisation.
Other Asian markets such as Korea, Taiwan and Hong Kong delivered a pleasing result with stable or slightly lower premium income.
South Africa Our business in South Africa is written through our subsidiary Hannover Reinsurance Africa Limited. This market is notable for what is still a relatively low insurance density; most vehicles on public roads, for example, are uninsured. While a large section of the population has not taken out any insurance for property damage or bodily injury, the situation with respect to commercial undertakings is nevertheless comparable with that of industrial nations.
The insurance market only grew in step with inflation in the year under review. Competition remains intense, thereby curtailing profitability. The underwriting result for the insurance market nevertheless closed in marginally positive territory in 2014. A number of major losses occurred in the reporting period, primarily impacting reinsurers – and hence also our subsidiary Hannover Re Africa. Yet the company was still able to generate a modestly positive business result thanks to its disciplined underwriting approach.
We also write direct business in South Africa. These activities are conducted through Compass Insurance Company Limited, a subsidiary for so-called agency business. Although primary insurers were certainly able to push through rate increases for existing business based on a higher level of retained premium, it cannot be assumed that general hardening of the market has set in. What is more, the industry suffered a number of substantial major losses in the year under review. Despite the difficult environment prevailing in the South African market overall, Compass Insurance Company Limited succeeded in delivering a positive result.
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 we are present with a representative office, as well as Mexico, Argentina, Colombia and Ecuador.
Movements in reinsurance rates varied; prices differed regionally from country to country and also by lines. Particularly in property business, larger Latin American markets experienced sometimes marked premium erosion of 10% to 15% under non-proportional treaties and an increase in commissions for proportional covers. We were nevertheless able to act on business opportunities that satisfied our margin requirements. In niche markets where we are market leader there was no decline in prices. In casualty business, where particularly great importance is attached to a reinsurer’s know-how and very good rating, we made the most of growth opportunities in all our markets and stepped up our acceptances.
We succeeded in preserving our market leadership in Argentina despite the restrictions placed on foreign reinsurers. In the English-speaking Caribbean we have been able to enlarge our market share in recent years, while staying firmly focused on the profitability of the business.
Hannover Re continues to be one of the largest providers of agricultural covers and also plays an active role in product development. We entered into cooperative ventures with governments and international organisations in the year under review with a view to expanding protection for agricultural risks.
We were successful in our efforts to further diversify the portfolio mix in terms of both countries and lines of business; a contributory factor here, for example, was an enlarged proportion of microinsurance products.
Retakaful business We write retakaful business, i. e. reinsurance transacted in accordance with Islamic law, both on the Arabian Peninsula and in Southeast Asia. We are present in Bahrain with a dedicated subsidiary for this business and also maintain a branch responsible for writing traditional reinsurance in the Arab world. All in all, we are satisfied with the development of our business.
The largest loss event for our company in the year under review was a fire which caused extensive damage to a large bakery plant in Saudi Arabia.
The gross premium volume for our global catastrophe business contracted by 16.6% in the year under review to EUR 310.0 million (EUR 371.5 million). The combined ratio improved to 39.3% (49.5%). The operating profit (EBIT) came in at EUR 185.6 million (EUR 188.2 million).
In keeping with our objective we pressed ahead with the enlargement of our customer base and further improved the regional diversification of our portfolio in the year under review. We also stepped up our involvement in the area of corporate captives. Quota share arrangements in motor business designed to provide solvency relief continued to enjoy brisk demand.
Insurance-linked securities (ILS) Demand on the capital market for ILS products shows no signs of easing. Thus, for example, we were able to renew our “K cession” – a modelled quota share cession consisting of nonproportional reinsurance treaties in the property, catastrophe, aviation and marine (including offshore) lines that we have placed inter alia on the ILS market for 20 years now – on an unchanged level of roughly USD 320 million for 2014.
The available funds currently exceed by far the opportunities for new investments in catastrophe bonds. This has prompted investors to look for other means of investing in the reinsurance sector. So-called collateralised reinsurance programmes again enjoyed particularly strong growth in the year under review and surpassed the volume of funds invested in catastrophe bonds. Under collateralised reinsurance business the investor assumes reinsurance risks that are normally collateralised in the amount of the limit of liability.
In the year under review we continued to expand our cooperation with selected managers of investor funds in the area of collateralised reinsurance business and thereby generated attractive margins. When it comes to investing in catastrophe bonds, on the other hand, we showed restraint on account of the sharp decline in prices.
Our strategic business group of Life & Health reinsurance accounted for 45% (previous year: 44%) of Group gross premium in the financial year just ended. This clearly shows the significant role played by these lines in Hannover Re’s overall portfolio. Thanks to partnership-based business relationships with our customers, our expertise and our worldwide presence, we not only identify trends and new markets; we also shape them and generate sustained, profitable growth.
Total business The international market climate in life and health reinsurance was influenced by a number of different effects in the reporting period just ended. In mature insurance markets such as the United States, Germany, the United Kingdom, France and Scandinavia the pressure on companies to consolidate increased. The strained state of capital and financial markets was also a factor in the generally moderate development of routine business in these regions. Turning to the major emerging and growth markets, the implementation of regulatory measures has been – and continues to be – stepped up, thereby increasingly opening up fresh business opportunities. This is especially evident in Asia. The growing prevalence of regulatory changes consistently poses new challenges for the entire international insurance sector. In many instances established product solutions have to be reworked or even entirely redesigned in order to satisfy the new requirements for all parties concerned. With this in mind, the development of Hannover Re’s life and health reinsurance business was very pleasing.
Our gross premium income for the year under review totalled EUR 6,458.7 million (EUR 6,145.4 million). This represents an increase of 5.1%. With growth of 4.9% adjusted for exchange rate fluctuations, we almost achieved the anticipated currencyadjusted gross premium growth of 5% to 7%. The level of retained premium developed as planned in the financial year just ended to stand at 83.9% (87.7%). Net premium improved slightly by 1.0% to EUR 5,411.4 million (EUR 5,359.8 million). Adjusted for exchange rate effects, the change in net premium would have been 0.7%.
Investment income in life and health reinsurance consists of two earnings components: on the one hand, from our assets under own management and, secondly, from securities deposited with ceding companies. In the financial year just ended income of EUR 258.5 million (EUR 269.1 million) was generated from the assets under own management, while the income from securities deposited with ceding companies came in at EUR 355.7 million (EUR 342.4 million). Taken together, the investment income in life and health reinsurance climbed by a modest 0.4% to EUR 614.2 million (EUR 611.5 million). This performance is especially gratifying in view of the protracted low level of interest rates and the correspondingly strained state of capital markets.
The development of the operating result (EBIT) was highly pleasing. Compared to the previous year – which had been substantially impacted by losses in Australian disability business – EBIT surged by a significant 75.3% and has now normalised relative to 2013 at EUR 263.8 million (EUR 150.5 million).
Earnings per share in EUR 1.70 +24.8% 1.36 1.84 1.51 1.82 1 Adjusted pursuant to IAS 8 2 Operating result (EBIT) / net premium earned
Hannover Re is equipped with long-standing expertise in the financial solutions business segment and ranks as one of the leading providers in a number of markets, including the United States. A special hallmark of our business philosophy is that we make virtually no use of standardised reinsurance solutions. Particularly when it comes to financial solutions transactions, we offer financing solutions as well as concepts designed to provide relief for capital and reserves that are individually tailored to our customers’ needs. This has enabled us to further enlarge our portfolio and generate a pleasing profit contribution. The rigorous and complex supervisory requirements in the US insurance market, which is one of the most highly developed in the world, are the key factor driving the stable strong demand for financial solutions and the pleasing development of this business segment. In addition, we again significantly expanded our financial solutions business in Asia – most notably in Japan and China. Not only that, we are also enjoying successes on the African continent, where we assumed a substantial portfolio of life insurance policies from a leading South African client. Traditional new business financing arrangements in Europe – including Southern and Eastern Europe – were another key driver of this segment in the reporting period just ended. We benefited here from lively demand for individual, innovative financing solutions.
Breakdown of gross written premium M 23 by reporting categories in EUR million
EBIT-margin per reporting category M 24 vs. target margins 2014 in %
Value of New Business (VNB) growth M 22 in EUR million
Mortality and morbidity In the following section we present a consolidated account of the mortality and morbidity reporting categories. In view of the fact that in the international (re)insurance markets these two risk types are frequently covered as part of the same business relationship or even under the same reinsurance treaty, it makes sense to consider them together.
Mortality The mortality reporting category encompasses our mortalityexposed business, which traditionally constitutes the core business of life and health reinsurance and accounts for the largest share of our total life and health reinsurance portfolio. The risk that we assume as a reinsurer is that the actually observed mortality may diverge negatively from the expected mortality. The US mortality market ranks as one of our most important markets. We are present here with our subsidiary and have been an established and sought-after business partner for more than 30 years.
Our new business in the US developed broadly as we had anticipated. The positive performance of large parts of our existing business was cancelled out by elevated risk experiences in the in-force portfolio covering policies from before 2005. On balance, this business fell somewhat short of our expectations.
On the whole, morbidity business normalised in 2014 after the adverse impacts of Australian disability risks in the previous year. The intensive efforts undertaken market-wide to counteract the elevated risk experiences brought about the first positive movements: it will, however, likely taken further time before the underlying treaties deliver consistently profitable results. It is nevertheless gratifying to note the reversal of the unfavourable trend, which suggests the onset of an encouraging upswing in results going forward. Other regions of the world, for the most part, are meanwhile playing a positive part in the growth of morbidity business. In the Netherlands, for example, we have assumed appreciable premium volumes under disability risk coverage. Demand for disability policies was similarly strong in Asian markets. In Korea we recorded poorer than anticipated risk experiences for our assumed morbidity business. The general rise in demand for long-term rate guarantees for such risks therefore necessitates a more selective underwriting policy. In the Indian market the growth of microinsurance business in the health insurance sector was very pleasing. These developments are reflected in highly gratifying premium growth of 37.7%. Gross premium income in the financial year surged sharply to EUR 1,202.1 million (EUR 872.9 million).
Investments • Return on investment somewhat better than forecast at 3.3% • Ordinary income slightly higher despite low interest rates • Sharp rise in valuation reserves
Ordinary investment income excluding interest on funds withheld and contract deposits showed a pleasing development to reach EUR 1,068.4 million (previous year: EUR 1,041.3 million ) despite the continued low level of interest rates. Interest on funds withheld and contract deposits improved slightly on the previous year to EUR 376.1 million (EUR 357.3 million). Net realised gains on disposals were considerably higher than in the previous year at EUR 182.5 million (EUR 144.2 million). This was due in part to the change in reporting currency at our Bermuda subsidiaries, the redemption of our bond issued in 2004 and regrouping moves as part of regular portfolio management, although we also acted on opportunities in the real estate sector.
We recognise a derivative for the credit risk associated with special life reinsurance treaties (ModCo) under which securities deposits are held by cedants for our account; the performance of this derivative in the year under review gave rise to negative fair value changes recognised in income of EUR 6.8 million, as against positive fair value changes recognised in income of EUR 7.4 million in the previous year. The inflation swaps taken out to hedge part of the inflation risks associated with the loss reserves in our technical account produced negative fair value changes of EUR 28.8 million (-EUR 41.0 million) over the course of the year. These fair value changes are recognised in income as a derivative pursuant to IAS 39. We assume an economically neutral development for these two items, and hence the volatility that can occur in specific reporting periods has no bearing on the actual business performance. Altogether, the negative changes in the fair values of our financial assets recognised at fair value through profit or loss amounted to EUR 33.3 million (EUR 27.1 million).
dation for the asset allocation of the entire Hannover Re Group and the individual portfolios. In addition, we ensure that we are able to meet our payment obligations at all times. Within the scope of our asset / liability management (ALM) the allocation of investments by currencies and maturities is determined by the technical liabilities. The modified duration of our bond portfolio is geared largely to the technical liabilities.
By adjusting the maturity pattern of our fixed-income securities to the expected payment patterns of our liabilities we reduce the economic exposure to the interest rate risk. In the current reporting period we slightly increased the modified duration of our fixed-income portfolio, as a result of which it stood at 4.6 (previous year: 4.4) as at 31 December 2014. Furthermore, through active and regular management of the currency spread in our fixed-income portfolio we bring about extensive matching of currencies on the assets and liabilities sides of the balance sheet, as a consequence of which fluctuations in exchange rates have only a limited effect on our result.
At year-end 2014 we held 36.9% (40.7%) of our investments in euro, 41.4% (38.0%) in US dollars, 8.5% (8.3%) in pound sterling and 5.2% (4.9%) in Australian dollars.
Our portfolio of assets under own management grew considerably more strongly than expected in the course of 2014; it closed significantly higher than the previous year’s level at EUR 36.2 billion (EUR 31.9 billion). This was based in part on a rise in the valuation reserves against the backdrop of the observed yield declines on government bonds in our main currency areas. Above all, though, the weakness of the euro against the major investment currencies substantially accentuated this effect; the cash flow was once again gratifyingly positive.
Compared to the previous year, we kept the allocation of our assets to the individual classes of securities largely unchanged. We merely moved to further slightly increase the share attributable to real estate as part of the strategic expansion of this asset category and scaled back the proportion of covered bonds in favour of corporate bonds. In all other classes we made only minimal changes in the context of regular portfolio maintenance.
Holdings of alternative investment funds increased slightly. As at 31 December 2014 an amount of EUR 684.9 million (EUR 574.3 million) was invested in private equity funds, a further EUR 551.5 million (EUR 402.9 million) predominantly in high-yield bonds and loans; in addition, altogether EUR 373.7 million (EUR 252.1 million) was invested in structured real estate investments. The uncalled capital with respect to the aforementioned alternative investments totalled EUR 716.3 million (EUR 598.5 million).
We were again able to increase our real estate allocation somewhat in the course of the year. Various properties in Germany and Central / Eastern Europe were acquired for this purpose; further projects are under review, and the real estate allocation will therefore keep rising steadily as planned. Despite selective sales in the course of the reporting period, it currently stands at 3.9% (3.6%).
At the end of the year under review we held a total amount of EUR 1.3 billion (EUR 1.2 billion) in short-term investments and cash. Funds withheld amounted to EUR 15.9 billion (EUR 14.3 billion).
The technical provisions and liabilities shown above, which include funds withheld / contract deposits and reinsurance payable, make up 77.6% (78.4%) 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 13.7% (12.1%) of the balance sheet total as well as the loans and – especially – subordinated capital at altogether 3.8% (4.6%) of the balance sheet total represent our most important sources of funds.
Hannover Re is guided in its capital management by the requirements and expectations of the rating agencies that assess the Group with an eye to its targeted rating. Furthermore, while making appropriate allowance for business policy considerations and factors that influence market presence, the allocation of capital to the Group’s operational companies is based upon the economic risk content of the business group in question. The Group companies are also subject to national capital and solvency requirements. All Group companies met the applicable local minimum capital requirements in the year under review. Adherence to these capital requirements is continuously monitored by the responsible organisational units on the basis of the latest actual figures as well as the corresponding planned and forecast figures. If, despite the capital allocation mechanisms described above, a scenario occurs in which there is a danger of minimum capital requirements being undershot, suitable options are immediately discussed and measures set in motion to counteract such an eventuality. From the Group perspective we manage Hannover Re’s solvency using our internal capital model, which is described in greater detail on page 75 et seq. of the opportunity and risk report.
