Equity attributable to shareholders of Hannover Rück SE 8,068.3 +6.9% 7,550.8 5,888.4 6,032.5 4,970.6
Dividend per share in EUR 3.25 + 1.50 2, 3 +11.8% 3.00 + 1.25 3 3.00 2.60 + 0.40 3 2.10
Share price at year-end in EUR 105.65 +40.9% 74.97 62.38 58.96 38.325
Combined ratio (property and casualty reinsurance) 4 94.4% 94.7% 94.9% 95.8% 104.3%
EUR 2.60 plus special dividend of EUR 0.40 for 2012 4 Including expenses on funds withheld and contract deposits 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
A complete list of our shareholdings is provided on page 160 et seq. of the notes. The addresses of the Hannover Re Group’s branch offices and subsidiaries abroad are to be found in the section “Further information” on page 242 et seq.
We transact all lines of property & casualty and life & health reinsurance and are present on all continents with roughly 2,500 staff. Established in 1966, the Hannover Re Group today has a network of more than 100 subsidiaries, branches and representative offices worldwide. The German business of the Hannover Re Group is transacted by our subsidiary E+S Rück.
Report by the Supervisory Board 238 Supervisory Board of Hannover Rück SE 241
The 2015 financial year was an exceptionally successful one for your company. This is reflected firstly in the record profit that we can report for what is now the fourth consecutive time. Even more significant, however, is the fact that in 2015 we were able to substantially strengthen the platform that we have put in place for achieving our financial goals going forward. In property and casualty reinsurance, for example, we again appreciably increased the confidence level of our loss reserves despite the difficult market environment. This should help us to post continued good underwriting results even in the challenging years to come. In life and health reinsurance we further boosted the value of new business and, what is more, we improved the profitability of the existing portfolio by taking targeted actions. We have thus cemented a robust foundation for further increasing the underlying profitability of our life and health reinsurance business. When it comes to our investments, we took purposeful structural steps that should enable us to keep the return on investment broadly stable in absolute terms. This was supported by further considerable growth in the portfolio of assets under own management, facilitated by a sharply higher operating cash flow compared to the previous year.
As our valued shareholders, you can therefore rest assured that your company has established a very good basis for continued success in the coming years, which will be shaped by a challenging general business climate. Our foundation is the successful implementation of our strategic approach geared to “long-term success in a competitive business”.
The market environment in property and casualty reinsurance remained intensely competitive in the year under review with the associated rate reductions. The key driver here is the fact that natural catastrophe losses were below the expected levels over the past four years, as a consequence of which reinsurers posted generally good results. This prompted an increased inflow of capacity into the markets both from traditional reinsurers as well as in the form of so-called alternative capital from pension funds, hedge funds and other investors. The supply of reinsurance capacity thus rose considerably more sharply than demand.
Thanks to our very good market position Hannover Re nevertheless achieved a business development in the year under review with which we can be thoroughly satisfied. Our long-standing, stable customer relationships and our good ratings were particularly crucial in enabling us to write business selectively and only at conditions that satisfied our margin requirements. Despite this, we boosted the premium volume by eight percent – adjusted for exchange rate effects – to more than EUR 9 billion. What is particularly gratifying is that the rise in premium income was accompanied by an even more significant increase in the underwriting result to EUR 432 million. The combined ratio improved from 94.7 percent to 94.4 percent. The quality of the underwriting result is also borne out by the fact that the growth was not generated at the expense of the confidence level of our loss reserves. Quite the contrary: the confidence level actually showed further improvement.
US mortality business, and especially a block of business that we had acquired in 2009, again performed unsatisfactorily. Still, it is pleasing to report that we were able to implement measures in this area that should lead to improved profitability. We substantially reduced the annual collateralisation costs while at the same time raising the reinsurance rates for a number of very poorly performing treaties. This should improve the profit outlook for this segment by an amount in the mid-double-digit millions of euros.
We moved forward on our expansionary course in life and health reinsurance in the financial year just ended. Gross premium adjusted for exchange rate effects rose by around ten percent to EUR 7.7 billion. As already mentioned, this growth went hand-in-hand with an even stronger increase in the earnings figures.
Given that the general business environment is by no means straightforward, we are also highly satisfied with the development of our investment income. The portfolio of assets under own management grew to more than EUR 39 billion, thanks not least to a continued positive cash flow. This is all the more remarkable because the valuation reserves fell again – on the back of higher risk premiums on corporate bonds – and we paid a substantially increased dividend of EUR 513 million. Despite the drop in interest rates, we boosted the investment income from assets under own management by a sizeable 16 percent to EUR 1.3 billion. The key contributory factors here are our increased exposure to real estate as well as income from private equity investments. The net return on assets under own management stood at 3.4 percent and thus came in comfortably better than planned. Including interest on funds withheld and contract deposits, net investment income grew to a very pleasing EUR 1.7 billion, equivalent to growth of 13 percent.
All in all, we are again expecting to post very good business results for your company in 2016. Provided major losses remain within the bounds of expectations and as long as there are no exceptional distortions on the investment side, we anticipate Group net income in the order of EUR 950 million.
… efficient Capital allocation – efficiently managed In the early years after its founding Hannover Re operated with scarce capital resources. This led, in the first place, to systematic strengthening of the reserves from organic growth in times of high interest income, while at the same time it resulted in a sophisticated risk-based capital model that enabled the company to write the most profitable business possible with its limited capital resources. Thanks to this capital model, we are able to identify attractive business, optimally deploy our capital in business groups, regions and lines and leverage potential scope for diversification. In 2015 this was the first internal model of any reinsurance company to be approved by the financial supervisory authority.
The Hannover Re share • Share price listed at new all-time high of EUR 111.50 • Share performance of +47.8% incl. reinvested dividends • Proposed dividend of EUR 3.25 plus special dividend of EUR 1.50 per share above the strategic payout ratio
After investors had seen rather meagre returns on the German stock market in 2014, German blue chips enjoyed a spectacular upswing right out of the gate as 2015 got underway. Driven by the European Central Bank’s easing of monetary policy – the extent of which came as a surprise to markets – the German DAX bellwether index had already broken through 12,000 points by March. This trend was supported by the weaker euro, which came as a boon to the heavily export-dependent German economy. The terrorist attacks in Paris, the possibility of Greece leaving the Eurozone, the flashpoints in the Middle East, the sustained drop in the price of oil, the rise in interest rates in the United States and softer economic data coming out of China – all these factors exacerbated the nervous mood on stock markets, giving rise to sometimes marked price volatility.
The Hannover Re share had started 2015 at a price of EUR 74.97 and was to slip to its lowest point of the year after just five days at EUR 73.81. In the spring, supported by broadly positive market sentiment and the unveiling of another record result for the financial year just ended, the share posted steady price gains and passed the EUR 100 mark for the first time on 10 April 2015. In the course of the following summer months until autumn the share was unable to divorce itself from the general sense of uncertainty prevailing on the markets, leading to a volatile performance with a number of setbacks. The sustained competitive intensity on reinsurance markets and the associated news on the renewals in property and casualty reinsurance – with corresponding rate erosion – had a detrimental impact on the share valuation. At the same time, a major loss experience that remained well below expectations and pleasing Group net income for the first half-year generated positive demand on the stock market. In times of low capital market rates investors increasingly looked at the Hannover Re share – and especially its attractive dividend yield – in 2015. In the fourth quarter the share moved higher, touching its highest point of the year – and new all-time high – of EUR 111.50 on 2 December 2015. This performance was supported primarily by the expectation that Hannover Re would post another very favourable Group result for 2015. This assumption was based on the insight that thanks to its comfortable capital resources, prudently calculated loss reserves and very good market position as a broadly diversified reinsurer, Hannover Re should be able to deliver good results even in the prevailing competitive market climate and hence again set a higher payout ratio for
Fo r ou r in ve st or s the dividend distribution in the year under review. The Hannover Re share closed the financial year with a gain of 40.9% at EUR 105.65 and thus recorded a performance of 47.8% including reinvested dividends. Over the year the Hannover Re share comfortably outperformed its benchmark indices, namely the DAX (+9.6%), MDAX (+22.7%) and the Global Reinsurance (Performance) Index (+22.5%). The Global Reinsurance Index tracks the share performance and dividend payments of the world’s 20 largest reinsurers. Hannover Re measures its performance by this benchmark index.
The Executive Board and Supervisory Board intend to propose to the Annual General Meeting on 10 May 2016 that a dividend of EUR 3.25 plus a special dividend of EUR 1.50 per share should be distributed. In keeping with the previous year, the special dividend will be paid as a capital management measure because the company’s capitalisation continues to be comfortably in excess of the required capital. Based on the year-end closing price of EUR 105.65, this produces a dividend yield of 4.5%.
The Annual General Meeting of Hannover Rück SE was held on 6 May 2015 in Hannover. Altogether, including postal ballots around 73% of the share capital was represented.
In his address to shareholders Chief Executive Officer Ulrich Wallin took the opportunity to look back once more on the record year of 2014, in which Hannover Re had again surpassed the previous year’s result with an after-tax profit of EUR 985.6 million. The two business groups of Property & Casualty and Life & Health reinsurance as well as the investment income all contributed to this successful performance.
Relative performance of the Hannover Re share I 10 in %
together with all other proposed resolutions put to the vote, was approved by the Annual General Meeting by a large majority.
Against the backdrop of a sustained competitive reinsurance environment and volatile capital markets, Hannover Re experienced continued strong demand for information on the part of its investors in 2015. Our event activities consequently remained on a high level. Altogether, members of the Executive Board and representatives of the Investor Relations department attended 16 international capital market conferences (previous year: 15) and 19 roadshows (21). We retained our focus on the financial centres of Frankfurt and London, which we visited at least once a quarter. The cities of Amsterdam, Dublin, Geneva, Copenhagen, Lugano, Lyon, Milan, Munich, New York, Paris, Tokyo, Vienna and Zurich were further destinations that we revisited. Berlin, Boston, Brussels, Hong Kong, Madrid, Naples, Nice, Rome and Toronto featured on our agenda for the first time.
In total, around 200 analyst recommendations were published for Hannover Re and the insurance sector in the 2015 financial year. By the end of the year 32 analysts had handed down opinions on Hannover Re: three analysts (6) recommended the Hannover Re share as “buy” or “overweight”. Altogether eight opinions (20) were a “hold”. “Underweight” or “sell” recommendations were issued a total of 21 (7) times, making
Shareholding structure as at 30 November 2015 I 11 7.8% Private investors 42.0% Institutional investors 50.2% Talanx AG
Geographical breakdown of the shares I 12 held by institutional investors 3.3% Scandinavia 1.6% Rest of Europe 0.6% Rest of world3.4% Switzerland 4.5% Asia 5.0% France 12.4% United Kingdom 9.7% Canada 7.5% Benelux 32.4% United States 19.6% Germany
Germany Xetra, Frankfurt, Munich, Stuttgart, Hamburg, Berlin, Düsseldorf, Hannover (official trading: Xetra, Frankfurt and Hannover)
Equity attributable to shareholders of Hannover Rück SE in EUR million 8,068.3 7,550.8 5,888.4 6,032.5 4,970.6
EUR 2.60 plus special dividend of EUR 0.40 for 2012 5 Earnings per share / average of book value per share at start and end of year 6 Dividend per share / year-end closing price 7 Year-end closing price / book value per share 8 Year-end closing price / earnings per share 9 Year-end closing price / cash flow (from operating activities) per share this the most common. According to analysts, the marked shift in recommendations away from “hold” towards “sell” within the year was motivated by the significantly more favourable performance – looked at in relative terms – of the Hannover Re share measured against comparable stocks and hence the supposedly limited scope for growth on the valuation side. Parallel to this, the analysts raised the average price target substantially from EUR 67.49 at the start of the year to EUR 91.88 at year-end (+36.1%).
We aim for successful employees • Offer attractive workplaces • Foster the qualifications, experience and commitment of our staff
• Ensure that requirements for equity resources (economic capital model, solvency regulations, etc.) are met
Our strategy encompasses ten strategic principles for ensuring the realisation of our vision “Long-term success in a competitive business” across business units. We implement the strategy in accordance with our holistic management system Performance Excellence 2.0. This forward-looking management system is based on the Excellence Model of the EFQM (European Foundation for Quality Management) and has a clear strategic focus: each organisational unit of the Hannover Re Group defines its own contribution to the Group strategy with the aid of the internal Strategy Guide and our Strategy Cockpit tool. In this way, we ensure that all initiatives and activities within Hannover Re are rigorously linked to the corporate strategy.
Report on economic position 30 Macroeconomic climate and industry- specific environment 30
With a gross premium volume of around EUR 17.0 billion, Hannover Re is the third-largest reinsurer in the world. We transact reinsurance in our Property & Casualty and Life & Health business groups.
Through the acceptance of reinsurance risks with little or no correlation in our Property & Casualty and Life & Health business groups across all lines of business and based on our global presence, we are able to achieve efficient risk diversification. In conjunction with our capital management, this is the key to our comparatively low cost of capital.
Guided by a clearly defined risk appetite, our risk management steers the company so as to be able to act on business opportunities while securing our financial strength on a lasting basis.
Our subsidiary E+S Rückversicherung AG (E+S Rück) , as the “dedicated reinsurer for the German market”, offers a range of products and services tailored to the specific features of the German market. Of special importance here are the mutual insurers with whom we maintain a strategic partnership that is underscored through their participation in E+S Rück.
Our integrated system of enterprise management constitutes the basis for accomplishment of our strategic objectives. Located at its core are, first and foremost, our profit and growth targets, which are summarised for the Group and its business groups in the so-called target matrix. In addition to traditional performance indicators geared to the IFRS balance sheet, our system of strategic targets also includes economic targets derived from our certified internal capital model. The targets are regularly analysed and adjusted in the context of the strategy review conducted at periodic intervals. Our focus is on long-term strategic target attainment.
Growth in earnings per share (year-on-year comparison) ≥ 6.5% 16.7% 10.1% 5.4% 10.6%
EBIT margin 7 Financial Solutions / Longevity ≥ 2% 11.0% 5.0% 5.2% 7.2%
Planning year 1 The Global Management Forum (GMF) brings together senior managers of the Hannover Re Group from around the world for the purpose of defining strategic orientations. The parameters developed here serve as the basis for the subsequent planning process.
The adjusted operating profit (EBIT) is comprised of two factors: the IFRS Group net income recognised after tax and the change in the balancing items for differences between economic valuations and amounts stated in the IFRS balance sheet. By way of the latter we make allowance for changes in the fair values of assets not recognised in income under IFRS as well as the change in the discount effects of the reserves in property and casualty reinsurance and in the Embedded Value Not Recognised (EVNR) in life and health reinsurance. In addition, interest on hybrid capital already recognised in the IFRS Group net income and the non-controlling interest in profit and loss are included back in the calculation.
1 Adjustment based on final MCEV calculation (life and health reinsurance) 2 Income above risk-free interest after deduction of risk-appropriate cost of capital
Above and beyond this, Hannover Re makes systematic efforts to identify new business opportunities in order to achieve sustainable growth and strengthen the profitable development of the company. At our Global Executive Forum in 2015 we expressly explored how to leverage emerging business opportunities, including those associated with innovative products and risk covers as well as new sales channels and capabilities, and we mapped out a course for future growth. The goal is to generate new business and thereby support Hannover Re’s profitable growth on a lasting basis. For further details please see the Opportunity report on page 95 et seq.
Macroeconomic climate and industry-specific environment • Global economy posts slightly weaker growth • Insurance industry still influenced by low interest rate environment • Implementation of risk-based solvency systems in Europe, China and South Africa • Losses from natural disasters again lower in 2015
Europe The economic climate in the Eurozone showed a modest recovery: growth increased by 0.6 percentage points to 1.5%. The improved performance of countries that had still been experiencing discernible growth problems in 2014 was a factor here. Italy, for example, put the difficult previous year behind it to deliver positive growth of 0.7%, while France boosted the pace of its expansion to more than one percent again. The Spanish economy picked up sharply with growth of 3.1%. Ireland, the peak growth performer, put on another 6.5%. After securing a hard-fought agreement with the countries giving it financial backing, Greece is struggling to implement austerity plans and will likely achieve at best zero growth in 2015.
Asia Heavily influenced by economic weakness in China and declining commodity prices, Asia’s emerging markets delivered a moderate pace of expansion overall in 2015. In China growth in the first quarter fell to the lowest level since 2008, triggering significant uncertainties on capital markets over the summer.
The Japanese economy continued to struggle under soft demand from emerging markets in 2015 and its performance was correspondingly weak. The country’s economy recorded modest growth of 0.7% over the year as a whole.
Further modest declines in yields were observed for German government bonds with shorter maturities, which therefore continued to deliver negative returns in net terms that extended into the medium-term maturity bands. The yield on three-year government bonds, for example, retreated over the course of the year from -0.1% to -0.3%. These declines were facilitated by the anticipation of further active market intervention by the ECB as well as by considerable liquidity in the markets and the search for safe investment opportunities. In the case of US Treasuries, modest yield increases were observed in the short- to medium-term maturity segments; longer maturities tended to remain stable year-on-year. The return on one-year US Treasuries, for example, rose from 0.2% to 0.6% over the course of the year. This increase can be attributed primarily to the expectation among market players that the Fed will make further moves on interest rates. UK gilts saw virtually no changes throughout the period under review. As for the European nations with higher risk premiums that have been the focus of so much attention in recent years, the picture was again largely one of recovery. Risk premiums on corporate bonds in our main currency areas increased – in some instances markedly – as the year progressed owing to developments in emerging markets combined with commodity price movements.
