Book value per share in EUR 48.83 -2.4% 50.02 41.22 37.39 30.80
1 Adjusted pursuant to IAS 8 (cf. Section 3.1 of the notes) 2 Proposed dividend 3 Dividend of EUR 2.60 plus EUR 0.40 bonus 4 Including funds withheld 5 Hannover Re Group’s net share for natural catastrophes and other major losses in excess of EUR 10 million gross as a percentage of net premium earned (until 31 December 2011: in excess of EUR 5 million gross) 6 Operating result (EBIT) / net premium earned
1 Based on US GAAP 2 Adjusted pursuant to IAS 8 (cf. Section 3.1 of the notes)
Report by the Supervisory Board 230 Supervisory Board of Hannover Rück SE 233
Branch offices and subsidiaries of the Hannover Re Group abroad 234 Glossary 237 Financial calendar 242 Contact information / Imprint 243
Shareholders’ equity and the book value per share showed a largely stable development in the year under review. The good result virtually made up for the erosion in the valuation reserves. The return on equity, which at 15.0 percent continues to be well above our minimum target, was also especially pleasing.
I would now like to explore in greater detail developments in our business groups of non-life and life and health insurance as well as on the investments side.
Increasingly fierce competition was a hallmark of the market environment in non-life reinsurance in the year under review. Most notably, the cash inflow from capital markets for the underwriting of reinsurance risks prompted sometimes considerable rate reductions from the middle of the year under review onwards. Against this backdrop, it was especially important for us to maintain a disciplined focus only on business that could be precisely evaluated and that satisfied our margin requirements. Premium growth consequently contracted markedly relative to the previous year. With a currencyadjusted increase of 3 percent, it nevertheless remained within the bounds of our expectations.
Turning to the major loss situation in the year under review, it should be noted that our domestic German market was disproportionately impacted by the natural catastrophe losses recorded globally. Special reference should be made here to hailstorm “Andreas”, the most costly event worldwide for the insurance industry in 2013, as well as to the flood damage in the middle of the year, with Germany the hardest-hit country in Europe. Given that we have a substantially larger market share in our domestic German market than we do worldwide, this resulted in our net burden of major losses rising by EUR 100 million year-on-year to EUR 578 million. At the same time, though, this figure remained below our expectation of EUR 625 million and was therefore comfortably outweighed by the portfolio as a whole. The combined ratio consequently decreased from 95.8 percent in the previous year to the current level of 94.9 percent. It should be borne in mind here that we have retained our highly conservative reserving policy, which means that the confidence level of our loss reserves is likely to have increased further.
Results in our second business group, life and health reinsurance, fell short of expectations in relation to both the operating profit (EBIT) and Group net income. The major reason here is substantial strengthening of the reserves set aside for our Australian disability business. This involves individual disability covers in respect of which the risk experience has deteriorated considerably not just for our company but industry-wide. Although we stopped writing this type of business back in 2009 owing to conditions which continue to be unfavourable for reinsurers, the aforementioned strengthening of our reserves led to an EBIT loss in the order of EUR 100 million in the year under review. Due to the special tax treatment of this business in Australia, this deficit also resulted in us having to show tax income under IFRS. As a further factor, the fair values of our financial assets measured at fair value through profit or loss recorded a negative change of around EUR 40 million compared to the previous year because the performance of the ModCo derivatives normalised at a virtually neutral level.
In the face of a market environment that was not without its challenges, we are satisfied with the development of our investments. The portfolio of assets under own management remained on a par with the previous year at around EUR 32 billion. The decreases in the valuation reserves – due to higher interest rates on good-quality government bonds as well as a resurgent euro – and the dividend payment were thus entirely offset by the very positive operating cash flow. It is pleasing to note that the latter is still clearly in excess of EUR 2 billion. Ordinary investment income contracted slightly as expected owing to the protracted low interest rate environment. The reduction of almost EUR 200 million in extraordinary investment income can be attributed chiefly to a normalisation of this item. Not including the ModCo derivatives and inflation swaps, the net return on investments stood at 3.4 percent and thus reached the planned level. Investment income including interest on funds withheld and contact deposits came in at a pleasing EUR 1.4 billion.
Permit me, if I may, to conclude by taking a brief look at the current financial year. The basic environment remains challenging in view of stubbornly low interest rates and increasingly intense competition, especially in non-life reinsurance. Yet even in this climate your company is well placed to succeed. Particularly key factors here are our tried and tested business model, which has proven itself over decades, and our recognised very good financial strength. Not only that, we also enjoy a tangible competitive edge through our lower cost of capital and administrative expenses.
In non-life reinsurance we put great emphasis on a disciplined treaty-based underwriting policy. With margins in overall business becoming ever tighter, we can show increasingly scant tolerance for poorly performing treaties. This was already evident in the treaty renewals as at 1 January 2014, when our premium volume contracted by a modest 2 percent.
We expect to see a significantly better result for life and health reinsurance than in the 2013 financial year, which was overshadowed in particular by losses from Australian disability business. Further profitable growth is anticipated above all from Asia, the Arab world and Central and Eastern Europe. We are also looking at growth contributions from Australia, where in some areas we can benefit from sharply improving market conditions, and from the United States as well as from longevity reinsurance, principally in the United Kingdom. All in all, we should be able to move forward on our growth track in life and health reinsurance.
For our total business we anticipate a stable to slightly higher gross premium volume in 2014. Group net income for 2014 is expected to be in the region of EUR 850 million. As always, this is conditional upon major losses staying within the expected bounds and assumes that capital markets are spared any distortions.
I would like to thank you, our valued shareholders, most sincerely for your trust – also on behalf of my colleagues on the Executive Board. I would also like to express my appreciation to our employees for their very good work in the year under review. Going forward, as in the past, we shall do everything in our power to continue to successfully grow Hannover Re’s business in the years ahead. It is and will remain our goal to increase the value of your company on a sustainable basis.
Ulrich Wallin Chairman Business Opportunity Management Compliance Controlling Corporate Development Corporate Communications Human Resources Management Internal Auditing Risk Management
Dr. Michael Pickel Group Legal Services Run-Off Solutions Target Markets in Non-Life Reinsurance
Navigating risks with foresight Marine reinsurance is attractive business for Hannover Re. Global trade has increased continuously in recent decades and we expect this growth to be sustained in the years ahead. Taken in conjunction with rising original values and value concentrations, what this trend means for us is a market environment in which our reinsurance solutions constitute desirable products for our clients. In part owing to the major loss expenditures of recent years, our focus is on the risk-appropriate pricing and structuring of our reinsurance business in a highly competitive market. As one of the leading reinsurance providers, we believe that the key to generating profitable results lies in risk selection as well as fair and partnership-based relations with our clients.
New vessel sizes and value concentrations in the marine market necessitate precise evaluation of the risk.
The Hannover Re share opened 2013 at EUR 58.96, having significantly outperformed its sector in the prior year with a price gain of 53.8%. Assisted by expectations of another very good result for the financial year, the share fared well in the first quarter to reach its highest point of the year – and at the same time a new record high – of EUR 64.34 on 14 March. The information that came out of the treaty renewals in non-life reinsurance during the year gave indications of growing competitive pressure, especially for coverage of US natural catastrophe risks. These insights prompted uncertainty among investors as to the implications for reinsurers’ growth and earnings prospects going forward. Furthermore, heavy overall losses were caused by weather events in Hannover Re’s domestic German market towards the middle of the year, while at the same time discussions were ongoing in relation to the effects of the low interest rate environment on the investment return generated by insurers and reinsurers. Against this backdrop the share ultimately sank to its lowest point of the year of EUR 52.42 on 6 September. The price recovery that subsequently set in was driven inter alia by a loss experience that remained within expectations overall as well as by a more intensive dialogue initiated with investors in view of the concerns mentioned above. At the end of the financial year the Hannover Re share was listed 5.8% higher at EUR 62.38, thereby delivering a performance of 11.1% including reinvested dividends.
With a book value per share of EUR 48.83 the Hannover Re share showed a price-to-book (P / B) ratio of 1.3 at the end of the year under review; compared to the average MDAX P / B ratio of 2.4 as at year-end the share thus continues to be very moderately valued.
The Annual General Meeting of Hannover Rück SE was held on 7 May 2013 in Hannover. Some 600 shareholders, shareholder and bank representatives as well as guests took up the invitation of the Executive Board and Supervisory Board to attend the meeting in the HCC (Hannover Congress Centrum). Altogether, a good 65% of the share capital was represented. In his address to the meeting Chief Executive Officer Ulrich Wallin took the opportunity to look back once more on the financial year just ended, which had passed off exceptionally successfully for Hannover Re. Despite the losses from hurricane “Sandy” the company had generated a new record result. Against this backdrop, the Annual General Meeting unanimously approved, among other things, the proposal of the Executive Board and Supervisory Board regarding distribution of a record dividend in the amount of EUR 2.60 plus a bonus of EUR 0.40.
All voting results and the attendance were published on the company’s website following the Annual General Meeting.
Given the increasingly competitive market environment in nonlife reinsurance Hannover Re noted a greater need for information on the part of investors, especially from the early summer of 2013 onwards. Our travel activities undertaken in response to this demand took us to altogether 14 capital market conferences (previous year: 14) and 18 roadshows (15). Our concentration was once again on the financial centres of Frankfurt and London, which we visited at least once a quarter. Other destinations included Brussels, Geneva, Helsinki, Copenhagen, Lugano, Milan, Paris, Stockholm and Zurich. North America was another special focus of our travels in 2013, which gave us an opportunity to meet interested investors not only in New York and Boston but also in San Francisco, Los Angeles, Montreal and Toronto. Not only that, we profiled ourselves for the first time to Asian investors at a capital market conference in Hong Kong.
In addition, in the year just ended we again provided information about our achievements as a responsible enterprise in the form of a stand-alone sustainability report drawn up in accordance with the internationally recognised reporting standards of the Global Reporting Initiative (GRI). Based on this structured reporting format, which was presented for the second year in succession, Hannover Re’s sustainability performance was also assessed on a rotating basis at the beginning of the year by the rating agency oekom research. Not only was our fulfilment of the minimum industry-specific requirements confirmed, we were also included in the oekom research Prime Standard. From the standpoint of its sustainability initiatives, Hannover Re is thus ranked as one of the leading companies in the insurance sector.
In total, around 280 analyst recommendations were published for Hannover Re and the insurance sector in the 2013 financial year. By the end of the year 34 analysts had handed down opinions on Hannover Re: 11 (7) analysts recommended the Hannover Re share as “buy” or “overweight”; altogether 20 (18) opinions were a “hold”, making this the most common, while “underweight” or “sell” recommendations were issued a total of 3 (8) times. The analysts’ average price target climbed steadily in the course of the year from EUR 56.01 at the outset to EUR 63.18 at year-end.
Shareholding structure by countries / regions as at 31 December 2013 (free float) 1 10.0% Benelux 16.4% United Kingdom 21.5% USA
USA American Depositary Receipts (Level 1 ADR program; 2 ADR = 1 share)
Market capitalisation at year-end in EUR million 7,522.8 7,110.4 4,621.9 4,840.2 3,944.7
Return on equity (after tax) 5 15.0% 15.4% 12.8% 18.2% 22.4%
The right provision for retirement is more important than ever now owing to the continuous rise in life expectancy.
Trend for the remaining life expectancy of 65-year-olds in the UK in years
We seek to strengthen and further expand our position as a leading, globally operating reinsurance group, delivering profitability that is above the average for the sector.
• Respond undogmatically, flexibly and quickly to the needs of our clients
• Offer standard products as well as specially tailored customer solutions that add value for both contracting parties
• Generate an IFRS return on equity of at least 750 basis points above the risk-free interest rate
Our employees contributed to the strategy revision. The high degree of familiarity and insight thereby created is a guarantor of successful execution.
• Achieve target return – risk-free interest rate plus the cost of capital
The Group management report was compiled for the first time in accordance with the new German Accounting Standard No. 20 (DRS 20).
• Through our global presence and infrastructure we are able to optimally respond to the needs of our clients
Our lean structures enable us to maintain one of the lowest administrative expense ratios in the reinsurance industry.
As a reinsurance specialist, we transact primary insurance business as a complement to our reinsurance activities in selected niche markets. In this context, we work together with partners from the primary sector, just as we do in our reinsurance business.
Our subsidiary E+S Rückversicherung AG, as the “dedicated reinsurer for the German market”, offers a range of products and services focused on the peculiarities of the German market – especially for those mutual insurers with whom we have established a particularly trusting cooperation that is underscored through their participation in E+S Rück.
Thanks to our worldwide presence and infrastructure, our organisational approach is optimally geared to customer and market requirements; working together with our client, it enables us to act on specific business opportunities. With our three pillars of target markets, specialty lines and global reinsurance, we are in a position to successfully meet individual client and market needs.
Our potential clients include not only life and health insurers but also banks, sales companies and pension funds. Thanks to our decentralised approach our customers enjoy the benefits of advice and support provided on the spot in their own language.
Our integrated system of enterprise management is central to the 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 targets also includes economic targets derived from our economic capital model. The targets are analysed and where necessary adjusted as part of a regular process. Our focus is on long-term strategic target attainment.
Value of New Business (VNB) growth ≥ 10% -1.6% 30.3% 61.2% 27.4%
EBIT margin 8, 11 Financial Solutions / Longevity ≥ 2% 5.2% 5.0% 5.5% 5.2%
With a view to allocating our profit and growth targets for the Group and its business groups to the individual business activities and profit centres on a basis that adequately reflects the risks and in order to be able to measure target attainment, we have for many years now used various value-based management tools that are integrated into our corporate processes.
Management Reporting The annual Management Reporting presents in detail the degree of target attainment for each individual operational unit and for the Group as a whole. On this basis appropriate performance controlling is carried out, potential scope for improvement and refinement is identified and performanceoriented remuneration components defined in the context of Management by Objectives are established.
Intrinsic Value Creation and excess return on capital allocated in EUR million 2013 2012
1 Adjustment based on amended allocation of economic effects (non-life reinsurance / investments) and final MCEV calculation (life and health reinsurance)
The allocated capital consists of three components: the shareholders ’ equity including non-controlling interests, the balancing items for differences between economic valuations and amounts stated in the IFRS balance sheet and the hybrid capital. In this context, capital that is not at risk (excess capital) is disregarded, i. e. it is not allocated. Capital is allocated to the profit centres as described above according to the risk content of the business in question. A systematic distinction is made here between the assumption of underwriting risks, on the one hand, and investment risks, on the other. Under the IVC calculation, therefore, only risk-free interest income on the generated cash flows is allocated to the business segments of non-life and life and health reinsurance. The investment income above and beyond risk-free is allocated in its entirety to the functional area of investments and included in the IVC after deduction of the risk-appropriate cost of capital and the administrative expenses.
As a reinsurer, Hannover Re does not have its own R&D department but it does develop products and solutions for its own benefit and that of its clients as part of day-to-day business operations. By way of example, our move to give capital market players access to insurance risks as far back as the mid1990s through our “K” transactions puts us among the industry pioneers. The intervening years have seen the evolution of a market for so-called insurance-linked securities, which is one of the fastest-growing markets in the insurance sector. Another example of Hannover Re’s development activities is the creation of its own internal model for risk management under Solvency II that caters to the requirements of various stakeholders (regulators, rating agencies, capital providers). Although we do not conduct any basic research, we are very active in tracking the latest developments and publications in science and research. Not only that, through our active involvement and the provision of financial resources we support scientific initiatives geared to developing products, solutions or markets that will be crucial success factors in the viability of a reinsurance undertaking going forward.