In view of the very favourable result, the development of the shareholders’ equity of the Hannover Re Group was highly pleasing. Compared to the position as at 31 December 2013, it surged by an appreciable EUR 1,722.9 million – or 26.4% – in the year under review to EUR 8,253.0 million. After adjustment for non-controlling interests, it rose by EUR 1,662.3 million to EUR 7,550.8 million. The book value per share increased accordingly by 28.2% to EUR 62.61. The changes in shareholders ’ equity were shaped chiefly by the following developments: Net unrealised gains on investments stood at EUR 1,169.3 million, a sharp rise of EUR 635.5 million compared to the beginning of the year under review. This increase was mainly due to gains realised on corporate and government bonds as a consequence of the reduced interest rate level.
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 2,270.3 million (EUR 2,465.0 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 cancelled and repaid at the first scheduled call date the subordinated debt
Amortised cost of our subordinated bonds M 32 in EUR million Issue date Coupon in %
Hannover Finance (Luxembourg) S.A., subordinated debt, EUR 500 million; 2012 / 2043 20.11.2012 5.00 496.9 496.7
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 144 et seq.
Cash flow from operating activities The cash flow from operating activities, which also includes inflows from interest received and dividend receipts, amounted to EUR 1,930.9 million in the year under review as opposed to EUR 2,225.5 million in the previous year. The decrease of EUR 294.6 million in the net inflow year-on-year – despite the modest rise in net premium – was attributable mainly to increased losses paid for hailstorm Andreas as well as for US mortality and senior health insurance business.
Cash flow from investing activities Making allowance for dividend payments and financing measures, the high cash flow from operating activities recorded in the year under review – as in the previous year – was for the most part invested in an amount of EUR 1,195.3 million (EUR 1,761.5 million) in additional investments while at the same time preserving the asset structure. The area of fixedincome securities saw particularly elevated activity compared to the previous year, attributable in part to the regrouping of the investment portfolio from EUR into USD at our subsidiaries in Bermuda and partly also to our repurchase and issuance of new subordinated debt.
Overall, allowing for the changes in the consolidated group, the cash and cash equivalents therefore increased year-on-year by EUR 130.0 million to EUR 772.9 million.
For further information on our liquidity management please see 97 of the risk report.
Hannover Rück SE, subordinated debt, EUR 500 million; 2014 / undated A a
Hannover Finance (Luxembourg) S.A., subordinated debt, EUR 500 million; 2012 / 2043 A a+
Hannover Finance (Luxembourg) S.A., subordinated debt, EUR 500 million; 2010 / 2040 A a+
The following companies hold direct or indirect capital participations that exceed 10% of the voting rights: Talanx AG, Riethorst 2, 30659 Hannover, holds altogether 50.2% (rounded) of the company’s voting rights, with 12.0% (rounded) thereof held indirectly. HDI-Haftpflichtverband der Deutschen Industrie Versicherungsverein auf Gegenseitigkeit, Riethorst 2, 30659 Hannover, which holds a stake of 79.0% in Talanx AG, therefore indirectly holds 39.7% (rounded) of the voting rights in the company.
The powers of the Executive Board with respect to the issue and repurchase of shares are defined in the Articles of Association of Hannover Rück SE as well as in §§ 71 et seq. Stock Corporation Act. In this connection the Annual General Meeting authorised the Executive Board on 4 May 2010 pursuant to § 71 Para. 1 Number 8 Stock Corporation Act to acquire treasury shares on certain conditions for a period of five years, ending on 3 May 2015.
The following paragraphs explain major agreements concluded by the company that are subject to reservation in the event of a change of control, inter alia following a takeover bid, and describe the resulting effects. The letter of credit lines extended to Hannover Rück SE contain standard market change-of-control clauses that entitle the banks to require early repayment if Talanx AG loses its majority interest or drops below the threshold of a 25% participation or if a third party acquires the majority interest in Hannover Rück SE. For details of the letter of credit lines please see our explanatory remarks on other financial facilities in the notes, Section 6.12 “Debt and subordinated capital”, page 213.
In the 2013 reporting year Hannover Re for the first time availed itself of the option to present a combined Group and company management report pursuant to § 315 Para. 3 of the Commercial Code (HGB) in conjunction with § 298 Para. 3 of the Commercial Code (HGB). Supplementary to the reporting on the Hannover Re Group, we discuss below the development of Hannover Rück SE.
The annual financial statement of Hannover Rück SE – from which the balance sheet and profit and loss account in particular are reproduced here in condensed form – has been submitted to the operator of the electronic Federal Gazette and can be accessed via the webpage of the Companies Register. This annual financial statement may be requested from Hannover Rück SE, Karl-Wiechert-Allee 50, 30625 Hannover, Germany.
The 2014 financial year was a very pleasing one for Hannover Rück SE. The gross premium of Hannover Rück SE in total business contracted by a modest 1.7% to EUR 10.9 billion (previous year: EUR 11.1 billion). The level of retained premium increased from 75.2% to 79.3%. Net premium earned grew by 3.3% to EUR 8.5 billion (EUR 8.2 billion).
The underwriting result for total business (before changes in the equalisation reserve) declined in the year under review from -EUR 4.7 million to -EUR 15.0 million. An amount of EUR 277.6 million (EUR 267.7 million) was allocated to the equalisation reserve and similar provisions.
The profit on ordinary activities increased to EUR 597.8 million (EUR 380.1 million). The year under review closed with a profit for the year of EUR 421.2 million (EUR 367.2 million).
Fire Total gross premium income for the fire line contracted by 5.6% in the 2014 financial year to EUR 1,298.2 million (EUR 1,375.7 million). The net loss ratio improved in the year under review from 64.0% to 61.4%. The underwriting profit climbed to EUR 140.3 million (EUR 105.3 million). An amount of EUR 186.6 million (EUR 148.4 million) was allocated to the equalisation reserve and similar provisions.
Casualty Gross premium in casualty business fell by 4.3% to EUR 1,174.7 million (EUR 1,228.0 million). The loss ratio increased from 96.6% to 104.5%. The underwriting result consequently slipped back to -EUR 276.0 million (-EUR 209.8 million ). An amount of EUR 88.7 million was withdrawn from the equalisation reserve and similar provisions in the year under review; the withdrawal in the previous year had totalled EUR 34.2 million.
Accident Gross premium decreased by 12.8% to EUR 316.0 million (EUR 362.2 million). Profitability was gratifying: the very good loss ratio of 52.8% in the previous year was maintained fairly stable in the year under review at 57.4%. The underwriting result came in at a very pleasing EUR 32.2 million, after EUR 31.9 million in the previous year. An amount of EUR 2.9 million was allocated to the equalisation reserve and similar provisions, following an allocation of EUR 2.5 million in the previous year.
Motor The gross premium volume for the motor line climbed by a very substantial 44.0%% to EUR 941.7 million (EUR 653.8 million) following the assumption of a large motor quota share arrangement in China. The loss ratio improved to 39.1% (78.9%). The underwriting result consequently increased sharply year-onyear to EUR 138.2 million (-EUR 21.2 million). An amount of EUR 69.3 million was allocated to the equalisation reserve and similar provisions in the year under review, after a withdrawal of EUR 37.2 million in the previous year.
C om bi ne d m an ag em en t re po rt
Life Gross premium income in the life line grew by 4.8% in the financial year just ended to EUR 4.1 billion (EUR 3.9 billion). The business climate in the largely saturated insurance markets of Western Europe was highly challenging. The steady premium erosion observed in particular in connection with a number of large treaties was therefore sustained in the year under review. In Asian markets, on the other hand, the premium development was pleasing and played a correspondingly positive part in the increased gross premium volume.
The underwriting result improved appreciably on the previous year’s figure of -EUR 53.6 million to reach -EUR 19.5 million. Most strikingly, the steps that we have taken to stabilise results in Australian disability business clearly bore fruit in the year under review. In general terms, our portfolio developed very much in line with our expectations, with longevity business performing even better than anticipated.
Balance sheet structure of Hannover Rück SE M 48 in EUR thousand 2014 2013
A dividend of EUR 3.00 per share, equivalent to EUR 361.8 million (EUR 361.8 million), was paid in the year under review for the 2013 financial year.
In view of the interrelations between the parent company and the Group companies and the former’s large share of business within the Group, we would refer here to our remarks contained in the section entitled “Outlook for 2015” on page 136, which also reflect in particular the expectations for Hannover Rück SE. In terms of the dividend for the current financial year, we envisage a payout ratio in the range of 35% to 40% of the IFRS Group net income. This ratio may increase in light of capital management considerations if the present comfortable level of capitalisation remains unchanged.
The effects of shifting demographics are making themselves felt in our company, just as they are in the wider world. For this reason another focus of our attention when it comes to updating our training programme is on aspects of health and performance capability as well as on supporting our staff in the later phase of their working life. To this end, we introduced a seminar to share knowledge about health impacts on business performance and raise awareness of resilience factors. Participants get to know their own personal resources that can sustain them in a healthy lifestyle and help them to preserve their long-lasting performance potential. Another newly launched seminar is aimed specially at members of staff who will be retiring in the next few years. Entitled “Purposefully shaping the transition to retirement”, it helps these employees to tackle their final years with the company proactively and prepare for retirement. On the one hand, then, this seminar leverages sources of potential for the company, while at the same time expressing the considerable esteem in which we hold such members of staff for their many years of dedication.
With this in mind, in 2011 we drew up a Sustainability Strategy for Hannover Re in which we explicitly committed to our strategic objective of sustainable value creation. This Sustainability Strategy is based on the implementation of all compliance requirements and fleshes out in more concrete terms the higher-level corporate strategy of the Hannover Re Group. We systematically adhered to this Sustainability Strategy in the 2014 financial year. The inclusion of Hannover Re in the internationally recognised sustainability index FTSE4Good in the fourth quarter of 2014 is a testament to our achievements.
Sustainable action is not, however, something which is static; rather, it must take place dynamically and in accordance with changing environmental circumstances. In conformity with the Group Strategy, therefore, our sustainability considerations are regularly reviewed every three years and revised as necessary. Going forward, our refined Sustainability Strategy for the years 2015 to 2017 defines the following four action fields as well as specific goals and measures: • Governance and dialogue
As an internationally operating company, Hannover Re bears responsibility in various senses. This is true of its compliance with relevant laws and regulations, but also applies to its relationship with staff, shareholders, the public at large and the cultures within which the company operates. In this respect, the Group Strategy, our Corporate Governance principles and the defined Code of Conduct form the basis of our enterprise management. As a European company (SE) based in Germany, the formal framework that shapes our corporate governance is determined by national (German) law. Consequently, the company’s management structure is composed of three bodies: the Executive Board, the Supervisory Board and the General Meeting. Their interaction is regulated by law and by the company’s articles of association.
In addition to our continuous engagement with the changing legal framework conditions, since 2003 we have provided an annual Declaration of Conformity with the German Corporate Governance Code (DCKG); this is published on our corporate website and can also be found on page 101 et seq. of the present Annual Report. The Corporate Governance principles of
In 2014 Hannover Re’s sustainability performance was again evaluated by the rating agency Oekom Research; our company was awarded “Prime” status in recognition of its above-average fulfilment of industry-specific requirements. In addition, Hannover Re was added to the worldwide FTSE4Good Index Series in the financial year just ended by the FTSE4Good Advisory Committee. The company’s inclusion was based on its sustainability rating according to ESG (environmental, social and governance) criteria for 2014. We have thus achieved another major objective of our Sustainability Strategy.
When it comes to the management of our investment portfolio, we aim to generate a commensurate market return in the interests of our clients and shareholders. This is done in accordance with our Sustainability Strategy by incorporating ESG (environmental, social and governance) criteria into our investment policy. Specifically, since 2012 we have been guided by the ten principles of the United Nations Global Compact and thus also recognise the aspects of human rights, working conditions, the environment and anti-corruption. Since 2013 our investments have been reviewed half-yearly to verify compliance with these ESG standards. If a failure to comply is identified, we part with the instrument in question and exclude it from our investment universe. As we develop and continuously review our investment strategy, we work together with an established service provider that specialises in sustainability.
Hannover Re makes every effort to keep negative environmental impacts of its business operations as low as possible. With this in mind, we focus in particular on reducing carbon dioxide (CO2) emissions from our electricity consumption and the heating of our premises as well as those caused by business travel. Our goal is to operate on a climate-neutral basis at Hannover Home Office by the year 2015. In addition, we are committed to the economical and environmentally friendly use of (raw) materials such as paper and water in our offices. Major steps taken towards achieving this goal were the changeover to power generated from purely renewable sources, the installation of a photovoltaic system on the roof of our main office building in Hannover and the implementation of an environmental management system. Shortly after its launch in 2012 this was successfully certified according to DIN EN ISO 14001; its conformity was recertified in the context of the 2014 maintenance audit.
Hannover Re’s carbon dioxide emissions at its German location in 2014 amounted to 7,798 (previous year: 7,203) tonnes, some 8.3% more than in the previous year. This is equivalent to per capita CO2 emissions of 6.0 tonnes (+2.4% compared to the previous year).
In the financial year just ended, as in prior years, we reported on our climate strategy and our measures to reduce carbon dioxide emissions as part of the international initiative overseen by the Carbon Disclosure Project (CDP).
Gerald Segler is the Director in charge of “Investment and Collateral Management” at Hannover Re
Facultative business – North America Facultative reinsurance refers to the coverage of significant individual risks outside of obligatory reinsurance. In particular, insurers tend to reinsure complex risks of large undertakings with sizeable operating facilities spanning several countries or extensive production processes on an individual risk basis so as to spread the risk exposure worldwide. Our clients, for example, reinsure insurance risks associated with financial groups, real estate companies, undertakings in the food industry, rail operators, municipalities, semiconductor and IT manufacturers, carmakers or airline companies on a facultative basis.
Risk report • We are well capitalised, and our available capital comfortably exceeds the required capital • We are convinced that our Group-wide risk management system gives us a transparent overview of the current risk situation at all times and that we are optimally prepared for Solvency II
In the course of the last financial year we revised our corporate strategy. It encompasses ten fundamental strategic principles which safeguard the realisation of our vision “Long-term success in a competitive business” across the various divisions. For further information on the corporate strategy and the strategic principles in detail please see the section entitled “Our strategy” on page 12 et seq. The following principles of the corporate strategy constitute the key strategic points of departure for our Group-wide risk management: • We manage risks actively.