The environment facing the international insurance industry remained challenging in 2015: with the general level of interest rates still being extremely low, insurers devoted particularly close attention to preserving the value of their investments and the stability of returns.
One response to the more demanding market conditions in the insurance sector has been an appreciable increase in the number of companies joining forces – whether through mergers, acquisitions or equity investments. According to industry analysts, M&A activities among both insurers and reinsurers were more intensive last year than they had been in a long time. Within the first nine months alone 15 transactions were documented worldwide. They estimate that this trend will continue in 2016.
Risk-based solvency systems are currently the focus of attention worldwide: in China, for example, the Risk Oriented Solvency System (C-ROSS) has been adopted and in South Africa the Solvency Assessment and Management (SAM) framework is being implemented.
In the area of property and casualty reinsurance the prevailing intense competition was sustained in 2015: in the absence of market-changing large losses insurers continued to enjoy strong capital resources, hence further supporting the trend towards increased retentions. At the same time the market for collateralised reinsurance products continued to build substantial capacities and thereby absorbed additional risks that had hitherto been covered on the reinsurance market. For the reinsurance sector this was accompanied by further pressure on prices and conditions. To some extent it was possible to offset this decline through stronger demand resulting from preparations for the requirements of Solvency II.
On the product side 2015 once again opened up some intriguing possibilities: increasing digitalisation, for example, stimulated demand for protection against cyber risks.
The life and health reinsurance market is still going through a process of adjustment: in Germany the appeal of traditional life insurance policies has continued to diminish in tandem with the protracted low interest rate environment. In the United Kingdom the reform of the Pensions Act in April led to a shake-up of the pensions market: for those (re)insurance industry players covering the longevity risk the reform means that existing insurance solutions must be modified to fit the new conditions.
Despite the fiercely competitive state of the market we are satisfied with the development of our business in property and casualty reinsurance. Even though rates in most markets continued to decline, our positioning as a financially robust reinsurer enabled us to act on opportunities for profitable growth, as a consequence of which premium income in the year under review grew more strongly than had been anticipated. Gross premium increased by 18.2% as at 31 December 2015 to EUR 9.3 billion (EUR 7.9 billion). At constant exchange rates the increase would still have been as much as 8.1%.
Life and health reinsurance business delivered another solid contribution to the successful result posted by the Group in the year just ended. The general business climate remained competitive, especially in mature life insurance markets. We were nevertheless able to identify potential new business opportunities for our long-standing clients based on our proven, partnership-based approach and we additionally acquired new customers through active marketing efforts, attractive conditions and comprehensive service support. This had favourable implications for our gross premium income: gross premium increased in the reporting period just ended to EUR 7.7 billion (EUR 6.5 billion), equivalent to growth of 19.7%. Adjusted for exchange rate effects, the growth of 9.5% exceeded our target growth range for gross premium of between 5% and 7%. Similarly, at EUR 542,6 million we also beat our planned target of more than EUR 180 million for the Value of New Business in the year under review.
Our investment income grew by 15.5% in the year under review to EUR 709.2 million (EUR 614.2 million). Of this, EUR 334.3 million (EUR 258.5 million) was attributable to assets under own management; the remaining EUR 374.9 million (EUR 355.7 million) derived from securities deposited with ceding companies.
Bearing in mind the protracted low interest rate environment, we are highly satisfied with the development of our total investments as at 31 December 2015. The portfolio of investments under own management stood at EUR 39.3 billion and was thus higher than the comparable level at the end of the previous year (31 December 2014: EUR 36.2 billion). This increase derived in large measure from positive exchange rate effects, especially associated with the strong US dollar, but was also due to a pleasing positive operating cash flow. The decline in valuation reserves, which resulted primarily from the flattening of the US yield curve and higher credit spreads on corporate bonds, served as a restraining factor in this development.
The gross premium in our total business increased substantially by 18.8% as at 31 December 2015 to EUR 17.1 billion (EUR 14.4 billion). At constant exchange rates the increase would have been 8.7%. This puts us at the upper end of our guidance – which we had raised after the second quarter – for currency-adjusted growth in the range of five to ten percent for 2015. The level of retained premium edged lower to 87.0% (87.6%). Net premium earned rose 17.5% to EUR 14.6 billion (EUR 12.4 billion). At unchanged exchange rates growth would have come in at 7.9%.
The development of our shareholders’ equity was also once again highly satisfactory: driven by the increase in retained earnings, the equity attributable to shareholders of Hannover Re rose by 6.9% relative to the position at year-end 2014 to
+8.7% at constant exchange rates +18.8% not adjusted for currency effects
The Executive Board of the Hannover Re Group is very satisfied with the development of business in 2015. Not only did the company achieve its targets for important key indicators such as the operating profit (EBIT) and Group net income, return on equity and combined ratio, in some cases it also clearly surpassed them. This is all the more gratifying given that the business environment for reinsurers remains intensely competitive. The investment income and the generated return on investment developed successfully despite the continued low level of interest rates. Group net income rose to the highest level ever recorded in the company’s history at more than EUR 1 billion. The company’s shareholders’ equity also showed a very pleasing increase, as a consequence of which the total policyholders’ surplus surpassed the previous year’s record figure to reach a new all-time high. At the time of preparing the management report, the business position of the Hannover Re Group remains highly favourable and its financial strength has been further reinforced.
Breakdown of proportional and non-proportional M 08 treaties by volume in % and in EUR million proportional non-proportional
Breakdown into business written through brokers M 09 and direct business in % and in EUR million business written through brokers direct business
Property and casualty reinsurance once again proved to be intensely competitive in the 2015 financial year. In the absence of market-changing losses, ceding companies continue to enjoy strong capital resources, prompting some of our clients to pass on fewer risks to the reinsurance market. On the other hand, we noted increased demand for additional reinsurance coverage. As a further factor, the inflow of capital from the market for catastrophe bonds (ILS) – especially in US natural catastrophe business – added to the premium erosion. As the year progressed, however, a reduction in the oversupply of reinsurance capacity could be discerned relative to the previous year. Most significantly, the resurgent US economy sent out positive signals for the premium trend in mature markets.
Based on our profit-oriented underwriting policy, we are well placed to handle the challenging market conditions. It remains the case that we expand our portfolio only in areas where margins are commensurate with the risks. In regions and lines where prices fail to satisfy our profitability requirements, however, we systematically reduce our shares. This strategy of active cycle management enables us – despite soft market conditions – to largely preserve the high rate quality of our portfolio.
We are broadly satisfied with the outcome of the various rounds of treaty renewals during the year under review. The largest business volume is traditionally renewed on 1 January, the date in 2015 when almost two-thirds of our treaties were renegotiated. While rate reductions and in some instances deteriorations in conditions were observed in many markets, it was also possible to obtain rate increases under treaties that had been impacted by losses in 2014. This was especially true of our domestic German market. Rates in the aviation line developed less favourably despite significant losses. Rate movements were still limited on account of the continued abundant availability of insurance capacity, prompting us to scale back our premium volume in this line. All in all, our portfolio remained stable.
All in all, Hannover Re once again benefited in the year under review from its enduring customer relationships as well as its position as one of the leading and most financially robust reinsurance groups in the world.
Against this backdrop, the total gross premium in the year under review climbed by a substantial 18.2% to EUR 9.3 billion (previous year: EUR 7.9 billion); at constant exchange rates growth would have reached 8.1%. We thus beat our guidance, which had anticipated a stable currency-adjusted premium volume. The level of retained premium decreased to 89.3% (90.6%). Net premium earned increased by 15.5% to EUR 8.1 billion (EUR 7.0 billion); growth would have been 6.4% at constant exchange rates.
Investment income in property and casualty reinsurance climbed by a pleasing 12.0% to EUR 945.0 million (EUR 843.6 million). The operating profit (EBIT) reached a new record level in the year under review of EUR 1,341.3 million (EUR 1,190.8 million), equivalent to growth of 12.6%. The EBIT margin stood at 16.6% (17.0%) and thus comfortably surpassed our minimum target of 10%. Group net income improved by 10.3% to EUR 914.7 million (EUR 829.1 million). Earnings per share stood at EUR 7.58 (EUR 6.88) for this business group.
Credit, surety and political risks 605.6 +14.0% 531.4 63.7 98.9% 96.9%
Hannover Re is very well positioned in the North American market and thanks to its excellent rating, its financial standing and its experience the company is a valued partner for its clients. Especially in long-tail liability business, this is of the utmost importance. Thanks to our access to the entire market spectrum, we were particularly successful in further diversifying our portfolio and writing additional profitable business in the financial year just ended.
On the claims side North America experienced a number of smaller natural catastrophe events, which resulted in merely moderate losses for reinsurers. This was particularly the case with the hurricane season, which again passed off thoroughly benignly in the year under review. Hannover Re incurred sizeable losses in the United States from, inter alia, the winter storm in February (EUR 12.8 million), forest fires (EUR 9.3 million) as well as a storm and flooding in May / June (EUR 7.3 million).
Despite the competitive climate and our margin-oriented underwriting policy, the gross premium for our business in North America rose by 23.1% to EUR 1,493.8 million (EUR 1,213.4 million). Adjusted for exchange rate effects, North American business booked growth in the mid-single-digit percentage range. The combined ratio deteriorated in the year under review to 99.6% (91.8%). The operating profit (EBIT) fell to EUR 242.0 million (EUR 258.2 million).
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 1,431.7 million (EUR 1,406.1 million). The combined ratio stood at 98.4% (93.1%). The operating profit (EBIT) amounted to EUR 203.2 million and thus fell short of the previous year’s good performance (EUR 249.4 million).
Loss expenditure caused by natural disasters was slightly higher than in the previous year, driven above all by winter storm “Niklas” in late March / early April. The German Insurance Association (GDV) estimates that losses from natural catastrophe events cost the insurance industry around EUR 2.1 billion. Roughly one third of the total loss burden can be attributed to winter storm “Niklas”, which – with damage to insured buildings put at EUR 750 million – ranks among the five most severe winter storms since 1997.
The diverging developments in property and casualty insurance in Germany became even more marked in the year under review: while the premium quality in retail lines improved, especially in motor and homeowners business, industrial lines – above all fire insurance – remained fiercely competitive. A further factor is that loss ratios here have been rising steadily since the beginning of the decade and no further underwriting profits have been generated market-wide. Not only were very large individual losses (in some cases more than EUR 250 million) recorded in 2015, the number of claims also increased sharply.
Property & Casualty reinsurance: Breakdown of gross M 14 written premium in North America by line of business 8.7% Motor 48.0% Property 0.2% Other 43.1% Liability
Developments in Central and Eastern Europe were overshadowed by political tensions and the associated economic impacts. The primary insurance market consequently saw a contraction in premium income, with corresponding implications – exacerbated by the competition – for the reinsurance market. In the year under review, however, it was largely possible to obtain risk-appropriate rates and conditions and hence we were able to generate satisfactory results with a somewhat smaller premium volume. On the claims side the region was impacted by numerous small and mid-sized events.
Specialty lines worldwide Under specialty lines we include marine and aviation reinsurance, credit and surety reinsurance, business written on the London Market as well as direct business and facultative reinsurance.
The significant major losses recorded in 2014 had only a very limited positive effect on the rate trend in 2015. This can be attributed above all to the unchanged abundant supply of insurance capacity. Rate increases in the market for war covers similarly fell short of expectations. We adhered to our disciplined underwriting strategy in this soft market phase and kept a clear focus on non-proportional business. In this segment we operate as one of the market leaders, in contrast to our selective stance on writing proportional acceptances.
The premium volume for our total aviation portfolio rose slightly from EUR 364.0 million in the previous year to EUR 377.3 million. Total expenditure on large losses was lower than in the previous year at EUR 51.3 million; the combined ratio consequently improved to 93.6% (112.1%) and came in below the target level for the maximum tolerable combined ratio (99.3%). The operating result (EBIT) improved to EUR 70.5 million (-EUR 2.4 million).
The claims frequency in credit and surety business increased considerably in the year under review, most strikingly in emerging markets. A few sizeable insolvency losses were also recorded, including for example a Spanish engineering and energy group. The loss ratio in political risk insurance also rose slightly from a low level. The combined ratio of 98.9% for the entire segment was thus significantly higher than in the previous year (92.2%) and exceeded our maximum tolerable target ratio of 96.9%. The operating profit (EBIT) contracted by 26.9% to EUR 63.7 million (EUR 87.2 million).
Global reinsurance We combine all markets worldwide under global reinsurance with the exception of our target markets and specialty lines. This segment also encompasses global catastrophe business, the reinsurance of agricultural risks, Sharia-compliant retakaful business as well as structured reinsurance and insurance- linked securities.
The premium volume increased by 28.9% in the year under review to EUR 3,492.1 million (EUR 2,708.4 million). The combined ratio deteriorated slightly from 91.6% to 93.1%. The operating profit (EBIT) declined from EUR 513.8 million to EUR 377.7 million.
Property & Casualty reinsurance: M 18 Breakdown of gross written premium in global reinsurance in EUR million
Japan remains one of the most important regional markets in the Asia-Pacific for the Hannover Re Group. The year under review was notable for a very active typhoon season. Storm “Etau” caused a major loss for Hannover Re that we reserved in the amount of EUR 27.3 million. The other lines written here closed the period under review with mostly positive results.
After the Indian government had opened the way in 2015 for foreign reinsurers to set up branches, we embarked on intensive preparations for the licensing process. In so doing, we are aiming to strengthen our market presence and boost our growth prospects.
In Australia and New Zealand, contrary to expectations, Hannover Re achieved vigorous growth by realising sizeable transactions with a number of target customers. In the first half of 2015 the region was impacted by an unusual frequency of midsized and smaller natural catastrophe losses. Given that the Hannover Re Group is the third-largest provider of reinsurance protection in the Australian market, our results were initially adversely affected by these events. As the financial year drew to a close, however, the overall result posted by the Australian permanent establishment proved to be encouragingly positive. This was facilitated by the high retentions carried by local ceding companies, the selective underwriting policy practised by our underwriters and a favourable run-off result.
This market continues to be characterised by its relatively low insurance density; most vehicles on public roads, for example, are uninsured. Despite this, the insurance market showed only marginal growth in the year under review, although the results posted by insurers were significantly better than in the previous year. This can be attributed above all to a lower frequency of large and catastrophe losses.
A survey of cedants conducted by the trade magazine “Intelligent Insurer” confirmed our excellent position. Our clients named us as a preferred partner in all categories. In Argentina, despite the restrictions placed on foreign reinsurers, we succeeded in preserving our market leadership. We wrote our business increasingly selectively in order to generate our required margins. In Brazil we maintained our position in the face of ongoing market concentration on the primary insurance side.
Losses from natural disasters were again on the moderate side for the (re)insurance industry in the year under review. The earthquake in Chile gave rise to net loss expenditure of EUR 25.5 million for Hannover Re. Overall, we are satisfied with the development of our business in Latin America.
Rates and conditions remained broadly stable on the primary insurance side. Conditions in reinsurance business came under pressure in the established markets due to new market players.
We were successful in our efforts to further diversify our portfolio mix in terms of both countries and lines of business; a contributory factor here, for example, was an enlarged share of business involving insurance products for small farmers, predominantly in emerging and developing countries. Growth was also driven by the expansion of a long-standing customer relationship in the United States.
We are satisfied with the development of our agricultural risks business. The major loss situation was comparatively moderate in 2015. Hail events, droughts and floods had little or no impact on our portfolio. To this extent, a healthy profit contribution was generated on the back of the further improvement in our diversification in this segment.
Bearing in mind that takaful and retakaful markets have now become fiercely competitive – in part due to the entry of new market players –, rates remain under sustained pressure. Hannover Re has been active in retakaful business since 2006 and the company is strongly positioned. We were particularly successful in growing our motor portfolio in the year under review; the largest single line is industrial fire business.
Natural catastrophe business We write the bulk of our catastrophe business out of Bermuda, which has established itself as a worldwide centre of competence. In the interest of diversifying the portfolio our subsidiary Hannover Re (Bermuda) Ltd. has also written some of the specialty lines since 2013.
In keeping with our objective we continued to expand our customer base and further improved the regional diversification of our portfolio in the year under review. The premium volume in structured reinsurance increased again – in part driven by unchanged brisk demand for quota share arrangements in the motor line.
Preparations for the implementation of Solvency II at the beginning of the 2016 financial year dominated the insurance industry in Europe. Insurance companies were heavily preoccupied with the future capital and reporting requirements. In this connection, working together with our primary insurance customers, we have already identified various means of bringing about an optimal capital and solvency situation. Another significant move in the reporting period just ended was the entry into the Canadian life reinsurance market with the establishment of a branch in that country. Along with opening up new business opportunities, this will help to further diversify our portfolio. Asian as well as Central and Eastern European markets are exhibiting stronger interest in automated underwriting systems and innovative life insurance concepts.