Reinsurance business is founded on the comprehensive understanding and active management of risks. Our specialists therefore continuously analyse known risks with an eye to changes in their structure and probability of occurrence, while at the same time focusing on the early detection of newly emerging risks and working to provide our clients with appropriate solutions tailored to their needs (cf. here also the Opportunity report on page 92 et seq.).
“Development work” on the life and health reinsurance side has many facets. Given that the assessment of biometric risks is of fundamental and essential importance to our company, Hannover Re invests continuously in expanding the specialist expertise that produces new and enhanced reinsurance solutions. We have, for example, concentrated and refined our know-how in the area of longevity risks. We are able to offer novel derivative solutions for this type of risk that bring considerable capital relief to ceding clients and companies. Furthermore, we are currently working on a new version of our IT-based underwriting tool. We shall then make this improved software, which has undergone thorough conceptual reworking, available to our customers for their automated underwriting processes. The advantages of the new system are efficiency gains and expanded underwriting know-how. Our goal is to develop sustainable solutions for our clients that take adequate account of the latest trends. The focus of our development efforts is not only on innovative products, such as so-called lifestyle products; we also seek opportunities to assist our customers with the cultivation of new markets or sales channels.
While the global economic recovery continued in 2013 with growth of 2.9% (previous year: 3.1%), it remained muted and varied from region to region. For the first time in four years advanced economies were the driving force. Assisted by an expansionary monetary policy, the United States and United Kingdom saw further debt reduction in the private sector. Europe also benefited from a more open fiscal policy. The uncertainty surrounding the continued existence of the single currency area receded slightly. In Japan, too, the economy began to gather momentum again.
Foreign trade, on the other hand, was weaker in 2013: owing to comparatively soft demand from the Eurozone, growth in German exports was slower than the pace seen in world trade. With a working population of 41.78 million (+0.6%), the number of people in Germany with a job reached a new record high for the seventh year in succession.
Despite fluctuations during the year the euro ultimately closed slightly higher against the US dollar and pound sterling yearon -year. The gains against the Australian and Canadian dollars, on the other hand, were significant.
For detailed remarks on the development of Hannover Re’s investments please see the “Investments” section on page 50 et seq.
The continuing tense economic climate and the accompanying measures on the economic policy side again determined conditions for the international insurance industry in 2013: given that the state of capital markets remains challenging, particularly high importance attaches to preserving the value of investments and the stability of returns. Sales of traditional life insurance policies were also impacted by the low interest rate environment; at the same time, though, growing demand is emerging for products geared towards this market environment. In 2013 this could be discerned, inter alia, in the increasing demand for products designed to deliver capital relief and improve solvency.
Implementation of the Solvency II framework directive was again a central preoccupation in the year just ended. Although the financial market and a prolonged low interest rate environment made the introduction of this system of insurance regulation difficult in its originally envisaged form, another major step forward was taken in 2013. In order to overcome the obstacles the European Parliament, European Council and European Commission reached a compromise in November 2013. The amendments that were negotiated are to be adopted in the spring of 2014 by way of the Omnibus II directive and then implemented in national law by March 2015. Especially with respect to the widely discussed assessment of long-term guarantees, which are a vital component for the life insurance sector, key details were elaborated that, most notably, give companies greater security in their planning.
For Hannover Re the 2013 financial year was a pleasing one despite challenging market conditions. At EUR 895.5 million we generated the highest Group net income to date in the history of Hannover Re. Although this figure was assisted by positive tax effects from the recognition of deferred taxes, we would have surpassed our guidance of around EUR 800 million even without this effect. Please find below a brief summary of the development of our business groups – non-life and life and health reinsurance – and of our investments. More detailed information is to be found on pages 34 to 51.
Investment income from assets under own management for non-life reinsurance contracted by 17.7% year-on-year to EUR 766.2 million (EUR 930.8 million). This was due in part to the low interest rate level and also to the elimination of positive special effects, which in 2012 had resulted from higher realised gains and the gratifying fair value development of the inflation swaps. The operating profit (EBIT) of EUR 1,061.0 million fell only slightly short of the previous year’s result (EUR 1,091.4 million). The underwriting result was thoroughly pleasing. The combined ratio improved on the previous year’s good level of 95.8% to reach 94.9%. The EBIT margin of 15.5% came in comfortably above our strategic target of 10% and reflects the outstanding result in non-life reinsurance. Group net income increased by 17.8% to EUR 807.7 million (EUR 685.6 million) and is thus the best performance to date in non-life reinsurance in Hannover Re’s history.
Despite the generally tense state of the life (re)insurance market, business developed moderately in life and health reinsurance in the year under review. Gross premium volume increased by 1.4% to EUR 6.1 billion (EUR 6.1 billion). Adjusted for exchange rate effects, growth amounted to 5.1%; it thus came in within the forecast target corridor for 2013 of 5% to 7%.
Investment income in life and health reinsurance totalled EUR 611.5 million (EUR 685.1 million) in the year under review. Of this, EUR 269.1 million (EUR 343.4 million) was attributable to assets under own management and EUR 342.4 million (EUR 341.7 million) to securities deposited with ceding companies. The decline of 10.7% in investment income reflects the stubbornly low interest rate level and the difficult investment climate on capital markets. As a further factor, the performance of the Modified Coinsurance (ModCo) derivatives reverted to normal after the very positive result posted in the previous year.
Overall, our income from assets under own management contracted year-on-year as expected: it totalled EUR 1,054.5 million (EUR 1,300.2 million) as at 31 December 2013. The resulting annual return (excluding ModCo derivatives and inflation swaps) amounted to 3.4% (4.1%). The decrease relative to the previous year can be attributed in part to the net realised gains, which at EUR 144.2 million (EUR 227.5 million) were considerably lower than in the previous year – when we had acted to a greater extent on opportunities in the real estate sector. On the other hand, in the previous year we had recorded exceptionally high positive fair value changes of EUR 89.3 million in our financial assets measured at fair value through profit or loss; these contrasted with a negative fair value change of EUR 27.1 million as at 31 December 2013, which was attributable primarily to the performance of the inflation swaps. This was only partially offset by the marginally positive result of the ModCo derivatives.
The gross premium in our total business increased by 1.4% as at 31 December 2013 to EUR 14.0 billion (EUR 13.8 billion). At constant exchange rates the increase would have been 4.2%. The growth rate in a fiercely competitive environment was thus somewhat below our forecast, which had anticipated around 5%. The level of retained premium decreased slightly to 89.0% (89.8%). This resulted principally from increased reinsurance cessions for fronting business written for third parties. Net premium earned remained almost unchanged at EUR 12.2 billion (EUR 12.3 billion). At constant exchange rates growth would have come in at 2.3%.
Gross premium growth (Group) ≈ + 5% 1 +4.2% at constant exchange rates +1.4% not adjusted for currency effects
Gross premium growth for non-life reinsurance ≈ + 3 – 5% 1 +3.5% at constant exchange rates +1.3% not adjusted for currency effects
Gross premium growth for life and health reinsurance ≈ + 5 – 7% 1, 2 +5.1% at constant exchange rates +1.4% not adjusted for currency effects
Group net income ≈ EUR 800 million 4 EUR 895.5 million 1 At constant exchange rates 2 Organic growth only 3 Excluding inflation swaps and ModCo derivatives 4 Assuming stable capital markets and / or major loss expenditure in 2013 that does not exceed EUR 625 million
The Executive Board of the Hannover Re Group is satisfied with the development of business in 2013. The company surpassed its goals, such as those for Group net income, return on equity and combined ratio. Although investment income declined owing to the sustained low level of interest rates, it is pleasing to note that the targeted return on investment was achieved in the reporting period. Indeed, Group net income actually came in significantly higher than planned. This performance is particularly gratifying in view of the challenging business environment. Despite sharply lower valuation reserves in the investment portfolio and the distribution of an attractive dividend including a bonus, Hannover Re’s shareholders’ equity remains robust. At the time of preparing the management report, the company’s business position and its financial strength continue to be very good.
Accounting for 56% of our premium volume, non-life reinsurance is Hannover Re’s largest business group. We continue to pursue unchanged our strategy of active cycle management: we expand our business only in areas where the rate situation is favourable. If prices fail to meet our profitability requirements, we systematically reduce our shares.
We were broadly satisfied with the market development in nonlife reinsurance in the year under review, although competition was considerably more intense than in 2012. The primary reason here was the availability of sufficient capacity in the market overall, as a consequence of which the supply of reinsurance protection exceeded demand. A further contributory factor was the increased business carried by our clients in their retention.
Yet in regions or lines that had seen significant losses in 2012, such as marine reinsurance, it was possible to push through sometimes appreciable price increases. In view of the record high loss expenditure associated with the wreck and salvage of the “Costa Concordia” cruise ship as well as with hurricane “Sandy”, rates here climbed sharply; under loss-impacted programmes the increases ranged from 25% to 40%. We were again able to obtain considerable premium increases for nonproportional motor liability covers in the United Kingdom. In markets or lines that had posted good underwriting results in the comparable period owing to minimal losses – for example aviation business – rates declined, but the business was still adequately priced. We were also satisfied with the development of the rest of our property and casualty portfolio in North America. As expected, appreciable growth was booked from the markets of Asia and the Middle East.
The largest individual losses incurred by Hannover Re in the year under review were the hail event “Andreas” in Germany – with net expenditure of EUR 99.3 million – and the flooding in Germany and other European countries, at a cost of EUR 92.5 million. These and other major losses combined to produce net expenditure for 2013 of altogether EUR 577.6 million (EUR 477.8 million). Although this figure was higher than in the previous year, the burden of major losses nevertheless came in below our expected level of EUR 625 million. At 94.9% (95.8%), our combined ratio again improved on the previous year and remained below our target mark of 96%. Key factors in this pleasing development were the merely partial utilisation of our major loss budget as well as run-off profits. The latter still remained in line with expectations thanks to the
Key figures for non-life reinsurance in EUR million 2013 + / – previous year
Investment income in the non-life reinsurance business group contracted by 17.3% in the year under review to EUR 781.2 million (EUR 944.5 million). Key drivers here were lower realised gains as well as the elimination of positive effects from the inflation swaps taken out by Hannover Re to partially hedge its loss reserves. These factors were in large measure offset by the very good underwriting result. The operating profit (EBIT) of EUR 1,061.0 million – a decrease of 2.8% – fell only very slightly short of last year’s record level of EUR 1,091.4 million. Assisted by the positive tax effect, Group net income for the non-life reinsurance business group increased by a substantial 17.8% to EUR 807.7 million (EUR 685.6 million). Earnings per share for non-life reinsurance amounted to EUR 6.70 (EUR 5.68).
Germany Within the Hannover Re Group the German market – the second -largest in the world for non-life reinsurance – is served by our subsidiary E+S Rück. As the “dedicated reinsurer for Germany”, the company is a sought-after partner thanks to its good rating and the continuity of its business relations. E+S Rück is superbly positioned in its domestic German market and one of the market leaders in non-life reinsurance.
Long-tail liability lines (general liability, motor liability) are sensitive to interest rates; as anticipated, improved rates could be obtained here – especially for motor XL covers. The stubbornly low level of interest rates nevertheless necessitates further technical rate adjustments.
Hannover Re also supports covers for sources of renewable energy. Our exposure in this new segment is, however, still modest in view of the continued difficulty of assessing risks and the intense competition.
Thanks to our excellent rating and financial standing we are a valued partner for our clients, especially when it comes to longtail liability placements. Access to the entire market spectrum enables us to optimally diversify our portfolio. Our business is made up of more than 2,000 treaties spread across almost 600 clients.
Non-life reinsurance: Breakdown of gross written premium in Germany by line of business 8.4% Other 36.9% Property 34.3% Motor 20.4% Liability
Casualty business continued to grow in appeal. Almost all lines saw further rate increases combined with a reduced loss incidence. On the property side, as expected, rates improved on the back of the losses from hurricane “Sandy”, although in the third and fourth quarters a slight softening – especially in industrial lines – could be observed. Given that the overall level was nevertheless highly satisfactory, we continued to expand our property portfolio.
We continued to expand our portfolio in the year under review thanks to an improved pricing environment. The premium volume for our business in North America grew as expected by 4.7% to EUR 1,176.8 million, an outcome which we consider satisfactory. The combined ratio for our North American business stood at 92.9% in the year under review after 102.5 % in 2012. The operating profit (EBIT) increased to EUR 235.5 million (EUR 150.8 million).
The premium volume contracted from EUR 2,797.7 million to EUR 2,594.2 million in the year under review. The combined ratio improved from 96.5% to 94.0%. The operating profit (EBIT) for specialty lines met our target at EUR 299.7 million (EUR 314.3 million).
Non-life reinsurance: Breakdown of gross written premium in specialty lines in EUR million
the ILS market played no significant role in marine reinsurance because, among other things, there are no means of modelling the risks.
Aviation In international aviation reinsurance, too, Hannover Re is one of the market leaders.
Although the burden of major losses continued to be below average, the year under review saw a higher frequency of hull losses. This development did not, however, have any significant implications for reinsurers because for the most part the claims remained within the retention carried by primary insurers. Given a moderate loss situation overall and the existing surplus capacities, rates in aviation business continued to soften.
In a market that is not without its challenges on the whole, our goal is to preserve our portfolio and further consolidate it where necessary. We successfully achieved this aim in the year under review. The premium volume for our total aviation portfolio contracted slightly, as forecast, to EUR 402.5 million (EUR 415.7 million).
The largest single loss in 2013 was the crash landing of a passenger plane at San Francisco airport. The resulting net loss for Hannover Re amounted to EUR 20.3 million. We are thoroughly satisfied with the underwriting result. The combined ratio stood at 78.4% (81.8%), a testament to the strong profitability of our aviation portfolio. The operating profit (EBIT) retreated slightly to EUR 103.6 million (EUR 112.6 million).
Credit and surety In worldwide credit and surety reinsurance Hannover Re ranks among the market leaders.
An increased number of mid-sized basic losses was observed in surety insurance in 2013. This development was due to the fact that the repercussions of the crisis in the construction industry only made themselves felt after a time delay. Improvements in conditions were possible in some markets in response to the increased claims expenditure. From an overall perspective, surety markets remained stable.
In view of a prevailing capacity surplus and the diminishing appeal of treaty conditions in credit and surety reinsurance, further expansion of our market share was not a priority for us. Only in cases where our required margins were met did we undertake measured expansion of our portfolio. This was especially true of business with political risks in the year under review.
Growth impetus for structured reinsurance is deriving in particular from preparations for the adoption of Solvency II in the European Union as well as from the implementation of riskbased capital requirements in various countries.
The premium volume for structured reinsurance contracted in the year under review. Results fell slightly short of our expectations owing to an increased loss frequency and the strengthening of reserves for a medical malpractice programme.
In addition to using the capital market to protect our own property catastrophe risks, we transfer risks to it in a structured and packaged form on behalf of our cedants. We also take the role of investor ourselves by investing in catastrophe bonds.