4. We strive for the highest ERM rating and the approval of our internal model.
10. We assess the risk contribution from new business areas and new products.
Central guidelines: investments, exposure management, central underwriting guidelines (property & casualty, life & health reinsurance) …
Probability of complete loss of economic capital < 0.03% < 0.01%
Regulatory developments: Solvency II is a reform of insurance supervision law in Europe, the implementation of which on 1 January 2016 poses enormous challenges for the entire (re) insurance industry. Along with redefining capital requirements, Solvency II places additional demands on companies’ internal management systems and on the information to be disclosed by undertakings to the regulator and the public at large. Further more specific aspects of Solvency II were defined in 2014, and among other things there is a new draft of the delegated act. Hannover Re has been progressively implementing the new requirements in recent years. Our internal target capitalisation with a confindence level of 99.97% comfortably exceeds the target level of 99.5% under Solvency II. The core functions of Solvency II – the risk management function, the actuarial function, the compliance function and the internal audit function – have been implemented along existing processes and organisational structures at Hannover Re. Additional staff had to be taken on and extra systems deployed as part of the launch phase, first and foremost in order to be able to meet internal and external reporting requirements.
Parallel to the regulatory developments in Europe, we are seeing adjustments worldwide to the regulation of (re)insurance undertakings. It is often the case that various local supervisory authorities take their lead from the principles of Solvency II or the requirements set out by the International Association of Insurance Supervisors (IAIS).
(SCR / MCR *) • Own funds (solvency balance sheet) • Standard model and internal model
Pillar 2 Qualitative requirements • I nternal controls, risk management and key functions • Internal risk assessment • Supervisory review procedure
Hannover Re has long had in place an internal control system, the necessary key functions and extensive risk management. Additional requirements arising out of Solvency II have been implemented progressively in recent years.
Pillar 3 Disclosure requirements • to the regulator and the public • with the goal of market transparency and market discipline
C om bi ne d m an ag em en t re po rt at Risk (VaR) of the economic change in value over a period of one year with a confidence level of 99.97%. This reflects the goal of not exceeding a one-year ruin probability of 0.03%. The internal target capitalisation of the Hannover Re Group is therefore significantly higher than the confidence level of 99.5% which will be required in future under Solvency II. It goes without saying that Hannover Rück SE also meets the current capital requirements set by regulators. The capital adequacy ratio of Hannover Rück SE under Solvency I stood at 136% as at 31 December 2014. Since the corresponding calculation is neither market-consistent nor risk-based a relevant comparison with the coverage ratio under the internal capital model is not possible.
“A+” (Superior, stable outlook) by A.M. Best. Standard & Poor’s evaluates Hannover Re’s risk management as “Very Strong”, the best possible rating. The ratings highlight, in particular, the company’s very good risk management, the consistent and systematic implementation of corporate strategy by management and the excellent capital resources. Hannover Re’s internal capital model is also examined as part of the rating. Based on this review, Standard & Poor’s factors the results of the internal capital model of the Hannover Re Group into the determination of the target capital for the rating.
Capitalisation ratios M 56 1 (Shareholders’ equity + hybrid capital) / net premium earned 2 Hybrid capital / shareholders’ equity 3 EBIT / interest on hybrid capital 4 Net reserves / net premium earned
The following chart provides an overview of the central functions and bodies within the overall system as well as of their major tasks and powers.
Group Risk Management Risk monitoring across the Group as a whole and the business groups of all material risks from the company perspective supported by local risk management functions
Ensures adequacy of the methods used and underlying models in relation to calculation of the technical provisions supported by local actuarial functions
Casualty reinsurance, Life & Health reinsurance and investments Risk steering and original risk responsibility for risk identification and assessment on the divisional and company level 3rd line of defence2nd line of defence2nd line of defence 1st line of defence
Our risk strategy, the Framework Guideline on Risk Management and the system of limits and thresholds for material risks of the Hannover Re Group describe the central elements of our risk management system. The risk management system is subject to a constant cycle of planning, action, control and improvement. Systematic risk identification, analysis, measurement, steering and monitoring as well as risk reporting are especially crucial to the effectiveness of the system as a whole.
Risk identification A key source of information for monitoring risks is the risk identification carried out on a rotating basis. All identified risks are documented in the central register containing all material risks. Risk identification takes the form of, for example, structured assessments, interviews or scenario analyses. External insights such as recognised industry know-how from relevant bodies or working groups are incorporated into the process. Risk identification is important for ensuring that our risk management consistently remains up-to-date.
It is assisted by transparent risk communication and the open handling of risks as part of our risk culture. Risk communication takes the form, for example, of internal and external risk reports, information on current risk complexes in the intranet and training opportunities for staff. The regular sharing of information between risk-steering and risk-monitoring units is also fundamental to the proper functioning of risk management.
Process-integrated / -independent monitoring and quality assurance The Executive Board is responsible for the orderly organisation of the company’s business irrespective of internally assigned competencies. This also encompasses monitoring of the internal risk steering and control system. Process-independent monitoring and quality assurance of risk management is carried out by the internal audit function and external instances (regulators, independent auditors and rating agencies). Most notably, the independent auditors review the trigger mechanism and the internal monitoring system. The entire system is rounded off with process-integrated procedures and rules, such as those of the internal control system.
We organise our business activities in such a way that they are always in conformity with all legal requirements. The internal control system (ICS) is an important subsystem that serves, among other things, to secure and protect existing assets, prevent and reveal errors and irregularities and comply with laws and regulations. The core elements of Hannover Re’s ICS are documented in a Framework Guideline that establishes a common understanding of the differentiated execution of the necessary controls. In the final analysis, it is designed to systematically steer and monitor the implementation of our corporate strategy. The Framework Guideline defines concepts, stipulates responsibilities and provides a guide for the description of controls. In addition, it forms the basis for the accomplishment of internal objectives and the fulfilment of external requirements imposed on Hannover Re. The ICS consists of systematically structured organisational and technical measures and controls within the enterprise. This includes, among other things: • the principle of dual control,
We use a central IT solution with standardised accounting and consolidation processes, posting rules and interfaces for data delivery in order to draw up the consolidated financial statement. Access rights for the reporting systems are assigned through an approval process. All components of the accounting -related internal control system, the processes for the organisation and implementation of consolidation tasks and for the preparation of the consolidated financial statement as well as
The available economic capital increased in the period under review from EUR 11,143.9 million to EUR 12,443.9 million. This was due principally to the successful business result in 2014, positive effects from the weakening of the euro against our major currencies and a rise in the valuation reserves for investments, principally owing to yield declines on government bonds in our main currency areas and also in some cases to reduced credit spreads. As a consequence of a decrease in the discounting effect for the loss reserves, the low interest rate environment gave rise to opposing effects in the valuation adjustments for property and casualty reinsurance. A further factor was an increase in the risk premium, which reflects the higher capital requirements in this business group. Positive effects derived
The required risk capital of the Hannover Re Group at the target confidence level of 99.97% rose in the year under review from EUR 6,896.9 million to EUR 7,786.6 million. The bulk of the increase resulted from a model- and volume-driven rise in market risks. The market risks rose due to the strengthening of several model parameters in the credit and spread model as well as of the dependency parameters between risk factors in conjunction with substantially higher investment volumes due to exchange rate movements and positive cash flows.
Diversification within the Property & Casualty reinsurance business group is actively managed through allocation of the cost of capital according to the contribution made to diversification. A high diversification effect arises out of the underwriting of business in different lines and different regions with different business partners. In addition, the active limitation of individual risks – such as natural catastrophes – enhances the diversification effect. The risk capital with a confidence level of 99.5% for underwriting risks in property and casualty reinsurance breaks down as follows: Required risk capital 1 for underwriting risks M 61 in property and casualty reinsurance in EUR million 2014 2013
Underwriting risk in property and casualty reinsurance 3,101.1 2,738.6 1 Required risk capital with a confidence level of 99.5%
The statistical run-off triangles are another monitoring tool used by our company. They show the changes in the reserve over time as a consequence of paid claims and in the recalculation of the reserves to be established as at each balance sheet date. Their adequacy is monitored using actuarial methods.
In order to partially hedge inflation risks Hannover Re has taken out inflation swaps (USD and EUR zero coupon swaps) and invested in inflation-linked instruments that protect parts of the loss reserves against inflation risks. An inflation risk exists particularly inasmuch as the liabilities (e. g. loss reserves) could develop differently than assumed at the time when the reserve was constituted because of inflation. Inflation protection was purchased for the first time in the second quarter of 2010 with terms of 4 and 5 years; it was increased in the first quarter of 2011 (term of 8 years). Since 2012 we have also increasingly obtained parts of the inflation protection for our loss reserves by purchasing bonds with inflation-linked coupons and redemption amounts.
Stress tests for natural catastrophes after retrocessions M 63 in EUR million 2014 2013
Storm Ela in Europe 7 – 10 June 2014 67.4 49.1 2 snowstorms in Japan February 2014 38.2 21.1
Flooding in India and Pakistan 1 – 5 September 2014 35.8 35.8 2 severe weather events in the United States May and June 2014 28.6 20.0
Hail and windstorm in Australia 27 and 28 November 2014 27.4 18.9
Calculation of the loss expectancy • Historical loss and exposure analysis • Future inflation • Changes in the quality of underlying risks • Changes in the quantity of underlying risks • Discounting of future cash flows
Calculation of the cost of capital • Level of capital allocation determined by volatility of the business covered and contribution to diversification
All risks directly connected with the life of an insured person are referred to as biometric risks. They include in particular the miscalculation of mortality, life expectancy, morbidity and occupational disability. Biometric risks are the material risks for our company in the area of life and health reinsurance. Our goal is to strike a balance between biometric risks. Counterparty and lapse risks are also material since we additionally prefinance our cedants’ new business acquisition costs. Furthermore, we are exposed to catastrophe risks, especially catastrophes involving a high number of fatalities in our insurance portfolio.
The reserves are determined on the basis of secure biometric actuarial bases in light of the information provided by our clients. The biometric actuarial bases used and the lapse assumptions are continuously reviewed with an eye to their adequacy and if necessary adjusted. This is done using the company’s own empirical data as well as market-specific insights. Our current risk profile in life and health reinsurance is dominated by mortality and longevity risks. This is due to the fact that under some of our contracts we pay death benefits, while under others we pay survival benefits. The volume of our annuity portfolio has continued to grow and contributes to diversification within life and health reinsurance. We calculate the diversification effect between mortality and longevity risks prudently in view of the fact that the contracts are normally taken out for different regions, age groups and individuals. The required risk capital with a confidence level of 99.5% for underwriting risks in life and health reinsurance breaks down as follows: Required risk capital 1 for underwriting risks M 68 in life and health reinsurance in EUR million 2014 2013
Thereof catastrophe 1 Including financial reinsurance and specialty insurance 2 Net share of the Hannover Re Group for natural catastrophes and other major claims in excess of EUR 10 million gross as a percentage of net premium earned (until 31 December 2011: in excess of EUR 5 million gross)
Market risk 3,521.6 2,032.9 1 Required risk capital with a confidence level of 99.5% 2 Including private equity
The sharp rise in the credit and spread risk is attributable to the strengthening of various model parameters, the increased investment volume and an interaction between the two effects.
Value at Risk 1 for the investment portfolio of the Hannover Re Group M 71 in %
Further significant risk management tools – along with the various stress tests used to estimate the loss potential under extreme market conditions – include sensitivity and duration analyses and our asset / liability management (ALM). The internal capital model provides us with quantitative support for the investment strategy as well as a broad diversity of VaR calculations. In addition, tactical duration ranges are in place, within which the portfolio can be positioned opportunistically according to market expectations. The parameters for these ranges are directly linked to our calculated risk-bearing capacity. Further information on the risk concentrations of our investments can be obtained from the tables on the rating structure of fixed-income securities as well as on the currencies in which investments are held. Please see our comments in the section of the notes entitled “Investments under own management” on page 178 et seq.
Share price risks derive from the possibility of unfavourable changes in the value of equities, equity derivatives or equity index derivatives in our portfolio. We hold such assets 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. Please see our comments in the section of the notes entitled “Investments under own manage ment” on page 178 et seq.
The measurement and monitoring mechanisms that have been put in place safeguard a prudent, broadly diversified investment strategy. This is reflected inter alia in the fact that within our portfolio of assets under own management the exposures to government bonds or instruments backed by sovereign guarantees issued by the so-called GIIPS states (Greece, Ireland, Italy, Portugal, Spain) amount to altogether just EUR 245.9 million on a fair value basis. This corresponds to a proportion of 0.7%. The individual countries account for the following shares: Spain EUR 118.0 million, Italy EUR 72.1 million, Ireland EUR 30.2 million and Portugal EUR 25.6 million. No impairments had to be taken on these holdings. Our portfolio does not contain any bonds of Greek issuers.
The counterparty default risk consists primarily of the risk of complete or partial failure of the counterparty and the associated default on payment.
Since the business that we accept is not always fully retained, but instead portions are retroceded as necessary, the credit risk is also material for our company in reinsurance transactions. Our retrocession partners are carefully selected and monitored in light of credit considerations in order to keep the risk as small as possible. This is also true of our broker relationships, which entail a risk inter alia through the potential loss of the premium paid by the cedant to the broker. We minimise these risks, among other things, by reviewing all broker relationships once a year with an eye to criteria such as the existence of professional indemnity insurance, payment performance and proper contract implementation. The credit status of retrocessionaires is continuously monitored. On the basis of this ongoing monitoring a Security Committee decides on measures where necessary to secure receivables that appear to be at risk of default. This process is supported by a Web-based risk management application, which specifies cession limits for the individual retrocessionaires participating in protection cover programmes and determines the capacities still available for short-, medium- and long-term business. Depending on the type and expected run-off duration of the reinsured business, the selection of reinsurers takes into account not only the minimum ratings of the rating agencies Standard & Poor’s and A.M. Best but also internal and external expert assessments (e. g. market information from brokers). Overall, retrocessions conserve our capital, stabilise and optimise our results and enable us to act on opportunities across a broader front, e. g. following a major loss event. Regular visits to our retrocessionaires give us a reliable overview of the market and put us in a position to respond quickly to capacity changes. The following table shows how the proportion of assumed risks that we do not retrocede (i. e. that we run in our retention) has changed in recent years: Gross written premium retained M 74
The key ratios for managing the credit risk are as follows: • 88.6% of our retrocessionaires have an investment grade rating (“AAA” to “BBB”).
• 40.1% 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.
• In terms of the Hannover Re Group’s major companies, EUR 219.1 million (7.0%) of our accounts receivable from reinsurance business totalling EUR 3,114.0 million were older than 90 days as at the balance sheet date.
Further remarks on technical and other assets which were un adjusted 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” on page 194 et seq., Section 6.6 “Other assets” on page 197 et seq. and Section 7.2 “Investment result” on page 217 et seq.
Operational risk 382.7 296.8 1 Required risk capital at a confidence level of 99.5%
The change in risk capital in the 2014 financial year can be attributed primarily to the increased business volume and the resulting higher exposure for operational risks.
Reinsurance recoverables as at the balance sheet date M 75 in EUR million
In selected market niches we transact primary insurance business that complements our reinsurance activities. In so doing, just as on the reinsurance side, we always work together with partners from the primary sector – such as insurance brokers and underwriting agencies. This gives rise to risks associated with such sales channels, although these are minimised through the careful selection of agencies, mandatory underwriting guidelines and regular checks.