Overall, the development of the year under review was thoroughly satisfactory. We booked gross premium income for the financial year just ended of EUR 7,730.9 million (previous year: EUR 6,458.7 million). This represents an increase of 19.7%. Adjusted for exchange rate fluctuations, growth came in at 9.5%. We thus comfortably beat the comparable growth target for gross premium of 5% to 7%. The level of retained premium also developed as planned and amounted to 84.2% (83.9%). Net premium totalled EUR 6,492.4 million (EUR 5,411.4 million ). Adjusted for exchange rate effects, growth would have reached 10.0%.
Value of New Business (VNB) growth 1 M 22 in EUR million
≥ 6 1 Including a longevity treaty that was previously classified under financial solutions
Investment income in life and health reinsurance amounted to EUR 709.2 million (EUR 614.2 million). The investment income derives, 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 334.3 million (EUR 258.5 million) was generated from the assets under own management, while income from securities deposited with ceding companies came in at EUR 374.9 million (EUR 355.7 million). The modest increase in the investment income should be viewed particularly favourably in light of the unchanged low level of interest rates and is a testament to a solid investment strategy.
In the following sections we discuss developments in life and health reinsurance in greater detail on the basis of our reporting categories. We split our business and the associated reporting into the categories of financial solutions and risk solutions. For the purposes of differentiation by biometric risks, the category of risk solutions is further divided into longevity, mortality and morbidity. This also corresponds to the breakdown used within our internal risk management system.
Financial solutions Our financial solutions reporting category encompasses reinsurance solutions that focus on the management of our clients’ balance sheets and thereby support them in – among other things – financing new business and optimising their capital or solvency structure. A crucial criterion for allocation to this category is that there is less emphasis on biometric risks with this form of reinsurance, even though they are always present.
Financial solutions business has been a central pillar of our activities for many years. We are equipped with long-standing expertise and current surveys rank us as the leading provider in a number of markets, including for example the United States. A special hallmark of our business philosophy is that we do not fall back on standardised reinsurance solutions. We offer our clients financing solutions and customised concepts designed to provide relief for capital and reserves that are individually tailored to their needs. This approach has stood the test of time and resulted in another exceptionally pleasing profit contribution in the year under review.
US financial solutions business, in particular, again fared thoroughly profitably in the financial year just ended and delivered a positive profit contribution. Along with solutions for capital relief and optimising the solvency situation of our customers in the life insurance market, we extended our business activities in the year under review to the emergent longevity and health reinsurance market and have already completed the first transactions. The underlying profitability of the financial solutions business generated in the United States developed superbly. As a further factor, the investment income was positively influenced on a one-off basis by the cancellation of a financial solutions contract in an amount running into the mid-double-digit millions of US dollars. Australia similarly developed well in the financial year just ended, especially in the area of new business financing, and thereby laid the foundation for the future.
In South Africa, too, new supervisory requirements for the (re) insurance industry are on the verge of implementation. Generally speaking, financial solutions business in South Africa and Asia developed positively overall with a pleasing share of new business.
Our activities in the area of financial solutions produced gross premium of EUR 1,271.3 million (EUR 1,295.2 million). This is equivalent to 16.4% of the total gross premium income booked in life and health reinsurance. The operating result (EBIT) amounted to EUR 203.2 million (EUR 74.6 million), a gratifying performance after the comparatively low EBIT reported in 2014. The EBIT margin stood at 18.1% (6.5%).
Longevity The longevity reporting category encompasses our entire annuity and pension reinsurance business, insofar as the material risk here is the longevity risk. The policies in our portfolio are for the most part already in the pay-out phase.
Our portfolio consists to a large extent of enhanced annuities. These guarantee individuals with a reduced life expectancy a higher regular income for the remainder of their shorter lifespan. The United Kingdom continued to be our largest longevity market by premium volume in the year under review. Although the reform of the UK Pensions Act in April 2015 had a particularly adverse effect on enhanced annuities business, the implications for our premium volume have proven to be considerably less marked than previously anticipated.
The longevity sector throughout the rest of the European market saw unusually brisk activity prompted by the impending implementation of Solvency II. This opened up a broad array of attractive business opportunities for our company, and in volume terms the financial year just ended proved to be the most successful in Hannover Re’s history. This positive development was also crucially reinforced by stronger worldwide demand for longevity solutions. The global demographic trend played a part here, generating further demand around the world for the transfer of longevity portfolios.
Mortality and morbidity In the following section we report on our mortality and morbidity business. In the international (re)insurance markets these two risk types frequently occur together in business relationships and sometimes they are even covered under the same reinsurance treaties. It therefore makes sense to consider the results of both reporting categories on a consolidated basis and merely to give a separate account of the business development.
With our subsidiary Hannover Life Reassurance Company of America we have grown into an established and sought-after business partner in our important US mortality market. Business there fell short of our expectations in the year under review. This can be attributed principally to the one-time payout of a very lucrative life insurance policy. In view of the risk experiences observed in a partial portfolio, we stepped up our portfolio maintenance activities with a view to further optimising the development of business going forward. In addition, by restructuring our collateral instruments in September of 2015 we were able to achieve a future annual saving – starting in 2016 – in the low double-digit million euros for this business. The effects of this restructuring were felt pro rata in the year under review. Moreover, working in cooperation with a primary insurance partner, we launched a holistic lifestyle concept in the US market that combines traditional life insurance policies with benefits and rewards in the area of health and wellness.
Looking at the year under review as a whole, our mortality-exposed business in Europe experienced volatility. In Continental Europe stronger demand could be discerned for unit-linked and risk-oriented products. The difficult situation on capital markets, especially when it comes to the protracted low level of interest rates, is driving this trend. In Central European markets and some parts of Northern Europe we similarly observed increased interest in risk-oriented insurance products as well as stronger demand for automated underwriting systems and alternative sales channels in general. This demand was also evident in Asia. In Russia we were able to successfully roll out our proprietary automated underwriting system for the first time on a joint basis with one of our customers. Not only that, in Malaysia we established a sales company for the exclusive online selling of insurance policies.
From a global perspective, however, we observed lively demand in the financial year just ended – above all with respect to products for long-term care insurance. Particularly in mature insurance markets with progressively ageing demographics, demand for protection in retirement and in case of illness is growing. Consequently, we were able to boost our premium for worldwide morbidity business by 17.8% to EUR 1,415.9 million (EUR 1,202.1 million).
Our goal in life and health reinsurance is to offer our customers a broad and individually tailored range of solutions and – in addition to pure risk assumption – to successfully support them in the service sector. In the field of medical underwriting, we strive to highlight – inter alia through our “ReCent” newsletter – current and relevant topics in health and medicine. When it comes to our electronic underwriting manual “Ascent” – which provides our customers with integrated support for individual risk assessment –, we similarly focus on continuous updating and enhancement of the contents in order to adequately reflect the latest market developments and trends at all times. Furthermore, thanks to our international network we are able to quickly and directly transfer novel and innovative reinsurance solutions to other markets.
Bearing in mind the persistently low level of interest rates, ordinary investment income excluding interest on funds withheld and contract deposits delivered a highly gratifying performance to reach EUR 1,253.4 million (previous year: EUR 1,068.4 million). This can be attributed to sharply higher income from fixed-income investments, real estate and private equity, the measurement of which was additionally supported by effects associated with the appreciation of various currencies against the euro. Our exposure to high-yield investment funds as well as special income from life reinsurance business also played a very pleasing part here. Interest on funds withheld and contract deposits improved slightly on the previous year to EUR 395.0 million (EUR 376.1 million). Net realised gains on disposals came in below the previous year’s figure at EUR 135.8 million (EUR 182.5 million) despite the liquidity made available for dividend payments and preparations made for the changeover in our Irish subsidiary’s functional currency to USD as well as regrouping moves to expand the asset classes of fixed income enhancements and emerging markets and the rebuilding of an equity portfolio.
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 26.1 million (loss of EUR 6.8 million). The inflation swaps taken out in 2010 to hedge part of the inflation risks associated with the loss reserves in our technical account no longer gave rise to any fair value changes recognised in income because these contracts matured or were terminated in the course of the second quarter. In future, we shall ensure this protection through the inflation-linked bonds already contained in our portfolio. Altogether, the positive changes in the fair values of our financial assets recognised at fair value through profit or loss amounted to EUR 0.9 million (loss of EUR 33.3 million).
Impairments and depreciation totalling just EUR 38.7 million (EUR 27.7 million) were taken. Scheduled depreciation on directly held real estate amounted to EUR 23.7 million (EUR 18.5 million), a reflection of the further increase in our involvement in this sector. The vast bulk of impairments – totalling EUR 5.9 million – were attributable to alternative investments (EUR 5.8 million). In addition, impairments were recognised on real estate in an amount of EUR 4.5 million (EUR 1.4 million) as well as on fixed-income securities in an amount of EUR 2.8 million (EUR 2.0 million) and on equities in an amount of EUR 1.9 million (EUR 0.0 million). These writedowns contrasted with write-ups of altogether EUR 0.6 million (EUR 0.1 million).
Change in fair value of financial instruments 3 0.9 (33.3) (27.1) 89.3 (38.8)
Net investment income from funds withheld and contract deposits 395.0 +5.0% 376.1 357.3 355.5 338.5 1 Excluding income and expenses on funds withheld and contract deposits 2 Including depreciation / impairments on real estate 3 Portfolio at fair value through profit or loss and trading
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 kept the modified duration of our fixed- income portfolio broadly neutral, as a result of which it stood at 4.4 (previous year: 4.6) as at 31 December 2015.
Our portfolio of assets under own management grew substantially in the course of 2015 to EUR 39.3 billion (EUR 36.2 billion). This was due in large measure to exchange rate effects – primarily associated with the US dollar – and in particular to our gratifyingly positive operating cash flow. The only inhibiting factors in this growth were the decline in valuation reserves in connection with the observed yield increases on US Treasuries and higher credit spreads.
The portfolio of fixed-income securities excluding short-term assets rose to EUR 33.6 billion (EUR 32.0 billion). Hidden reserves for available-for-sale fixed-income securities, which are allocable to shareholders’ equity, totalled EUR 635.6 million (EUR 1,246.4 million). This reflects the yield increases observed in the course of the reporting period, especially in the area of US Treasuries, and above all higher risk premiums on corporate bonds and semi-government bonds. As to the quality of the bonds – measured in terms of rating categories –, the proportion of securities rated “A” or better remained on a virtually unchanged high level as at year-end at 79.8% (82.9%).
We again slightly increased our real estate allocation in the course of the year. Two properties were acquired in the United States 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
C om bi ne d m an ag em en t re po rt period, it rose to 4.4% (3.9%). By moving back into listed equities – accounting for 1% of the asset portfolio – we further improved the diversification of our investment portfolio.
The policyholders’ surplus totalled EUR 10,267.3 million (EUR 10,239.5 million) as at the balance sheet date. The rise in retained earnings and in the foreign currency gains and losses recognised in equity were opposed in the year under review by the redemption of subordinated debt with a nominal volume of EUR 500 million and a decline in the unrealised gains and losses recognised in equity. Overall, therefore, the policyholders’ surplus remained almost unchanged with an increase of 0.3%.
Hannover Re uses “Intrinsic Value Creation” (IVC) as its central value-based management tool. As part of this methodology, we apply the principles of economic allocation of equity and efficient use of debt as an equity substitute in order to achieve the lowest possible weighted cost of capital. This concept as well as the objectives and principles in accordance with which we conduct our enterprise management and capital management are described in greater detail in our remarks on value-based management on page 23 et seq. of this report.
Capital structure as at 31 December 2015 M 30 2.8% Loans and subordinated capital 13.9% Equity 4.8% Other liabilities 78.5% Technical provisions and liabilities
In its capital management Hannover Re is guided 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 (cf. “Opportunity and risk report”, page 74 et seq.).
The Group net income for 2015 attributable to the shareholders of the Hannover Re Group climbed to EUR 1,150.7 million (EUR 985.6 million). The non-controlling interest in the profit generated in the year under review totalled EUR 64.0 million (EUR 79.5 million).
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 of EUR 500.0 million issued in 2005 by Hannover Finance (Luxembourg) S.A. As at the balance sheet date altogether three subordinated bonds had been placed on the European capital market through Hannover Rück SE and Hannover Finance (Luxembourg) S.A.
Amortised cost of our subordinated bonds M 33 in EUR million Issue date Coupon in % 2015 2014
Hannover Finance (Luxembourg) S.A., subordinated debt, EUR 500 million; 2010 / 2040 14.9.2010 5.75 498.7 498.4
Hannover Finance (Luxembourg) S.A., subordinated debt, EUR 500 million; 2012 / 2043 20.11.2012 5.00 497.2 496.9
Hannover Rück SE, subordinated debt, EUR 500 million; 2014 / undated 15.9.2014 3.375 494.0 493.5
Various financial institutions have provided us with letters of credit for the collateralisation of technical liabilities. Both bilateral agreements and an unsecured syndicated guarantee facility existed as at the balance sheet date with a number of financial institutions for this purpose. The guarantee facility was terminated in January 2016 and partially refinanced through bilateral credit facilities. We report in detail on existing contingent liabilities in the notes, Section 6.12 “Debt and subordinated capital” in our remarks on other financial facilities, page 211, and Section 8.7 “Contingent liabilities and commitments ”, page 232 et seq.
Change in cash and cash equivalents according to cash flow statement 19.7 134.0
Cash and cash equivalents at the end of the period 792.6 772.9
Cash flow from investing activities After allowance for dividend payments and financing measures, the substantially higher cash flow from operating activities was for the most part invested in an amount of EUR 2,048.1 million (EUR 1,195.3 million) while preserving the existing asset structure.
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 6 May 2015 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 5 May 2020.
Since the 2013 financial year Hannover Re has 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 2015 financial year passed off highly satisfactorily for Hannover Rück SE. The gross premium of Hannover Rück SE in total business increased by 30.1% to EUR 14.1 billion (previous year: EUR 10.9 billion). The level of retained premium contracted from 79.3% to 73.0%. Net premium earned grew by 20.0% to EUR 10.2 billion (EUR 8.5 billion).
Allocated investment return transferred from the non-technical account, net of retrocession 328,840 442,194
Ordinary investment income including deposit interest clearly exceeded the previous year’s level to reach EUR 1,737.8 million (EUR 1,589.6 million). This was due principally to higher distributions from our investment holding companies. Our exposure to high-yield fund investments was also a very pleasing factor here. Net gains of EUR 94.0 million (EUR 104.0 million ) were realised on disposals. Write-downs of EUR 83.2 million (EUR 92.9 million) were taken on investments. They were attributable almost exclusively to bearer debt securities held as current assets. The write-downs contrasted with write-ups of EUR 5.1 million (EUR 30.5 million) that were made on assets written down in previous periods in order to reflect increased fair values.
Life Gross premium income in the life line grew by 47.0% in the financial year just ended to EUR 5,998.7 million (EUR 4,082.0 million). Business in the year under review was still heavily shaped by the generally very challenging market climate in Europe. Particularly in the markets of Northern and Western Europe, conditions continued to be competitive in the area of traditional life insurance covers. Asian markets as well as those of Central and Eastern Europe are exhibiting stronger interest in automated underwriting systems and innovative life insurance concepts. Generally speaking, it was noticeable that demand for long-term care and longevity insurance solutions increased in all markets. Innovative concepts such as lifestyle products also enjoyed stronger demand. Our international orientation is vital to our success in writing new business worldwide. We are thereby able to ensure sustainable earnings growth.
The underwriting result improved to EUR 163.3 million (-EUR 19.5 million) in the year under review. Our life and health reinsurance portfolio thus developed in line with our expectations. Financial solutions business comfortably outperformed its target.
Other lines The lines of health, credit and surety, other indemnity insurance and other property insurance are reported together under other lines. Other property insurance consists of the extended coverage, comprehensive householder’s (contents), comprehensive householder’s (buildings), burglary and robbery, water damage, plate glass, engineering, loss of profits, hail, livestock and windstorm lines. Other indemnity insurance encompasses legal protection, fidelity as well as other pure financial losses and property damage.
The total premium volume in the other lines climbed by 14.7% to EUR 2,609.4 million (EUR 2,274.9 million). The loss ratio improved to 68.4% (74.1%). The underwriting result closed at EUR 54.0 million, after -EUR 8.9 million in the previous year. An amount of EUR 53.4 million (EUR 50.6 million) was allocated to the equalisation reserve and similar provisions.
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 2016” on page 132 et seq., 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 Hannover Re Group employed 2,568 staff as at 31 December 2015 (previous year: 2,534). The turnover ratio at Home Office in Hannover of 2.5% (1.5%) was higher than the level of the previous year. The rate of absenteeism – at 3.8% – was slightly higher than in the previous year (3.6%). The turnover ratio and rate of absenteeism continue to be below the average expected across the industry as a whole.
In the financial year just ended we carried out an international, Group-wide employee survey for the first time. The purpose of this survey was, in the first place, to continue the dialogue initiated in recent years on a consistent understanding of values and leadership. For this reason, the questions centred above all on the extent to which our Values and Management Principles – which have been defined as mandatory Group-wide – are known and embodied in practice. Secondly, we inquired into our employees’ connection and dedication to the company and explored the status of (international) cooperation.
On the basis of these insights we shall evaluate the findings in detail in the current financial year and initiate measures. The goals will be to leverage higher-order potential scope for improvement and to support the individual units as they explore the findings of relevance to them.
HannoverReAcademy additionally serves as the platform for operating our e-learning programmes. We have been successfully using these for a number of years in a blended learning format, i. e. in combination with face-to-face tutorials, as part of the international basic training provided to our new members of staff.