The available funds currently exceed by far the opportunities for new investments in catastrophe bonds. This has prompted investors to look for other means of investing in the reinsurance sector. So-called collateralised reinsurance programmes enjoyed particularly strong growth in the year under review and have now surpassed the volume of funds invested in catastrophe bonds. Under collateralised reinsurance business the investor assumes reinsurance risks that are normally collateralised in the amount of the limit of liability.
United Kingdom, London market and direct business Traditional reinsurance We are satisfied with the reinsurance business that we write in the United Kingdom and on the London market. The rate level remained stable overall. Building on the very favourable market conditions in non-proportional motor reinsurance in 2012, we secured further appreciable rate increases in the year under review. Against this backdrop we doubled our premium volume in this area. As anticipated, we were able to expand our UK portfolio in 2013.
Direct business We write our direct business through two subsidiaries, International Insurance Company of Hannover Plc (Inter Hannover) in the United Kingdom and the South African company Compass Insurance Company Limited, a subsidiary of Hannover Reinsurance Africa Limited. This essentially involves tightly defined portfolios of niche or other non-standard business that complements our principal commercial activity as a reinsurer.
The premium volume grew by 6.4% in the year under review to EUR 2,966.1 million (EUR 2,788.7 million). This is in line with our forecast of stable growth. The combined ratio decreased from 90.9% to 90.4%. The operating profit (EBIT) improved from EUR 507.1 million to EUR 556.5 million.
Europe European markets continue to be fiercely competitive; this is true both of countries in Central and Eastern Europe and of mature markets such as France. On the whole, market conditions here are still very soft. As anticipated, prices retreated slightly in most lines of business. In builder’s risk insurance the challenging economic circumstances led to sharply lower premiums. No significant loss events occurred in France in 2013. The premium volume for Hannover Re remained stable in the year under review.
Despite very tight margins, we were able to enlarge our market share in Spain and Portugal thanks to regrouping of the portfolio. While industrial fire business recorded further losses, the situation in Spain was dominated by the devastating accident near Santiago de Compostela involving a high-speed passenger train, which caused numerous fatalities. This incident did not result in a major loss for Hannover Re.
The markets of Northern Europe are served by our branch in Stockholm. Although large industrial programmes continued to be highly competitive, the situation in retail insurance lines was considerably more relaxed. Rates in general remained broadly stable. No major loss events were recorded.
Non-life reinsurance: Breakdown of gross written premium in global reinsurance in EUR million
Non-life reinsurance: Breakdown of gross written premium in worldwide treaty reinsurance 9.2% Other 55.9% Property 17.6% Liability 17.4% Motor
Compared with the primary insurance markets of Western Europe, growth rates in the countries of Central and Eastern Europe continue to be above average. As a result, competition remains intense and original rates in most countries are under pressure. On the reinsurance side, by contrast, prices and conditions in the year under review were again broadly commensurate with the risks, thereby enabling us to boost our premium volume as forecast. We have defined the markets of Central and Eastern Europe as strategic growth markets and it remains our assumption – based on a selective underwriting policy – that we can generate further strong profitability going forward. In terms of losses, various Central and Eastern European countries were impacted by severe flooding in the summer of 2013; we also incurred a number of basic losses. Despite this, we were thoroughly satisfied with the development of our business in the markets of Central and Eastern Europe.
Latin American markets have enjoyed very vigorous growth in recent years. In Brazil further programmes were launched to stimulate the economy. The country is investing heavily in infrastructure and power generation as it prepares for two major sporting events, the FIFA World Cup in 2014 and the 2016 Olympic Games. These growth incentives continued to foster rising demand for (re)insurance covers in the year under review.
In view of the competitive climate, rising loss ratios and major losses in property business, we wrote our business highly selectively. We increased our shares in areas where we considered business to be attractive, for example by further enlarging our casualty and motor portfolio in the year under review.
Asia-Pacific region The Asia-Pacific countries are considered a growth region by Hannover Re. In the year under review we again extended our position here. Developments in the individual markets – in common with the markets themselves – were very mixed. On the whole, the region was shaped by intense competition coupled with heavy losses in previous years as well as by losses in the year under review.
In many parts of this region our portfolio consists predominantly of property and motor business. We reduced the proportion of catastrophe-exposed business in the year under review because we did not consider conditions to be commensurate with the risks.
In India we established a service company that concentrates exclusively on the growing segment of microinsurance. Provincial governments and local insurers are advised on products that can provide insurance protection for low-income individuals.
Unlike in the previous years, the loss situation in Australia and New Zealand was relatively untroubled in terms of natural disasters. Adverse effects on our portfolio were therefore minimal. Even the bushfires close to Sydney failed to reach the scale that had been feared. Taken in conjunction with very low claims activity in the other lines, this prompted initial concessions over terms and conditions.
Thanks to our strong market position we benefited from an increased need for capacity driven by the more exacting capital requirements imposed by local insurance regulators.
Hannover Re is strongly placed in retakaful business. Our largest single market continues to be Saudi Arabia, followed by Malaysia. Our strategy is geared to further profitable growth. We maintained the lead position in our most important markets without neglecting our profitability requirements.
The premium volume increased by around 10% in the year under review. Retakaful business can be expected to show further dynamic growth over the coming years.
The largest loss events were fires at a sugar factory in Saudi Arabia and at a Dubai airport building under construction in the United Arab Emirates. The resulting strains for our account were each in the mid-single-digit million euro range.
We successfully pursued our strategy of diversifying our portfolio both in terms of its geographical spread and the breakdown by lines of business; a larger share of livestock covers, for example, played a part here.
After the heavy losses incurred in 2012 the loss situation in the year under review was moderate. Argentina recorded an elevated intensity and frequency of hail events, the expenditures on which have already had positive implications for rates. Hannover Re did not incur any major losses from agricultural risks in the year under review.
Global catastrophe business We write the bulk of our catastrophe business out of Bermuda, which has established itself as the worldwide centre of competence for this line. In the year under review our subsidiary Hannover Re (Bermuda) Ltd. also began to write some of the specialty lines with a view to diversifying the portfolio.
The environment was more competitive in 2013, especially in US catastrophe business. Although hurricane “Sandy” had served to stabilise rates in the renewals as at 1 January 2013, appreciable rate erosion was observed over the course of the year. The additional capacities from the market for catastrophe bonds (ILS) was a particularly important factor here. However, the reduced margins in US catastrophe business have merely limited implications for Hannover Re because this only accounts for a small part of our portfolio.
After an uneventful first three months, the subsequent quarters of 2013 – especially in Europe – witnessed a series of natural disasters. These did not, however, usher in a more favourable rate trend for the catastrophe covers market as a whole. The sometimes substantial losses merely prompted rate adjustments on a regional basis. Germany was especially heavily impacted by natural disasters in the year under review. Along with severe flooding, the German (re)insurance industry also had to absorb losses from several hailstorms. In addition, further windstorm events caused heavy losses in other European countries, including the United Kingdom.
The hurricane season in the United States and the Caribbean, by contrast, passed off very quietly. No storm of hurricane strength reached the US mainland. Nevertheless, tornado events left a trail of devastation in the United States with corresponding insured losses. In Canada two flood events resulted in unprecedented losses, with a combined net cost for Hannover Re of EUR 60.9 million.
The development of our catastrophe-exposed business in the Asia-Pacific region was satisfactory: the price level in Japan remained comparatively high owing to major losses from previous years. This was also true of the Australian and New Zealand markets. We did not incur any major losses here.
The gross premium volume in our global catastrophe business increased by 6.5% in the year under review to EUR 433.1 million (EUR 406.7 million). The combined ratio deteriorated slightly year-on-year as we had anticipated to stand at 65.1% (50.9%). The operating profit (EBIT) moved modestly lower to EUR 156.3 million (EUR 167.1 million).
Building on strong growth in the United States in 2012 our premium volume continued to expand in the year under review, albeit at a more moderate pace. We enlarged our motor liability portfolio and – as in the previous year – the share of agency business. We also extended our exposure to niche lines, such as event cancellation covers and special accident insurance solutions, e.g. for sports professionals. Our participation in the property line also grew, although the increase was moderate because our involvement in regions with natural catastrophe exposure is restricted and hence our risk appetite is limited. The flood events in Canada had no effects on our facultative portfolio.
In worldwide energy business we further enlarged our market share as planned in 2013. Faced with a relatively unfavourable environment, however, our growth was limited. We stepped up our exposure to the offshore construction sector, thereby boosting our energy portfolio, while our participation in mining insurance was scaled back slightly. In Germany, too, we moved forward with our involvement in construction covers for wind farms.
Growth was also booked in Central Europe and in Latin America, where most notably we expanded our non-proportional property and engineering portfolio.
With attractive opportunities opening up not only in the United Kingdom but also internationally, we made the most of 2013 to stabilise the professional indemnity line.
Total business Market conditions for worldwide life and health reinsurance were challenging in the year under review, as a consequence of which our premium volume also grew less vigorously in 2013 than in previous years. Gross premium income increased by 1.4% to EUR 6,145.4 million (EUR 6,057.9 million). Adjusted for exchange rate fluctuations, growth would have come in at 5.1%. In the year under review we thus achieved our targeted gross premium growth in the range of 5% to 7%. The level of retained premium decreased to 87.7% (89.3%). Net premium earned was down slightly by 1.2% to EUR 5,359.8 million (EUR 5,425.6 million); adjusted for exchange rate effects, net premium increased by 2.4%.
Financial Solutions Financial Solutions business encompasses those reinsurance transactions that – along with the transfer of biometric risks – can optimise the financial position of our ceding companies. Reinsurance solutions of this type offer clients an alternative means of raising capital as well as the resulting optimisation of their equity and debt position. Gross premium income for this reporting category amounted to EUR 1,554.3 million (EUR 1,536.6 million) in the year under review, accounting for 25.3% of the total premium volume. The major driver of growth here in 2013 was our US subsidiary. Thanks to solutions designed to provide relief for capital and reserves so as to optimise the balance sheet structure of our clients, we were able to build on the successful development of the previous year in the United States. This type of reinsurance is heavily influenced by regulatory requirements, such as those arising out of the planned Solvency II standards and to some extent also indirectly from the Basel III framework. At this early point in time it still remains to be seen whether these effects will have positive or negative implications for insurance demand; this will only become clear in the future, once Solvency II and other prudential regimes have been adopted on a mandatory basis. Increasing regulation was also evident in emerging markets, especially in Asia. Although competition continues to intensify on account of the business potential in these regions, we booked double-digit percentage growth rates for our premium in both China and Hong Kong. Despite a challenging market climate, we thus asserted our leading position in Financial Solutions business.
Life and health reinsurance: Breakdown of gross premium by reporting categories in EUR million
Present at 23 locations in 19 countries International network in life and health reinsurance
Breakdown of gross premium by continents in EUR million blau und cyan im Layout getauscht, in den Daten noch nicht
Risk Solutions In our reporting category of Risk Solutions we further differentiate between Mortality, Morbidity and Longevity.
In Europe the business climate on the reinsurance market was again challenging in 2013 and the market for traditional riskoriented products proved to be largely saturated, leaving only limited scope for growth. Against this backdrop, a number of primary insurers in the German market came up with plans to modify traditional products – such as term life insurance – and limit the long-term guarantees under savings products in order to preserve the competitiveness of such offerings in the future. It is all the more pleasing to report that, among other things, we were able to retain our leading position in Italian credit life business.
The less favourable developments in morbidity business are connected to the elevated risk experiences and reserve increases in Australian disability business, the adverse repercussions of which left their mark throughout the entire industry on insurers and reinsurers alike. Intensive efforts have been made on the Australian market to counteract this development and thereby improve results.
The health insurance market is also taking active steps to counter this effect, hence opening up new insurance opportunities which we seek to cover with the broadest possible range of reinsurance solutions. As a further factor, the so-called dual demonstration programme was launched in the United States: previously operated independently of one another, the federally backed Medicare programme was coordinated with Medicaid, responsibility for which rests with the individual states. The dual demonstration programme is aimed at insureds who are theoretically entitled to participate in both schemes. For health insurance companies participating in the new programme this created fresh business potential, hence also leading to new opportunities on the reinsurance side. As anticipated, developments in the Middle East region were also positive, consequently giving rise to attractive profitable growth in group business.
This trend towards the growing importance attached to additional services that go above and beyond pure reinsurance protection was again sustained in 2013. In the markets of Eastern Europe, in particular, insurers are seeking to tap into new growth segments, e.g. for disability products and private health insurance covers. The level of service expected here – not only from insurers but also reinsurers – is rising. Thanks to our customer -oriented solutions and innovative product ideas in this area, we were able to consolidate existing customer relationships and win over new clients.
We also recorded exceptionally positive changes in the fair values of our financial assets recognised at fair value through profit or loss (EUR 89.3 million), contrasting with a negative fair value change of EUR 27.1 million as at 31 December 2013. This can be attributed primarily to the performance of the ModCo derivatives and the inflation swaps. 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 period under review gave rise to positive fair value changes recognised in income of EUR 7.4 million (EUR 51.8 million). The inflation swaps taken out in 2010 and 2011 to hedge part of the inflation risks associated with the loss reserves in our technical account produced negative fair value changes of EUR 41.0 million, as against a positive contribution of EUR 28.0 million in the previous year. The changes in the fair values of the inflation swaps are recognised in income as a derivative pursuant
Investment income in EUR million 2013 + / – previous year
Net investment income from 1 Excluding expenses on funds withheld and contract deposits 2 Including depreciation / impairments on real estate 3 Portfolio at fair value through profit or loss and trading
Impairments and depreciation totalling just EUR 19.4 million (EUR 21.7 million) were taken. By far the bulk of the impairments – amounting to EUR 3.5 million – were attributable to alternative investments (EUR 5.8 million). Scheduled depreciation taken on directly held real estate amounted to EUR 14.0 million (EUR 10.4 million), a reflection of our greater involvement in this area. These write-downs contrasted with write-ups of EUR 0.3 million (EUR 2.7 million).
Financial position and net assets • Risk-appropriate investment policy • High-quality diversified investment portfolio to be maintained • Expansion in the area of corporate bonds and in the real estate sector • Shareholders’ equity stable thanks to excellent Group net income in spite of challenging interest rate and currency environment
Hannover Re’s investment policy continues to be guided by the following core principles: • generation of stable and risk-commensurate returns while at the same time maintaining the high quality standard of the portfolio; • ensuring the liquidity and solvency of Hannover Re at all times; • high diversification of risks; • limitation of currency exposures and maturity risks through matching currencies and maturities.
By adjusting the maturity pattern of our fixed-income securities to the expected payment patterns of our liabilities we reduce the economic exposure to the interest rate risk. In the current reporting period we slightly reduced the modified duration of our fixed-income portfolio, as a result of which it stood at 4.4 years (previous year: 4.5 years) as at 31 December 2013. Furthermore, through active and regular management of the currency spread in our fixed-income portfolio we bring about extensive matching of currencies on the assets and liabilities sides of the balance sheet, as a consequence of which fluctuations in exchange rates have only a limited effect on our result.