Information technology risks and information security risks arise, inter alia, out of the risk of the inadequate integrity, confidentiality or availability of systems and information. By way of example, losses and damage resulting from the unauthorised passing on of confidential information, the malicious overloading of important IT systems or from computer viruses are material to the Hannover Re Group. Given the broad spectrum of such risks, a diverse range of steering and monitoring measures and organisational standards, including for example the requirement to conclude confidentiality agreements with service providers, have been put in place. In addition, our employees are made more conscious of such security risks through practically oriented tools provided online in the intranet or by way of training opportunities.
When it comes to reducing business interruption risks, the paramount objective is the quickest possible return to normal operations after a crisis, for example through implementation of existing contingency plans. Guided by internationally accepted standards, we have defined the key framework conditions and – among other measures – we have assembled a crisis team to serve as a temporary body in the event of an emergency. The system is complemented by regular exercises and tests. In the 2014 financial year, for example, we compiled a leaflet on correct behaviour in the event of a business interruption; this condenses in compact form the key information that all employees need to know (e. g. information channels in a crisis situation). Regular risk reporting to the Risk Committee and the Executive Board has also been put in place.
The hallmark of emerging risks is that the content of such risks cannot as yet be reliably assessed – especially on the underwriting side with respect to our treaty portfolio. Such risks evolve gradually from weak signals to unmistakable tendencies. It is therefore vital to detect these risks at an early stage and then determine their relevance. For the purpose of early detection we have developed an efficient process that spans divisions and lines of business and we have ensured its linkage to risk management. Operational implementation is handled by an expert working group assembled specially for this task. The analyses performed by this working group are used Group-wide in order to pinpoint any necessary measures (e. g. the implementation of contractual exclusions or the development of new reinsurance products). By way of example, the risks arising out of aspects of climate change (e. g. questions of liability) are analysed by this working group. These problematic issues may also have implications for our treaty portfolio – in the form not only of risks but also opportunities, e. g. through increased demand for reinsurance products.
Strategic risks derive from a possible imbalance between the corporate strategy of the Hannover Re Group and the constantly changing general business environment. Such an imbalance might be caused, for example, by incorrect strategic policy decisions, a failure to consistently implement the defined strategies and business plans or an incorrect allocation of resources. We therefore regularly review our corporate strategy in a multi-step procedure and adjust our processes and the resulting guidelines as and when required. The Group Strategy was reviewed in the year under review and the revised corporate strategy was unveiled to investors at the Investors’ Day held in London on 23 October. We have defined performance criteria and indicators for the operational implementation of the strategic guidelines; these are authoritative when it comes to determining fulfilment of the various targets. With the “Strategy Cockpit” the Executive Board and responsible managers have at their disposal a strategy tool that assists them with the planning, elaboration and management of strategic objectives and measures and safeguards their overall perspective on the company and its strategic risks. In addition, the process for the management of strategic risks is assessed annually as part of the monitoring of business process risks. Further details on the topic of strategy are provided in the section entitled “Our strategy” on page 12 et seq.
Since as long ago as 2010 the stand-alone service unit “Opportunity Management” has been assigned to the Chief Executive Officer’s area of responsibility. This is a clear reflection of the considerable importance that Hannover Re attaches to opportunity management. The monitoring and active networking carried out by the innovative minds involved give rise to close links with other projects, working groups and bodies, such as with the working group on “Emerging Risks und Scientific Affairs” in regard to emerging risks and opportunities (see page 97 “Other risks”). The working group carries out qualitative assessments of emerging risks. As a result, however, not only are the potential risks analysed but also any available business opportunities. In the year under review, for example, issues such as general environmental pollution, climate change and associated questions of liability, e-cigarettes and the risks of lithium-ion batteries as well as cyber-risks were explored by the working group.
Cyber-risks Cyber-attacks on critical systems are becoming increasingly common. They can cause considerable financial losses and also damage corporate reputations. Not only that, they can severely hamper private and public life, especially if critical infrastructures are impacted – such as the health, transportation / traffic and energy sectors. In such instances supply bottlenecks with lasting effects as well as major disruptions to public safety may ensue. In a networked world the repercussions of cyber-attacks are intensifying because the volume of data stored around the world is constantly growing – and in this context it is not only one’s own technical infrastructure that needs to be secured. On the contrary, the trend towards cloud computing is increasingly shifting the focus to thirdparty infrastructures and the associated network connection.
If a business idea is translated into reality and a new reinsurance product results, the normal procedure – provided the criteria defined for this purpose by Risk Management are applicable – is to work through the so-called new product process. This process is supported by Risk Management at Hannover Re. The process is always worked through if a contractual commitment is to be entered into in a form not previously used by Hannover Re or if the exposure substantially exceeds the existing scope of coverage. If this is the case, all material internal and external influencing factors are examined beforehand by Risk Management (e. g. implications for the overall risk profile or the risk strategy) and an assessment is made. Risk Management ensures that before it can be used or sold a new reinsurance product must be approved by the Executive Board.
The quality of our Enterprise Risk Management (ERM) is evaluated separately by Standard & Poor’s. In the year under review Standard & Poor’s gave our risk management its highest possible grade of “very strong”. Most notably, our established risk culture promotes the development of appropriate risk monitoring systems and strategic risk management. The evaluation encompasses above all the areas of risk culture, risk controls, the management of emerging risks, risk models and strategic risk management. This external appraisal confirms the quality of our holistic approach to risk management.
We would also refer to the explanatory remarks on the financial strength ratings of our subsidiaries in the “Financial position” section of the management report on page 59. In addition, the risk trigger mechanism and internal monitoring system are reviewed annually by the independent auditor. The Group-wide risk management system is also a regular part of the audits conducted by the internal audit function. For additional information on the opportunities and risks associated with our business please see the Forecast on page 130 et seq.
Hannover Rück SE hereby provides insight into its enterprise management practices as part of the Declaration on Corporate Governance pursuant to § 289 a Commercial Code (HGB): Corporate Governance
As an instrument of self-regulation for the business world, the German Corporate Governance Code – the latest version of which dates from 24 June 2014 – sets out recommendations and suggestions that are intended to maintain and foster the trust of investors, customers, employees and the general public in the management and supervision of German companies. Although the Code does not have binding legal force, the enterprises addressed by the Code are nevertheless required by § 161 Stock Corporation Act (AktG) to provide an annual declaration as to whether or not the recommendations of the Code were and are complied with in the reality of the company’s business activities. If recommendations were not acted upon, this is to be explained and disclosed as part of the Declaration of Conformity.
The Executive Board and Supervisory Board of Hannover Rück SE declare pursuant to § 161 Stock Corporation Act (AktG) that – with the following divergences – the company was and continues to be in conformity with the recommendations made by the Government Commission on the German Corporate Governance Code published by the Federal Ministry of Justice on 24 June 2014 in the official section of the Federal Gazette: Code Item 4.2.3 Para. 2; Caps on the amount of variable compensation elements in management board contracts Item 4.2.3 Para. 2 Sentence 6 of the Code recommends that there should be a maximum limit on the amount of variable compensation paid to members of the management board.
The variable compensation of the members of the Executive Board is granted in part in the form of Hannover Re share awards. The maximum number of share awards granted at the time of allocation depends upon the total amount of variable compensation, which is subject to an upper limit (cap), i. e. the allocation of share awards is limited by the cap. The share awards have a vesting period of four years. During this period the members of the Executive Board therefore participate in positive and negative developments at the company, as reflected in the share price. The equivalent value of the share awards is paid out to the members of the Executive Board after the end of the vesting period. The amount paid out is determined according to the share price of the Hannover Re share applicable at the payment date plus an amount equivalent to
Code Item 4.2.3 Para. 4; Caps on severance payments in management board contracts Pursuant to Item 4.2.3 Para. 4 of the Code, when management board contracts are concluded care should be taken to ensure that payments made to a member of the management board upon premature termination of his or her contract of service do not exceed a certain amount.
Code Item 5.3.2; Independence of the Chair of the Audit Committee Item 5.3.2 Sentence 3 of the Code recommends that the Chair of the Audit Committee should be independent.
The current Chairman of the Finance and 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 in advance in the justification for divergence from Code Section 5.2 Para. 2, the current Chairman of the Supervisory Board is, however, optimally suited to chairing the Finance and 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 Rück SE dates back to a period more than ten years ago, it is also the case that the reviews and checks performed by the Finance and Audit Committee no longer relate to any timeframe within which he himself was still a member of the Executive Board or decisions initiated by him as a member of the Executive Board were still being realised. In the opinion of Hannover Rück SE, it is therefore in the interest of the company to diverge from this recommendation.
In addition to the Corporate Governance principles, Hannover Rück SE has adopted a more extensive Code of Conduct (www. hannover-re.com/resources/cc/generic/codeofconduct-e.pdf). Complementing our corporate strategy and the Corporate Governance principles, it establishes rules governing integrity in the behaviour of all employees of Hannover Rück SE and is intended to help members of staff cope with the ethical and legal challenges that they face as part of day-to-day work. The rules defined in the Code of Conduct reflect the high ethical and legal standards that guide our actions worldwide. It is our belief that integrity in dealings with our stakeholders constitutes the foundation of a successful enterprise. In both our strategic planning and our day-to-day business activities, we therefore aspire to consistently apply the highest ethical and legal standards; for our actions and the way in which every single one of us presents and conducts himself or herself are crucial in shaping the image of Hannover Rück SE.
Considerable time was once again devoted to the issue of sustainability. The strategic orientation of Hannover Rück SE towards sustainability constitutes an increasingly important element of the enterprise strategy. The aim here is to achieve commercial success on the basis of a solid business model in accordance with the needs of our staff and the company as well as with an eye to protecting the environment and conserving natural resources. We strive to reduce as far as possible the greenhouse gas emissions produced by our day-to-day business activities in order to come closer to reaching our goal of carbon neutrality. In so doing, we are demonstrably taking responsibility for a sustainable future. In 2011 we defined for the first time a concrete Sustainability Strategy setting out our primary objectives in this field. Not only that, in the year under review we again presented our Sustainability Report in the form of a so-called “GRI Report” (Global Reporting Initiative). Further information on the topic of sustainability is provided on our website (www.hannover-re.com/sustainability/index.html).
The goal defined in the Rules of Procedure to have at least two women sitting on the Supervisory Board was again surpassed in the year under review with three female members of the Supervisory Board. In addition, one of the members of the Supervisory Board’s Nomination Committee is a woman. Once again, the Executive Board and Supervisory Board considered the programme for the advancement of women that had been implemented within the workforce in 2012 and discussed the progress that had been made. The primary objective of this programme is to foster promising young female professionals through a variety of targeted measures and to enlarge the proportion of women in management positions.
The Executive Board and Supervisory Board of Hannover Rück SE work together on a trusting basis to manage and monitor the company. In accordance with the Rules of Procedure of the Executive Board, matters of fundamental importance require the consent of the Supervisory Board. In addition, the Supervisory Board is kept informed on a regular and timely basis of the business development, the execution of strategic decisions, material risks and planning as well as relevant compliance issues. The Chairman of the Supervisory Board stays in regular contact with the Chairman of the Executive Board in order to discuss with him significant business occurrences. The composition of the Executive Board (including areas of responsibility) as well as of the Supervisory Board and its committees is set out on pages 6 et seq. and 243 respectively of the present Annual Report.
In the year under review the Supervisory Board also carried out another audit of the efficiency of its work. Experiences gathered in connection with the electronic distribution of documents to the members of the Supervisory Board were evaluated as part of this efficiency audit.
The Standing Committee prepares personnel decisions for the Supervisory Board. It bears responsibility for granting loans to the group of persons specified in §§ 89 Para. 1, 115 Stock Corporation Act and those considered equivalent pursuant to § 89 Para. 3 Stock Corporation Act as well as for approving contracts with Supervisory Board members in accordance with § 114 Stock Corporation Act. It exercises the powers arising out of § 112 Stock Corporation Act in lieu of the Supervisory Board and – in cooperation with the Executive Board – ensures that long-term succession planning is in place.
The compliance report for the 2014 calendar year will be submitted to the Finance and Audit Committee in March 2015. The reporting sets out the structure and diverse range of activities of Hannover Re in this regard. The findings of the separate data privacy reporting for the 2014 calendar year are also included in the compliance report. After in-depth examination of topics such as directors’ dealings, ad hoc and other disclosure requirements, the insider register, consulting agreements, data protection, international sanctions and the Group-wide whistleblower system, the report concludes that only a few circumstances 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 the future Hannover Re is in full conformity with the internal and external requirements governing its business activities.
• Securities transactions pursuant to Item 6.3 of the German Corporate Governance Code,
• Shareholdings pursuant to Item 6.3 of the German Corporate Governance Code.
Information on share-based payment pursuant to Item 7.1.3 of the German Corporate Governance Code is provided in Section 8.3 of the notes “Share-based payment”, page 229 et seq., and in the remuneration report with respect to the members of the Executive Board.
In addition, the amount of remuneration paid to the Supervisory Board on the basis of its work for Hannover Rück SE and companies belonging to the Group as well as the principles according to which this remuneration is determined are described; we also explain the principles on which the remuneration for managers below the level of Executive Board is based.
The remuneration report is guided by the recommendations of the German Corporate Governance Code and contains information which forms part of the notes to the 2014 consolidated financial statement as required by IAS 24 “Related Party Disclosures ”. Under German commercial law, too, this information includes data specified as mandatory for the notes (§ 314 HGB) and the management report (§ 315 HGB). These details are discussed as a whole in this remuneration report and presented in summary form in the notes.
The variable remuneration is defined at the Supervisory Board meeting that approves the consolidated financial statement for the financial year just ended.
1 Chief Executive Officer / Chief Financial Officer 70% profit bonus, 30% performance bonus (personal targets); Board members with divisional responsibility: 50% profit bonus, 50% performance bonus (25% personal targets / 25% divisional targets)
Goal attainment of 100% is achieved in property and casualty reinsurance with a RoCA of 9.1% and in life and health reinsurance with a RoCA of 10.1%. These RoCA values are above the cost of capital and thus generate positive intrinsic value creation (IVC 1).
Personal qualitative, quantitative targets; individual contribution to the overall result, leadership skills, innovative skills, entrepreneurial skills, specific features of area of responsibility.
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 2014 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 0.5 million (EUR 1.4 million ) in 2014.
With regard to Item 4.2.3. Para. 2 “Caps on the amount of variable compensation elements in management board contracts” and Item 4.2.3 Para. 4 “Caps on severance payments in management board contracts” of the German Corporate Governance Code, we would refer the reader to our remarks in the 2014 Declaration of Conformity contained in the section “Statement of enterprise management practices” on page 101 et seq. of this Group Annual Report.
If the company insists on a non-competition clause with Mr. Wallin for two years after the termination of his service contract, he shall be recompensed in a monthly amount of 50% of his most recent fixed remuneration. Income earned through the application of his working capacity elsewhere shall be counted towards this compensation insofar as such income in combination with the compensation exceeds 100% of the most recently received fixed remuneration. The non-competition clause shall not apply if the contract ends prior to the age of 65 because the company does not extend it or because Mr. Wallin declines an extension offered to him on what are for him inferior terms, or if the premature termination or nonextension is due to a compelling reason for which the company is responsible.