It is also pleasing to note that the launch of HannoverReAcademy has enabled us to streamline what used to be more of a patchwork of administrative processes. Henceforth, for example, a package of entry-level seminars is automatically booked for every new employee based on the experience that we have gained over the years. This is all done on a worldwide basis because our international units also have access to HannoverReAcademy. In this way we ensure that the standard of training given to our workforce is of a consistently high standard.
For Hannover Re, sustainability means a commitment to responsible and transparent enterprise management that is geared to lasting corporate success. With this in mind, in 2011 we drew up a Sustainability Strategy for Hannover Re that reflects in concrete terms the higher-order corporate strategy of the Group and in which we explicitly commit to our strategic objective of sustainable value creation.
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 99 et seq. of the present Annual Report. The Corporate Governance principles of Hannover Rück SE are also subject to regular review and fulfil the recommendations of the currently valid version of the German Corporate Governance Code.
In 2015 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, in June 2015 Hannover Re received confirmation of its inclusion in the worldwide FTSE4Good Index Series from the FTSE Environmental, Social and Governance Advisory Committee.
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 breach of the criteria 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. In the context of our Sustainability Strategy we have set ourselves the goal of expanding our ESG guidelines for investment management. We intend to refine our ESG Investment Policy, including the development of positive screening.
Employing successful members of staff on a long-term basis is one of the ten key points of our Group Strategy. In order to ensure that we are always perceived as an attractive employer by our existing staff and potential new junior recruits, we pay special attention to their skills and further growth. The health and well-being of our staff are also vital to the sustainable development of our business. The focus of our efforts is therefore on the prevention of disease, e. g. through medical checkups by the company physician, workplace inspections, advice and treatment relating to matters of general medicine as well as a range of sporting opportunities designed to promote a healthy lifestyle.
We also stress the importance of enabling our employees to strike the right balance between their career and private life. Consequently, we offer individually customisable part-time and telecommuting models as well as flexitime working arrangements with no core hours. By offering such flexibility we want to help our employees organise their daily routine in various stages of life such as starting a family or preparing for retirement, e. g. through partial retirement opportunities for older staff. One of the cornerstones of our successful business activities, along with skills and commitment, is the high degree of diversity in our workforce – since this is vital to safeguarding our high global quality standard. The workforce at Hannover Home Office alone is comprised of 39 different nations, reflecting the international dimension of our business activities. Fostering this diversity is similarly enshrined in our Sustainability Strategy.
Hannover Re does its utmost to keep negative environmental impacts of its business operations as low as possible. The focus of our efforts to conserve the environment is on reducing carbon dioxide (CO2) emissions associated with the supply of electricity and heating to our premises as well as with our business travel. Having already converted our power supply at the German location to renewables, we now want to extend this progressively to our international offices as well. With the implementation of our Environmental Management System, which was certified according to DIN EN ISO 14001 in 2012, we have put in place standard processes for dealing with environmental protection and defined concrete measures in the environmental programme. Our Environmental Management System was successfully recertified in November 2015.
In 2015, as in previous years, we compensated for our unavoidable CO2 emissions of 8,306 (7,514) tonnes caused by business travel by making voluntary offsetting payments to the international organisation “atmosfair” and thereby supported selected climate protection projects in developing and emerging countries. This is equivalent to an offset of around 97% of our total CO2 emissions resulting from business travel and the consumption of electricity, district heating and paper.
In the financial year just ended, as in prior years, we reported on our measures to reduce carbon dioxide emissions as part of the international initiative overseen by the Carbon Disclosure Project (CDP); in this context we achieved a disclosure score of 91 out of a possible 100 points.
The table below breaks down Hannover Re’s consumption and emissions over the past five years.
Resources consumed at Hannover Home Office M 44 1 Karl-Wiechert-Allee 50, Roderbruchstrasse 21 and 26 as well as infant daycare centre, Hannover 2 Karl-Wiechert-Allee 50, Roderbruchstrasse 21 and 26 as well as infant daycare centre, Karl-Wiechert-Allee 57 (pro rata), Hannover 3 Radiative Forcing Index: 2.7
Our commitment to society has a long tradition. Hannover Re has been active as a sponsor of culture and social projects for several decades. Our activities extend beyond our location in Germany to our subsidiaries with their specific projects catering to social concerns in their own country. Content-wise, we concentrate our non-profit activities today on the areas of research, learning, art and music as well as on assisting our employees with their voluntary contributions to society. Our involvement encompasses not only projects in Germany but also activities at our international locations.
Risk report • We are well capitalised. 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 fulfil the requirements placed on the risk management system by Solvency II.
Our current corporate strategy encompasses ten guiding principles that 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 16 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 a comfortable level of capital adequacy under Solvency II.
Central guidelines: e. g. investments, exposure management, central underwriting guidelines (property & casualty, life & health reinsurance)
The risk strategy and the major guidelines derived from it, such as the Framework Guideline on Risk Management and the central system of limits and thresholds, are reviewed at least once a year. In this way we ensure that our risk management system is kept up-to-date.
Regulatory developments: Further more concrete aspects of Solvency II were defined in the 2015 financial year, including the decision by lawmakers to adopt a revised version of the Insurance Supervision Act with effect from 1 January 2016 and thereby translate European standards into national law. The Hannover Re Group has systematically implemented all requirements to date. Following intensive preparations the Hannover Re Group received approval to calculate its solvency requirements using its internal model when Solvency II comes into effect. The approved model covers the underwriting, market and counterparty default risks that are most relevant to enterprise management. Our internal model enables us to optimally map the risk structure of our reinsurance business and our investments, which would not be possible using a standard model. Regulatory approval also means that the risks can be better reflected when determining the regulatory capital requirements. Our internal target capitalisation with a confidence level of 99.97% comfortably exceeds the target level of 99.5% under Solvency II, thereby ensuring a comfortable level of capital adequacy under Solvency II if the internal target is achieved.
In the interests of our shareholders and clients we strive to ensure that our risks remain commensurate with our capital resources. Our quantitative risk management provides a uniform framework for the evaluation and steering of all risks affecting the company as well as of our capital position. In this context, the internal capital model is our central tool. The internal capital model of the Hannover Re Group is a stochastic enterprise model. It covers all subsidiaries and business groups of the Hannover Re Group. The central variable in risk and enterprise management is the economic capital, which is calculated according to market-consistent measurement principles and also constitutes the basis for calculating the own funds under Solvency II. Hannover Re’s internal capital model reflects all risks that influence the development of the economic capital. These are split into underwriting risks, market risks, counterparty default risks and operational risks. For each of these risk classes we have identified a number of risk factors for which we define probability distributions. These risk factors include, for example, economic indicators such as interest rates, exchange rates and inflation indices, but also insurance-specific indicators such as the mortality of a particular age group within our portfolio of insureds in a particular country or the number of natural catastrophes in a certain region and the insured loss amount per catastrophe. The specification of the probability distributions for the risk factors draws upon historical and publically available data as well as on the internal data resources of the Hannover Re Group. This process is further supplemented by the know-how of internal and external experts. The fit of the probability distributions is regularly checked by our specialist
Hannover Re has received approval for its partial internal model. Internal and external risk quantification are therefore largely consistent. Supervisory capital requirements can continue to be efficiently implemented.
We help our clients to fulfil the requirements of Solvency II through flexible product design and a regular exchange of experience.
All figures on the risk capital provided below are based on the full internal model of the Hannover Re Group: our excess capital coverage at the target confidence level of 99.97% was very comfortable at 131.5% as at 30 September 2015. Hannover Re is well capitalised and our available capital comfortably exceeds the required capital: Available capital and required risk capital M 48 in EUR million 30.9.2015 31.12.2014
We hold additional capital above all to meet the requirements of the rating agencies for our target rating and to be able to act flexibly on business opportunities. We strive for a rating from the rating agencies most relevant to our industry that facilitates and secures our access to all reinsurance business worldwide. Hannover Re is analysed by the rating agencies Standard & Poor’s (S & P) and A. M. Best as part of an interactive rating process. The current financial strength ratings are assessed as “AA-” (Very Strong, stable outlook) by Standard & Poor’s and “A+” (Superior, stable outlook) by A. M. Best. Standard & Poor’s evaluates Hannover Re’s risk management as “Very Strong”, the best possible rating. In this regard particular mention was made of the company’s very good risk management, the consistent and systematic implementation of corporate strategy by management and its excellent capital resources. Hannover Re’s internal capital model was also subjected to expert appraisal. Based on this review, Standard & Poor’s factors the results of the Hannover Re Group’s internal capital model into the determination of the target capital for the rating.
Group-wide risk communication and an open risk culture are important to our risk management. Regular global meetings attended by the actuarial units and risk management functions serve as a central anchor point for strategic considerations in relation to risk communication.
Risk steering The steering of all material risks is the task of the operational business units on the divisional and company level. In this context, the identified and analysed risks are either consciously accepted, avoided or minimised. The risk / reward ratio and the required capital are factored into the division’s decision. Risk steering is assisted by, among other things, the parameters of the central and local underwriting guidelines and by defined limits and thresholds.
Risk reporting Our risk reporting provides systematic and timely information about all material risks and their potential implications. The central risk reporting system consists primarily of regular risk reports, e. g. on the overall risk situation, adherence to the parameters defined in the risk strategy or on the capacity utilisation of natural catastrophe scenarios. Complementary to the regular risk reporting, immediate internal reporting on material risks that emerge at short notice takes place as necessary. The already existing range of risk reports will be supplemented in the context of Solvency II implementation by further reports, including for example the “Regular Supervisory Report” (RSR) and the “Solvency and Financial Condition Report” (SFCR).
Process-integrated / -independent monitoring and quality assurance Irrespective of internally assigned competencies, the Executive Board is responsible for the orderly organisation of the company’s business. This also encompasses monitoring of the internal risk steering and control system. Process-independent
C om bi ne d m an ag em en t re po rt 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.
The proper functioning of the ICS necessitates the involvement of management, executive staff and employees on all levels.
The available economic capital increased to EUR 12,614.7 million as at 30 September 2015 compared to EUR 12,443.9 million as at 31 December 2014. This was due principally to the good business performance in the first three quarters as well as positive effects from the weakening of the euro against our major foreign currencies and from economic adjustments for underwriting reserves. The value adjustments increased primarily as a consequence of the good development of new business in life and health reinsurance and due to a more favourable assessment of future cash flows in property and casualty reinsurance. This is opposed by a decrease in the available capital from subordinated bonds owing to redemption of a hybrid bond.
Reconciliation (economic capital / shareholders’ equity) M 50 in EUR million 30.9.2015 31.12.2014
Available economic capital 12,614.7 12,443.9 1 Adjustments for technical provisions in life & health and property & casualty reinsurance incl. risk margin 2 Includes the deduction of foreseeable dividends, which in the 2014 Annual Report was still shown as part of the technical provisions
The required risk capital of the Hannover Re Group at the target confidence level of 99.97% rose to EUR 9,593.0 million as at 30 September 2015, compared to EUR 7,786.6 million as at 31 December 2014. The bulk of the increase was due to the weaker euro against our major foreign currencies and the associated higher foreign-currency volumes underlying the risks, such as the volume of investments or loss reserves. These increases in volume driven by exchange rate movements caused the risk capital to climb in all risk categories. A further factor was the diminished diversification effect as a consequence of dependencies between, in particular, US-dollar- dominated risks. The decline in the tax effect resulted from the fact that with the currently higher risk capital the loss-minimising effect of taxes is subject to greater limitations.
The underwriting risks in property and casualty reinsurance increased primarily on account of the larger volume of reserves and the higher catastrophe risks, which could be attributed above all to the stronger US dollar. The increase in the underwriting risks in life and health reinsurance was driven not only by exchange rate movements but also by larger business volumes in the area of longevity risks.
Counterparty default risks increased principally as a result of a larger volume of cash and short-term deposits. Operational risks developed in step with the underlying business volumes.
• market risks which arise in connection with our investments and also as a consequence of the valuation of sometimes long-term payment obligations associated with the technical account,
At the present time our most significant risks are the credit and spread risks within the market risks, the reserving and catastrophe risks within the underwriting risks of property and casualty reinsurance and the risk of changes in mortality within the underwriting risks of life and health reinsurance. With regard to mortality risks, as a general principle annuity portfolios are impacted by improvements in mortality while death benefit portfolios are adversely affected by deteriorations in mortality. The specific risk characteristics and the principal monitoring and steering mechanisms are described in the following sections.
Risk management in property and casualty reinsurance has defined various overall guidelines for efficient risk steering. These include, among other things, the limited use of retrocessions to reduce volatility and conserve capital. It is also crucially important to consistently maximise the available risk capacities on the basis of the risk management parameters of the Hannover Re Group and to steer the acceptance of risks systematically through the existing central and local underwriting guidelines. Our conservative reserving level is a crucial factor in our risk management. We make a fundamental distinction between risks that result from business operations of past years (reserve risk) and those stemming from activities in the current or future years (price / premium risk). In the latter case, special importance attaches to the catastrophe risk.
The largest share of the required risk capital for the premium risk (incl. catastrophe risk) is attributable to risks from natural disasters. The following table shows the required risk capital for our four largest natural hazards scenarios: Required risk capital 1 for the four largest M 54 natural hazards scenarios in EUR million 2015
Our own actuarial calculations regarding the adequacy of the reserves are also subject to annual quality assurance reviews conducted by external firms of actuaries and auditors. For further remarks on the reserve risk please see our comments in the section “Technical provisions” on page 198 et seq.
Survival ratio in years and reserves for asbestos-related claims and pollution damage M 55 in EUR million 2015 2014
Asbestos-related claims / pollution damage 36.0 203.3 26.9 33.8 189.3 28.2
In order to partially hedge inflation risks Hannover Re holds inflation-linked instruments in its portfolio 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. This inflation protection was initially ensured by way of inflation swaps, which were purchased for the first time in 2010; it was increased in 2011. 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. In the course of the year under review the inflation protection was converted to the exclusive use of such bonds.
For the purposes of risk limitation, maximum amounts are also stipulated for various extreme loss scenarios and return periods in light of profitability criteria. Risk management ensures adherence to these maximum amounts. The Executive Board, Risk Committee and P&C Executive Committee are kept regularly updated on the degree of capacity utilisation. The limits and thresholds for the 200-year aggregate loss as well as the utilisation thereof are set out in the following table: Limit and threshold for the 200-year aggregate M 57 annual loss as well as utilisation thereof in EUR million
All natural catastrophe risks 1 200-year aggregate annual loss 1,778 1,600 1,481 1 Loss relative to the underwriting result
Net expenditure on major losses in the year under review amounted to EUR 572.9 million (EUR 425.7 million). Our company incurred the following catastrophe losses and major claims in the 2015 financial year: Catastrophe losses and major claims 1 in 2015 M 58 in EUR million Date gross net
Storm “Niklas”, Germany, Switzerland, Austria 31 March – 1 April 2015 26.7 21.0
For further information on the run-off of the loss reserves please see our explanatory remarks in the section “Run-off of the net loss reserve in the property and casualty reinsurance segment” on page 199 et seq.
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. Furthermore, we are exposed to lapse risks because the cash flows resulting from our reinsurance treaties are in part dependent on lapse rates among policyholders. Counterparty default risks are also material since we additionally prefinance our cedants’ new business acquisition costs. Furthermore, we are exposed to catastrophe risks, especially events involving a high number of fatalities in our insurance portfolio.
Through our quality assurance measures we ensure that the reserves established by ceding companies in accordance with local accounting principles satisfy all requirements with respect to the calculation methods used and assumptions made (e. g. use of mortality and morbidity tables, assumptions regarding the lapse rate). New business is written in all regions in compliance with underwriting guidelines applicable worldwide, which set out detailed rules governing the type, quality, level and origin of risks and how these considerations are factored into the pricing. These global guidelines are revised annually and approved by the Executive Board. Special underwriting guidelines give due consideration to the particular features
C om bi ne d m an ag em en t re po rt of individual markets. By monitoring compliance with these underwriting guidelines we minimise the risk of an inability to pay or of deterioration in the financial status of cedants. Regular reviews and holistic analyses (e. g. with an eye to lapse risks) are carried out with respect to new business activities and the assumption of international portfolios. The actuarial reports and documentation required by local regulators ensure that regular scrutiny also takes place on the level of the subsidiaries. The interest rate risk, which in the primary sector is important in life business owing to the guarantees that are given, is of only minimal relevance to our company thanks to the design of our reinsurance treaties. We have confidence in the entrepreneurial abilities of our underwriters and grant them the most extensive possible powers. In our decentralised organisation we manage risks where they arise using a consistent Group-wide approach in order to obtain an overall view of the risks in life and health reinsurance. Our global underwriting guidelines provide underwriters with an appropriate framework for this purpose. The risks arising out of life and health reinsurance are reflected in the internal capital model.
Faced with a challenging capital market climate, particularly high importance attaches to preserving the value of assets under own management and the stability of the return. Hannover Re’s portfolio is therefore guided by the principles of a balanced risk / return profile and broad diversification. Based on a risk-averse asset mix, the investments reflect both the currencies and durations of our liabilities. Market price risks include equity risks, interest rate risks, currency risks, real estate risks, spread risks and credit risks. Our portfolio currently consists in large part of fixed-income securities, and hence credit and spread risks account for the bulk of the market risk. We minimise interest rate and currency risks through the greatest possible matching of payments from fixed-income securities with the projected future payment obligations from our insurance contracts. Market risks derive from the investments managed by Hannover Re itself and from investment risks of ceding companies that we assume in connection with insurance contracts. The following table shows the risk capital with a confidence level of 99.5% for the market risks from investments under own and third-party management.