At year-end 2013 we held 40.7% (40.4%) of our investments in euro, 38.0% (37.1%) in US dollars, 8.3% (8.2%) in pound sterling and 4.9% (5.6%) in Australian dollars.
Holdings of alternative investment funds increased slightly. As at 31 December 2013 an amount of EUR 574.3 million (EUR 566.6 million) was invested in private equity funds, a further EUR 402.9 million (EUR 427.1 million) predominantly in high-return bond funds and loans; in addition, altogether EUR 252.1 million (EUR 178.8 million) was invested in structured real estate investments. The uncalled capital with respect to the aforementioned alternative investments totalled EUR 598.5 million (EUR 575.9 million).
We were again able to increase our real estate allocation somewhat in the course of the year. Various properties in Germany, the United States and Central / Eastern Europe were acquired for this purpose; further projects are under review, and the real estate allocation will therefore keep rising steadily as planned. Despite selective sales in the course of the reporting period, it currently stands at 3.6% (2.2%).
The comparable disclosures for the previous year were adjusted pursuant to IAS 8; please see our explanatory remarks in Section 3.1 of the notes, “Changes in accounting policies”, on page 139 et seq.
Capital structure as at 31 December 2013 4.6% Loans and subordinated capital 4.9% Other liabilities 78.4% Technical provisions and liabilities
The technical provisions and liabilities shown above, which include funds withheld / contract deposits and reinsurance payable, make up 78.4% (78.2%) of the balance sheet total and are more than covered by our investments, (assets-side) funds withheld / contract deposits, accounts receivable and reinsurance recoverables.
The equity including non-controlling interests at 12.1% (12.3%) of the balance sheet total as well as the loans and – especially – subordinated capital at altogether 4.6% (4.4%) of the balance sheet total represent our most important sources of funds.
Hannover Re | Annual Report 2013 per share fell accordingly by 2.4% to EUR 48.83. The changes in shareholders’ equity were shaped chiefly by the following developments: Net unrealised gains on investments recognised in the other reserves stood at EUR 533.7 million, a sharp decrease of EUR 454.2 million compared to the beginning of the year under review. This contraction was due to increased yields on high-quality government bonds as well as the appreciation of the euro.
Non-controlling interests in shareholders’ equity decreased by EUR 40.1 million to EUR 641.6 million as at 31 December 2013. This reduction was attributable primarily to the noncontrolling interests in E+S Rückversicherung AG in an amount of EUR 27.9 million.
The Group net income for 2013 attributable to the shareholders of the Hannover Re Group increased to EUR 895.5 million (EUR 849.6 million). The non-controlling interest in the profit generated in the year under review totalled EUR 43.8 million (EUR 75.4 million).
Hannover Finance (Luxembourg) S.A. subordinated debt, EUR 500 million; 2005 / undated 1.6.2005 5.00 493.3 489.6
Hannover Finance (Luxembourg) S.A. subordinated debt, EUR 500 million; 2012 / 2043 20.11.2012 5.00 496.7 496.6
For further explanatory information please see our remarks in the notes to this report, Section 6.12 “Debt and subordinated capital”, page 200 et seq., and Section 6.13 “Shareholders’ equity, non-controlling interests and treasury shares”, page 203.
Letters of credit have been furnished by various financial institutions as collateral for our technical liabilities. Both bilateral agreements and an unsecured syndicated guarantee facility existed as at the balance sheet date with a number of financial institutions for this purpose. We report in detail on existing contingent liabilities in the notes, Section 6.12 “Debt and subordinated capital” in our remarks on other financial facilities, page 202 et seq., and Section 8.7 “Contingent liabilities and commitments”, page 222 et seq.
Liquidity We generate liquidity primarily from our operational reinsurance business, investments and financing measures. Regular liquidity planning and a liquid investment structure ensure that Hannover Re is able to make the necessary payments at all times. Hannover Re’s cash flow is shown in the consolidated cash flow statement on page 132 et seq.
Change in cash and cash equivalents according to cash flow statement 74.6 65.2
Cash and cash equivalents at the end of the period 642.9 572.2 1 Cf. Section 4 “Consolidation” of the notes
Cash flow from operating activities The cash flow from operating activities, which also includes inflows from interest received and dividend receipts, amounted to EUR 2,225.5 million in the year under review as opposed to EUR 2,637.2 million in the previous year. Along with the reduced net premium and the contraction of EUR 47.1 million in ordinary investment income, the decrease of EUR 411.7 million in the net inflow year-on-year was attributable to the higher inflow in the previous year from the retrocession of major losses, an outflow for an acquisition payment for a US portfolio and an adjustment payment for the New Zealand earthquake in the year under review.
Cash flow from financing activities Compared to the previous year, the cash flow from financing activities decreased by -EUR 496.1 million from EUR 148.4 million to -EUR 347.7 million. The change was influenced first and foremost by the subordinated debt 2012 / 2043 placed in an amount of EUR 500.0 million in the previous year. The cash outflow in the year under review was due principally to the dividend of EUR 361.8 million paid by Hannover Rück SE as well as repayment of a long-term debt in an amount of EUR 10.7 million by Hannover Re Real Estate Holdings, Inc.
Overall, allowing for the changes in the consolidated group, the cash and cash equivalents therefore increased year-on-year by EUR 70.7 million to EUR 642.9 million.
For further information on our liquidity management please see page 91 of the risk report.
All of our bonds issued by Hannover Finance (Luxembourg) S.A. are rated “a+” by A.M. Best and “A” by Standard & Poor’s.
Ordinary investment income including deposit interest clearly surpassed the previous year at EUR 1,304.8 million (EUR 1,205.9 million). This figure includes the non-recurring effect from transformation of our UK life reinsurance subsidiary into a branch in an amount of EUR 231.4 million. Net gains of EUR 43.5 million (EUR 68.9 million) were realised on disposals. Write-downs of EUR 186.7 million (EUR 25.4 million) were taken on investments. They were attributable principally
The following section describes the development of the various lines of business. Hannover Rück SE also participates in the German reinsurance market through intra-Group retrocessions from E+S Rückversicherung AG. The proportion of Hannover Rück SE’s gross written premium attributable to business accepted from E+S Rückversicherung AG stood at 3.7% (3.8%) in the year under review.
Casualty Gross premium in casualty business contracted by 2.5% to EUR 1,228.0 million (EUR 1,259.5 million). The loss ratio increased slightly from 92.4% to 96.6%. The underwriting result consequently slipped back to -EUR 209.8 million (-EUR 164.8 million). An amount of EUR 34.2 million was withdrawn from the equalisation reserve and similar provisions in the year under review; the allocation in the previous year had totalled EUR 27.5 million.
Aviation The gross premium volume contracted in the year under review from EUR 405.2 million to EUR 384.5 million. The major loss experience was once again unremarkable. Against this backdrop the net loss ratio decreased to 50.9% (69.6%). The underwriting result came in at a very good EUR 66.1 million (EUR 27.5 million). Following an allocation of EUR 6.8 million in the previous year, the equalisation reserve and similar provisions were boosted by an amount of EUR 34.0 million in the year under review.
The total premium volume in the other lines increased by 28.0% to EUR 2.7 billion (EUR 2.1 billion). The loss ratio of 76.0% was virtually unchanged from the previous year (73.1%). The underwriting result closed at EUR 1.0 million in the year under review, after -EUR 3.0 million in the previous year. An amount of EUR 31.0 million (EUR 63.4 million) was allocated to the equalisation reserve and similar provisions.
Our portfolio of assets under own management grew in the year under review to EUR 20.8 billion (EUR 19.5 billion). This corresponds to an increase of 6.3% and can be attributed above all to the very positive operating cash flow, which offset the yield increases recorded especially on high-quality government bonds as well as the softening of key foreign currencies against the euro. The balance of unrealised gains on fixedincome securities and bond funds consequently decreased to EUR 414.7 million (EUR 798.3 million).
Deposits with ceding companies, which are shown under the investments, totalled EUR 12.4 billion (EUR 10.9 billion) in the year under review.
In November 2013 the responsible bodies of Hannover Rück SE and its subsidiary E+S Rückversicherung AG decided to reorganise the business relationship between the two companies with effect from 1 January 2014. The exchange of business under the joint underwriting arrangements is to be discontinued at the beginning of 2014. In non-life reinsurance business, however, a retrocession from Hannover Rück SE to E+S Rückversicherung AG will be maintained. The exclusive responsibility borne by E+S Rückversicherung AG for German business and by Hannover Rück SE for international business remains in place.
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 the full 2014 financial year” on page 124, which also reflect in particular the expectations for Hannover Rück SE. For 2014, as in recent years, we are again targeting a payout ratio for the dividend in the range of 35% to 40% of Group net income.
The skills and dedication of our staff are a high-value asset for our company. It is for this reason that we conduct an internal employee survey – usually every other year – in order, among other things, to ascertain how satisfied our employees are with their tasks, their working conditions, their development and advancement as well as to explore the topics of cooperation and leadership.
Working through this survey, carried out most recently at the end of 2012, was one of the dominant themes of our work in human resources in the financial year just ended. The Executive Board also considered the survey and its findings on several occasions at its meetings.
It goes without saying that the survey also revealed areas in need of improvement. As regards the content of human resources activities, our employees would like to see, among other things, an expanded range of opportunities for development and advancement. This would provide fresh incentives to learn, especially for staff who already have extensive professional experience and considerable expertise. Further room for improvement was identified, for example, in the expansion of opportunities for project work and in the handling of conflicts.
We have already picked up on many of these suggestions in the financial year just ended. With a view to better fostering seasoned members of staff, for example, we designed a seminar which deals with difficult decision-making situations of the type that present themselves increasingly often in our employees ’ everyday working lives. We also continued to hold our so-called “Client Centric Re Skills” seminar, which is aimed at experienced senior underwriters wishing to supplement their already well-proven negotiating skills with successful alternative approaches.
The individual specialist units took it upon themselves to foster opportunities for project work, devising appropriate solution approaches on a decentralised basis. On the one hand, these emphasise the need to inform staff so as to make it clear which projects are upcoming for which areas of the company. On the other hand, for example, opportunities for members of staff to apply independently for project work were improved.
With a view to strengthening our internal conflict management, we subjected our relevant personnel development tools to fresh scrutiny. In this connection we offer our managers wide-ranging support tailored to specific issues, including for example mediation, coaching, process support and specially created seminars such as our “Conflict manager”.
Our reorganised management feedback, by means of which managers receive feedback from their employees and supervisors, also proved its worth. Geared systematically towards our Management Principles, this tool is now used successfully by all executive staff and chief / senior managers with managerial responsibility for disciplinary matters. In general terms, the high quality of our management performance was confirmed. At the close of the financial year just ended we also prepared the next implementation round for our executive staff, who will already be experiencing this new form of feedback for the second time; this will make it possible to identify developments and trends in relation to the previous survey, which will hopefully attest to a further strengthening of our management quality.
With the entry in the commercial register of Hannover Country Court the transformation of Hannover Rückversicherung AG into the legal form of a European Company, Societas Europaea (SE), came into effect on 19 March 2013. The negotiations conducted by management with the Special Negotiating Body regarding the structuring of the participation procedure and the determination of employee participation rights in the SE were an important milestone in the process of conversion into an SE. On 23 January 2013 the negotiations were successfully concluded with the signing of the Participation Agreement.
By this time it had been necessary to resolve numerous questions and issues between the parties on the basis of the Act on the Participation of Employees in a European Company (SEBG). While this legislation is intended to safeguard in an SE the rights acquired by employees to participate in company decisions, it leaves room for interpretation as to the specifics. In accordance with the SEBG negotiations with the Special Negotiating Body can take as long as six months and may be extended under certain conditions – an option which the parties to the negotiations made use of.
The negotiations centred on, among other things, matters such as the responsibilities of the SE Employee Council, the number of seats assigned to a Member State in the SE Employee Council and the allocation of seats. It was necessary to determine whether one or two annual regular meetings of the SE Employee Council should be held and establish rules governing formation, tasks, number of meetings and number of members of an Executive Committee. A further important step was to reach agreement on an information and consultation procedure to facilitate dialogue between the SE Employee Council and the Executive Board of Hannover Rück SE. Another key point of negotiation was the rules governing co-determination on the Supervisory Board.
With this in mind, in September 2011 we drew up a Sustainability Strategy for Hannover Re in which we explicitly commit to our strategic objective of sustainable value creation. This Sustainability Strategy is based on good and sustainable implementation of all compliance requirements and fleshes out in more concrete terms relevant aspects of the higher-level corporate strategy of the Hannover Re Group. For us, sustainability encompasses the following five action fields: • Governance and dialogue
In the year just ended we again reported on our achievements as a responsible enterprise in the form of a stand-alone Sustainability Report. In this regard we follow the currently applicable and internationally recognised guidelines of the Global Reporting Initiative (GRI); we fulfil Application Level B – the intermediate level of transparency – as defined by the GRI.
Since 2009 Hannover Re’s sustainability performance has been regularly evaluated by the rating agency oekom research. Since 2013, upon completion of the current rating process, we have been ranked among the leading companies in our industry and we fulfil the industry-specific minimum requirements. This is reflected in our inclusion in the oekom research Prime Standard.
Our detailed Sustainability Report can be accessed at www. hannover-re.com / sustainability / index.html
In our understanding, product responsibility also extends to the management of our investment portfolio. The goal of our investment strategy is to generate a commensurate market return in the interests of our clients, institutional investors and private investors. In this context we pay attention not only to traditional financial considerations but also to environmental, social and governance (ESG) criteria. Since 2012 our investment policy has been guided specifically by the ten principles of the United Nations Global Compact and thus also recognises 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. Exclusion from our investment universe is provided for in the event of failure to comply with the criteria. Furthermore, investments in correspondingly identified securities are also prospectively avoided. As we develop and continuously review our investment strategy, we work together with a service provider that specialises in sustainability.
The success of our company is directly dependent on the successful work of our staff. We therefore pay special attention to their skills, experience and commitment and we attach considerable importance to outstanding personnel development and management activities. In this context, the compatibility of career and private life for our employees is especially significant. By way of flexible working-time models and telecommuting Hannover Re promotes a balance between these two elements.
Hannover Re is committed to keeping negative environmental impacts of its business operations as low as possible. With this in mind, the focus of our efforts is on reducing carbon dioxide (CO2) emissions as we move towards climate neutrality by the year 2015. A major step towards achieving this goal was the implementation of our Environmental Management System at Hannover Home Office in 2012. Shortly after launch it was successfully certified according to DIN EN ISO 14001; its conformity was recertified in this year’s maintenance audit.
We took another step towards our goal of climate neutrality with the construction of a photovoltaic system on the roof of our main office premises in Hannover at the end of 2013. From 2014 onwards all the power that it generates will be fed directly into the building’s own grid. Depending on the actual number of hours of sunshine, the system can generate some 145,000 kilowatt hours of solar power per year, which is roughly equivalent to the electricity consumption of 42 two-person households. Put another way, this means that approximately 136 tonnes of harmful CO2 emissions will be avoided each year.