Financial year Non-performance-based remuneration Performance-based remuneration 1 Performance-based remuneration 1 Total Number of share awards 6 2013 = Actual 2014 = Estimate
In 2014 altogether EUR 35,900 more than had been originally reserved was allocated to the bonus bank for 2013. 5 The nominal amount is stated; virtual Hannover Re share awards are automatically granted in an amount equivalent to 20% of the variable remuneration. The equivalent amount will be paid in 2019 at the prevailing share price of Hannover Re. In 2014 nominal amounts of EUR 35,900 more than had been originally reserved were used as a basis for allocation of the 2013 share awards.
6 In order to calculate the number of share awards for 2014 reference was made to the Xetra closing price of the Hannover Re share on 30 December 2014 (EUR 74.97). The number to be actually awarded is established from the arithmetic mean of the Xetra closing prices of the Hannover Re share in a period from five trading days before to five trading days after the meeting of the Supervisory Board that approves the consolidated financial statement in March 2015. The applicable market price of the Hannover Re share had decreased from EUR 62.38 (30 December 2013) to EUR 60.53 by the allocation date (10 March 2014) of the share awards for 2013; the share awards actually allocated for 2013 are shown here, not those estimated in the 2013 Annual Report.
8 The appointment of Mr. Arrago ended on age grounds on 31 August 2014.
Variable remuneration payable Bonus bank Share awards remuneration from seats with Group bodies in EUR thousand
2 The non-cash compensation has been carried in the amounts established for tax purposes. 3 In 2014 altogether EUR 107,300 more in variable remuneration was paid out to Board members for 2013 than had been reserved. 4 The nominal amount is stated; full or partial repayment in 2018, depending on the development until such time of the balance in the bonus bank.
4 The appointment of Mr. Arrago ended on age grounds on 31 August 2014.
The following two tables show the remuneration of the Executive Board in the 2014 financial year in accordance with the recommendations of the German Corporate Governance Code: German Corporate Governance Code, Item 4.2.5 Para. 3 – Table 1 M 84 (target / minimum / maximum remuneration as nominal amounts)
(see also our Declaration of Conformity on page 99 et seq.). 4 In the case of Mr. Althoff the dividend for 2013 refers to share awards from his work as a senior executive at Hannover Re.
Benefits granted Jürgen Gräber Board member with divisional responsibility Coordinator of worldwide property & casualty reinsurance
6 For details of the service cost see the tables “Defined benefit commitments” and “Defined contribution commitments” on page 121.
4 Stock appreciation rights were awarded in 2007, exercise option at the discretion of the Executive Board until 31 December 2017 in the following tranches: 40% from 2010, 60% from 2011, 80% from 2012, 100% from 2013 onwards.
Pension payments to former members of the Executive Board The pension payments to former members of the Executive Board and their surviving dependants, for whom 16 (14) pension commitments existed, totalled EUR 1.5 million (EUR 1.4 million) in the year under review. The projected benefit obligation of the pension commitments to former members of the Executive Board amounted to altogether EUR 28.8 million (EUR 21.4 million).
DBO 31.12. Personnel expense 1 Mr. Althoff and Mr. Vogel were first granted a pension commitment prior to 2001 on the basis of their service to the company prior to their appointment to the Executive Board; the earned portion of the commitment from the Unterstützungskasse is therefore established as a proportion (in the ratio [currently attained service years since entry] / [attainable service years from entry to exit age]) of the final benefit. Measurement under IFRS consequently uses the defined benefit method.
In accordance with § 14 of the Articles of Association as amended on 18 July 2013 and the resolution of the Annual General Meeting on 7 May 2013, 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 one-and-a-half times the said amounts.
In addition, the members of the Finance and Audit Committee formed by the Supervisory Board receive remuneration of EUR 15,000 for their committee work and the members of the Standing Committee formed by the Supervisory Board receive remuneration of EUR 7,500. In this case, too, the Chairman of the Committee receives twice and the Deputy Chairman one-anda -half times the stated amounts. No remuneration is envisaged for the Nomination Committee.
Individual remuneration received by the members of the Supervisory Board M 88
Herbert K. Haas 2 Chairman of the • Supervisory Board Member of the • Standing Committee • Finance and Audit Committee • Nomination Committee
Uwe Kramp 4 Member of the Supervisory Board (until 3 May 2012)
Otto Müller 3 Member of the Supervisory Board Fixed remuneration 30.0 30.0
Dr. Erhard Schipporeit Member of the • Supervisory Board • Finance and Audit Committee
Attendance allowances – 1.0 1 Amounts excluding reimbursed VAT 2 Including supervisory board remuneration and remuneration for committee work as well as advisory board remuneration received from entities affiliated with the company 3 Employee representatives 4 Former employee representative
André Arrago Purchase Share DE0008402215 11 March 2014 1,600 61.00 1 97,599.04 1 Rounded; average price = EUR 60.994
Members of the Supervisory Board and Executive Board of Hannover Rück SE as well as their spouses or registered partners and first-degree relatives hold less than 1.0% of the issued shares. The total holding as at 31 December 2014 amounted to 0.004% (0.056%) of the issued shares, i. e. 4,549 (67,103) shares.
Attainment of the agreed IVC results in goal attainment of 100%. Outperformance of the divisional targets, i. e. a degree of goal attainment in excess of 100%, requires at least the agreement and attainment of a positive IVC. Furthermore, a degree of goal attainment in excess of 100% should be geared to a real comparison of planned IVC with actual IVC. A maximum degree of goal attainment of 150% is conditional upon attainment of an excellent positive IVC and implies that the actual IVC of the division is significantly in excess of the planned IVC.
Individual targets are agreed and measured for a period of one year. The degree of goal attainment is between 0% and 100%.
Home Office Hannover 623 staff (excl. seconded employees) out of the altogether 1,269 at Hannover Home Office (incl. 94 senior executives) are GPB-eligible.
Agricultural crop and livestock insurance Demand is constantly growing for foodstuffs and agricultural commodities, while the arable land around the world is limited. This encourages investment in agriculture, which coverage requirements are rising in light of the expected increase in extreme weather events due to climatic change. In this context, agricultural crop and livestock insurance is taking on added significance, not only in industrial nations but also in emerging markets where governments are increasingly supporting farmers with premium subsidies. We therefore expect demand in this business segment to continue growing.
The principal lines of business in crop farming are Multi-Peril Crop Insurance (MPCI) or covers for single perils such as hail. Extended coverage is available for forestry and greenhouses. In the case of bloodstock and livestock, insurance can be taken out for the mortality, disease and transit risks in addition to general natural perils. In the aquaculture sector risks such as algal bloom can also be covered. Furthermore, our involvement in index-based insurance products opens up a variety of new business opportunities when it comes to insuring agricultural risks.
Forecast • New challenges due to worldwide regulatory changes • Solid prospects for 2015 despite soft market conditions in property and casualty reinsurance • Profitability set to continue growing in life and health reinsurance • Return on investment of 3.0% for assets under own management • Group net income in the order of EUR 875 million expected
United States The growth in output in the United States will probably rise by one percentage point in the year ahead to 3.2%. The main engine of growth is the continued improvement of the labour market; this will progressively stimulate consumer spending and accelerate wage growth. With sales prospects brightening at home and abroad, investment activity will also pick up. It will be boosted by the continued favourable financing environment.
Europe Developments in the Eurozone are still overshadowed by structural problems affecting parts of the currency area, and hence growth will only gather pace gradually. In 2015 it is expected to come in slightly higher than in the previous year at around 1.2%. Not least owing to the very low price of oil, consumer prices will probably rise by just 0.3%. Fears of deflation consequently persist. Even if this should happen, however, the economy will probably not suffer because such a scenario would be driven essentially by energy prices and would not therefore be accompanied by lower household and corporate earnings. Unemployment is expected to shrink further to 11.2%. The United Kingdom should generate roughly the same growth – at 2.9% – as in the previous year.
Capital markets The decision of the European Central Bank to stand by its low interest rate policy and purchase government bonds is intended to protect the Eurozone against the threat of deflation. The US Federal Reserve, by contrast, set in motion the trend reversal in its interest rate policy. This should be reflected in a continued strong US dollar. International bond markets will again be shaped by below-average and increasingly divergent interest rate levels in 2015. In the relevant currency areas for our company we anticipate at most unchanged yield curves and moderate interest rate rises. With respect to Treasury bonds issued by the countries of the European Monetary Union with higher risk premiums, which have been the focus of so much attention of late, stabilisation may continue despite the current deflation risk. Generally speaking, the very low volatility seen on the capital market is not expected to be sustained. The effects of currency and oil price movements should therefore be all the more pronounced, although on balance the opportunities for the world economy will outweigh the risks. As a further factor, the elections in a number of European countries have the potential to unsettle the strategy of taking incremental steps to resolve the Euro debt crisis. The necessary consolidation of public finances in the industrial nations will therefore continue to preoccupy the economic environment; it may, however, be overcompensated by resurgent private consumption and investment demand. In view of the existing uncertainties, broad diversification within the investment portfolio will therefore continue to be of considerable importance in the current financial year.
Insurance industry The international insurance industry will likely find itself operating in a largely unchanged environment in 2015. Even though experts believe that low interest rates will continue, the insurance sector should remain on a stable course in the current year.
In China, too, the regulatory requirements have grown enormously in recent years. The local regulator, the China Insurance Regulatory Commission (CIRC), already requires submission of regular reports both in writing and orally. Adoption of the new regulatory regime C-ROSS (China Risk Oriented Solvency System) is envisaged for 2015; this will require even more detailed reporting and it will thus increase the workload on companies. In terms of content, C-ROSS is geared towards the European Solvency II guidelines, thereby further increasing international comparability.
Generating growth in a highly competitive environment is likely to prove a challenging task in 2015. Industry experts estimate that premium volume will be stable overall. What is more, if the current year should also pass off with another very light burden of major losses, the market will respond with a further decline in prices – especially for natural catastrophe covers.
Overview After three consecutive years of low major losses and good results, property and casualty reinsurance is once again seeing intense competition in the current financial year. The healthy capitalisation of ceding companies due to the absence of major losses has resulted in fewer risks being ceded to reinsurers. Furthermore, the inflow of capital from the market for catastrophe bonds (ILS) continues to create a surplus of capacity.
1 In EUR 2 ++ = significantly above the cost of capital; + = above the cost of capital; + / – = on a par with the cost of capital; – = below the cost of capital 3 All lines with the exception of those reported separately
Target markets North America In tandem with the existing surplus capacities, the trend towards greater consolidation of reinsurance programmes at large clients continued in North America, hence keeping up the pressure on rates. On the reinsurance side this was true of both the property and casualty lines, where the situation is expected to bottom out in the medium term. We are adhering to our strategy of a margin-oriented underwriting policy, even if this compels us to relinquish volume growth. Nevertheless, in view of our long-standing and robust customer relationships, we expect to maintain our presence even in the soft market. Overall, then, we were satisfied with the outcome of the renewals as at 1 January 2015. In part through targeted new business acquisition, we were able to grow the premium volume in North America by around 5%. In this context we expanded our niche business in the professional indemnity line, where rates proved to be firmer. It remains the case that we do not participate in multi-line liability quota share reinsurance arrangements. Slight rate increases were recorded in Canadian property business owing to the losses incurred in 2013 and 2014. Looking ahead to the treaty renewals on 1 June and 1 July 2015 – the time of year when catastrophe XL covers, in particular, are renegotiated – we currently anticipate further intense competition in this segment.
All in all, we achieved moderate growth of 1% in the treaty renewals for Continental European markets.
Aviation The significant major losses incurred in aviation reinsurance in 2014 have had only a qualified positive effect on rates. It remains the case that insurance capacities are widely available, and it is therefore our expectation that premiums in conventional aviation reinsurance will tend to stabilise on the existing level. Although we anticipate price increases for war covers, these have not so far been as appreciable as originally anticipated. Based on our long-standing expertise in all lines of aviation reinsurance, we nevertheless see attractive business opportunities in the current financial year. All in all, though, the premium volume is set to contract.
Credit, surety and political risks The premium volume in the area of credit, surety and political risks is expected to remain stable in 2015. We again slightly boosted the share of our total portfolio deriving from political risks in the context of the 1 January 2015 treaty renewals. In view of the good results posted by insurers, the modest pressure on conditions is likely to be sustained in the current financial year and primary insurers can be expected to further increase their premium retained for own account.
In Japan there will likely be a consolidation in demand for reinsurance covers: rates for natural catastrophe risks and in other lines will probably come under further pressure in the April round of renewals. Overall, we expect to book slightly lower premium in the original currency for our portfolio in Japan. The region of South and Southeast Asia should again prove to be the engine of growth in the current year. Consequently, our portfolio here should show a further rise in premium volume due to special initiatives that have already been launched. Rates for most markets in South and Southeast Asia are expected to be broadly adequate.
The outcome of the treaty renewals as at 1 January 2015 in the Caribbean and Latin America were satisfactory on the whole for our company. We were very successful in defending our market position in the region despite soft conditions and fierce competition over placements. The reinsurance market is notable for an oversupply of capacity, as a consequence of which a reinsurer’s financial strength continues to be crucially important – a state of affairs from which Hannover Re profited. As expected, the renewals on 1 January 2015 for Latin America – the main renewal season here is not until 1 July – provided to be competitive, but prices were still commensurate with the risks. In Brazil we were able to write new treaties and enlarge existing relationships. Despite the difficult state of the market we succeeded in holding our portfolio stable thanks to our focus on Latin America as a whole. Premium income from Venezuela and Ecuador may be curtailed in future by restrictive regulatory regimes as well as inflation and negative exchange rate effects. Nevertheless, even as we continue to adhere to our selective underwriting policy we remain confident of generating further profitable growth for our portfolio from Latin American markets in the current financial year.
In South Africa we expect to record slightly higher premium income and an improved result for 2015 in our reinsurance portfolio and specialty business.
Hannover Re expects demand to continue rising in the area of agricultural risks. This can be attributed to the increased demand for food and a greater need to protect against extreme weather events. Not only that, we also see further growth potential for index-linked microinsurance products in emerging markets, not least bearing in mind that the G8 nations have defined agricultural insurance as a tool for fighting poverty. Hannover Re expects its premium to come in higher for the current financial year.
Catastrophe XL (Cat XL) An oversupply of reinsurance capacity continues to be the hallmark of natural catastrophe markets. In the first place the influence of ILS markets is still rising, while at the same time primary insurers have more capital at their disposal, as a consequence of which fewer risks are being passed on to reinsurers. As a further factor, the absence of major losses in 2014 prompted additional rate reductions in the 1 January 2015 renewals, including for example in US property catastrophe business. Despite this, price increases were also attainable in a variety of regions and segments. In Europe, and especially in Germany, higher prices were obtained under programmes that had been impacted by various hail and windstorm events. Further developments in catastrophe business will depend on the loss situation going forward, particularly in the US market. Given the prevailing market climate the strategy pursued by our subsidiary in Bermuda is to further expand in specialty lines.