Interest rate and spread markets, in particular, saw very mixed movements across the most important investment currencies over the course of the period under review. In this context the escalation levels of the trigger system were reached on occasion during the year (cf. chart on page 88). Key factors in this development were increases in the general level of interest rates, especially in USD and GBP, as well as the general increase in credit spreads. Even our conservatively oriented and broadly diversified investment portfolio was unable to divorce itself from the resulting declines in fair value. Specifically, our portfolio of fixed-income bonds gave back some of the fair value gains recorded in previous years, in part owing to yield increases but also entirely normally due to the passage of time. Fair value changes from investments in equities and private equity as well as the renewed drop in interest rates in the EUR portfolio were positive factors here.
The short-term loss probability measured as the “Value at Risk” (VaR) is another vital tool used for monitoring and managing market price risks. It is calculated on the basis of historical data, e. g. the volatility of the securities positions under own management and the correlation between these risks. As part of these calculations the decline in the fair value of our portfolio is simulated with a certain probability and within a certain period. The VaR of the Hannover Re Group determined in accordance with these principles specifies the decrease in the fair value of our securities portfolio under own management that with a probability of 95% will not be exceeded within ten trading days. A multi-factor model is used to calculate the VaR indicators for the Hannover Re Group. It is based on time series of selected representative market parameters (equity prices, yield curves, spread curves, exchange rates, commodity prices and macro-economic variables). All asset positions are mapped on the level of individual positions within the multi -factor model; residual risks (e. g. market price risks that are not directly explained by the multi-factor model) can be determined through back-calculation and are incorporated into the overall calculation. The model takes into account interest rate risks, credit and spread risks, systematic and specific equity risks, commodity risks and option-specific risks. Against the backdrop of what was still a difficult capital market environment, the volatilities of fixed-income assets, in particular, and hence the market price risks increased in the year under review relative to the previous year. Based on continued broad risk diversification and the orientation of our investment portfolio, our Value at Risk was nevertheless clearly below the Value at Risk upper limit defined in our investment guidelines. It amounted to 1.0% (0.8%) as at the end of the reporting period.
The portfolio of fixed-income securities is exposed to the interest rate risk. Declining market yields lead to increases and rising market yields to decreases in the fair value of the fixed-income securities portfolio. The credit spread risk should also be mentioned. The credit spread refers to the interest rate differential between a risk-entailing bond and risk-free bond with the same maturity. Changes in these risk premiums, which are observable on the market, result – analogously to changes in pure market yields – in changes in the fair values of the corresponding securities.
Currency risks are especially relevant if there is a currency imbalance between the technical liabilities and the assets. Through extensive matching of currency distributions on the assets and liabilities side, we reduce this risk on the basis of the individual balance sheets within the Group. The shortterm Value at Risk therefore does not include quantification of the currency risk. We regularly compare the liabilities per currency with the covering assets and optimise the currency coverage by regrouping assets. In so doing, we make allowance for collateral conditions such as different accounting requirements. Remaining currency surpluses are systematically quantified and monitored within the scope of economic modelling. A detailed presentation of the currency spread of our investments is provided in Section 6.1 of the notes entitled “Investments under own management” on page 184 et seq.
The measurement and monitoring mechanisms that have been put in place safeguard a prudent, broadly diversified investment strategy.
The counterparty default risk consists primarily of the risk of complete or partial failure of the counterparty and the associated default on payment. The required risk capital for counterparty defaults with the confidence level of 99.5% amounted to EUR 279.9 million as at 30 September 2015.
Counterparty default risks are also relevant to our investments and in life and health reinsurance because we prefinance acquisition costs for our ceding companies. Our clients, retrocessionaires and broker relationships as well as our investments are therefore carefully evaluated and limited in light of credit considerations and are constantly monitored and controlled within the scope of our system of limits and thresholds.
Retrocession gives rise to claims that we hold against our retrocessionaires. These reinsurance recoverables – i. e. the reinsurance recoverables on unpaid claims – amounted to EUR 1,395.3 million (EUR 1,376.4 million) as at the balance sheet date.
5. We manage within defined limits and create transparency through measurements.
Within the overall framework of operational risks we consider, in particular, business process risks, compliance risks, risks associated with sales channels and outsourcing of functions, fraud risks, personnel risks, information technology risks / information security risks and business interruption risks.
Business process risks are associated with the risk of deficient or flawed internal processes, which can arise as a consequence of an inadequate process organisation. We have defined criteria to evaluate the maturity level of the material processes, e. g. for the reserving process. This enables us to ensure that process risks are monitored. In cooperation with the process participants, the process owner evaluates the risks of the metaprocess and develops measures for known, existing risks. Data quality is a highly critical success factor in this regard, especially in risk management, because – among other things – the validity of the results delivered by the internal model depends primarily on the data provided.
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, risks associated with possible climate change are analysed by this working group. Global warming would affect not only natural perils, but also human health, the world economy, the agricultural sector etc. These problematic issues may also have implications for our treaty portfolio – in the form of not just risks but also opportunities, e. g. through increased demand for reinsurance products. Further examples of emerging risks include nanotechnology, shortage of resources and supply chain risks.
The liquidity risk refers to the risk of being unable to meet our financial obligations when they become due. The liquidity risk consists of the refinancing risk (necessary cash could not be obtained or could only be obtained at increased costs) and the market liquidity risk (financial market transactions could only be completed at a poorer price than expected due to a lack of market liquidity). Core elements of the liquidity management of our investments are, in the first place, management of the maturity structure of our investments on the basis of the planned payment profiles arising out of our technical liabilities and, secondly, regular liquidity planning as well as the asset structure of the investments. Above and beyond the foreseeable payments, unexpected and exceptionally large payments may pose a threat to liquidity. In reinsurance business, however, significant events (major losses) are normally paid out after a lead time that can be reliably planned. As part of our liquidity management we have nevertheless defined asset holdings that have proven to be highly liquid – even in times of financial stress such as the 2008 financial crisis. Our holdings of unrestricted German, UK and US government bonds as well as cash during the year under review were larger than possible disbursements for assumed extreme events, which means that our liquidity is assured even in the unlikely case of financial crises coinciding with an extreme event that needs to be paid out quickly. The liquid asset reserve stood at EUR 5.4 billion as at the balance sheet date. In addition, we manage the liquidity of the portfolio by checking on each trading day the liquidity of the instruments contained therein. These measures serve to effectively reduce the liquidity risk.
Key elements in Hannover Re’s opportunity management include its various market-specific innovations in the Life & Health and Property & Casualty reinsurance business groups (see the Forecast on page 126 et seq.). What is more, innovative and creative ideas are developed by our employees. Those that can be successfully translated into additional profitable premium volume are financially rewarded. Further elements are the working group on “Emerging Risks and Scientific Affairs” and the “Future Radar” initiative.
Energy Output Performance Protect (EOPP) Many companies would like to bring new solutions to market that generate more energy and are more efficient. Given the innovative nature of the technology, however, customers often lack confidence in such solutions. By protecting the output performance of energy-creating or energy-increasing technologies we help to boost customer confidence and enable providers to set themselves apart from other market players.
As an internationally operating reinsurance group, we move in a highly complex environment. Nevertheless, thanks to our business activities in all lines of reinsurance we are able to achieve optimal risk spreading through geographical and risk-specific diversification while at the same time maintaining a balanced opportunity / risk profile. We consider the risks described in the above sections to be manageable, particularly because our steering and monitoring measures are effectively and closely interlinked. Despite these diverse mechanisms, individual and especially accumulation risks can decisively affect our assets, financial position and net income. In accordance with our understanding of risk, however, we consider not only risks but also at the same time opportunities. We therefore only enter into those risks that go hand-in-hand with opportunities.
assumptions of rating agencies with respect to our target rating and the expectations of our clients and shareholders. This increase gives us a sufficient capital cushion to be able both to absorb risks and act on business opportunities that may arise. Similarly, our very good ratings (see page 58) also testify to our financial stability. 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 management culture – one of the rating agency’s benchmark criteria – promotes the development of appropriate risk monitoring systems and strategic risk management. The evaluation further encompasses the areas of risk controls, emerging risk management and risk models. This external appraisal confirms the quality of our holistic approach to risk management.
Declaration on Corporate Governance pursuant to § 289a Commercial Code (HGB)
The Executive Board and Supervisory Board of Hannover Rück SE expressly support the suggestions and recommendations of the German Corporate Governance Code that are practicable for the reinsurance industry and recognise their central importance in guiding our activities. The principles of responsible and good enterprise management therefore constitute the core of our internal Corporate Governance principles (www.
The positive attitude of Hannover Rück SE towards the Code is not contradicted by the fact that in the year under review we again did not comply with certain Code recommendations, since a well justified deviation from the recommendations of the Code may – as in the present cases – be very much in the interests of good corporate governance tailored to a particular company, i. e. by reflecting enterprise- and industry-specific features (cf. Foreword to the German Corporate Governance Code). Based on what is still a high degree of fulfilment of the recommendations and suggestions of the Code, Hannover Re continues to rank very highly among the companies listed on the DAX and MDAX.
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 12 June 2015 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 the total dividends per share distributed during the vesting period. The share awards consequently follow the economic fortunes of the Hannover Re share.
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 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.
Three of the members of the Supervisory Board in the year under review were women. In addition, one of the members of the Supervisory Board’s Nomination Committee is a woman. The programme for the advancement of women that had been implemented within the workforce in 2012 encourages the fostering of promising young female professionals through a variety of targeted measures and supports enlargement of the proportion of women in management positions.
The Rules of Procedure of the Supervisory Board provide inter alia that each member of the Supervisory Board must have the knowledge, skills and professional experience required for orderly performance of their tasks and that the Supervisory Board must have a sufficient number of independent members. Currently, four of the six shareholder representatives are independent as defined by Item 5.4.2 of the German Corporate Governance Code. At least one independent member shall have
For further details of the activities of the Supervisory Board committees please see the explanations provided in the Supervisory Board Report on pages 238 to 240.
The risk management system applicable throughout the entire Hannover Re Group is based on the risk strategy, which in turn is derived from the corporate strategy. A core component is the systematic and comprehensive recording of all risks that from the current standpoint could conceivably jeopardise the company ’s profitability and continued existence. Further details in this regard may be obtained from the risk report contained in this Annual Report on page 72 et seq.
• Securities transactions pursuant to Item 6.2 of the German Corporate Governance Code,
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 senior executives below the level of the 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 2015 consolidated financial statement as required by IAS 24 “Related Party Disclosures ”. Under German commercial law, too, this information includes data specified as mandatory for the notes (§ 314 HGB) and the management report (§ 315 HGB). These details are discussed as a whole in this remuneration report and presented in summary form in the notes.
The provisions of the Act on the Adequacy of Management Board Remuneration (VorstAG) and of the Insurance Supervision Act (VAG) in conjunction with the Regulation on the Supervisory Law Requirements for Remuneration Schemes in the Insurance Sector (VersVergV) have been observed. In addition, we took into account the more specific provisions of DRS 17 (amended 2010) “Reporting on the Remuneration of Members of Governing Bodies”.
Remuneration reviewed by the Supervisory Board normally at two-year intervals. Since 2014 gradual conversion of Executive Board contracts: review of annual fixed salary during the contract period no longer applies.
Variable remuneration (approx. 60% of total remuneration upon 100% goal attainment) The profit- and performance-based remuneration (variable remuneration ) is contingent on certain defined results and the attainment of certain set targets. The set targets vary according to the function of the Board member in question. The variable remuneration consists of a profit bonus and a performance bonus.
The following chart summarises the make-up of the variable remuneration components. For details of measurement and payment procedures please see the two tables following the chart.
Measurement bases / conditions of payment for variable remuneration M 73
Proportion of variable remuneration: Chief Executive Officer / Chief Financial Officer: 70%; Board member with divisional responsibility: 50%
In view of the market interest rate the Supervisory Board has set the risk-free interest rate at 1.8%.
The basis for the divisional bonus is the return generated on the capital allocated to the division in the respective 3-year period just ended ( = RoCA (Return on Capital Allocated)).
Goal attainment can amount to a maximum of 200% and from 2015 onwards a minimum of -100%.
Special arrangements for 2013 and 2014: the basis for the average RoCA is the divisional performance from 2013 onwards; the minimum divisional bonus is EUR 0.
1 An instrument of value-based management used to measure the attainment of long-term goals on the level of the Group, business groups and operational units (see also page 26 et seq.).
Of the total amount of defined variable remuneration, a partial amount of 60% is paid out in the month following the Supervisory Board meeting that approves the consolidated financial statement. The remaining amount of 40% is initially withheld as explained below with a view to encouraging long-term value creation: Payment procedures for the total variable remuneration M 74
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 2015 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 2.0 million (previous year: EUR 0.5 million) in 2015.
Continued payment in case of disability In the event of temporary incapacity for work the fixed annual salary shall continue to be paid in the same amount, at most until termination of the service contract.
If a member of the Executive Board is permanently incapacitated for work during the period of the service contract, the service contract shall terminate at the end of the sixth month after which the permanent incapacity for work is established – although no later than at the end of the service contract.
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 2015 Declaration of Conformity contained in the section “Statement of enterprise management practices” on page 99 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 non- extension 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 2014 = Actual 2015 = Estimate
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 2020 at the prevailing share price of Hannover Re. In 2015 nominal amounts of EUR 37,400 more than had been originally reserved were used as a basis for allocation of the 2014 share awards.
2 The non-cash compensation has been carried in the amounts established for tax purposes. 3 In 2015 EUR 110,100 more in variable remuneration was paid out to Board members for 2014 than had been reserved.
The table is to be viewed independently of the presentation of the total remuneration received by active members of the Executive Board pursuant to DRS 17.
Total 1 The change in the reserve for share awards from previous years derives from the increased market price of the Hannover Re share, the dividend approved for 2014 and the spreading of the expense for share awards across the remaining period of the individual service contracts.
Dividend on share awards for 2013 3 20.3 0.0 0.0 0.0 20.6 0.0 0.0 0.0 22.8 0.0 0.0 0.0
Roland Vogel Chief Financial Officer 1 The stated values include the remuneration of Mr. Althoff as a senior executive of Hannover Re for the period from 1 January to 31 July 2014. The service cost for 2015 includes a past service cost of EUR 704,500. 2 This refers in each case to payment of the variable remuneration for the previous year. Remuneration for seats with Group bodies that is counted towards the variable remuneration accrues in the year of occurrence. The company’s Supervisory Board only decides on the final amount paid out for the 2015 financial year after the remuneration report has been drawn up.
5 For details of the service cost see the tables “Defined benefit commitments” and “Defined contribution commitments” on page 119.
Contribution-based pension commitment (appointment from 2009 onwards) The commitments given to members of the Executive Board from 2009 onwards are based on a defined contribution scheme.
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 (16) pension commitments existed, totalled EUR 1.6 million (EUR 1.5 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 25.0 million (EUR 28.8 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. The values shown include the entitlements prior to appointment to the Executive Board, which in accordance with a resolution of the company’s Supervisory Board shall remain unaffected by the pension commitment as a member of the Executive Board.
2 The first increased contribution was paid for Mr. Althoff in 2015 based on his appointment to the Executive Board in an amount of EUR 42,100 (25% of the pensionable income). The personnel expenditure in 2015 includes a past service cost of EUR 704,500. The values shown for 2014 refer to his entitlements based on the remuneration prior to appointment to the Executive Board (1 August 2014). The guaranteed interest rate of his commitment is 3.25%.
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
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-and-a-half times the stated amounts. No remuneration is envisaged for the Nomination Committee.
Members who have only belonged to the Supervisory Board or one of its Committees for part of the financial year receive the remuneration pro rata temporis.
Individual remuneration received by the members of the Supervisory Board M 81
Frauke Heitmüller 3 Member of the Supervisory Board Fixed remuneration 30.0 30.0
Maike Sielaff 3 Member of the Supervisory Board Fixed remuneration 30.0 30.0
Gert Wächtler 4 Member of the Supervisory Board (until 19 March 2013)
– 2.5 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
Dealings in shares, options and derivatives of Hannover Rück SE effected by members of the Executive Board or Supervisory Board of Hannover Re or by other persons with managerial functions who regularly have access to insider information concerning the company and who are authorised to take major business decisions – as well as such dealings conducted by certain persons closely related to the aforementioned individuals – in excess of EUR 5,000 are to be reported pursuant to § 15a Securities Trading Act (WpHG). No such reportable transactions took place in the 2015 financial year.
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 2015 amounted to 0.004% (0.004%) of the issued shares, i. e. 4,585 (4,549) shares.
The group of participants and the total number of eligible participants in the variable remuneration systems of Hannover Re are set out in the following table.
In view of the fact that the Excess Return on Capital Allocated (xRoCA) is even more suitable for comparisons between units of differing size, it was decided that from 2016 onwards the xRoCA will be used as the measurement basis instead of the IVC. The xRoCA describes the IVC in relation to the allocated capital and shows the relative excess return generated above and beyond the weighted cost of capital.