More detailed information on our social commitment can be found at www.hannover-re.com / sustainability / index.html
Resources consumed at Hannover Home Office 1 Karl-Wiechert-Allee 50, Roderbruchstraße 26 and infant daycare centre, Hannover 2 Karl-Wiechert-Allee 50, Roderbruchstraße 21 and 26 as well as infant daycare centre, Hannover 3 Karl-Wiechert-Allee 50, Roderbruchstraße 21 and 26 as well as infant daycare centre, Karl-Wiechert-Allee 57 (pro rata), Hannover 4 Radiative Forcing Index: 2.7
The steadily rising number of patients afflicted by common diseases poses new challenges for research and medicine as well as for society and insurance companies.
Risk report • Taking a deliberate and controlled approach, we enter into a broad variety of risks which, on the one hand, can open up opportunities for profit but, on the other hand, can also have adverse implications for our company
• We are convinced that our risk management system gives us a transparent overview of the current risk situation at all times and that our overall risk profile is appropriate
• Reserving risks can manifest themselves when the current estimates of future payment obligations from existing insurance contracts diverge from the payments that are actually to be made in the future.
• Risks of changes in mortality derive from the difference between the mortality of insureds factored into the pricing and reserving and the actual mortality.
The risk strategy derived from the corporate strategy constitutes the basis for our handling of opportunities and risks. The strategy is implemented on multiple levels.
Our corporate strategy encompasses ten basic strategic principles, which safeguard across divisions the accomplishment of our mission “Growing Hannover Re profitably”. The orientations of the different business groups are guided by these principles and thus contribute directly to attainment of the overarching goals. Key strategic points of departure for our Group-wide risk management are the principles of active risk management, an adequate capital base and sustained compliance. For further information on the corporate strategy and the strategic principles in detail please see the section entitled “Our strategy” on p. 16 et seq.
3. We promote an open risk culture and the transparency of the risk management system.
4. We aspire to each rating agency’s highest risk management rating and we seek approval of our internal capital model for Solvency II.
We manage our total enterprise risk such that we can expect to generate positive Group net income with a probability of 90% and the likelihood of the complete loss of our economic capital and IFRS shareholders’ equity does not exceed 0.03% p.a. These indicators are monitored using our internal capital model and the Executive Board is informed quarterly about adherence to these key parameters. The necessary equity resources are determined according to the requirements of our economic capital model, solvency regulations, the expectations of rating agencies with respect to our target rating and the expectations of our clients. Above and beyond that, we maintain a capital buffer in order to be able to act on new business opportunities at any time.
In the year under review it was first and foremost the agreement reached in November 2013 on the implementation of Solvency II effective 1 January 2016 that was of importance. The main goals of the Solvency II framework directive are to strengthen protection for insureds, put in place consistent competitive standards in the insurance sector of the European Single Market and hence ensure a broadly uniform regulatory practice in Europe. Key details must still be determined on the European and national level before the new regime can fully enter into effect on 1 January 2016. Hannover Re has been preparing intensively for Solvency II for years and is well equipped to provide the markets with tailored products. We believe that we are well placed for Solvency II because we are a solid and low-risk contracting partner with an excellent rating. We can make multiple use of the know-how that we have acquired through development of the internal capital model, and we expect the convergence of supervisory, rating and internal capital requirements to bring relief that will provide us with additional reinsurance capacity.
The Hannover Re Group is seeking approval of its internal model for the determination of regulatory capital under Solvency II. In the event of approval and depending on the final measurement rules of Solvency II, the capitalisation with a confidence level of 99.5% constitutes an indication of the fulfilment of future regulatory requirements.
Our excess capital coverage at the target confidence level of 99.97% is currently very comfortable. We hold additional capital above all to meet the requirements of the rating agencies for our target rating. In this connection 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.
Standard & Poor’s evaluates Hannover Re’s risk management as “Very Strong”, the best possible rating. The rating highlights, in particular, the company’s very good risk management, the consistent and systematic implementation of corporate strategy by management and the excellent capital resources. Hannover Re’s internal capital model is also examined as part of the rating. Based on this review, Standard & Poor’s factors the results of the internal capital model of the Hannover Re Group into the determination of the target capital for the rating.
Available economic capital 11,143.9 10,693.7 1 The presentation of the risks was amended in the reporting period. The required risk capital is now shown as the change relative to the expected value (rather than the initial value) and the expected result is reflected in the available capital. The previous year’s figures for the required and available capital have been restated accordingly.
Supervisory Board Advising and supervising the Executive Board in its management of the company, inter alia with respect to risk management, on the basis of the Supervisory Board’s Rules of Procedure
Group Risk Management Risk monitoring across the Group as a whole and the business groups of all material risks from the company perspective
Chief Risk Officer Responsibility for holistic risk monitoring across the Group as a whole and the business groups of all material risks from the Group perspective supported by local risk management functions
Ensures adequacy of the methods used and underlying models in relation to calculation of the technical provisions
Monitoring of areas where misconduct can result in civil actions or criminal / administrative proceedings supported by local compliance functions
Internal Auditing Process-independent and Group-wide supervision on behalf of the Executive Board
The Hannover Re Group’s Framework Guideline on Risk Management sets out the existing elements of the risk management system that has been put in place. It describes, among other things, the major tasks, rights and responsibilities, the organisational framework conditions and the risk control process. The guideline also contains principles governing the evaluation of new products in light of risk considerations as well as requirements for the outsourcing of functions. It aims to establish homogeneous Group standards for risk management. Key elements of our risk management system area as follows: Risk-bearing capacity concept The establishment of the risk-bearing capacity involves determining the total available risk coverage potential and calculating how much of this is to be used for covering all material risks. This is done in conformity with the parameters of the risk strategy and the risk appetite defined by the Executive Board. The quantitatively measurable individual risks and the risk position as a whole are evaluated using our risk model. A central system of limits and thresholds is in place to monitor material risks. This system incorporates – along with other risk-related key figures – in particular the indicators derived and calculated from the risk-bearing capacity. Adherence to the overall risk appetite is verified using the results of the risk model. The calculation is updated half-yearly.
Risk identification The most important source of information for monitoring risks is the risk identification carried out on a rotating basis. In order to ensure that all risks are identified in the context of risk identification an overarching categorisation containing all material risks has been established. Risk identification is carried out – adjusted to fit the particular risk – by way of, for example, structured assessments, interviews, scenario analyses, checklists or standardised questionnaires. External insights such as recognised industry know-how (e.g. from position papers of the CRO Forum; the CRO Forum is an international organisation comprised of the Chief Risk Officers (CRO) of large insurance and reinsurance companies) are incorporated into the process. Risk identification ensures that new risks identified from the current and rotating monitoring are added and known risks can be revised if necessary.
Risk analysis and assessment Every risk that is identified and considered material is quantitatively assessed. Only risk types for which quantitative risk measurement is currently impossible or difficult are qualitatively assessed, e.g. reputational risks or emerging risks.
Evaluation is carried out using, for example, qualitative selfassessments. As part of the Hannover Re risk model Group Risk Management carries out a quantitative assessment of material risks and the overall risk position. In so doing, allowance is made as far as possible for risk accumulations and concentrations.
Risk monitoring The monitoring of all identified material risks is a fundamental risk management task. This includes, inter alia, monitoring execution of the risk strategy and adherence to the defined limits and thresholds. A further major task of risk monitoring is the ascertainment of whether risk steering measures were carried out at the planned point in time and whether the planned effect of the measures is sufficient.
Risk communication and risk culture The Executive Board is responsible for the implementation of Group-wide risk communication and risk culture. Risk Management takes responsibility for operational implementation on behalf of the Executive Board. Key elements of communication include internal and external risk reporting, information on risk complexes in the intranet (e.g. position papers on emerging risks) as well as regular meetings of risk management officers within the Group.
The Framework Guideline defines concepts, stipulates responsibilities and provides a guide for the description of controls. In addition, it forms the basis for the accomplishment of internal objectives and the fulfilment of external requirements imposed on Hannover Re. The ICS consists of systematically structured organisational and technical measures and controls within the enterprise. This includes, among other things: • the principle of dual control,
All components of the accounting-related internal control system, the processes for the organisation and implementation of consolidation tasks and for the preparation of the consolidated financial statement as well as the accompanying controls are consistently documented. In order to safeguard and continuously improve the adequacy of the control system it is subject to regular review and evaluation. In this regard, the internal audit function ensures that the quality of the control system is constantly monitored. All relevant accounting principles are collated in a Group Accounting Manual that sets out uniform Group-wide rules for the recognition, measurement and reporting of items in the consolidated financial statement. The process for updating and, if necessary, adjusting these rules is clearly regulated with respect to information channels, responsibilities and period of validity. Not only that, we provide prompt Group-wide notification of significant developments and modified requirements in Group financial reporting.
Within the scope of our control system the Group companies are responsible for Group-wide adherence to the accounting policies and the internal control guidelines. The managing directors and chief financial officers of the Group companies defined as material in our control system affirm to the Executive Board of Hannover Rück SE at each closing date the completeness, correctness and reliability of the financial data that they pass on to Group Accounting. Data for the preparation of the consolidated financial statement is delivered using a Webbased IT application. The relevant data for Group financial reporting is collected in a database and processed via automatic interfaces in a consolidation system. Depending upon the results of our checks, these figures can be corrected if necessary. Given that our Group financial reporting is heavi ly dependent on IT systems, these systems also need to be subject to controls. Authorisation concepts regulate system access and for each step content-based as well as system-side checks have been implemented, by means of which errors are analysed and promptly eliminated.
Hannover Re calculates the economic equity as the difference between the market-consistent value of the assets and the marketconsistent value of the liabilities. The corresponding accounting principles also apply largely to the IVC (see the section “Management system” on page 24). While fair values are available for most investments, the market-consistent valuation of reinsurance treaties necessitates a specific valuation model. We establish the market-consistent value of technical items as the present value of projected payments using actuarial methods. This is adjusted by a risk loading that factors in the fluctuation in future payments. Such fluctuations result from risks that cannot be hedged by means of capital market products, such as technical risks. In a departure from the measurement rules currently under discussion in relation to Solvency II, we use risk-free interest rates derived from the yields on high-quality government bonds for discounting of our future cash flows.
Market prices for options and guarantees embedded in insurance contracts are determined or approximated using option valuation models from the field of financial mathematics.
Available economic capital 11,143.9 10,693.7 1 In the course of the change of the risk presentation as change relative to the expected targets (instead of intial values) the expected result is now considered within the respective value adjustment as part of the available capital. The figures for the previous year have been adjusted accordingly.
Hannover Re’s business model is based inter alia on building up the most balanced possible portfolio so as to achieve the greatest possible diversification effects and in order to deploy capital efficiently. Diversification exists between individual reinsurance treaties, lines, business segments and risks. We define the cost of capital to be generated per business unit according to the capital required by our business segments and lines and based on their contribution to diversification.
We make a fundamental distinction between risks that result from business operations of past years (reserving risk) and those stemming from activities in the current or future years (price / premium risk). In the latter case, special importance attaches to the catastrophe risk. With respect to the catastrophe risk, we differentiate between natural catastrophes and man-made disasters.
Total non-life reinsurance 2,738.6 1 The presentation was modified analogously to the disclosure of individual risks. In the interests of more transparent presentation of the diversification effect the risks are now shown as a change relative to the expected value (instead of the initial value).
The risk capital with a confidence level of 99.5% in the non-life reinsurance business group breaks down as follows: Required risk capital 1 for underwriting risks in non-life reinsurance in EUR million 2013
Underwriting risks in non-life reinsurance 2,738.6 1 Required risk capital with a confidence level of 99.5%
The reserving risk, i. e. the risk of under-reserving losses and the resulting strain on the underwriting result, is the overriding priority in our risk management. We attach the utmost importance to a conservative reserving level and therefore traditionally have a high confidence level (> 50%). In order to counter this potential risk we calculate our loss reserves based on our own actuarial estimations and establish, where necessary, additional reserves supplementary to those posted by our cedants as well as the segment reserve for losses that have already occurred but have not yet been reported to us. Liability claims have a major influence on this reserve. The segment reserve is calculated on a differentiated basis according to risk categories and regions. The segment reserve established by the Hannover Re Group amounted to EUR 5,359.6 million in the year under review.
Survival ratio in years and reserves for asbestos-related claims and pollution damage in EUR million 2013 2012
Windstorm United States 100-year loss -393.1 -369.1 250-year loss -630.6 -568.0
All natural catastrophe risks 1 200-year aggregate annual loss 1,404 1,264 900 1 Loss relative to the underwriting result
Hailstorm “Manni” in Germany, Switzerland and Austria 19 – 20 June 51.9 37.7
In addition, Hannover Re’s regional and treaty departments prepare regular reports on the progress of their respective renewals. The reporting in this regard makes reference inter alia to significant changes in conditions, risks (such as inadequate premiums) as well as to emerging market opportunities and the strategy pursued in order to accomplish targets. The development of the combined ratio in non-life reinsurance is shown in the table below: Combined and catastrophe loss ratio
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 non-life reinsurance segment” on page 190 et seq.
Our current risk profile in life and health reinsurance is dominated by mortality risks. This is due to the fact that for the majority of our insurance contract we pay death benefits rather than survival benefits. The volume of our annuity portfolio has continued to grow, as a consequence of which the longevity risk is now our second-largest risk within the life and health reinsurance business group. We calculate the diversification effect between mortality and longevity risks prudently in view of the fact that the contracts are normally taken out for different regions, age groups and individuals.
Required risk capital 1 for underwriting risks in life and health reinsurance in EUR million 2013
Underwriting risk in life and health reinsurance 1,434.3 1 Required risk capital with a confidence level of 99.5%
Diversification is a central management tool for our company. We seek to spread risks as far as possible across different risk classes and different regions. In our pricing of reinsurance treaties we provide incentives to further increase diversification.
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 interest rate risk, which in the primary sector is important in life business owing to the guarantees that are given, is of only minimal relevance to our company thanks to the structure of our contracts. The actuarial reports and documentation required by local regulators ensure that regular scrutiny also takes place on the level of the subsidiaries.
For detailed information please see the MCEV report 2012 published on our website. The MCEV report for the 2013 financial year will be published on our website close to publication of this report.
Market risk 2,032.9 1 Required risk capital with a confidence level of 99.5% 2 Including private equity
With a view to preserving the value of our assets under own management, we constantly monitor adherence to a trigger mechanism based on a clearly defined traffic light system that is applied across all portfolios. This system defines clear thresholds and escalation channels for the cumulative fluctuations in fair value and realised gains / losses on investments since the beginning of the year.
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
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 in the course of the reporting period and – at 1.1% (0.8%) – as at the end of the reporting period was clearly below the Value at Risk upper limit defined in our investment guidelines.
Further information on the risk concentrations of our investments can be obtained from the tables on the rating structure of fixed-income securities as well as on the currencies in which investments are held. Please see our comments in Section 6.1 of the notes, “Investments under own management”, page 175 et seq.
Share price risks derive from the possibility of unfavourable changes in the value of equities, equity derivatives or equity index derivatives in our portfolio. We hold such assets only on a very modest scale as part of strategic participations. The scenarios for changes in equity prices consequently have only extremely slight implications for our portfolio. Please see our comments in Section 6.1 of the notes, “Investments under own management”, page 168 et seq.
• Since 2009 we have reduced the level of recoverables by altogether 19.7%.
• 47.3% of our recoverables from reinsurance business are secured by deposits or letters of credit. What is more, for the majority of our retrocessionaires we also function as reinsurer, meaning that in principle recoverables can potentially be set off against our own liabilities.