Structured reinsurance and insurance-linked securities Further healthy demand is anticipated for our Advanced Solutions business and structured reinsurance in the current financial year. The key driver here is the growing integration of reinsurance into companies’ risk management. This development has been prompted by the increasingly exacting capital requirements placed on insurers: with a growing number of countries adopting risk-based solvency systems and the implementation of Solvency II soon to become a reality, demand for products that deliver capital relief is likely to remain brisk in 2015.
In the area of insurance-linked securities (ILS) it is our expectation that demand will continue to grow. Along with protecting our own peak exposures, we make use of the broad range of opportunities available here, particularly in collateralised reinsurance business. Over the coming years we expect to see a positive and steadily rising profit contribution. We succeeded in renewing our “K cession”, a collateralised modelled quota share cession of non-proportional reinsurance treaties that we have placed on the ILS market for many years – with an increased capacity of USD 400 million for 2015.
1 In EUR 2 ++ = significantly above the cost of capital; + = above the cost of capital; + / – = on a par with the cost of capital; – = below the cost of capital
Turning to longevity business, the announcement in the United Kingdom of new arrangements relaxing the rules on compulsory retirement already led to a decline in annuity business in the year under review. With effect from 1 April 2015 pensioners will enjoy considerably greater flexibility in accessing and using their pension lump sums on reaching retirement age. At the same time the one-year transitional period will also come to an end. It is to be anticipated that this will continue to affect the UK annuity market in 2015. Nevertheless, it is our assumption that the influence on the market volume of enhanced annuities will, if anything, be rather slight, and hence the general outlook for our enhanced annuity business is bright. Going forward, therefore, we continue to expect substantial business volumes for our UK longevity portfolio. Working in concert with our customers in the interest of policyholders, we are confident that we can offer solutions tailored to the new situation and thereby tap into new business opportunities.
Given the high capital requirements and potentially increased volatility on equity markets – which are in part driven by liquidity –, our cautious stance on investments in listed equities at current valuation levels remains unchanged.
The premium volume in property and casualty reinsurance is expected to remain stable for 2015 based on constant exchange rates. We shall continue to practise our systematic underwriting discipline, writing only business that satisfies our margin requirements. We expect the treaty renewals during the year to pass off favourably thanks to our good rating and long-standing stable customer relationships. Despite softer market conditions overall in property and casualty reinsurance, the underwriting result should come in on the level of 2014 – provided the major loss incidence remains within the bounds of expectations. In terms of the targeted combined ratio, we are aiming for a figure under 96%. The EBIT margin for property and casualty reinsurance should amount to at least 10%.
For 2015 we anticipate Group net income in the order of EUR 875 million. This is subject to the proviso that the burden of major losses does not significantly exceed the budgeted level of EUR 690 million and that there are no exceptionally adverse developments on capital markets.
In terms of the dividend for the current financial year, Hannover Re envisages a payout ratio in the range of 35% to 40% of its IFRS Group net income. This ratio may increase in light of capital management considerations if the present comfortable level of capitalisation remains unchanged.
Our strategic objective is to generate a minimum return on equity within the Group that is 900 basis points above the risk-free interest rate. We also seek to increase the earnings per share by 6.5% and the book value per share (including dividends paid) by at least 7.5% annually.
Other financial assets – at fair value through profit or loss 6.1 66,394 70,082
Consolidated statement of income 2014 N 02 in EUR thousand Notes 1.1. – 31.12.2014 1.1. – 31.12.2013
Total income and expense recognised directly in equity – – (454,173) (230,160) – 7,965 – (676,368) (20,603) (696,971)
Changes in the consolidated group – – – – – – – – (1,387) (1,387)
Capital increases / additions – – – – – – – – 115 115
Acquisition / disposal of treasury shares – – – – – – 5 5 – 5
Total income and expense recognised in equity – – 633,338 436,836 707 (31,776) – 1,039,105 43,649 1,082,754
Change in fair value of financial instruments (through profit or loss) 33,257 27,136
Cash and cash equivalents at the end of the period 772,882 642,936
Notes to the consolidated financial statements 2014 1. Company information 148 2. Accounting principles 148 3. Accounting policies 151 3.1 Summary of major accounting policies 151 3.2 Major discretionary decisions and estimates 159 4.1 Consolidation principles 160 4.2 Consolidated companies and complete list of shareholdings 161 4.3 Major acquisitions and new formations 172 4.4 Major disposals and retirements 172 4.5 Other corporate changes 172 5. Segment reporting 173 6. Notes on the individual items of the balance sheet 178 6.1 Investments under own management 178 6.2 Funds withheld (assets) 194 6.3 Contract deposits (assets) 194 6.4 Technical assets 194 6.6 Other assets 197 6.7 Technical provisions 200 6.8 Funds withheld (liabilities) 205 6.9 Contract deposits (liabilities) 205 6.10 Provisions for pensions and other post-employment benefit obligations 205 6.11 Other liabilities 209 6.12 Debt and subordinated capital 210 6.13 Shareholders’ equity and treasury shares 214 6.14 Non-controlling interests 215 7. Notes on the individual items of the statement of income 216 7.1 Gross written premium 216 7.2 Investment income 217 7.3 Reinsurance result 219 7.4 Other income and expenses 220 7.5 Taxes on income 221 8. Other notes 224 8.1 Derivative financial instruments and financial guarantees 224 8.2 Related party disclosures 227 8.3 Share-based payment 229 8.4 Staff and expenditures on personnel 232 8.5 Earnings per share and dividend proposal 233 8.7 Contingent liabilities and commitments 234 8.8 Long-term commitments 235 8.9 Rents and leasing 235 8.10 Fee paid to the auditor 236
The consolidated financial statement reflects all IFRS in force as at 31 December 2014 as well as all interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), application of which was mandatory for the 2014 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 underwriting 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 declaration of conformity required pursuant to § 161 German Stock Corporation Act (AktG) regarding compliance with the German Corporate Governance Code has been submitted and, as described in the Declaration of the Executive Board regarding the Corporate Governance of the Company, made permanently available on the Hannover Re website.
In June 2013 the IASB issued “Novation of Derivatives and Continuation of Hedge Accounting” (Amendments to IAS 39 “Financial Instruments: Recognition and Measurement”). These amendments allow a novation of an OTC derivative designated as a hedging instrument to be deemed to be a continuation of the existing hedging relationship. The amendments, which were endorsed by the EU in December 2013, have a mandatory effective date for annual periods beginning on or after 1 January 2014. The amendments did not have any implications for the carrying amounts in the consolidated financial statement or for Group net income.
In December 2011 the IASB issued “Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32)”. While the offsetting rules for financial instruments remain unchanged, the application guidance of the standard clarifies the meaning of “currently has a legally enforceable right to set-off ” and “simultaneous”. The amendments have a mandatory effective date for annual periods beginning on or after 1 January 2014 and were endorsed by the EU in December 2012. The amendments did not have any implications for the carrying amounts in the consolidated financial statement or for Group net income.
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 – Non-Monetary 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 accordance with IFRS 11 the proportionate inclusion of interests in joint ventures – a practice not adopted by Hannover Re – will no longer be permissible. Rather, interests in joint ventures must be accounted for using the equity method. IFRS 12 “Disclosure of Interests in Other Entities” encompasses the disclosure requirements for IFRS 10 and 11 as well as IAS 27 and IAS 28. With the aim of clarifying for the users of financial statements the nature of an entity’s interest in other entities as well as the effects of those interests on its financial position, financial performance and cash flows, this gave rise to expanded annual mandatory disclosures in comparison with the previous requirements. With the exception of the rules governing investment entities, the new requirements, especially with respect to disclosure requirements, were not amended in IAS 34 “Interim Financial Reporting”. The corresponding disclosures are mostly provided in Sections 4.1, 4.2, 6.1 and 6.14.
Further amendments were made to the standards in 2012. 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”. The requirement to provide adjusted comparative information is limited upon initial application to only the immediately preceding period; retrospective adjustments for subsidiaries sold in the comparative period are not required. Furthermore, it is not necessary to provide comparative information on unconsolidated structured entities upon initial application of IFRS 12. These amendments were endorsed by the EU in April 2013. In October 2012 the IASB issued “Investment Entities (Changes to IFRS 10, IFRS 12 and IAS 27)”. Given that the parent company of the Hannover Re Group does not meet the definition of an investment entity, these amendments – which were endorsed by the EU in November 2013 – are not relevant to Hannover Re.
The revised version of IAS 27 consists solely of requirements for the accounting of investments in subsidiaries, jointly controlled entities and associates in separate (non-consolidated) financial statements of the parent company. In this context, only minimal changes were made relative to the previous wording of the standard.
The requirements of IFRS 10, 11 and 12 as well as the revised IAS 27 and 28 were to be applied to financial years beginning on or after 1 January 2013. The Accounting Regulatory Committee (ARC) decided in June 2012, however, that application of the aforementioned standards within the EU shall not be mandatory until one year later, with an effective date for annual periods beginning on or after 1 January 2014. The new IFRS 10, 11, 12 and the revised IAS 27 and 28 as well as the changes published in 2012 have now been endorsed in their entirety by the EU. Initial application of the new and revised standards on consolidation did not give rise to any changes in Hannover Re’s scope of consolidation.
The IASB has issued the following standards, interpretations and amendments to existing standards with possible implications for the consolidated financial statement of Hannover Re, application of which is not yet mandatory for the year under review and which are not being applied early by Hannover Re: In December 2014 the IASB published “Amendments to IFRS 10, IFRS 12 and IAS 28: Investment Entities: Applying the Consolidation Exception”. The amendments address issues that have arisen in the context of applying the consolidation exception for investment entities. They are effective for annual periods beginning on or after 1 January 2016 and have still to be endorsed by the EU.
In December 2014 the IASB also issued “Amendments to IAS 1: Disclosure Initiative”. The amendments provide clarifications in relation to materiality considerations, the aggregation and disaggregation of disclosures and the understandability and comparability of the notes to the IFRS financial statements. They are effective for annual periods beginning on or after 1 January 2016 and have still to be endorsed by the EU.
In September 2014 the IASB also published “Amendments to IFRS 10 and IAS 28: Sales or Contributions of Assets between an Investor and its Associate or Joint Venture”. These clarify that the extent of gain or loss recognition for transactions between an investor and its associate or joint venture depends upon whether the assets sold or contributed constitute a business. The amendments are effective for annual periods beginning on or after 1 July 2016 and have still to be endorsed by the EU.
In May 2014 the IASB also amended a number of existing standards.
The “Amendments to IFRS 11: Accounting for Acquisitions of Interests in Joint Operations” clarify the accounting for acquisitions of an interest in a joint operation when the operation constitutes a business as defined in IFRS 11. These amendments are effective for annual periods beginning on or after 1 January 2016, but have still to be endorsed by the EU.
In January 2014 the IASB issued IFRS 14 “Regulatory Deferral Accounts”. The standard permits an entity which is a firsttime adopter of IFRS to continue to account, with some limited changes, for “regulatory deferral account balances” in accordance with its previous GAAP, both on initial adoption of IFRS and in subsequent financial statements. Regulatory deferral account balances, and movements in them, are presented separately in the statement of financial position and statement of profit or loss and other comprehensive income, and specific disclosures are required. IFRS 14 applies to an entity’s first annual IFRS financial statements for a period beginning on or after 1 January 2016, but has still to be endorsed by the EU.
In December 2013 the IASB issued “Annual Improvements to IFRSs 2010 – 2012 Cycle” and “Annual Improvements to IFRSs 2011 – 2013 Cycle”. The annual improvements involve minor amendments and clarifications relating to the following standards: IFRS 2 “Share-based Payment”, IFRS 3 “Business Combinations”, IFRS 8 “Operating Segments”, IFRS 13
“Fair Value Measurement”, IAS 16 “Property, Plant and Equipment ”, IAS 24 “Related Party Disclosures”, IAS 38 “Intangible Assets”, IFRS 1 “First-time Adoption of International Financial Reporting Standards” and IAS 40 “Investment Property”. Both collections of improvements are effective for annual periods beginning on or after 1 July 2014 and were endorsed by the EU in December 2014.
Reinsurance contracts: IFRS 4 “Insurance Contracts” represents the outcome of Phase I of the IASB project “Insurance Contracts” and serves as a transitional arrangement until the IASB defines the measurement of insurance contracts after completion of Phase II. IFRS 4 sets out basic principles for the accounting of insurance contracts. Underwriting business is to be subdivided into insurance and investment contracts. Contracts with a significant insurance risk are considered to be insurance contracts, while contracts without significant insurance risk are to be classified as investment contracts. The standard is also applicable to reinsurance contracts. IFRS 4 contains fundamental rules governing specific circumstances, such as the separation of embedded derivatives and unbundling of deposit components, but it does not set out any more extensive provisions relating to the measurement of insurance and reinsurance contracts. In conformity with the basic rules of IFRS 4 and the IFRS Framework, reinsurance-specific transactions therefore continue to be recognised in accordance with the pertinent provisions of US GAAP (United States Generally Accepted Accounting Principles) as applicable on the date of initial application of IFRS 4 on 1 January 2005.
Unlisted equities and equity investments Acquisition cost, cash flows, EBIT multiples, as applicable book value
Financial assets at fair value through profit or loss consist of securities held for trading and those classified as measured at fair value through profit or loss since acquisition. This refers principally to unsecured debt instruments issued by corporate issuers and derivative financial instruments. Within the scope of the fair value option provided under IAS 39 “Financial Instruments: Recognition and Measurement”, according to which financial assets may be carried at fair value on firsttime recognition subject to certain conditions, all structured securities that would have needed to have been broken down had they been recognised as available for sale or under loans and receivables are also recognised here. Hannover Re makes use of the fair value option solely for selected subportfolios of its financial assets. Securities held for trading and securities classified as measured at fair value through profit or loss since acquisition are carried at their fair value on the balance sheet date. If stock market prices are not available for use as fair values, the carrying amounts are determined using generally acknowledged measurement methods. All changes in fair values from this measurement are recognised in investment income. The classification of financial assets at fair value through profit or loss is compatible with Hannover Re’s risk management strategy and investment strategy, which are oriented extensively towards economic fair value variables.
Impairments: As at each balance sheet date we review our financial assets with an eye to the need to take impairments. Permanent impairments on all invested assets are recognised directly in the statement of income. In this context we take as a basis the same indicators as those subsequently discussed for fixed-income securities and securities with the character of equity. Qualitative case-by-case analysis is also carried out. IAS 39 “Financial Instruments: Recognition and Measurement ” contains a list of objective, substantial indications for impairments of financial assets. In the case of fixed-income securities and loans reference is made, in particular, to the rating of the instrument, the rating of the issuer / borrower as well as the individual market assessment in order to establish whether they are impaired. With respect to held-to-maturity instruments as well as loans and receivables recognised at amortised cost, the level of impairment is arrived at from the difference between the book value of the asset and the present value of the expected future earnings flows. The book value is reduced directly by this amount which is then recognised as an expense. With the exception of value adjustments taken on accounts receivable, we recognize impairments directly on the assets side – without using an adjustment account – separately from the relevant items. If the reasons for the write-down no longer apply, a write-up is made in income up to at most the original amortised cost for fixed-income securities.