In view of the fact that outperformance of up to 200% is possible for Group net income and up to 150% for divisional targets, a maximum total degree of goal attainment of 140% can be attained in both treaty / regional departments and service departments. Given outperformance of all targets, a maximum of 140% of the variable remuneration can therefore be attained on management levels 2 and 3.
The risks to the economy seen in recent years still exist: on the political front, the development of flashpoints in the Near and Middle East is especially hard to foresee. The expansion of crisis zones or an upsurge in terrorist activity could unsettle markets and undermine the anticipated global economic growth. Furthermore, geopolitically induced turmoil on financial markets cannot be ruled out: interest rate hikes in the United States, for example, could have increasingly negative repercussions on the world economy, especially because numerous countries are still in the throes of a restructuring process. As additional factors, movements in the oil price and the pace of growth in China are likely to impact the markets.
Europe The Eurozone economy is gradually picking up momentum. The moderate revival in the winter months will in all likelihood be sustained for the entirety of 2016. Nevertheless, the structural problems affecting parts of the currency area will stubbornly persist. Growth is expected to come in slightly higher than in the previous year at 1.7%. Despite trending upwards, the increase in consumer prices in the Eurozone will continue to be very low at 1.0%. The unemployment rate is trending lower: it is forecast to nudge modestly lower again to 10.4%. The United Kingdom should generate growth almost on a par with the previous year at 2.3%.
In the assessment of the Kiel Institute for the World Economy, employment will continue to trend higher, accompanied by appreciable wage growth. The fall in unemployment will, however, come to a halt as a consequence of the considerable influx of refugees. The jobless rate is expected to remain at around 6.3%.
International bond markets will again be shaped by below- average and increasingly divergent interest rate levels in 2016. In the relevant currency areas for our company we anticipate flatter yield curves. With respect to government bonds with higher risk premiums issued by countries of the European Monetary Union that have been the focus of so much attention of late, the situation should continue to stabilise. Generally speaking, the increased volatility observed on the capital market since the summer of 2015 is not expected to diminish. The effects of currency and oil price movements should therefore be all the more pronounced, with more risks than opportunities anticipated at this point in time for the world economy – also with an eye to geopolitical concerns. The consolidation of public finances in the industrial nations and the advanced phase of the credit cycle in the United States will continue to preoccupy the economic environment; they may, however, be more than offset by resurgent private consumption. In view of the existing uncertainties, broad diversification within the investment portfolio will therefore continue to be of considerable importance in 2016.
Along with Europe (Solvency II) and China (C-ROSS), South Africa will also be adopting a risk-based solvency system (Solvency Assessment and Management) during the year or at the beginning of 2017 at the latest.
Generating growth in what continues to be a highly competitive environment will doubtless remain a real challenge in 2016. Furthermore, industry experts anticipate stable or slightly lower premiums. If 2016 should again pass off without large losses from natural catastrophes or if reinsurers post adequate returns on equity from the perspective of shareholders, the soft market phase is likely to continue.
These factors also shaped the treaty renewals as at 1 January 2016, the date when some 65% of our property and casualty reinsurance portfolio (excluding facultative business and structured reinsurance) was renegotiated. Despite sometimes appreciable price erosion, we were broadly satisfied with the outcome of the renewals – even though the rate quality of the renewed portfolio was somewhat lower than in the previous year. Virtually unchanged conditions and stronger demand for multi-year covers are likely indications that the current soft market phase is bottoming out.
Target markets North America In North American primary insurance, where rate increases have been observed since 2011, softening is likely to emerge in the market in 2016 – and this could increasingly lead to rate reductions for major risks. The absence of sizeable claims expenditure on natural disasters and individual risks continues to make itself felt on the reinsurance side and will sustain the trend towards rate erosion in property and – to a lesser extent – casualty business, albeit in a more muted form. Mergers and acquisitions in the primary market will lead to a shakeup in reinsurance purchasing over the long term; in the short term, however, we see more opportunities than risks, which Hannover Re will be able to leverage thanks to its long-standing close and established customer relationships.
The latest round of renewals offered increasing indications of a bottoming out in both the property and casualty lines. We are adhering to our strategy of a margin-oriented underwriting policy, even if this compels us to forego premium 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 2016. The rate erosion has slowed somewhat. Modest rate reductions were recorded in non-proportional property business, especially under profitable loss-free programmes. On the other hand, premium increases were booked in all three subsectors of US liability business (standard, special and professional liability) – while conditions under proportional treaties remained stable. All in all, the premium volume for the North American portfolio renewed as at 1 January climbed by around 9% – in part due to the expansion of customer relationships. As things currently stand, we expect to see further intensification of competition in this segment in the treaty renewals as at 1 June and 1 July 2016 – the time of year when catastrophe XL covers, in particular, are renegotiated. On the whole, our North American business is expected to deliver slightly higher premium volume in the current financial year.
Specialty lines worldwide Marine In marine reinsurance we expect to see a sharp decline in rates for the 2016 financial year despite the sizeable number of large losses. Demand for primary insurance in the area of offshore energy risks is soft on the back of low oil prices. Combined with high capacity and fierce competition throughout the entire marine insurance market, our customers have booked reduced premium income. When it comes to our own portfolio, we anticipate a lower premium volume overall in 2016.
Aviation The significant major losses incurred in aviation reinsurance in 2014 and 2015 have failed to bring about long-term stabilisation of rates. Although rising passenger numbers and fleet values are creating stronger demand for reinsurance in the original market, we anticipate a continued abundant oversupply of insurance capacities and sharply lower rates. With this in mind, we are scaling back our involvement and our market share in the aviation sector, and we expect to book a sharp contraction in premium volume.
Facultative reinsurance As is also the case in obligatory reinsurance, the soft market phase prevailing in facultative reinsurance is likely to continue in 2016. A revival in offshore energy business is not to be expected in view of reduced investment in the construction of drilling rigs due to the low oil price. Nevertheless, by taking a selective approach we also see attractive business opportunities. For example, we anticipate stronger demand in areas such as covers for renewables and cyber risks. An increased focus on US casualty business should also open up new prospects. In addition, thanks to our very good rating we should continue to profit from the pooling of reinsurance cessions on the part of large primary insurance groups. Our portfolio of facultative risks is expected to deliver a slightly reduced premium volume with continued healthy profitability in the current financial year.
Global reinsurance Worldwide treaty reinsurance The Asia-Pacific markets continue to rank as growth markets. Along with sustained rising demand for insurance products among the expanding middle classes of many emerging markets, regulatory changes – above all in China and India – are also having favourable implications for Hannover Re’s positioning. In certain Asian countries, on the other hand, moves to reduce the outflow of reinsurance premiums into foreign markets are having adverse impacts.
Our reinsurance business in China is expected to deliver another significant surge in premium growth. The regulatory changes ushered in with the adoption of the C-ROSS solvency regime on 1 January 2016, Hannover Re’s local presence and our strategy of building stronger customer relationships with a diversified business volume will support the growth of the portfolio.
In Australia and New Zealand we shall continue to systematically leverage our strategically important local presence and the company’s financial strength in order to further expand our customer relationships in the region and hence moderately boost our premium volume. We shall devote special strategic attention here to the provision of holistic customer care and the cultivation of niche business.
In South Africa a risk-based solvency system known as SAM (Solvency Assessment and Management) is to be implemented for the insurance industry during 2016 or 2017. We expect the premium for our reinsurance portfolio and specialty business to contract in 2016, in part owing to exchange rate effects.
Hannover Re expects demand to continue rising for coverage of agricultural risks. The increasing need for agricultural commodities and foodstuffs as well as the growing prevalence of extreme weather events are generating stronger demand for reinsurance covers, particularly in emerging and developing markets. In addition, the decision was taken at the Paris Climate Conference in December 2015 to insure a further 400 million people in poor and at-risk nations against the effects of climate change by the year 2020. In this regard, we see further growth potential for index-linked products among direct and indirect insurance concepts in emerging and developing countries. Hannover Re therefore expects its premium to come in higher for the current financial year.
We expect to write further profitable business on the level of the previous year for our retakaful portfolio in the current financial year.
Catastrophe XL (Cat XL) An oversupply of reinsurance capacity continues to be the hallmark of natural catastrophe business. The inflow of capital from alternative and ILS markets slowed over the course of the year. The current soft market phase will only come to an end when the majority of market players reach a level of profitability that is insufficient – whether through high loss expenditures, inadequate reserving levels or influencing effects from the capital market. In the 1 January 2016 treaty renewals rates declined by around 8% as natural catastrophe losses remained below expectations. For the full financial year we therefore anticipate reduced premium income.
In the area of insurance-linked securities (ILS) we expect to see steadily growing demand. Investors are seeking a low correlation with other financial investments and hence the diversification that this brings. What is more, the market for insurance risks is perceived by investors as relatively attractive compared to other investments. We are responding to this market situation with a strong emphasis on service, offering individually tailored products – from collateralised reinsurance to catastrophe bonds – and extending our range of services for life reinsurance risks. Over the coming years we expect our ILS activities to deliver a positive and consistently rising profit contribution.
In the Life & Health reinsurance business group we are a globally operating and professional partner for our customers. We conduct profitable activities in international and highly competitive markets and, as a global reinsurer, we strive for sustainable success. In so doing, we do not restrict ourselves solely to our core business of offering our customers reinsurance solutions, but rather we also tackle the manifold other challenges posed by the life and health reinsurance market.
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
Developments on capital markets play a crucial role and will once again influence our business in the current year. The prevailing low interest rate environment will impact new business and the profitability of the existing portfolio in 2016, as it did in 2015. Especially in Europe, this situation is exerting a particularly dampening effect on demand for traditional savings products with interest rate guarantees. It is our expectation that attention in these markets will increasingly focus on risk-oriented and unit-linked solutions. There are also signs of further consolidation, principally affecting traditional life insurance business. It is evident that primary insurers are switching their new business with conventional life insurance products to innovative new concepts with a variable return. With a view to staying focused on writing new business, in-force portfolios are being passed on in block transactions to professional consolidation platforms. With the implementation of Solvency II effective 1 January 2016, we anticipate rising demand – especially in Germany – for innovative business possibilities and, in particular, for financially oriented reinsurance solutions that help to provide solvency relief for our primary insurance customers.
In South Africa and China, too, local insurance companies are facing fresh challenges with the implementation of new solvency regimes – namely SAM and C-ROSS respectively. As was already the case with the preparations for adoption of Solvency II, here too Hannover Re is optimally positioned to support our customers as an expert, reliable and solution-driven partner.
When it comes to longevity business, it is our expectation that the steady rise in worldwide demand will be sustained in the coming year and further profitable business opportunities will open up. Particularly in the Scandinavian markets and in the Netherlands, business potential can already be discerned.
Given the high capital requirements and potentially increased volatility on equity markets – which are in part driven by liquidity –, we take a cautious stance on further new investments in listed equities at current valuation levels.
The expected positive cash flow that we generate from the technical account and our investments should – based on stable exchange rates – lead to further growth in our asset portfolio. We are looking to deliver a return on investment of 2.9%.
Events after the reporting date No matters of special significance occurred after the closing date for the consolidated financial statements.
Fixed-income securities – at fair value through profit or loss 6.1 108,982 64,494
Other financial assets – at fair value through profit or loss 6.1 39,602 66,394
Consolidated statement of income 2015 N 02 in EUR thousand Notes 1.1. – 31.12.2015 1.1. – 31.12.2014
Income / expense on funds withheld and contract deposits 7.2 395,033 376,056
Consolidated statement of changes N 04 in shareholders’ equity 2015 in EUR thousand
Changes in the consolidated group – – – – – – – – 966 966
A nn ua l f in an ci al s ta te m en ts in EUR thousand
Total income and expense recognised directly in equity – – 633,338 436,836 707 (31,776) – 1,039,105 43,649 1,082,754
Total income and expense recognised in equity – – (457,254) 318,735 7,531 11,717 – (119,271) (12,124) (131,395)
Change in fair value of financial instruments (through profit or loss) (901) 33,257
Change in cash and cash equivalents (I. + II. + III. + IV.) 19,722 134,000
Cash and cash equivalents at the end of the period 792,604 772,882
In January 2016 the IASB issued IFRS 16 “Leases” setting out new principles governing the recognition, measurement, presentation and disclosure of leases. The most significant new requirements relate principally to accounting by lessees. In future, the lessee shall as a general principle recognise a lease liability for all leases. At the same time it shall recognise a right to use the underlying asset. The standard is to be applied to annual periods beginning on or after 1 January 2019 and has still to be endorsed by the EU. Hannover Re is currently exploring the implications of the new requirements and does not expect them to have any significant effect on the consolidated financial statement.
In May 2014 the IASB issued IFRS 15 “Revenue from Contracts with Customers”. The standard specifies when and in what amount revenue is to be recognised and which disclosures are required for this purpose. IFRS 15 provides a single five-step model to be applied to all contracts with customers. Financial instruments and other contractual rights and obligations which are to be recognised under separate standards as well as (re) insurance contracts within the scope of IFRS 4 are expressly exempted from the standard’s scope of application. The standard is to be applied for the first time to annual periods beginning on or after 1 January 2018 and has still to be endorsed by the EU. The new standard does not apply to reinsurance contracts. Possible implications for Group companies that realise revenues outside of reinsurance business are currently being analysed but cannot as yet be foreseen.
Published: Title Initial application to annual periods beginning on or after the following date: January 2016 Amendments to IAS 7: Disclosure Initiative 1 January 2017 (still to be endorsed by the EU)
January 2016 Amendments to IAS 12: Recognition of Deferred Tax Assets for Unrealised Losses 1 January 2017 (still to be endorsed by the EU)
December 2014 Amendments to IFRS 10, IFRS 12 and IAS 28: Investment Entities: Applying the Consolidation Exception 1 January 2016 (still to be endorsed by the EU)
December 2014 Amendments to IAS 1: Disclosure Initiative 1 January 2016
May 2014 Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation
January 2014 IFRS 14 Regulatory Deferral Accounts 1 January 2016 (still to be endorsed by the EU)
With effect from the first quarter of 2015 Hannover Re extended its estimation methods to include an additional subportfolio. This extension, which relates to estimated amounts from reinsurance treaties that have not yet been brought to account and the deferral thereof, helped to improve the accuracy of estimation.
Premiums or discounts are deducted or added within the statement of income using the effective interest rate method until the amount repayable becomes due. Impairment is taken only to the extent that repayment of a loan is unlikely or no longer expected in the full amount. Please refer to our comments on impairments in this section.
Unlisted structured bonds Interest rate curve, volatility surfaces Hull-White, Black-Karasinski, LIBOR market model etc.
Inflation swaps Inflation swap rates (Consumer Price Index), historical index fixings, interest rate curve
A nn ua l f in an ci al s ta te m en ts can be used as inputs (financial instruments belonging to fair value hierarchy level 3) are for the most part measured on the basis of proven valuations drawn up by knowledgeable, independent experts, e. g. audited net asset value, the plausibility of which has previously been subjected to systematic review. For further information please see our explanatory remarks on the fair value hierarchy in Section 6.1 “Investments under own management”.
Intangible assets: in accordance with IFRS 3 “Business Combinations ” goodwill is not amortised; instead, impairments may be taken after an annual impairment test or as indicated. For the purposes of the impairment test, goodwill is to be allocated pursuant to IAS 36 “Impairment of Assets” to so-called “cash generating units” (CGUs). Each CGU to which goodwill is allocated should represent the lowest level on which goodwill is monitored for internal management purposes and may not be larger than a segment. Following allocation of the goodwill it is necessary to determine for each CGU the recoverable amount, defined as the higher of the value in use and the fair value less costs to sell. For impaired goodwill the recoverable amount is to be stated. The recoverable amount is to be compared with the book value of the CGU including goodwill. When the latter exceeds the recoverable amount, an impairment expense is to be recognised. For detailed information on the impairment method used and the goodwill recognised as at the balance sheet date, please see Section 6.5 “Goodwill”.
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 3.3 “Major discretionary decisions and estimates”.
Provisions for pensions are established in accordance with IAS 19 “Employee Benefits” using the projected unit credit method. They are calculated according to actuarial principles and are based upon the commitments made by the Hannover Re Group for retirement, disability and widows’ benefits. The amount of the commitments is determined according to length of service and salary level. The pension plans are defined benefit plans. The basis of the valuation is the estimated future increase in the rate of compensation of the pension beneficiaries.
The benefit entitlements are discounted by applying the capital market rate for highest-rated securities. All changes in valuation, especially actuarial gains and losses, are captured immediately in cumulative other comprehensive income. Service cost and interest cost are recognised in the statement of income. Returns on plan assets are determined using the same interest rate as that used in the calculation of the present value of the defined benefit obligation.
• Other financial assets – at fair value through profit or loss
By analysing a broad range of observable information it is possible to classify losses as major individual loss events. Measurement of the obligations existing in this connection is carried out using a separate process, which is based largely on contract- specific estimates.
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 83 et seq. We would further refer to our explanatory remarks on the technical reserves in Section 3.2 “Summary of major accounting policies” and Section 6.7 “Technical provisions”.