Retrocession gives rise to claims that we hold against our retrocessionaires. These reinsurance recoverables – i. e. the reinsurance recoverables on unpaid claims – amounted to EUR 1,403.8 million (EUR 1,538.2 million) as at the balance sheet date. The following chart shows the development of our reinsurance recoverables – split by rating quality – due from our retrocessionaires. Recent years are clearly trending lower with an average reduction of 5.3% per year.
Further remarks on technical and other assets which were unadjusted but considered overdue as at the balance sheet date as well as on significant impairments in the year under review are provided in Section 6.4 “Technical assets”, page 183 et seq., Section 6.6 “Other assets”, page 186 et seq. and Section 7.2 “Investment income”, page 205 et seq.
2. We manage operational risks proactively and sustainably. 3. We consider events and scenarios that cover that entire spectrum of operational risks.
With the aid of Self-Assessments for Operational Risks (SAOR) we determine the degree of maturity of our operational risk management and define action fields for improvements. Based on these measurements, limits and thresholds are developed in light of risk indicators and efficiency considerations. One key indicator in this regard is the SAOR-based capital commitment in our internal model. This currently stands at EUR 510.7 million.
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 degree of maturity 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 also a highly critical success factor, especially in risk management, because – among other things – the validity of the results delivered by the internal model depends primarily on the data provided. The overriding goal of our data quality management is the sustainable improvement and safeguarding of data quality within the Hannover Re Group. Appropriate management of data quality risks is conditional upon clearly defined roles and associated responsibilities. Within the scope of process-integrated risk monitoring, centralised data quality management is responsible for establishing and maintaining the system and in so doing has the authority to prescribe standards and methods.
Compliance risks are associated with the risk of breaches of standards and requirements, non-compliance with which may entail lawsuits or official proceedings with not inconsiderable detrimental implications for the business activities of the Hannover Re Group. Regulatory compliance, compliance with the company’s Code of Conduct, data privacy and compliance with anti-trust and competition laws have been defined as issues of particular relevance to compliance. The compliance risk also includes tax and legal risks. Responsibilities within the compliance organisation are regulated and documented Group-wide and interfaces with risk management have been put in place. The set of tools is rounded off with regular compliance training programmes. For further information on compliance-related topics, including for example lawsuits, contingent liabilities and commitments, please see Sections 8.6 and 8.7, page 222.
It is therefore vital to detect these risks at an early stage and then determine their relevance. For the purpose of early detection we have developed an efficient process that spans divisions and lines of business and we have ensured its linkage to risk management. Operational implementation is handled by an expert working group assembled specially for this task. The analyses performed by this working group are used Group-wide in order to pinpoint any necessary measures (e.g. the implementation of contractual exclusions or the development of new reinsurance products). By way of example, the risks arising out of the emergence of large cities and urban conurbations – socalled megacities – are analysed by this working group. The growth of such urban centres goes hand-in-hand with a host of different problems, including a growing demand for food, drinking water, energy and living space. These challenges may also have implications for our treaty portfolio – in the form not only of risks but also opportunities, e.g. through increased demand for reinsurance products. Climate change, nanotechnology, political unrest, amendments to laws and changes in regulatory requirements may be cited as examples of other emerging risks.
Strategic risks derive from a possible imbalance between the corporate strategy of the Hannover Re Group and the constantly changing general business environment. Such an imbalance might be caused, for example, by incorrect strategic policy decisions, a failure to consistently implement the defined strategies and business plans or an incorrect allocation of resources. We therefore regularly review our corporate strategy in a multi-step procedure and adjust our processes and the resulting guidelines as and when required. We have defined performance criteria and indicators for the operational implementation of the strategic guidelines; these are authoritative when it comes to determining fulfilment of the various targets. With the “Strategy Cockpit” the Executive Board and responsible managers have at their disposal a strategy tool that assists them with the planning, elaboration and management of strategic objectives and measures and safeguards their overall perspective on the company and its strategic risks. In addition, the process for the management of strategic risks is assessed annually as part of the monitoring of business process risks. Further details on the topic of strategy are provided in the section entitled “Our strategy” on page 16 et seq.
Reputational risks refer to the risk that the trust put in our company by clients, shareholders, employees or the public at large may be damaged. This risk has the potential to jeopardise the business foundation of the Hannover Re Group. A good corporate reputation is therefore an indispensable prerequisite for our core business as a reinsurer. Reputational risks may arise out of all business activities conducted by the Hannover Re Group. Reputational damage may be caused, inter alia, by a data mishap that becomes public knowledge, a serious case of fraud or financial difficulties on account of a technical risk. In addition to the risk identification methods already described, we use a number of different techniques for risk minimisation, such as our defined communication channels, a professional approach to corporate communications, tried and tested processes for specific crisis scenarios as well as our established Code of Conduct.
Speed is one of the qualities used to measure a successful knowledge transfer. Quick solutions and staying one step ahead of the competition is the name of the game. Hannover Re searches systematically for new business opportunities in order to generate sustainable growth and strengthen the company’s profitable development. With a view to identifying opportunities and successfully translating ideas into business, Hannover Re adopts a number of closely related approaches in order to achieve holistic opportunistic and risk management. Of significance here is the interplay without overlaps of the various functions within opportunity and risk management, which is ensured by interfaces.
In general terms, attractive business opportunities are analysed prospectively by the “Future Rader” in order to translate them, as a second step, into marketable insurance and reinsurance products. For this purpose, concrete topics are examined by cross-divisional and interdisciplinary teams and potential business approaches are elaborated. The analyses carried out in the “Future Rader” encompass not only topics of the future but also the steps taken by competitors to identify business opportunities and niche markets at an early stage.
We are convinced that our risk management affords us a transparent overview of the current risk situation at all times, that our overall risk profile is appropriate and that our business opportunity management plays an important part in Hannover Re’s profitable growth. Based on our currently available insights arrived at from a holistic analysis of the opportunities and risks, the Executive Board of Hannover Re cannot discern any risks that could jeopardise the continued existence of the Hannover Re Group in the short or medium term or have a material and lasting effect on its assets, financial position or net income.
Declaration on Corporate Governance Declaration of the Executive Board regarding the Corporate Governance of the Company as defined by § 289a Para. 1 Commercial Code (HGB): German Corporate Governance Code
The variable compensation of the members of the Executive Board consists of a cash component and payments into a bonus bank as well as – accounting for 20% of the total variable compensation – the automatic allocation of virtual Hannover Re share awards. The number of share awards allocated is determined by dividing the amount of the 20% variable compensation by the average share price of the Hannover Re share on the five trading days before and five trading days after the Annual General Meeting for the allocation year in question.
Should the share price at the time of exercise be higher than the share price at the time of allocation, the resulting additional expenditure for the company can be neutralised by way of appropriate safeguards.
Code Item 4.2.3 Para. 4; Caps on severance payments in management board contracts
Premature termination of a service contract without serious cause may only take the form of cancellation by mutual consent. Even if the Supervisory Board insists upon setting a severance cap when concluding or renewing an Executive Board contract, this does not preclude the possibility of negotiations also extending to the severance cap in the event of a member leaving the Executive Board. In addition, the scope for negotiation over a member leaving the Executive Board would be restricted if a severance cap were agreed, which could be particularly disadvantageous in cases where there is ambiguity surrounding the existence of serious cause for termination. In the opinion of Hannover Rück SE, it is therefore in the interest of the company to diverge from the recommendation contained in Code Item 4.2.3 Para. 4.
The current Chairman of the Audit Committee is at the same time also the Chairman of the Board of Management of the controlling shareholder and hence cannot, in the company’s legal assessment, be considered independent. As already explained above in the justification for divergence from Code Item 5.2 Para. 2, the current Chairman of the Supervisory Board is, however, optimally suited to chairing the Audit Committee. This assessment is also not cast into question by the fact that the Committee Chairman cannot therefore be considered independent within the meaning of the German Corporate Governance Code. Furthermore, since his service as Chief Financial Officer of Hannover Rück SE already dates back ten years, it is also the case that the reviews and checks performed by the Finance and Audit Committee no longer relate to any period in which he himself was still a member of the 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 contained in Code Item 5.3.2.
This is not contradicted by the fact that in the year under review we again did not comply with some recommendations of the Code, since a well justified deviation from the recommendations of the Code may – as in the present case – be in the interests of good corporate governance (cf. Foreword to the DCKG). Based on what is still a high degree of fulfilment of the recommendations and suggestions of the DCGK, Hannover Re continues to rank very highly among the companies listed on the DAX and MDAX.
The risk management system applicable throughout the entire Hannover Re Group is based on the risk strategy, which in turn is derived from the company strategy. A core component is the systematic and comprehensive recording of all risks that from the current standpoint could conceivably jeopardise the company ’s profitability and continued existence. Further details in this regard may be obtained from the risk report contained in the Annual Report on page 70 et seq.
The Executive Board and Supervisory Board of Hannover Re work together on a trusting basis to manage and monitor the company. In accordance with the Rules of Procedure of the Executive Board, matters of fundamental importance require the consent of the Supervisory Board. In addition, the Supervisory Board is kept informed on a regular and timely basis
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 technical expertise in the fields of accounting and the auditing of financial statements. Persons suggested to the Annual General Meeting as candidates for election to the Supervisory Board may not be older than 72 at the time of their election. Nominations shall take account of the company’s international activities as well as diversity. For their part, each member of the Supervisory Board shall ensure that they have sufficient time to discharge their mandate. The Supervisory Board meets at least twice each calendar half-year. If a member of the Supervisory Board participates in less than half of the meetings of the Supervisory Board in a financial year, this shall be noted in the Supervisory Board’s report. No more than two former members of the company’s Executive Board may belong to the Supervisory Board.
In 2012 the Supervisory Board carried out another regularly scheduled audit of the effectiveness of its work. An extensive questionnaire addressed, among other aspects, issues such as the organisation of the Supervisory Board and the conduct of meetings, the cooperation between the Executive Board and the Supervisory Board and the supply of information to the Supervisory Board. The findings were explained and discussed at the first Supervisory Board meeting of 2013. They resulted, among other things, in meeting documents being made available to the Supervisory Board members in an “Electronic Board Room” as part of the efficient provision of information.
For further details of the activities of the Supervisory Board committees please see the explanations provided in the Supervisory Board Report on pages 230 to 232.
Information regarding the following items is provided in the remuneration report: • Remuneration report for the Executive Board and disclosure of the remuneration received by Supervisory Board members pursuant to Items 4.2.5 and 5.4.6 of the German Corporate Governance Code,
• Securities transactions pursuant to Item 6.6 of the German Corporate Governance Code,
Information on share-based payment pursuant to Item 7.1.3 of the German Corporate Governance Code is provided in Section 8.3 of the notes “Share-based payment”, page 217 et seq., and in the remuneration report with respect to the members of the Executive Board.
The remuneration report summarises the principles used to determine the remuneration of the Executive Board of Hannover Rück SE and explains the structure, composition and amount of the components of the remuneration received by the Executive Board in the 2013 financial year on the basis of the work performed by the Board members for Hannover Rück SE and companies belonging to the Group.
An individually determined amount specified in the service contract is calculated for each 0.1 percentage point by which the average 3-year RoCa exceeds the level of 0%.
Individual bonus Proportion of variable remuneration: Chief Executive Officer / Chief Financial Officer: 30%; Board members except for Chief Executive Officer / Chief Financial Officer: 25%
As at 31 December 2013 active members of the Executive Board had at their disposal a total of 288,797 (391,891) granted, but not yet exercised stock appreciation rights with a fair value of EUR 2.4 million (EUR 3.2 million).
Other information The contracts of the Board members do not include a commitment to benefits in the event of a premature termination of employment on the Executive Board owing to a change of control. Only the conditions for the granting of share-based remuneration in the form of stock appreciation rights provide for special exercise options in the event of the merger, spin-off or demerger of Hannover Re into another legal entity.
With regard to Item 4.2.3. Paragraph 2 “Caps on the amount of variable compensation elements in management board contracts ” and Item 4.2.3 Paragraph 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 Declaration of Conformity contained in the section “Statement of enterprise management practices” on page 95 of this Group Annual Report.
2 The non-cash compensation has been carried in the amounts established for tax purposes. 3 In 2013 altogether EUR 32,000 more in variable remuneration was paid out to Board members for 2012 than had been reserved. 4 The nominal amount is stated; full or partial repayment in 2017, depending on the development until such time of the balance in the bonus bank.
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 2012, contract extensions and the spreading of the expense for share awards across the remaining period of the individual service contracts.
Total 1 Remuneration for seats with Group bodies that is counted towards the variable remuneration accrues in the year of occurrence. 2 In 2013 altogether EUR 32,000 more in variable remuneration was paid to the members of the Executive Board for 2012 than had been reserved.
A Board member who has reached the age of 65 and left the company’s employment receives a life-long retirement pension. The amount of the monthly retirement pension is calculated according to the reference date age (year of the reference date less year of birth) and the funding contribution on the reference date. The annual funding contribution for these contracts is paid by the company in an amount of 25% of the pensionable income (fixed annual remuneration as at the reference date of 1 July of each year).
Provision for surviving dependants If the Board member dies during the period of the service contract, the surviving spouse – or alternatively the eligible children – shall be entitled to continued payment of the fixed monthly salary for the month in which the Board member dies and the six months thereafter, at most until termination of the service contract. If the member of the Executive Board dies
after pension payments begin, the surviving spouse and alternatively the dependent children shall receive continued payment of the retirement pension for the month of death and the following six months.
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 14 (13) pension commitments existed, totalled EUR 1.4 million (EUR 1.4 million) in the year under review. The projected benefit obligation of the pension commitments to former members of the Executive Board amounted to altogether EUR 21.4 million (EUR 22.5 million).
The remuneration of the Supervisory Board is determined by the Annual General Meeting of Hannover Rück SE and regulated by the Articles of Association.
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.
Frauke Heitmüller 3 Member of the Supervisory Board Fixed remuneration 30.0 19.8
Uwe Kramp 3 Member of the Supervisory Board (until 3 May 2012)
Maike Sielaff 3 Member of the Supervisory Board (from 6 March 2013)
Gert Wächtler 3 Member of the Supervisory Board (until 6 March 2013)
Attendance allowances 1.0 3.0 1 Amounts excluding reimbursed VAT 2 Including supervisory board remuneration and remuneration for committee work as well as advisory board remuneration received from entities affiliated with the company 3 Employee representatives
In 2013 no loan relationships existed with members of the Executive Board or Supervisory Board of Hannover Rück SE, nor did the company enter into any contingent liabilities for members of the management boards.
The group of participants and the total number of eligible participants in the variable remuneration systems of Hannover Re are set out in the table on this page.
Measurement of variable remuneration for senior executives The measurement of the variable remuneration is based on three elements: Group net income, business group targets and individual targets. The weighting of the elements is dependent upon whether responsibility is carried in a treaty / regional department or in a service department. In the treaty / regional departments the Group net income is weighted at 20%, the business group targets at 40% and the individual targets also at 40%. In the service departments the Group net income carries a 40% weighting, while the individual targets account for 60%. Agreements on business group targets and individual targets as well as on their degree of goal attainment are arrived at as part of the Management by Objectives (MbO) process.