Investments in associated companies are valued at equity on the basis of the proportionate shareholders’ equity attributable to the Group. Further information is provided in Section 4.1 “Consolidation principles”.
The other intangible assets largely consist of purchased and self-developed software. This is recognised at acquisition cost less scheduled depreciation. Intangible assets are regularly tested for impairment and impairment is taken where necessary. The other intangible assets also include the expected profits from acquired life reinsurance portfolios. These are carried at the present value of future profits (PVFP) at time of acquisition, which is calculated as the present value of profits expected from the acquired blocks of business disregarding new business and tax effects. Scheduled amortisation is taken according to the periods of the underlying acquired contracts. The PVFP is regularly tested for impairment using a liability adequacy test and impairments are taken if necessary. In this regard please see Section 3.2 “Major discretionary decisions and estimates”.
Deferred tax liabilities: in accordance with IAS 12 “Income Taxes” deferred tax liabilities must be recognised if assets are to be recognised in a higher amount or liabilities in a lower amount in the consolidated balance sheet than in the tax balance sheet and if these temporary differences will lead to additional tax loads in the future; please see our explanatory remarks on deferred tax assets.
Debt and subordinated capital principally consists of subordinated liabilities that can only be satisfied after the claims of other creditors in the event of liquidation or bankruptcy. They are measured at amortised cost using the effective interest rate method. Both components of profit or loss arising out of the amortisation of transaction costs and premiums / discounts in connection with an issue and the nominal interest are shown as interest on hybrid capital.
Financial liabilities at fair value through profit or loss: Hannover Re does not make use of the fair value option provided by IAS 39 “Financial Instruments: Recognition and Measurement ” to classify financial liabilities in this category upon first-time recognition.
Non-controlling interests are shares in the equity of affiliated companies not held by companies belonging to the Group. IAS 1 “Presentation of Financial Statements” requires that non-controlling interests be recognised separately within Group shareholders ’ equity. The non-controlling interest in profit or loss is shown separately following the net income. Further information is provided in Section 6.14 “Non-controlling interests”.
Disclosures about financial instruments: IFRS 7 “Financial Instruments: Disclosures” requires more extensive disclosures according to classes of financial instruments. In this context, the term “class” refers to the classification of financial instruments according to their risk characteristics. A minimum distinction is required here between measurement at amortised cost or at fair value. A more extensive or divergent distinction should, however, be geared to the purpose of the corresponding disclosures in the notes. In contrast, the term “category” is used within the meaning of the measurement categories defined in IAS 39 “Financial Instruments: Recognition and Measurement” (held to maturity, loans and receivables, available for sale and financial assets at fair value through profit or loss with the subcategories of trading and designated financial instruments). Essentially, the following classes of financial instruments are established: • Fixed-income securities - Equities, equity funds and other variable-yield securities - Other financial assets – at fair value through profit or loss
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. Effective 1 January 2014 the functional currency of the Group companies Hannover Life Reassurance Bermuda Ltd. and Hannover Re (Bermuda) Ltd. changed from euro to US dollar. This changeover was prompted by the regrouping of large parts of the securities portfolios held by the companies to USD-denominated instruments. Taken in conjunction with the fact that large parts of the insurance business written by the companies are transacted in US dollars, the currency of the primary economic environment in which the Group companies operate is the US dollar. Currency translation differences resulting from long-term loans or lendings without specified maturity between Group companies are similarly recognised outside the statement of income in a separate item of shareholders’ equity.
For further details, for example concerning the modelling of natural catastrophe scenarios and the assumptions relating to asbestos and pollution risks, the reader is referred to our comments in the risk report on page 86 et seq. We would further refer to our explanatory remarks on the technical reserves in Section 3.1 “Summary of major accounting policies” and Section 6.7 “Technical provisions”.
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 amounts 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 3.1 “Summary of major accounting policies” and on the liability adequacy tests in Section 6.7 “Technical provisions”.
Capital consolidation The capital consolidation is carried out according to the requirements of IFRS 10 “Consolidated Financial Statements” on the basis of a consistent consolidation model for all entities that identifies control as the single basis for verifying the consolidation requirement, irrespective of whether control is substantiated in company law, contractually or economically. Group companies are consolidated from the point in time when Hannover Re gains control over them. Control exists if Hannover Re directly or indirectly has decision-making power over a Group company on the basis of voting rights or other rights, if it has exposure or rights to positive and negative variable returns from its involvement with the Group company and if it can use its power to influence these returns. All of these criteria must be met. Other circumstances may also give rise to control, for example the existence of a principal-agent relationship. In this case a party outside the Group with decision-making powers (agent) acts for Hannover Re, but does not control the company since it merely exercises decision-making powers that have been delegated by Hannover Re (principal). These principles are also applied to structured entities, on which further information is provided in Section 4.2 “Consolidated companies and complete list of shareholdings ”. Group companies are consolidated until the Hannover Re Group loses control over them. The accounting policies of Group companies are adjusted, where necessary, in order to ensure consistent application of the Hannover Re Group’s accounting policies.
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 17 (15) companies at home and abroad were not consolidated in the year under review. A further 14 (13) companies were not included at equity in the consolidated financial statement for the same reason. The business object of these altogether 31 (28) companies is for the most part the rendering of services for reinsurance companies within the Group.
National provisions of company law or requirements of supervisory law may in certain countries limit the ability of the Hannover Re Group to transfer assets between companies belonging to the Group. These limitations result principally from local minimum capital and solvency requirements as well as to a lesser extent from foreign exchange restrictions.
The following list of shareholdings is provided in full in the present Group annual financial report in accordance with § 313 Para. 2 German Commercial Code (HGB) as amended by the Act on the Modernisation of Accounting Law (BilMoG). The stipulations of IFRS 12.10 and IFRS 12.21 have also been observed.
Hannover Rück Beteiligung Verwaltungs-GmbH, Hannover / Germany 1, 2 100.00 EUR 2,091,925 –
Hannover Life Re AG, Hannover / Germany 1, 2 100.00 EUR 1,705,385 –
HILSP Komplementär GmbH, Hannover / Germany 3 100.00 EUR 27 (3)
FUNIS GmbH & Co. KG, Hannover / Germany 100.00 EUR 28,806 2,854
HAPEP II Holding GmbH, Hannover / Germany 1 95.42 EUR 15,611 11,284
Hannover Re Euro RE Holdings GmbH, Hannover / Germany 1 87.68 EUR 728,604 8,791
HR GLL Central Europe Holding GmbH, Munich / Germany 1 87.67 EUR 61,941 (27)
HEPEP III Holding GmbH, Cologne / Germany 1 67.54 EUR 12,857 (525)
International Hannover Holding AG, Hannover / Germany 1, 4 100.00 EUR 39 (3)
Other participations b2b protect GmbH, Hildesheim / Germany 5, 6 41.86 EUR 467 (236)
Hannover Life Reassurance Bermuda Ltd., Hamilton / Bermuda 1 100.00 USD 405,355 38,085
Hannover Life Reassurance Company of America, Orlando / USA 1 100.00 USD 212,052 26,876
Hannover Re (Ireland) Limited, Dublin / Ireland 1 100.00 EUR 1,452,048 78,898
Hannover Re (Bermuda) Ltd., Hamilton / Bermuda 1 100.00 USD 1,465,820 243,214
Inter Hannover (No. 1) Limited, London / United Kingdom 1 100.00 GBP – –
Leine Investment General Partner S.à r.l., Luxemburg / Luxembourg 1, 8 100.00 EUR 38 157
Leine Investment SICAV-SIF, Luxemburg / Luxembourg 1, 8 100.00 USD 75,040 1,204
LI RE, Hamilton / Bermuda 1, 8 100.00 USD – –
Hannover Reinsurance Group Africa (Pty) Ltd., Johannesburg / South Africa 100.00 ZAR 209,906 4
Hannover Life Reassurance Africa Limited, Johannesburg / South Africa 100.00 ZAR 611,281 78,621
Compass Insurance Company Limited, Johannesburg / South Africa 100.00 ZAR 132,364 6,585
Micawber 185 (Pty) Ltd., Johannesburg / South Africa 100.00 ZAR 18,880 2,925
Hannover Reinsurance Mauritius Ltd., Port Louis / Mauritius 100.00 MUR 44,816 (3,232)
GLL HRE CORE Properties, L.P., Wilmington / USA 8 95.15 USD 229,382 15,889 11 Stanwix, LLC, Wilmington / USA 8 95.15 USD 36,711 1,095 402 Santa Monica Blvd, LLC, Wilmington / USA 8 95.15 USD 28,158 654
300 South Orange Avenue, LLC, Orlando / USA 8 95.15 USD 1,493 10,040
Broadway 101, LLC, Wilmington / USA 8 95.15 USD 11,536 258
HR GLL Roosevelt Kft, Budapest / Hungary 1 87.67 HUF 20,635,541 628,492
HR GLL Liberty Corner SPÓLKA Z OGRANICZONA ODPOWIEDZIALNÓSCIA, Warsaw / Poland 1 87.67 PLN 48,489 (3,233)
HR GLL Griffin House SPÓLKA Z OGRANICZONA ODPOWIEDZIALNÓSCIA, Warsaw / Poland 1 87.67 PLN 39,480 (3,221)
Mustela s.r.o., Prague / Czech Republic 1 87.67 CZK 1,234,391 (21,671)
Transit Underwriting Managers (Pty) Ltd., Cape Town / South Africa 45.90 ZAR 940 1,760
Cargo Transit Insurance (Pty) Ltd., Helderkruin / South Africa 5, 10 40.80 ZAR (4,499) –
Landmark Underwriting Agency (Pty) Ltd., Bloemfontein / South Africa 38.51 ZAR 3,211 2,114
Hospitality Industrial and Commercial Underwriting Managers (Pty) Ltd., Johannesburg / South Africa 36.82 ZAR 1,640 3,805
Garagesure Consultants and Acceptances (Pty) Ltd., Johannesburg / South Africa 35.70 ZAR 1,491 2,573
Gem & Jewel Acceptances (Pty) Ltd., Johannesburg / South Africa 30.60 ZAR 278 449
Construction Guarantee (Pty) Ltd., Johannesburg / South Africa 5, 10 30.60 ZAR – –
Envirosure Underwriting Managers (Pty) Ltd., Durban / South Africa 30.60 ZAR 201 161
Woodworking Risk Acceptances (Pty) Ltd., Johannesburg / South Africa 10 30.60 ZAR 321 1,473
Film & Entertainment Underwriters SA (Pty) Ltd., Johannesburg / South Africa 26.01 ZAR (1,960) 32
International Mining Industry Underwriters Limited, London / United Kingdom 5 100.00 GBP 552 63
HR Hannover Re, Correduría de Reaseguros, S.A., Madrid / Spain 1 100.00 EUR 341 39
LRA Superannuation Plan Pty Ltd., Sydney / Australia 4 100.00 AUD – –
Mediterranean Reinsurance Services Ltd., Hong Kong / China 1, 10 100.00 USD 52 –
Hannover Re Services Japan, Tokyo / Japan 1 100.00 JPY 97,785 1,208
Hannover Re Consulting Services India Private Limited, Bombay / India 13 100.00 INR 79,502 10,573
Hannover Services (México) S.A. de C.V., Mexico City / Mexico 5 100.00 MXN 9,546 225
Hannover Re Services USA, Inc., Itasca / USA 100.00 USD 978 80
Hannover Re Services Italy S.R.L., Milan / Italy 99.65 EUR 511 69
Svedea Skadeservice AB, Stockholm / Sweden 12 53.00 SEK – –
Glencar Underwriting Managers, Inc., Chicago / USA 5 88.20 USD 5,475 2,973
ITAS Vita S.p.A., Trient / Italy 5 34.88 EUR 85,794 5,326
ASPECTA Assurance International AG, Vaduz / Liechtenstein 5 30.00 CHF 20,941 7,847
Camargue Underwriting Managers (Pty) Ltd., Johannesburg / South Africa 14.79 ZAR 13,783 5,983
Hurst Holme Insurance Company Limited – account 2009-01 SCC, Hamilton / Bermuda 5, 10 28.50 USD 518 (390)
XS Direct Holdings Limited, Dublin / Ireland 5 25.00 EUR 2,005 (392)
New PF Limited, Dublin / Ireland 5, 10 25.00 EUR (6) –
Clarenfin (Pty) Ltd., Johannesburg / South Africa 19.02 ZAR – –
Vela Taxi Finance (Pty) Ltd, Johannesburg / South Africa 12 10.46 ZAR – –
11 Certain equity items are not counted under IFRS, as a consequence of which the amount of capital and reserves can be negative here.
According to the local accounting practice relevant for supervisory purposes, the company is adequately capitalised. 12 Company was newly established in 2014; an annual financial statement is not yet available. 13 Financial year as at 31 March 2014 14 Formerly Firedart & Construction Guarantee Underwriting Managers (Pty) Ltd. 15 Financial year from 2 August 2013 to 31 December 2014 16 Financial year from 1 October 2012 to 31 December 2013
Retrocession and securitisation of reinsurance risks In connection with the sale of the operational companies of the subgroup Clarendon Insurance Group, Inc. (CIGI), Wilmington, to Enstar Group Ltd., Hamilton / Bermuda, a partial portfolio of CIGI was retroceded to a structured entity with effect from 12 July 2011. The term of the retrocession arrangement ran until the underlying obligations had been finally settled. The contract was commuted and terminated effective 31 Decem-
In 2012 Hannover Re issued a catastrophe 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 retrocession contract concluded with the special purpose entity under the transaction affords Hannover Rück SE, E+S Rückversicherung AG and Hannover Re (Bermuda) Ltd. protection against the aforementioned catastrophe risks. The aforementioned volume of the transaction is measured by the ceded exposure limit of the retrocession contract. The structured entity is fully funded by contractually defined investments in the form of cash and equivalent liquid assets. Given that the maximum liability of the structured entity is therefore wholly collateralised, there is no risk of an underwriting loss for Hannover Re.
The book values of the assets and liabilities from the specified transactions with unconsolidated structured entities were as follows as at the balance sheet date.
Life and health reinsurance assumed Some transactions in the life and health reinsurance segment are effected with 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. Given that the risks from such transfer transactions are entirely recognised in the technical / non-technical account of the Hannover Re Group, it is immaterial whether the active reinsurance business is assumed from structured or other entities. Although Hannover Re is exposed to variable returns from the business relations with such entities, these are independent of the purpose and design of the respective structured entity. Rather, these business relations correspond to regular cedantreinsurer relations and are therefore not the subject of this disclosure. Some of the transactions include features that are to be classified as financial guarantees. For the corresponding disclosures please see our remarks in Section 8.1 “Derivative financial instruments and financial guarantees”.