In life business, too, the calculation of reserves and assets is crucially dependent on actuarial projections of the covered business. So-called model points are defined according to the type of business covered. The main distinguishing criteria are the age, sex and (non-)smoker status of the insured, tariff, policy period, period of premium payment and amount of insurance. The portfolio development is simulated for each model point, in which regard the key input parameters are either predefined by the tariff (e. g. allowance for costs, amount of premium, actuarial interest rate) or need to be estimated (e. g. mortality or disability rates, lapse rates). These assumptions are heavily dependent on country-specific parameters and on the sales channel, quality of the cedant’s underwriting and claims handling, type of reinsurance and other framework conditions of the reinsurance treaty. The superimposition of numerous model points gives rise to a projection, which incorporates inter alia assumptions concerning the portfolio composition and the commencement of covered policies within the year. Such assumptions are estimated at the inception of a reinsurance treaty and subsequently adjusted to the actual projection.
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.
recognised as goodwill. Under IFRS 3 scheduled amortisation is not taken on goodwill. Instead, impairment is taken where necessary on the basis of annual impairment tests. Immaterial and negative goodwill are recognised in the statement of income in the year of their occurrence. Costs associated with acquisition are expensed.
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 18 (17) companies at home and abroad were not consolidated in the year under review. A further 12 (14) companies were not included at equity in the consolidated financial statement for the same reason. The business object of these altogether 30 (31) companies is for the most part the rendering of services for reinsurance companies within the Group.
Transactions between a disposal group and the continuing operations of the Group were similarly eliminated in accordance with IFRS 10.
A nn ua l f in an ci al s ta te m en ts 4.2 Consolidated companies and complete list of shareholdings
In addition to Hannover Rück SE as the parent company of the Group, the scope of consolidation of the Hannover Re Group encompasses the companies listed in the table below.
Hannover Rück Beteiligung Verwaltungs-GmbH, Hannover / Germany 1, 2 100.00 EUR 2,341,925 –
Dritte HRBV GmbH & Co. KG, Hannover / Germany 1 100.00 EUR 152,865 –
Vierte HRBV GmbH & Co. KG, Hannover / Germany 1 100.00 EUR 152,865 –
Hannover America Private Equity Partners II GmbH & Co. KG, Hannover / Germany 1 95.42 EUR 222,380 37,760
HAPEP II Holding GmbH, Hannover / Germany 1 95.42 EUR 19,878 9,277
Hannover Re Euro PE Holdings GmbH & Co. KG, Hannover / Germany 1 91.20 EUR 210,787 2,787
Hannover Re Euro RE Holdings GmbH, Hannover / Germany 1 87.68 EUR 854,859 12,400
HEPEP III Holding GmbH, Cologne / Germany 1 67.54 EUR 11,423 5,067
HEPEP II Holding GmbH, Cologne / Germany 1 57.89 EUR 4,727 1,445
International Hannover Holding AG, Hannover / Germany 4, 5 100.00 EUR 39 (2)
Oval Office Grundstücks GmbH, Hannover / Germany 50.00 EUR 2,061 16,008
HANNOVER Finanz GmbH, Hannover / Germany 6 27.78 EUR 69,477 6,032
Hannover ReTakaful B.S.C. (c), Manama / Bahrain 1 100.00 BHD 60,631 2,859
Leine Investment General Partner S.à r.l., Luxembourg / Luxembourg 1, 7 100.00 EUR 38 530
Hannover Reinsurance Group Africa (Pty) Ltd., Johannesburg / South Africa 1 100.00 ZAR 209,905 206,410
Peachtree (Pty) Ltd., Johannesburg / South Africa 4, 6 100.00 ZAR – –
Hannover Re Real Estate Holdings, Inc., Orlando / USA 7 95.25 USD 588,536 26,199
Nashville West, LLC, Wilmington / USA 1, 7 95.15 USD 29,953 496 1225 West Washington, LLC, Wilmington / USA 1, 7 95.15 USD 23,812 1,165 975 Carroll Square, LLC, Wilmington / USA 1, 7 95.15 USD 54,389 1,818
Kaith Re Ltd., Hamilton / Bermuda 1 88.00 USD 241 (176)
HR GLL Roosevelt Kft, Budapest / Hungary 1 87.67 HUF 19,188,054 1,820,616
HR GLL Liberty Corner SPÓLKA Z OGRANICZONA ODPOWIEDZIALNÓSCIA, Warsaw / Poland 1 87.67 PLN 48,411 (78)
HR GLL Griffin House SPÓLKA Z OGRANICZONA ODPOWIEDZIALNÓSCIA, Warsaw / Poland 1 87.67 PLN 38,359 (1,103)
Akvamarín Beta s.r.o., Prague / Czech Republic 1 87.67 CZK 100,919 41,363
HR GLL Europe Holding S.à r.l., Luxembourg / Luxembourg 1 87.67 EUR 165,908 (25)
Pipera Business Park S.r.l., Bucharest / Romania 1 87.67 RON 40,341 7,577
Integra Insurance Solutions Limited, Bradford / United Kingdom 6 74.99 GBP 2,841 2,622
Lireas Holdings (Pty) Ltd., Johannesburg / South Africa 70.00 ZAR 192,524 17,375
Transit Underwriting Managers (Pty) Ltd., Cape Town / South Africa 63.00 ZAR 1,114 1,174
Landmark Underwriting Agency (Pty) Ltd., Bloemfontein / South Africa 52.85 ZAR 3,523 1,713
SUM Holdings (Pty) Ltd., Johannesburg / South Africa 50.54 ZAR 23,117 5,310
Envirosure Underwriting Managers (Pty) Ltd., Durban / South Africa 35.70 ZAR 1,180 979
Synergy Targeted Risk Solutions (Pty) Ltd, Johannesburg / South Africa 35.70 ZAR 2,042 62
International Mining Industry Underwriters Limited, London / United Kingdom 1 100.00 GBP 208 49
HR Hannover Re, Correduría de Reaseguros, S.A., Madrid / Spain 1 100.00 EUR 377 36
Mediterranean Reinsurance Services Ltd., Hong Kong / China 1, 4 100.00 USD 52 –
Hannover Rück SE Escritório de Representação no Brasil Ltda., Rio de Janeiro / Brazil 6 100.00 BRL 2,440 357
London & European Title Insurance Services Limited, London / United Kingdom 1 100.00 GBP 372 123
Hannover Re Risk Management Services India Private Limited, New Delhi / India 13 100.00 INR 52,226 15,774
HMIA Pty Ltd, Sydney / Australia 6 55.00 AUD (128) (128)
ITAS Vita S.p.A., Trient / Italy 6 34.88 EUR 94,147 8,353
Clarenfin (Pty) Ltd., Johannesburg / South Africa 26.11 ZAR 156 (15)
Camargue Underwriting Managers (Pty) Ltd., Johannesburg / South Africa 25.79 ZAR 12,955 6,593
Vela Taxi Finance (Pty) Ltd, Johannesburg / South Africa 14.36 ZAR (1,270) (1,045)
Energi Re, LLC, Wilmington / USA 6 28.50 USD 16,570 1,278
Hurst Holme Insurance Company Limited – account 2006 – 03 SCC, Hamilton / Bermuda 4, 6 28.50 USD 229 (69)
Hurst Holme Insurance Company Limited – account 2009 – 01 SCC, Hamilton / Bermuda 4, 6 28.50 USD (27) (545)
New PF Limited, Dublin / Ireland 4, 6 25.00 EUR (6) –
Meribel Midco Limited, St. Helier / Jersey 1 20.11 EUR 131,725 15,199
Acte Vie S.A. Compagnie d’ Assurances sur la Vie et de Capitalisation, Strasbourg / France 6 9.38 EUR 8,996 254 1 Provisional (unaudited) figures 2 Year-end result after profit transfer 3 Financial year as at 30 September 2015 4 Company is in liquidation 5 Abbreviated financial year from 1 January 2015 to 30 June 2015 6 Figures as at 31 December 2014 7 IFRS figures 8 Financial year as at 31 October 2015 9 Company was newly established in 2015; an annual financial statement is not yet available. 10 Company is inactive 11 Figures as at 31 December 2013 12 Abbreviated financial year from 1 January 2015 to 31 July 2015 13 Financial year as at 31 March 2015 14 Start of business operations at 1 January 2015, an annual financial statement is not yet available.
LI RE is a segregated account of Kaith Re Ltd., the purpose of which – as with all segregated accounts under Kaith Re Ltd. – is the securitisation of underwriting risks. In contrast to the other segregated accounts, the sole investor and hence the risk carrier of LI RE is Hannover Re.
Investing activities and investments in catastrophe bonds (ILS) Within the scope of its investment activities Hannover Re has participated since 1988 inter alia in numerous structured entities. These are predominantly special purpose entities in the form of funds, which for their part transact certain types of equity and debt capital investments. These investments encompass private equity funds, fixed income funds, collateralised debt obligations, real estate funds, index funds and other public funds. The volume of these transactions is derived from the book values of the respective investments and amounted to EUR 2,893.3 million (EUR 2,489.4 million) as at the balance sheet date. The maximum risk of loss corresponds to the book values.
By way of its “K” transactions Hannover Re has raised underwriting capacity for catastrophe risks on the capital market. The “K Cession”, which was placed with investors in North America, Europe and Asia, involves a quota share cession on worldwide natural catastrophe business as well as aviation and marine risks. Of the total volume of the “K Cession” amounting to EUR 362.2 million, an amount equivalent to EUR 304.0 million (EUR 169.2 million) was securitised via structured entities as at the balance sheet date. The transaction has an indefinite term and can be cancelled annually by the investors. Segregated accounts of Kaith Re Ltd. are used for transformer purposes for part of this transaction. Hannover Re also uses further segregated accounts of Kaith Re Ltd. and other structured entities outside the Group for various retrocessions of both its traditional and ILS covers, which in each case are passed on to institutional investors in securitised form. The volume of these transactions is measured by the ceded exposure limit of the underlying retrocession agreements and amounted to altogether EUR 1,872.6 million (EUR 847.9 million) as at the balance sheet date. The structured entities are in all cases fully funded by contractually defined investments in the form of cash and equivalent liquid assets. Given that the entire exposure limit of the structured entities is therefore wholly collateralised in each case, there is no risk of loss for Hannover Re.
Book values from business relations with unconsolidated structured entities N 11 in EUR thousand
All the shares of a new special purpose property company were acquired in the 2015 financial year through HR GLL Central Europe GmbH & Co. KG, Munich, a subsidiary of Hannover Re Euro RE Holdings GmbH, Hannover. The business object of the company is to hold and manage one property. The property was acquired on 30 October 2015 for a purchase price of EUR 103.8 million. No contingent liabilities or conditional payments as defined by IFRS 3 were identified.
In August 2015 the Group company Hannover Life Reassurance Company of America, Orlando, United States, established Sand Lake Re, Inc., the registered office of which is located in Burlington, Vermont, United States. The business object of the company, which is wholly owned by Hannover Life Reassurance Company of America, is to transact reinsurance business and conduct associated activities. The company was registered on 14 August 2015, but had not yet commenced its business operations as at the balance sheet date.
Within the 95.1%-owned US subgroup Hannover Re Real Estate Holdings, Inc., all the shares in each of three special purpose property companies were acquired in the second and fourth quarters of 2015 via the subsidiary GLL HRE Core Properties, LP, Wilmington. The business object of the companies is to hold and manage one property each. The properties were acquired on 1 and 24 July as well as on 23 November 2015 for a purchase price equivalent to altogether EUR 207.5 million. No contingent liabilities or conditional payments as defined by IFRS 3 were identified.
The company Hannover Re Global Alternatives GmbH & Co KG was established in March 2015 with its registered office in Hannover, Germany, and has been included in the consolidated financial statement with effect from the first quarter of 2015.
Effective 3 July 2015 Hannover Reinsurance Africa Limited, Johannesburg, South Africa, a subsidiary of our subgroup Hannover Reinsurance Group Africa (Pty) Ltd., acquired further shares in Lireas Holdings (Pty) Ltd., also based in Johannesburg, for a purchase price equivalent to EUR 2.5 million from a third party outside the Group. Through an increase of 19.0% in its shareholding with no change of control status Hannover Reinsurance Africa Limited held 70.0% of the shares in Lireas Holdings upon closing of the transaction. The effects of the change in participating interest were recognised in the consolidated financial statement as an equity transaction in accordance with IFRS 10.
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.
Fixed-income securities – available for sale 21,779,850 19,822,832 7,598,153 6,639,186 238,445 355,505 29,616,448 26,817,523
Equity securities – available for sale 452,108 32,804 – – – – 452,108 32,804
Financial assets at fair value through profit or loss 110,836 63,648 37,748 54,262 – 12,978 148,584 130,888
Reinsurance recoverables on unpaid claims 1,070,380 1,052,357 325,515 325,534 (614) (1,459) 1,395,281 1,376,432
Reinsurance recoverables on other reserves 6,860 421 1,827 5,025 – – 8,687 5,446
Other assets in the segment 1,334,802 1,416,187 675,435 680,215 (828,423) (1,021,307) 1,181,814 1,075,095
Commission and brokerage, change in deferred acquisition costs and other technical income / expenses 1,849,059 1,643,705 1,075,078 946,361 2 – 2,924,139 2,590,066
The investments under own management also encompass investments in associated companies, real estate and real estate funds (also includes: investment property), other invested assets, short-term investments and cash.
Loans and receivables due in one year 411,608 422,774 261,575 265,156 due after one through two years 280,642 289,989 373,036 390,647 due after two through three years 152,075 159,589 268,376 283,396 due after three through four years 200,139 219,242 143,511 152,077 due after four through five years 220,728 243,500 197,584 219,375 due after five through ten years 898,664 1,035,482 979,791 1,122,393 due after more than ten years 706,009 858,523 764,314 954,282
Financial assets at fair value through profit or loss due in one year 13,703 13,703 5,306 5,306 due after one through two years 19,027 19,027 2,433 2,433 due after two through three years 53,432 53,432 12,251 12,251 due after three through four years 19,841 19,841 20,590 20,590 due after four through five years 2,979 2,979 10,790 10,790 due after five through ten years – – 146 146 due after more than ten years – – 12,978 12,978 1 Including accrued interest 2 Including short-term investments, cash and cash equivalents
Amortised cost, unrealised gains and losses and accrued interest on the portfolio of investments N 16 classified as held to maturity as well as their fair value in EUR thousand
Debt securities issued by semi-governmental entities 219,019 4,317 6,503 – 225,522
Amortised cost, unrealised gains and losses and accrued interest on the portfolio of investments N 17 classified as held to maturity as well as their fair value in EUR thousand
Government debt securities of EU member states 391,809 7,071 10,099 – 401,908
Amortised cost, unrealised gains and losses and accrued interest on loans and receivables as well as their fair value N 18 in EUR thousand
Debt securities issued by semi-governmental entities 1,595,127 26,617 243,934 1 1,839,060
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 the portfolio of investments N 20 classified as available for sale as well as their fair value in EUR thousand
Debt securities issued by semi-governmental entities 4,436,469 41,568 236,064 11,728 4,660,805
Government debt securities of EU member states 2,411,949 18,573 169,231 1,733 2,579,447
Fair value of financial assets at fair value through profit or loss before and after accrued interest N 22 as well as accrued interest on such financial assets in EUR thousand
Hannover Re recognised in this category as at the balance sheet date derivative financial instruments in an amount of EUR 39.6 million (EUR 66.4 million) that are originally allocable to this item as well as fixed-income securities amounting to EUR 109.0 million (EUR 64.5 million) designated in this category.
Analysis of the fair value changes in the portfolio of fixed-income securities at fair value through profit or loss indicated that no fair value changes (EUR 0.3 million) were due to changes in ratings.
Fixed-income securities – available-for-sale 12,270,732 5,002,570 5,971,866 5,329,934 806,651 114,680 6,258 113,757 29,616,448
Fixed-income securities – at fair value through profit or loss – – – – 54,033 8,982 – 45,967 108,982
Fixed-income securities – held to maturity – 58,813 – 628,496 80,673 239,683 – – 1,007,665
Fixed-income securities – loans and receivables – – 87,851 2,107,800 47,801 626,413 – – 2,869,865
Fixed-income securities – loans and receivables – 6,490 95,818 2,112,064 45,092 724,533 – 4,190 2,988,187
Other financial assets – at fair value through profit or loss – – – 19,083 967 46,344 – – 66,394
The following table shows combined financial information on the Hannover Re Group’s individual non-material investments in associated companies.
Financial information on investments in associated companies N 28 in EUR thousand 2015 2014
Group share of income and expense recognised directly in equity 2,407 10,217
Net book value at 31 December of the previous year 154,822 144,489
No discontinued operations existed in the year under review among the companies measured at equity. Insofar as there are commitments from contingent liabilities of associated companies, the Hannover Re Group shares in such commitments in proportion to its respective shareholding.
Public price listings are not available for companies valued at equity. The net book value of associated companies includes goodwill in the amount of EUR 21.9 million (EUR 23.1 million). For further details please see Section 4 “Consolidation”.
Real estate Real estate is divided into real estate for own use and thirdparty use (investment property). Own-use real estate is recognised under other assets.
Development of investment property N 30 in EUR thousand 2015 2014
Gross book value at 31 December of the year under review 1,374,305 1,023,281
Cumulative depreciation at 31 December of the previous year 44,979 25,741
Net book value at 1 January of the year under review 1,015,340 891,451
Net book value at 31 December of the year under review 1,302,703 978,302
The fair value of investment property amounted to EUR 1,388.7 million (EUR 1,038.6 million) as at the balance sheet date.