The Group net income is measured by the three-year average return on equity (ROE) of the Hannover Re Group above the risk-free interest rate. Goal attainment is calculated as follows: for each individual financial year of the last three financial years it is calculated by how many percentage points the RoE of the Hannover Re Group exceeds the risk-free interest rate. The average of these three differences determines the threeyear average RoE above the risk-free interest rate. The risk-free interest rate is the average market interest rate over the past five years for 10-year German government bonds.
Group of participants and total number of eligible participants in variable remuneration systems Valid: 31 December 2013
In the case of the allocation and payment of share awards to participants in the Share Award Plan who are located abroad, the rate of exchange used to convert the average share price is the average of the relevant exchange rate in a period from 20 trading days before to 10 trading days after the meeting of the Supervisory Board that approves the consolidated balance sheet. For payment of the dividend to participants in the Share Award Plan who are located abroad, the rate of exchange used to convert the dividend per share is the average of the relevant exchange rate in a period from 20 trading days before to 10 trading days after the Annual General Meeting that approves the dividend payment for the financial year just ended.
In its forecast for 2014, the Kiel Institute for the World Econo my expects that central banks in mature national economies will stand by their expansionary monetary policy. Given these framework conditions, experts anticipate accelerated growth of 3.7% for the global economy in the coming year.
United States The effect of monetary stimuli is likely to be felt increasingly strongly in the US in the course of the year, causing the econo my to pick up further momentum. The Kiel Institute for the World Economy anticipates a growth rate of 2.3% in the year ahead. Experts believe that the real estate market will also benefit greatly from this development. Increasing debt reduction and further improvement on the labour market will boost private consumption. On the corporate side, it can be assumed that the positive framework conditions will bring greater investment confidence.
Europe Within the Eurozone the consolidation processes in the crisisaffected countries will further curb domestic demand, with the result that economic growth will likely be comparatively weak in 2014. In addition, problems in the banking sector which hinder the transfer of monetary stimuli to the markets persist.
Despite this, economic activity in the Eurozone will gradually gather steam. The Kiel Institute for the World Economy forecasts growth of 0.9% for 2014. Unemployment has passed its peak and will slowly subside overall; the crisis-hit countries will remain exceptions here for the time being. In the United Kingdom, too, the economy is picking up; a sustained upturn with a growth rate of 2.0% for 2014 is possible here.
After the muted growth in the past year, economic activity is likely to gather further momentum in 2014. The Kiel Institute for the World Economy anticipates a growth rate of 1.7%. As part of this upturn the volume of replacement and expansion investments, some of which had been deferred, is likely to increase markedly. The extremely favourable financing environment will further stimulate residential construction and support the emerging real estate boom. Exports will enjoy a brisk revival in light of improved economic conditions abroad. Foreign trade will not give rise to any appreciable production effects.
The outlook for Japan is that the current expansion will be sustained over a protracted period. The growth anticipated for 2014 is in the order of 1.5%.
Insurance industry The situation in the international insurance industry is likely to change only marginally in 2014. Despite a challenging general environment, it is likely to remain on a broadly stable course – despite the fact that investment income will probably move lower again as a reflection of the difficult investment conditions on capital markets. In order to be able to generate adequate investment income, (re)insurers may continue to shift portfolios into other asset classes, e.g. in the infrastructure sector, or adjust products even more specifically in line with market circumstances. For the German life (re)insurance market this means having to establish further legally prescribed additional reserves for policies with guarantees; in the companies’ own assessment, however, building up such a financial buffer would be feasible.
Strengthening the risk-bearing capacity of insurers should remain a central concern in 2014. The currently ongoing adjustment of European regulations, especially with respect to Solvency II, as well as improvements in compliance and risk management systems will likely enhance the ability of insurers to withstand crises. These requirements affect not only mature markets but also increasingly growth markets around the world, where insurance reforms and solvency rules are being adopted and implemented in individual countries. The resulting challenges should at the same time open up fresh opportunities for (re)insurers.
Overview Even compared to 2013, competition is intensifying appreciably in the non-life reinsurance market in the current financial year. This is being driven by a number of factors: along with the absence of market-changing major losses, ceding companies are retaining more risks for net account due to their healthy capital resources. Not only that, the inflow of capital from the ILS market – especially in the area of US natural catastrophe business – is causing marked price erosion. For Hannover Re, however, this aspect has not prompted any significant share reductions. On the whole, it may be stated that there is currently an oversupply of reinsurance capacity. This development was already becoming apparent in the course of the year under review and overshadowed the treaty renewals as at 1 January 2014. On this date we renegotiated around 65% of our treaties in non-life reinsurance (excluding facultative business and structured reinsurance).
Overall, Hannover Re again benefited in the treaty renewals from its durable customer relationships and its position as one of the leading and most financially robust reinsurance groups.
We see further growth potential in North America, the AsiaPacific markets, the countries of Central and Eastern Europe, marine business and facultative reinsurance and in structured reinsurance.
Facultative reinsurance + 1 In EUR, development in original currency may vary 2 ++ = significantly above the cost of capital; + = above the cost of capital; + / – = on a par with the cost of capital; – = below the cost of capital 3 All lines with the exception of those reported separately
When it comes to the development of our premium income, we expect to see growth overall for 2014.
It is our assumption that demand in the area of insurance-linked securities will continue to grow. In addition to protecting our own peak exposures, we make the most of the attractive opportunities available in collateralised reinsurance business. The extent to which we step up our investments in catastrophe bonds will depend on price movements. For 2014 we are looking to a rising premium volume and pleasing results. We were able to renew our “K” quota share – a collateralised modelled quota share cession of non-proportional reinsurance treaties in the property catastrophe, aviation and marine (including offshore) lines that we have placed in the ILS market for almost 20 years – with a capacity of USD 320 million for 2014.
The picture on European markets is again a mixed one for 2014: in Central and Eastern Europe demand for high-quality reinsurance protection remains unabated. In the treaty renewals as at 1 January 2014 we achieved largely stable rates and conditions. Developments in Russia, where we enjoyed stronger demand for reinsurance protection for large infrastructure projects, were especially pleasing. We therefore enlarged our portfolio. Modest premium erosion was recorded only under programmes that had been spared losses. Thanks to our positioning and selective underwriting policy we again expect to generate profitable growth for our portfolio in the markets of Central and Eastern Europe in the current year. In France, on the other hand, the market remains soft and no trend towards higher prices can currently be discerned. With this in mind, we do not intend to expand our business. In the countries of Northern Europe the volume should remain virtually stable. We anticipate a roughly unchanged premium volume for our portfolio in Spain and Portugal.
We were highly satisfied with the outcome of the treaty renewals in Latin America. In both Brazil and Mexico we booked slightly higher prices. A further positive upswing is anticipated in Brazil following the October elections, and this should deliver additional growth stimuli for the region. In view of the regulatory environment for cross-border reinsurance transactions, however, we expect to see a reduction in our premium income from Argentina in the middle of the year.
We also see additional growth potential in traditional reinsurance in the Middle East. Particularly crucial here are major projects such as Expo 2020 in Dubai and the FIFA Football World Cup 2022 in Qatar. All in all, gross premium volume for the current financial year should show a double-digit increase.
Global catastrophe business In view of the protracted low interest rate environment, further capital on the ILS market can be expected to flow into global catastrophe reinsurance. Against this backdrop, the treaty renewals as at 1 January 2014 saw further rate reductions, especially in US catastrophe business. On the other hand, in regions impacted by losses in 2013, such as Germany and Canada, we were able to secure rate improvements in some instances. The future trend in catastrophe business, particularly on the US market, will depend upon the major loss situation in the current year. For 2014 we currently anticipate a reduced premium volume.
In Europe, the market is very largely saturated when it comes to traditional life insurance products. In recent years an emerging shift in the target group could already be observed, and in 2014 too we expect the primary market to cater increasingly to the needs of seniors. There will likely be no easing in the considerable pressure to deliver competitive, cost-efficient and innovative products which focus on the needs of the over-sixties. If growth is to be generated, new products must be designed and existing product ranges expanded. In this context the primary emphasis will doubtless be on the biometric risk of morbidity, such as in long-term care insurance. Even if Germany is considered in isolation, an attractive return cannot be anticipated for traditional life insurance in the coming years.
In 2014 we shall pay close attention to the Asian market and expect demand for financially oriented reinsurance solutions to remain strong. It may be assumed that the consistently growing urban middle class will continue to take a closer interest in health coverage and retirement provision.
Reflecting the assumptions described for the development of non-life and life and health reinsurance, we expect to generate stable or slightly higher gross premium for the current 2014 financial year based on constant exchange rates.
Assuming that the burden of major losses does not significantly exceed the expected level of EUR 670 million and that there are no downturns on capital markets, Hannover Re expects to generate Group net income in the order of EUR 850 million for the 2014 financial year.
As for the dividend, we continue to aim for our payout ratio of 35% to 40% of Group net income.
Income / expense on funds withheld and contract deposits 7.2 357,348 355,486
Attributable to shareholders of Hannover Rück SE 219,099 1,332,906 1 Adjusted pursuant to IAS 8 (cf. Section 3.1 of the notes)
Capital repayments – – – – – – – – (6,389) (6,389)
Cash and cash equivalents at the beginning of the period 572,188 506,963
Change in cash and cash equivalents (I. + II. + III. + IV.) 74,581 65,225
Cash and cash equivalents at the end of the period 642,936 572,188
1 In the year under review the supplementary information on the cash flow statement was expanded to include dividend receipts as well as a breakdown of interest received and paid. The figures for the previous year were recalculated in this context. The income taxes as well as dividend receipts and interest received are included entirely in the cash flow from operating activities. The interest paid is attributable in an amount of EUR 120,929 thousand (EUR 122,770 thousand) to the cash flow from financing activities and in an amount of EUR 47,772 thousand (EUR 45,465 thousand) to the cash flow from operating activities.
Notes to the consolidated financial statements 2013 1. Company information 136 2. Accounting principles 136 3. Accounting policies 139 3.1 Changes in accounting policies 139 3.2 Summary of major accounting policies 143 3.3 Major discretionary decisions and estimates 151 4.1 Consolidation principles 153 4.2 Consolidated companies and complete list of shareholdings 154 4.3 Major acquisitions and new formations 161 4.4 Major disposals and retirements 162 4.5 Further corporate changes 162 5. Segment reporting 163 6. Notes on the individual items of the balance sheet 168 6.1 Investments under own management 168 6.2 Funds withheld (assets) 183 6.3 Contract deposits (assets) 183 6.4 Technical assets 183 6.6 Other assets 186 6.7 Technical provisions 189 6.8 Funds withheld (liabilities) 194 6.9 Contract deposits (liabilities) 194 6.10 Provisions for pensions and other post-employment benefit obligations 194 6.11 Other liabilities 198 6.12 Debt and subordinated capital 200 6.13 Shareholders’ equity, non-controlling interests and treasury shares 203 7. Notes on the individual items of the statement of income 204 7.1 Gross written premium 204 7.2 Investment income 205 7.3 Reinsurance result 207 7.4 Other income and expenses 208 7.5 Taxes on income 209 8. Other notes 212 8.1 Derivative financial instruments and financial guarantees 212 8.2 Related party disclosures 215 8.3 Share-based payment 217 8.4 Staff and expenditures on personnel 220 8.5 Earnings per share and dividend proposal 221 8.7 Contingent liabilities and commitments 222 8.8 Long-term commitments 223 8.9 Rents and leasing 223 8.10 Fee paid to the auditor 224 8.11 Events after the balance sheet date 224
An interest of 50.2% in Hannover Rück SE is held by Talanx AG, which in turn is majority-owned (with a stake of 79.0%) by HDI Haftpflichtverband der Deutschen Industrie V.a.G. (HDI).
Hannover Rück SE and its subsidiaries are required to prepare a consolidated financial statement and group management report in accordance with § 290 German Commercial Code (HGB).
The consolidated financial statement reflects all IFRS in force as at 31 December 2013 as well as all interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), application of which was mandatory for the 2013 financial year. IFRS 4 “Insurance Contracts” requires disclosures on the nature and extent of risks stemming from reinsurance contracts, while IFRS 7 “Financial Instruments: Disclosures” requires similar information on risks from financial instruments. Additionally, § 315 Para. 2 Number 2 German Commercial Code (HGB) also contains requirements for insurance undertakings with regard to information on the management of technical and financial risks that is to be provided in the management report. The disclosures resulting from these requirements are included in the risk report. We have dispensed with an additional presentation of the same content in the notes. In order to obtain a comprehensive overview of the risks to which Hannover Re is exposed it is therefore necessary to consider both the risk report and the relevant information in the notes. We refer the reader accordingly to the corresponding remarks in the risk report and the notes.
to EUR millions. Figures indicated in brackets refer to the previous year.
In May 2013 the IASB issued “Recoverable Amount Disclosures for Non-Financial Assets (Amendments to IAS 36 “Impairment of Assets”)” and thereby modified disclosure requirements potentially resulting from IFRS 13 “Fair Value Measurement ” that could have been broader than originally intended. It was thus clarified that disclosure of the recoverable amount is required only for impaired assets, including goodwill. The amendments were adopted by the EU in December 2013 and have a mandatory effective date for annual periods beginning on or after 1 January 2014. Hannover Re is applying the amendments early on a voluntary basis as at the balance sheet date. Initial application did not give rise to any changes in accounting methods or to changes in the carrying values in the consolidated financial statement.
In November 2013 the IASB issued “Defined Benefit Plans: Employee Contributions (Amendments to IAS 19)” and thereby clarified the requirements that relate to how contributions from employees or third parties that are linked to service should be attributed to periods of service. The amendments are intended to provide relief in that entities are allowed to deduct contributions from service cost in the period in which the service is rendered. The amendments are effective for annual periods beginning on or after 1 July 2014, but they have still to be endorsed by the EU. Hannover Re is currently reviewing the implications of these amendments.
In June 2013 the IASB issued “Novation of Derivatives and Continuation of Hedge Accounting” (Amendments to IAS 39 “Financial Instruments: Recognition and Measurement”). These amendments allow a novation of an OTC derivative designated as a hedging instrument to be deemed to be a continuation of the existing hedging relationship. The amendments, which have still to be endorsed by the EU, have a mandatory effective date for annual periods beginning on or after 1 January 2014. Hannover Re does not expect these amendments to have significant implications.
In May 2013 the IASB published IFRIC 21 “Levies”. IFRIC 21 provides guidance on the accounting of outflows imposed on entities by governments that do not constitute outflows within the scope of IAS 12 “Income Taxes”. IFRIC 21 is effective for annual periods beginning on or after 1 January 2014, but it has still to be endorsed by the EU. Hannover Re is currently reviewing the implications of these amendments.
In December 2011 the IASB issued “Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32)”. While the offsetting rules for financial instruments remain unchanged, the application guidance of the standard clarifies the meaning of “currently has a legally enforceable right to set-off” and “simultaneous”. The amendments have a mandatory effective date for annual periods beginning on or after 1 January 2014 and were endorsed by the EU in December 2012.
In May 2011 the IASB published five new or revised standards governing consolidation, the accounting of investments in associated companies and joint ventures and the related disclosures in the notes.