Under an agreement dated 6 August 2014 HR GLL Europe Holding S.à r.l., Luxembourg, acquired all shares in the special purpose property company Mustela s.r.o., Prague, which holds and manages a commercial property in Prague, for a purchase price of EUR 68.9 million. No contingent liabilities, conditional payments or separate transactions as defined by IFRS 3 were identified. The company is included in the consolidated financial statement with effect from the third quarter of 2014.
With effect from 3 March 2014 Hannover Re established the company Hannover Life Reassurance Company of America (Bermuda ) Ltd. based in Hamilton, Bermuda. All shares in the company are held by Hannover Life Reassurance Company of America, Orlando. The business object of the company is to assume life insurance risks by way of reinsurance and using capital market instruments as well as to transfer them to other Group companies. The company commenced its business operations in the first quarter of 2014 and has been included in full in Hannover Re’s consolidated financial statement since that date.
Since March 2014 Hannover Rück SE has participated in Meribel TopCo Limited, St. Helier, Jersey, in the form of a financial interest in a direct amount of 19.9% of the company’s shares. The business object of the company is the indirect acquisition of life insurance companies, inter alia Heidelberger Lebensversicherung AG, Heidelberg. Taken together with the shares held by Hannover Re Euro PE Holdings GmbH & Co. KG through a fund, Hannover Re directly and indirectly holds altogether 20.1% of the company’s shares. With effect from the first quarter of 2014 the shares in the company have been recognised in the consolidated financial statement as an equity investment measured at amortised cost.
Effective 24 March 2014 Funis GmbH & Co. KG (“Funis”) redeemed the voting puttable preference shares that it held in Glencar Underwriting Managers Inc., Chicago, United States (“Glencar”) and hence relinquished its majority voting interest in the company. In the context of this transaction a change was also made to the composition of Glencar’s managing board as per the contractual agreement, since Hannover Re no longer had majority representation on this body. In view of the fact that Hannover Re is therefore no longer able to exercise control over Glencar, but continues to be able to exercise a significant influence over the company, Glencar was deconsolidated as at the end of the first quarter of 2014 and included at equity in the consolidated financial statement. The derecognition of assets and liabilities as well as recognition of the participating interest at fair value gave rise to income of EUR 2.7 million, which was carried under other income and expenses. In addition, cumulative other comprehensive income of -EUR 0.1 million was realised from currency translation.
In accordance with the purchase agreement of 3 February 2014 Hannover Rück SE assumed 15% of the shares in Hannover Re Euro RE Holdings GmbH, Hannover, previously held through E+S Rückversicherung AG. The effects of the change in the amount of holding were recognised in the consolidated financial statement as an equity transaction pursuant to IFRS 10. Since it involves an internal transaction within the Group between companies under common control, this purchase transaction does not give rise to goodwill nor does it have any implications for Group net income.
Effective 17 October 2014 Hannover Rück Beteiligung Verwaltungs -GmbH, Hannover, all shares of which are held by Hannover Rück SE, acquired 838 shares in E+S Rückversicherung AG for a purchase price of EUR 20.1 million from a third party outside the Group. By way of an increase in its shareholding of 1.1% with no change of control status Hannover Rück Beteiligung Verwaltungs-GmbH holds 64.79% of the shares in E+S Rückversicherung AG upon closing of the transaction. In connection with the acquisition of the shares Hannover Rück SE contributed an amount of EUR 20.1 million to the additional paid-in capital of Hannover Rück Beteiligung Verwaltungs-GmbH.
A nn ua l f in an ci al s ta te m en ts 5. Segment reporting
Based on the “management approach” of IFRS 8, which requires segment information to be presented as it is reported internally to management and normally used by the chief operating decision maker to decide upon the allocation of resources to a segment and evaluate its performance, Hannover Re has identified the reportable segments of property & casualty reinsurance and life & health reinsurance. With regard to the object of business operations within the two segments please see the corresponding remarks in the management report.
The “Consolidation” column includes not only the elimination of cross-segment transactions but also, more significantly, companies whose business operations cannot be unambiguously allocated to property and casualty reinsurance or life and health reinsurance. These are principally the service and financing companies belonging to the Group.
Segmentation of assets Property and casualty reinsurance in EUR thousand 31.12.2014 31.12.2013
Financial assets at fair value through profit or loss 63,648 18,157
Amortised cost, unrealised gains and losses and accrued interest on the portfolio of investments classified N 15 as held to maturity as well as their fair value in EUR thousand 2013
Amortised cost, unrealised gains and losses and accrued interest on loans and receivables as well as their fair value N 16 in EUR thousand 2014
Debt securities issued by semi- governmental entities 1,655,060 27,559 260,622 – 1,915,682
Amortised cost, unrealised gains and losses and accrued interest on loans and receivables as well as their fair value N 17 in EUR thousand 2013
Amortised cost, unrealised gains and losses and accrued interest on the portfolio of investments N 18 classified as available for sale as well as their fair value in EUR thousand 2014
Covered bonds / asset-backed securities – 11,547 – 55 – 11,602
Analysis of the fair value changes in the portfolio of fixedincome securities at fair value through profit or loss indicated that fair value changes of EUR 0.3 million (none) were due to changes in ratings.
Carrying amounts before impairment N 21 in EUR thousand 2014 2013
For further explanatory remarks on the impairment criteria please see Section 3.1 “Summary of major accounting policies”.
Fixed-income securities – at fair value through profit or loss – 67 9,203 226 35,220 7,448 – 12,330 64,494
Rating structure of fixed-income securities N 23 in EUR thousand 2013
Fixed-income securities – at fair value through profit or loss – – 11,874 – 18,099 4,604 – 1,484 36,061
Fixed-income securities – held to maturity – 101,700 1,273,877 154,598 – 609,567 – – 2,139,742
Fixed-income securities – at fair value through profit or loss – – 18,014 649 – 45,831 – – 64,494
Other financial assets – at fair value through profit or loss – – 19,083 967 – 46,344 – – 66,394
Breakdown of investments by currencies N 25 in EUR thousand 2013
Fixed-income securities – held to maturity – 119,696 1,498,316 145,257 – 903,518 – – 2,666,787
Equity securities – available-for-sale – – 16,872 – – 12,108 – – 28,980
• ASPECTA Assurance International AG, Vaduz, Liechtenstein, as well as the following companies included at equity within the subgroup Hannover Reinsurance Group Africa (Pty) Ltd., Johannesburg, South Africa: • Firedart & Construction Guarantee Underwriting Managers (Pty) Ltd., Johannesburg, South Africa,
Group share of income and expense recognised directly in equity 10,217 1,712
The carrying amount of the investments in associated companies changed as follows in the year under review: Investments in associated companies N 27 in EUR thousand 2014 2013
Net book value at 31 December of the previous year 144,489 133,017
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. Income and expenses from rental agreements are included in the investment income.
Gross book value at 31 December of the previous year 872,905 505,727
Gross book value at 31 December of the year under review 1,023,281 872,905
Cumulative depreciation at 31 December of the previous year 25,741 14,067
The fair value of investment property amounted to EUR 1,038.6 million (EUR 875.3 million) as at the balance sheet date.
The market value of the real estate was determined using the discounted cash flow method.
If input factors from different levels are used to measure a financial instrument, the level of the lowest input factor material to measurement is determinative.
Movements in level 3 financial assets and liabilities N 31 in EUR thousand 2014
Currency translation at 31 December of the year under review (592) – 2,801 5,173 13,982
Movements in level 3 financial assets and liabilities N 32 in EUR thousand 2013
Currency translation at 31 December of the year under review 841 – (958) (3,233) (2,316)
Total depreciation, impairments and appreciation of investments – (494) (3,544) –
Change in fair value of financial instruments 1,090 – (97) 987
Total depreciation, impairments and appreciation of investments – – (3,544) –
If models are used to measure financial assets and liabilities included in level 3 under which the adoption of alternative inputs leads to a material change in fair value, IFRS 13 requires disclosure of the effects of these alternative assumptions. Of the financial assets included in level 3 with fair values of altogether EUR 1,580.4 million (EUR 1,205.0 million) as at the balance sheet date, Hannover Re measures financial assets with a volume of EUR 1,474.8 million (EUR 1,109.7 million) using the net asset value method, in respect of which alternative inputs within the meaning of the standard cannot reasonably be established. The remaining financial assets included in level 3 with a volume of EUR 105.6 million (EUR 95.3 million) relate in very large part to acquired life insurance policies, the valuation of which is based on technical parameters. Derivative financial instruments in connection with the reinsurance business were recognised under the other liabilities included in level 3 in the year under review. Their performance is dependent upon the risk experience of an underlying group of primary insurance contracts with statutory reserving requirements. The application of alternative inputs and assumptions has no material effect on the consolidated financial statement.
Fair value hierarchy of financial assets and liabilities measured at amortised cost N 35 in EUR thousand 2014
Total financial liabilities – 2,582,464 – 2,582,464 6.2 Funds withheld (assets)
The contract deposits on the assets side increased by EUR 16.6 million in the year under review from EUR 75.5 million to EUR 92.1 million.
Net book value at 31 December of the year under review 1,914,598 1,672,398
Age structure of overdue accounts receivable N 38 in EUR thousand 2014 2013
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 90 et seq.
The value adjustments on accounts receivable that we recognise in adjustment accounts changed as follows in the year under review: Value adjustments on accounts receivable N 39 in EUR thousand 2014 2013
Cumulative value adjustments at 31 December of the previous year 35,990 40,703
Cumulative value adjustments at 31 December of the year under review 42,221 35,990
Net book value of accounts receivable at 31 December of the year under review 3,113,978 2,945,685
Net book value at 31 December of the year under review 58,220 57,070
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 obtained 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 Institute of Public Auditors in Germany (IDW). The beta factor is calculated for Hannover Rück SE on the basis of publicly accessible capital market data.
Of this, other assets of EUR 5.1 million (EUR 4.2 million) are attributable to affiliated companies.
As in the previous year, the other receivables do not include any items that were overdue but unadjusted as at the balance sheet date. On the basis of specific impairment analyses no value adjustments (previous year: EUR 0.3 million) were taken on other receivables in the year under review.
This item consists of the present value of future cash flows recognised on business acquired in 2009 in the context of the acquisition of the ING life reinsurance portfolio. This intangible asset is amortised over the term of the underlying reinsurance contracts in proportion to the future premium income.
Gross book value at 31 December of the year under review 143,788 129,828
Cumulative depreciation at 31 December of the previous year 99,608 97,804
With regard to the measurement of fixtures, fittings and equipment, the reader is referred to our explanatory notes on the other assets in Section 3.1 “Summary of major accounting policies”.
The changes in the consolidated group refer to the deconsolidation of Glencar Underwriting Managers, Inc.; please see our explanatory remarks in Section 4.4 “Major disposals and retirements”.
Cumulative depreciation at 31 December of the previous year 165,846 152,589
Net book value at 31 December of the previous year 30,843 32,136
Net book value at 31 December of the year under review 37,462 30,843
The item includes EUR 2.2 million (EUR 3.2 million) for selfcreated software and EUR 30.0 million (EUR 19.1 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 18.0 million (EUR 5.0 million) for purchased software and EUR 1.0 million (EUR 0.9 million) for capitalised development costs for selfcreated software.
Technical provisions N 46 in EUR thousand 2014 2013 gross retro net gross retro net
The loss and loss adjustment expense reserves are in principle calculated on the basis of the information supplied by ceding companies. Additional IBNR reserves are established for losses that have been incurred but not as yet reported. The development of the loss and loss adjustment expense reserve is shown in the following table. Commencing with the gross reserve, the change in the reserve after deduction of the reinsurers’ portions is shown in the year under review and the previous year.
Net book value after currency translation 23,028,728 1,496,203 21,532,525 20,635,097 1,460,456 19,174,641
Net book value at 31 December of the year under review 24,112,056 1,376,432 22,735,624 21,666,932 1,403,804 20,263,128 1 Including expenses recognised directly in shareholders’ equity
In the year under review minimal (previous year: none) specific value adjustments were established on retrocessions, i. e. on the reinsurance recoverables on unpaid claims, while they were reversed in the amount of EUR 0.3 million (EUR 0.5 million). On balance, therefore, cumulative specific value adjustments of EUR 0.2 million (EUR 0.5 million) were recognised in these reinsurance recoverables as at the balance sheet date.
The total amount of the net reserve before specific value adjustments, to which the following remarks apply, was EUR 22,735.5 million (EUR 20,262.7 million) as at the balance sheet date.
Run-off of the net loss reserve in the property and casualty reinsurance segment To some extent the loss and loss adjustment expense reserves are inevitably based upon estimations that entail an element of uncertainty. The difference between the previous year’s and current estimates is reflected in the net run-off result. In addition, owing to the fact that the period of some reinsurance treaties is not the calendar year or because they are concluded on an underwriting-year basis, it is frequently impossible to make an exact allocation of claims expenditures to the current financial year or the previous year.
The following table shows the net loss reserve for the property and casualty reinsurance business group in the years 2004 to 2014 as well as the run-off of the reserve (so-called run-off triangle ). The figures reported for the 2004 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 2014 financial year for the individual run-off years.
Loss and loss adjustment expense reserve (net) for the year in question and previous years plus payments made to date on the original reserve
Due after one through five years 9,430,724 530,791 8,899,933 1,403,573 342,156 1,061,417
Due after five through ten years 3,604,852 182,255 3,422,597 1,186,478 277,396 909,082
Due after one through five years 8,335,299 551,507 7,783,792 662,966 85,903 577,063
The average maturity of the loss and loss adjustment expense reserves was 5.0 years (5.2 years), or 5.0 years (5.2 years) after allowance for the corresponding retrocession shares. The benefit reserve had an average maturity of 10.7 years (12.6 years) – or 11.5 years (13.1 years) on a net basis.
Development of the benefit reserve N 51 in EUR thousand 2014 2013 gross retro net gross retro net
Net book value at 31 December of the previous year 10,631,451 344,154 10,287,297 10,974,570 507,257 10,467,313
Net book value at 31 December of the year under review 11,757,132 676,219 11,080,913 10,631,451 344,154 10,287,297
Net book value at 31 December of the year under review 2,748,594 149,257 2,599,337 2,405,497 139,039 2,266,458
The funds withheld under reinsurance treaties totalling EUR 817.1 million (EUR 648.0 million) represent the cash and securities deposits furnished to our company by our retrocessionaires that do not trigger any cash flows and cannot be realised without the consent of our retrocessionaires. The maturities of these deposits are matched to the corresponding shares of the reinsurers in the technical provisions. If such a share no longer exists the corresponding funds withheld are reduced to the same extent.
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 e. V. This pension plan provides for retirement, disability and surviving dependants’ benefits.
The commitments to employees in Germany predominantly comprise benefit obligations financed by the Group companies. The pension plans are unfunded. The provisions for pensions in Germany and abroad were calculated on the basis of uniform standards according to prevailing economic circumstances.
Past service cost and plan curtailments 194 – – – – –
Return on plan assets, excluding amounts included in interest income – – 513 207 – –
Position at 31 December of the financial year 187,034 129,602 15,533 13,510 – 75