The additions to this item are attributable to the increased investment activities of the real estate companies belonging to the Hannover Re Group, principally due to investments in Europe and the United States.
In terms of diversification across various real estate sectors the focus is on office properties (70%), followed by retail properties (17%). The allocation is complemented by investments in further sectors, including for example parking facilities (7%) and logistics (2%). In geographical terms, exposures are spread across the United States (43%), Europe (excluding Germany; 33%) as well as Germany (24%).
Other invested assets The other invested assets consisted largely of participating interests in partnerships measured at fair value in an amount of EUR 1,396.0 million (EUR 1,153.9 million), the amortised cost of which amounted to EUR 976.5 million (EUR 749.7 million ). The differences between the carrying amounts and the amortised costs were recognised as unrealised gains of EUR 426.2 million (EUR 409.0 million) and unrealised losses of EUR 6.7 million (EUR 4.8 million) under cumulative other comprehensive income.
In addition, acquired life insurance policies measured at fair value through profit or loss were recognised under the other invested assets in an amount of EUR 79.4 million (EUR 105.0 million).
• Level 3: Assets or liabilities that cannot be measured or can only be partially measured using observable market inputs. The measurement of such instruments draws principally on valuation models and methods.
Fair value hierarchy of financial assets and liabilities recognised at fair value N 31 in EUR thousand
Fair value hierarchy of financial assets and liabilities recognised at fair value N 32 in EUR thousand
Net book value after currency translation 581 10 338,561 1,347,376 151,825
Currency translation at 31 December of the year under review (14) – (376) (2,496) 78
Net book value at 31 December of the year under review – 10 371,254 1,475,415 156,144
Movements in level 3 financial assets and liabilities N 34 in EUR thousand
Net book value at 31 December of the year under review 522 8 320,956 1,258,903 136,486
Change in fair value of financial instruments – – 8,131 17,771
Income and expenses from level 3 financial assets and liabilities N 36 in EUR thousand
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 1,846.7 million (EUR 1,580.4 million) as at the balance sheet date, Hannover Re measures financial assets with a volume of EUR 1,767.3 million (EUR 1,474.8 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 79.4 million (EUR 105.6 million ) relate 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.
The funds withheld totalling EUR 13,801.8 million (EUR 15,826.5 million) represent the cash and securities deposits furnished by our company to our cedants that do not trigger any cash flows and cannot be realised by cedants without our consent. The maturities of these deposits are matched to the corresponding provisions. In the event of default on such a deposit our reinsurance commitment is reduced to the same extent. The decrease in funds withheld was attributable principally to partial withdrawals for specific underwriting years in relation to our UK single premium business.
The retrocessionaires’ portions of the technical provisions are based on the contractual agreements of the underlying reinsurance treaties. For further details please refer to our comments on the technical provisions in Section 6.7 “Technical provisions” on page 198 et seq. as well as the remarks in the risk report on page 91 et seq.
In property and casualty reinsurance acquisition costs directly connected with the acquisition or renewal of contracts are deferred for the unearned portion of the premium.
Development of deferred acquisition costs N 39 in EUR thousand 2015 2014
Age structure of overdue accounts receivable N 40 in EUR thousand
Cumulative value adjustments at 31 December of the previous year 42,221 35,990
Cumulative value adjustments at 31 December of the year under review 35,992 42,221
Net book value at 31 December of the year under review 60,244 58,220
This item principally includes the goodwill from the acquisition of E+S Rückversicherung AG as well as from the acquisition of a 75% interest in Integra Insurance Solutions Limited. Goodwill equivalent to altogether EUR 2.4 million was recognised in the context of two smaller business combinations within our South African subgroup.
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 and where allowance is made for the latest market developments affecting the relevant entity (in relation to the sector and the economy as a whole). 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 in light of the specific market environment. 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. Both the yield curves and the government bonds reflect the current interest rate trend on financial markets. 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. The foreign exchange rates used for currency translation correspond to the situation on the balance sheet date.
The following capitalisation rates and growth rates were recognised for the individual cash-generating units: Capitalisation rates N 43
As in the previous year, the other receivables do not include any items that were overdue but unadjusted as at the balance sheet date.
Development of the present value of future profits (PVFP) on acquired life reinsurance portfolios N 45 in EUR thousand 2015 2014
Gross book value at 31 December of the previous year 131,102 130,186
Net book value at 31 December of the year under review 78,261 82,390
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. The period of amortisation amounts to altogether 30 years. For further information please refer to our explanatory notes on intangible assets in Section 3.2 “Summary of major accounting policies”.
Fixtures, fittings and equipment N 46 in EUR thousand 2015 2014
Gross book value at 31 December of the previous year 143,788 129,828
With regard to the measurement of fixtures, fittings and equipment, the reader is referred to our explanatory notes on the other assets in Section 3.2 “Summary of major accounting policies”.
Gross book value at 31 December of the previous year 220,296 196,689
The item includes EUR 1.6 million (EUR 2.2 million) for self-created software and EUR 31.2 million (EUR 30.0 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 13.4 million (EUR 18.0 million) for purchased software and EUR 1.1 million (EUR 1.0 million) for capitalised development costs for self-created software.
In the context of two smaller business combinations within our South African subgroup customer relationships were identified and recognised at fair value in an amount equivalent to EUR 6.1 million. Amortisation is taken over five years.
Credit risks may result from other financial assets that were not overdue or adjusted as at the balance sheet date. In this regard, the reader is referred in general to our comments on the credit risk contained in the risk report on page 87 et seq.
Loss and loss adjustment expense reserve N 49 in EUR thousand gross retro net gross retro net
Net book value at 31 December of the previous year 24,112,056 1,376,432 22,735,624 21,666,932 1,403,804 20,263,128
Net book value at 31 December of the year under review 26,556,388 1,395,281 25,161,107 24,112,056 1,376,432 22,735,624 1 Including expenses recognised directly in shareholders’ equity
In the year under review, as in the previous year, minimal specific value adjustments were established and reversed on retrocessions, i. e. on the reinsurance recoverables on unpaid claims. On balance, therefore, cumulative specific value adjustments of EUR 0.1 million (EUR 0.2 million) were recognised in these reinsurance recoverables 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 loss reserves constituted in the previous year and the losses paid out of these reserves is reflected in the net run-off result. In this regard, 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.
As percentage of original loss reserve 2.8 0.3 0.0 0.5 0.3 0.2 0.3 (0.6) 0.7 (0.7)
The run-off profit of altogether EUR 512.0 million in the 2015 financial year derives, as in the previous year, above all from positive run-offs of reserves in the areas of marine / aviation, motor third party liability and short-tail property business. An opposing effect was recorded in the area of liability, accident and health insurance.
Due after one through five years 10,514,893 561,676 9,953,217 2,074,902 790,242 1,284,660
Due after five through ten years 3,869,011 187,607 3,681,404 1,074,674 69,053 1,005,621
Due after ten through twenty years 2,527,158 112,346 2,414,812 722,625 34,890 687,735
The payment patterns are determined with the aid of actuarial estimation methods and adjusted to reflect changes in payment behaviour and outside influences. The calculations can also be distorted by major losses, and these are therefore considered separately using reference samples or similar losses. The payment patterns used can be compared year for year by contrasting the projected payments with the actual amounts realised. Liabilities in liability and motor reinsurance traditionally have long durations, sometimes in excess of 20 years, while liabilities in property business are settled within the first ten years.
At the inception of every reinsurance contract, assumptions about the three parameters are made and locked in for the purpose of calculating the benefit reserve. At the same time, safety / fluctuation loadings are built into each of these components. In order to ensure at all times that the originally chosen assumptions continue to be adequate throughout the contract, checks are made on a regular – normally annual – basis in order to determine whether these assumptions need to be adjusted (“unlocked’).
Development of the benefit reserve N 53 in EUR thousand gross retro net gross retro net
Net book value after currency translation 12,473,775 724,360 11,749,415 11,394,577 378,820 11,015,757
The funds withheld under reinsurance treaties totalling EUR 1,265.0 million (EUR 817.1 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.
From 1997 onwards it has been possible to obtain pension commitments through deferred compensation. The employee- funded commitments included in the provisions for accrued pension rights are protected by an insurance contract with HDI Lebensversicherung AG, Cologne.
Provisions for pensions are established in accordance with actuarial principles and are based upon the commitments made by the Hannover Re Group for retirement, disability and widows ’ benefits. The amount of the commitments is determined according to length of service and salary level.
The rate of compensation increase entails the risk that the increases in pensionable salaries factored into the trend assumptions on a parallel basis do not adequately reflect the actual developments. In addition, in the case of plans under which the determinative income components above and below the income threshold for contributions to the statutory pension insurance scheme are differently weighted for the purpose of calculating the benefit, there is a risk of a diverging trend in the future with respect to salary and income threshold.
Past service cost and plan curtailments 1,285 194 – – – –
Experience gains (–) / losses (+) (1,034) (1,160) – – – –
Return on plan assets, excluding amounts included in interest income – – 123 513 – –
The actuarial gains and losses from the change in financial assumptions for defined benefit obligations were chiefly influenced in the financial year just ended by the increase in the discount rate compared to the previous year.
Projected benefit obligations at 31 December of the financial year 154,832 187,034
Recognised pension obligations at 31 December of the financial year 150,299 171,501
In the current financial year Hannover Re anticipates contribution payments of EUR 0.9 million under the plans set out above. The weighted average duration of the defined benefit obligation is 17.5 (14.8) years.
Sensitivity analysis An increase or decrease in the key actuarial assumptions would have the following effect on the present value of the defined benefit obligation as at the balance sheet date: Effect on the defined benefit obligation N 58 in EUR thousand Parameter increase Parameter decrease
Furthermore, a change is possible with respect to the assumed mortality rates and lifespans. The underlying mortality tables were adjusted by reducing the mortalities by 10% in order to determine the longevity risk. Extending the lifespans in this way would have produced a EUR 5.0 million (EUR 5.3 million) higher pension commitment at the end of the financial year.
A nn ua l f in an ci al s ta te m en ts 6.11 Other liabilities
Of this, other liabilities of EUR 10.4 million (EUR 7.6 million) are attributable to affiliated companies.
The sundry liabilities include, most notably, distributions within the year of EUR 84.6 million (EUR 87.5 million) from interests in private equity funds that had still to be recognised in income as at the balance sheet date.
The maturities of the sundry non-technical provisions as at the balance sheet date are shown in the following table: Maturities of the sundry non-technical provisions N 61 in EUR thousand 2015 2014
The subordinated debt issued in 2005 by Hannover Finance (Luxembourg) S.A. with a volume of EUR 500.0 million was called by the issuer in the full nominal amount at the first scheduled redemption date and repaid on 1 June 2015.
Altogether three (four) subordinated bonds were recognised as at the balance sheet date with an amortised cost of EUR 1,489.9 million (EUR 1,986.5 million).
Partial retirement arrangements and early retirement obligations 3,215 10 3,225 – – (499) 206 – (2) 2,518
The ordinary expenses principally include interest expenses of nominally EUR 81.0 million (EUR 90.4 million) resulting from the issued subordinated debt.
Conditional capital of up to EUR 60,299 thousand is available. It can be used to grant shares to holders of convertible bonds and bonds with warrants as well as to holders of participating bonds with conversion rights and warrants and has a time limit of 2 May 2016.
The Executive Board is authorised, with the consent of the Supervisory Board, to acquire treasury shares – including through the use of derivatives – up to an amount of 10% of the share capital. The authorisation has a time limit of 5 May 2020.
For the disclosures arising out of IAS 1 “Presentation of Financial Statements” with regard to the management of capital, the reader is referred to the “Financial position” section on page 55 et seq. of the management report.
Treasury shares IAS 1 requires separate disclosure of treasury shares in shareholders ’ equity. As part of this year’s employee share option plan Hannover Rück SE acquired altogether 12,922 (21,608) treasury shares during the second quarter of 2015 and delivered them to eligible employees at preferential conditions. These shares are blocked until 31 May 2019. This transaction resulted in an expense of EUR 0.3 million (EUR 0.4 million), which was recognised under personnel expenditure, as well as a negligible change in retained earnings recognised in equity. The company was no longer in possession of treasury shares as at the balance sheet date.
A nn ua l f in an ci al s ta te m en ts 6.14 Non-controlling interests
Shareholders’ equity 1,894,706 1,908,328 thereof attributable to non-controlling interests 667,096 671,892
A nn ua l f in an ci al s ta te m en ts 7.2 Investment income
The net gains and losses on investments held to maturity, loans and receivables and the available-for-sale portfolio shown in the following table are composed of interest income, realised gains and losses as well as impairments and appreciation. In the case of the fixed-income securities at fair value through profit or loss designated in this category and the other financial assets, which include the technical derivatives, income and expenses from changes in fair value are also recognised.
Making allowance for the other investment expenses of EUR 101.2 million (EUR 95.3 million), net income from assets under own management of altogether EUR 1,270.1 million (EUR 1,095.8 million) was recognised in the year under review.
Commissions and brokerage, change in deferred acquisition costs N 75 in EUR thousand 2015 2014
Commissions and brokerage, change in deferred acquisition costs (net) 2,918,429 2,579,368
Income from contracts recognised in accordance with the deposit accounting method 98,377 71,895
Expenses from contracts recognised in accordance with the deposit accounting method 35,718 14,369
The reader is referred to the remarks in Section 3.2 “Summary of major accounting policies” regarding the basic approach to the recognition and measurement of deferred taxes.
Change in deferred taxes due to changes in tax rates 21,548 –
Domestic / foreign breakdown of recognised tax expenditure / income N 79 in EUR thousand 2015 2014
Deferred tax liabilities 1,499,222 1,481,668 1 Thereof on tax loss carry-forwards: -EUR 44,737 thousand (-EUR 50,927 thousand)
The deferred tax assets and deferred tax liabilities are shown unoffset in the above table. The deferred taxes are recognised as follows in the balance sheet after appropriate netting: Netting of deferred tax assets and deferred tax liabilities N 81 in EUR thousand 2015 2014
Reconciliation of the expected expense for income taxes with the actual expense N 82 in EUR thousand 2015 2014
Tax expense / income not attributable to the reporting period 16,117 (34,269)
The expense for income taxes in the financial year was EUR 150.6 million higher than in the previous year at EUR 456.2 million (EUR 305.6 million). The increase is due in large measure to the sharp rise year-on-year in the pre-tax result. In addition, the increase in the trade tax multiplier of the City of Hannover led to a rise in the expense for deferred taxes.
Availability of non-capitalised loss carry-forwards Unused tax loss carry-forwards and tax credits of EUR 455.4 million (EUR 352.8 million) existed as at the balance sheet date. Making allowance for local tax rates, EUR 164.4 million (EUR 183.1 million) thereof was not capitalised since realisation is not sufficiently certain.
No deferred taxes were established on liabilities-side taxable temporary differences amounting to EUR 57.5 million (EUR 52.3 million as well as assets-side differences of EUR 135.0 million) in connection with interests in Group companies because the Hannover Re Group can control their reversal and will not reverse them in the foreseeable future.
The fair values of the derivative financial instruments were determined on the basis of the market information available at the balance sheet date. Please see Section 3.2 “Summary of major accounting policies” with regard to the measurement models used.
In the course of the second quarter of the year under review derivative financial instruments held to hedge inflation risks within the loss reserves were disposed of in a total volume of EUR 67.9 million, allowing for a negative exchange rate effect of EUR 4.3 million. These derivative instruments were recognised under other liabilities in an amount of EUR 63.6 million as at the balance sheet date of the previous year.
Maturity structure of derivative financial instruments N 84 in EUR thousand
Hannover Re enters into derivative transactions on the basis of standardised master agreements that contain master netting agreements. The netting agreements set out below normally do not meet the criteria for netting in the balance sheet, since Hannover Re has no legal right whatsoever at the present moment in time to netting of the recognised amounts. The right to netting can, as a matter of principle, only be enforced upon occurrence of certain future defined events. Collateral furnished or received is recognised per counterparty up to at most the amount of the respective net liability or net asset.
All in all, application of the standards governing the accounting for derivatives in connection with the technical account led to recognition of assets totalling EUR 24.5 million (EUR 51.4 million ) as well as recognition of liabilities in an amount of EUR 163.3 million (EUR 142.2 million) from the derivatives resulting from technical items as at the balance sheet date. Increases in investment income amounting to EUR 18.5 million (EUR 11.4 million) as well as charges to income of EUR 29.7 million (EUR 7.5 million) were recognised in the year under review from all separately measured derivatives in connection with the technical account.
Talanx AG holds an unchanged majority interest of 50.22% in Hannover Rück SE. For its part, HDI-Haftpflichtverband der Deutschen Industrie Versicherungsverein auf Gegenseitigkeit, Hannover, (HDI), holds a stake of 79.0% in Talanx AG and therefore indirectly holds 39.7% (rounded) of the voting rights in Hannover Rück SE.
The Hannover Re Group provides reinsurance protection for the HDI Group. To this extent, numerous underwriting business relations exist with related parties in Germany and abroad which are not included in Hannover Re’s consolidation. This includes business both assumed and ceded at usual market conditions. For the year under review and the previous year these business relations can be broken down as follows:
In 2014 Hannover Rück SE reached an agreement with Talanx Asset Management GmbH that allows Talanx Asset Management GmbH to use software for checking sanctions lists.