In October 2012 the IASB issued “Investment Entities (Changes to IFRS 10, IFRS 12 and IAS 27)”. Insofar as the parent company meets the definition of an investment entity, an exception is provided in relation to the consolidation of subsidiaries required under IFRS 10. Rather than consolidate them, such parent companies are required to measure their investments in particular subsidiaries at fair value through profit or loss in accordance with IFRS 9 “Financial Instruments” or IAS 39 “Financial Instruments: Recognition and Measurement”. These amendments were endorsed by the EU in November 2013.
With effect from the third quarter of 2013 Hannover Re adjusted the calculation logic for the amortisation of inflation-linked government bonds with the aim of smoothing seasonal fluctuations in the underlying inflation indices. This represents a change in an accounting estimate, which pursuant to IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” is to be performed prospectively in the period under review without restatement of the comparative figures for previous years. As at the balance sheet date and as at the respective year-ends in future there will be no differences in the amortisation amounts, because the adjustment of the parameters merely has a smoothing effect within the year that is reflected only at the end of the various quarters.
As of 1 January 2013 Hannover Re applied for the first time the revised IAS 19 “Employee Benefits” (IAS 19R), which was issued by the IASB in June 2011. The standard has a mandatory effective date for annual periods beginning on or after 1 January 2013. The change was endorsed in European law by the EU in June 2012. In accordance with the transitional requirements the standard was applied retrospectively in conformity with IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”. The previous application of the corridor approach in the accounting of defined benefit pension plans resulted in actuarial gains and losses only being recognised to the extent that they exceeded certain size criteria. In addition, the portion to be recognised was spread over several years. An off-balance-sheet recognition of partial amounts of the pension commitment also arose out of the previously applicable rules governing retrospective plan changes, which resulted in an increase in the existing commitment and hence in a past service cost. This past service cost was to be recognised immediately only to the extent that the additional benefits had already vested. Amounts above and beyond this were recognised pro rata until the resulting benefits vested. In accordance with the revised IAS 19R all actuarial gains and losses (“remeasurements“) are to be recognised immediately and entirely in OCI and past service costs in profit or loss for the period. In addition, the expected return on plan assets must in future be determined by applying the discount rate used to measure the defined benefit obligation. Given that pension commitments in the Hannover Re Group are funded only to a small extent through plan assets, there are no significant implications for Group net income. Furthermore, application of the revised IAS 19 resulted in a minimal adjustment of the accounting in connection with German partial retirement pension commitments.
With regard to the new disclosures in the notes resulting from the revised standard, please see Section 6.10 “Provisions for pension and other post-employment benefit obligations”.
The effects of the retrospective application of the aforementioned changes to the opening balance sheet as at 1 January 2012 and to the consolidated balance sheet as at 31 December 2012 as well as to the comparable period of the previous 2012 financial year are as follows:
Equity attributable to shareholders of Hannover Rück SE 4,970,631 (3,113) – 4,967,518
Consolidated balance sheet as at 31 December 2012 in EUR thousand as stated Application of
Equity attributable to shareholders of Hannover Rück SE 6,055,808 (23,336) – 6,032,472
Consolidated statement of comprehensive income 2012 in EUR thousand as stated Application of
Total recognised income and expense 1,460,409 (22,641) – 1,437,768 thereof: Attributable to non-controlling interests 107,280 (2,418) – 104,862
Attributable to shareholders of Hannover Rück SE 1,353,129 (20,223) – 1,332,906
IFRS 4 contains fundamental rules governing specific circumstances, such as the separation of embedded derivatives and unbundling of deposit components, but it does not set out any more extensive provisions relating to the measurement of insurance and reinsurance contracts. In conformity with the basic rules of IFRS 4 and the IFRS Framework, reinsurancespecific transactions therefore continue to be accounted for in accordance with the pertinent provisions of US GAAP (United States Generally Accepted Accounting Principles) as applicable on the date of initial application of IFRS 4 on 1 January 2005.
Financial assets held to maturity are comprised of non-derivative assets that entail fixed or determinable payments on a defined due date and are acquired with the intent and ability to be held until maturity. They are measured at amortised cost. The corresponding premiums or discounts are recognised in profit or loss across the duration of the instruments using the effective interest rate method. Depreciation is taken in the event of permanent impairment. Please refer to our comments on impairments in this section.
Financial assets at fair value through profit or loss consist of securities held for trading and those classified as measured at fair value through profit or loss since acquisition. This refers principally to unsecured debt instruments issued by corporate issuers and derivative financial instruments. Within the scope of the fair value option provided under IAS 39 “Financial Instruments: Recognition and Measurement”, according to which financial assets may be carried at fair value on first-time recognition subject to certain conditions, all structured securities that would have needed to have been broken down had they been recognised as available for sale or under loans and receivables are also recognised here. Hannover Re makes use of the fair value option solely for selected subportfolios of its financial assets. Securities held for trading and securities classified as measured at fair value through profit or loss since acquisition are carried at their fair value on the balance sheet date. If stock market prices are not available for use as fair values, the carrying values are determined using generally acknowledged measurement methods. All changes in fair values from this measurement are recognised in investment income. The classification of financial assets at fair value through profit or loss is compatible with Hannover Re’s risk management strategy and investment strategy, which are oriented extensively towards economic fair value variables.
Establishment of the fair value of financial instruments carried as assets or liabilities: we establish the fair value of financial instruments carried as assets or liabilities using the methods and models described below. The fair value of a financial instrument corresponds to the amount that Hannover Re would receive or pay if it were to sell or settle the said financial instrument on the balance sheet date. Insofar as market prices are listed on markets for financial assets, their bid price is used; financial liabilities are valued at ask price. In other cases the fair values are established on the basis of the market conditions prevailing on the balance sheet date for financial assets with similar credit rating, duration and return characteristics or using recognised models of mathematical finance. Hannover Re uses a number of different valuation models for this purpose. The details are set out in the table above. Financial assets for which no publicly available prices or observable market data
Premiums for reinsurance treaties are booked to income as earned across the period of the contracts in proportion to the insurance protection already provided or when they become due. Unearned premiums are calculated individually for each treaty in order to establish the portion of the premium volume that is not booked to income. This applies principally to non-life reinsurance and parts of accident and health reinsurance. Premiums already collected that are attributable to future risk periods are deferred pro rata temporis and recognised in conformity with the pertinent standards of US GAAP. In this context, assumptions are to be made if the data required for a calculation pro rata temporis is not available. The unearned premium corresponds to the insurance protection afforded in future periods.
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 80 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.
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 15 (16) companies at home and abroad were not consolidated in the year under review. A further 13 (16) companies were not included at equity in the consolidated financial statement for the same reason. The business object of these altogether 28 (32) companies is for the most part the rendering of services for reinsurance companies within the Group.
Hannover Insurance-Linked Securities GmbH & Co. KG, Hannover / Germany 3 100.00 EUR 5,935 2,924
FUNIS GmbH & Co. KG, Hannover / Germany 3 100.00 EUR 25,955 1,603
Hannover America Private Equity Partners II GmbH & Co. KG, Hannover / Germany 1 95.28 EUR 193,624 23,068
HAPEP II Holding GmbH, Hannover / Germany 1 95.28 EUR 13,834 4,373
Hannover Re Euro RE Holdings GmbH, Hannover / Germany 1 81.84 EUR 633,815 6,170
HAPEP II Komplementär GmbH, Hannover / Germany 1 81.84 EUR 28 3
HR GLL Central Europe GmbH & Co. KG, Munich / Germany 1 81.83 EUR 175,644 538
HEPEP III Holding GmbH, Cologne / Germany 1 67.08 EUR 7,672 579
E+S Rückversicherung AG, Hannover / Germany 1 63.69 EUR 645,413 72,000
Oval Office Grundstücks GmbH, Hannover / Germany 1 50.00 EUR 59,411 1,554
Hannover Finance (Luxembourg) S.A., Luxembourg / Luxembourg 1 100.00 EUR 25,524 (4,891)
Hannover Life Reassurance Company of America, Orlando / USA 1 100.00 USD 196,874 23,228
Hannover Re (Bermuda) Ltd., Hamilton / Bermuda 1 100.00 EUR 1,029,006 170,196
Leine Investment SICAV-SIF, Luxembourg / Luxembourg 1, 7 100.00 USD 15,547 847
Hannover Re (Guernsey) PCC Limited, St Peter Port / Guernsey 1 100.00 EUR 181 (37)
Hannover Finance, Inc., Wilmington / USA 7 100.00 USD 506,686 9,104
Atlantic Capital Corporation, Wilmington / USA 7, 9, 10 100.00 USD (111,867) –
Hannover Life Reassurance Africa Limited, Johannesburg / South Africa 100.00 ZAR 530,616 203,310
Hannover Reinsurance Africa Limited, Johannesburg / South Africa 100.00 ZAR 752,920 96,423
GLL HRE CORE PROPERTIES, LP, Wilmington / USA 7 95.00 USD 221,729 22,920
300 South Orange Avenue, LLC, Orlando / USA 7 95.00 USD 55,550 646
Nashville (Tennessee) West, LLC, Wilmington / USA 7 95.00 USD 32,558 3,446 1225 West Washington, LLC, Tempe / USA 7 95.00 USD 23,430 1,268 975 Carroll Square, LLC, Washington D.C. / USA 7 95.00 USD 58,424 1,904
Broadway 101, LLC, Wilmington / USA 7 95.00 USD 28,777 506
HR GLL Liberty Corner Sp. z o.o., Warsaw / Poland 1 81.83 PLN 51,946 214
HR GLL Griffin House Sp. z o.o., Warsaw / Poland 1 81.83 PLN 43,289 (293)
Akvamarín Beta s.r.o., Prague / Czech Republic 1 81.83 CZK 80,092 (28,786)
HR GLL CDG Plaza S.r.l., Bucharest / Romania 1 81.83 RON 171,895 (3,605)
Integra Insurance Solutions Limited, Bradford / United Kingdom 5 74.99 GBP 1,984 975
SUM Holdings (Pty) Ltd., Johannesburg / South Africa 36.82 ZAR 16,377 3,484
Thatch Risk Acceptances (Pty) Ltd., Cape Town / South Africa 33.14 ZAR 1,082 815
Gem & Jewel Acceptances (Pty) Ltd., Johannesburg / South Africa 30.60 ZAR 914 (60)
Envirosure Underwriting Managers (Pty) Ltd., Durban / South Africa 30.60 ZAR 40 455
Film & Entertainment Underwriters SA (Pty) Ltd., Johannesburg / South Africa 26.01 ZAR (1,992) (548)
HR Hannover Re, Correduría de Reaseguros, S.A., Madrid / Spain 1 100.00 EUR 301 35
Mediterranean Reinsurance Services Ltd., Hong Kong / People’s Republic of China 9, 10 100.00 USD 125 –
Hannover Re Services Japan, Tokyo / Japan 1 100.00 JPY 96,577 2,231
Hannover Re Consulting Services India Private Limited, Bombay / India 12 100.00 INR 68,929 10,309
Hannover Life Re Consultants, Inc., Orlando / USA 1 100.00 USD 205 –
Hannover Services (México) S.A. de C.V., Mexico City / Mexico 5 100.00 MXN 9,321 (1,456)
Hannover Re Services USA, Inc., Itasca / USA 100.00 USD 898 24
L&E Holdings Limited, London / United Kingdom 5 100.00 GBP 5 82
Hannover Re Services Italy S.R.L., Milan / Italy 99.64 EUR 651 133
ASPECTA Assurance International AG, Vaduz / Liechtenstein 5 30.00 CHF 17,594 7,177
Commercial & Industrial Acceptances (Pty) Ltd., Johannesburg / South Africa 1 20.40 ZAR 3,894 14,934
Energi Re, LLC, Dover / USA 5 28.50 USD 2,864 1,778
Hurst Holme Insurance Company Limited – account 2006-03 SCC, Hamilton / Bermuda 5, 9 28.50 USD 82 (736)
Secquaero Re Vinyard IC Ltd., St Peter Port / Guernsey 1 21.04 USD 35,116 3,612
Secquaero ILS Fund Ltd., Georgetown, Grand Cayman / Cayman Islands 5, 7 21.04 USD 73,651 2,884
Retrocessions and Insurance-Linked Securities (ILS) As part of its extended Insurance-Linked Securities (ILS) activities, Hannover Re writes a number of so-called collateralised fronting arrangements under which risks assumed from ceding companies are passed on to institutional investors outside the Group using special purpose entities. The purpose of such transactions is to directly transfer clients’ business. Due to the lack of a controlling influence over the special purpose entities involved, there is no consolidation requirement for Hannover Re with respect to these structures.
In connection with the sale of the operational companies of the subgroup Clarendon Insurance Group, Inc. (CIGI), Wilmington / USA, to Enstar Group Ltd., Hamilton / Bermuda, a partial portfolio of CIGI was retroceded to a special purpose entity with effect from 12 July 2011. The term of the retrocession arrangement runs until the underlying obligations have been finally settled. Since Hannover Re is not the major beneficiary of the special purpose entity and does not exercise either indirect or direct control over it, there is no requirement to consolidate this special purpose entity.
Securitisation of reinsurance risks The securitisation of reinsurance risks is largely structured through the use of special purpose entities.
Hannover Re also uses the special purpose entity Kaith Re Ltd. for various retrocessions of its traditional covers to institutional investors. In accordance with SIC–12 Kaith Re Ltd. is included in the consolidated financial statement.
Life and health reinsurance assumed Some transactions in the life and health reinsurance segment are effected with the involvement of ceding special purpose entities as contracting parties that are established by parties outside the Group and from which member companies of the Hannover Re Group assume certain underwriting and / or financial risks. The transactions serve the purpose, for example, of transferring extreme mortality risks above a contractually defined retention or transferring longevity risks. Since Hannover Re does not bear the majority of the economic risks or benefits arising out of its business relations with these special purpose entities and cannot exercise a controlling influence over them, there is no consolidation requirement for Hannover Re.
Hannover Re participates through the Luxembourg-based company Leine Investment SICAV-SIF, which was established in September 2012, in a number of special purpose entities for the securitisation of catastrophe risks by investing in “disaster bonds” (or “CAT bonds”). Leine Investment General Partner S.à.r.l. is the managing partner of the asset management company Leine Investment SICAV-SIF, the business object of which is to build, hold and manage a portfolio of insurancelinked securities (catastrophe bonds) – including for third-party investors outside the Group. Since Hannover Re cannot exercise a controlling influence in any of these transactions either there is no requirement to consolidate the relevant special purposes entities. The portfolio of catastrophe bonds held by Hannover Insurance-Linked Securities GmbH & Co. KG (HILS), which had been used for such transactions until the previous year, was entirely eliminated in the year under review through sale or repayment.
In August 2013 Hannover Rück SE reached agreement with another investor on a financial participation in a company, the business object of which is the indirect acquisition of Heidelberger Lebensversicherung AG, Heidelberg. Regulatory approval for the acquisition of Heidelberger Leben from a seller belonging to Lloyds Banking Group, London, has been received by Hannover Rück SE as the indirect acquirer, but has not yet been given to the other investor.
In the year under review the structure of Hannover Re Euro RE Holdings GmbH, Hannover, and of Hannover Re Real Estate Holdings, Inc., Orlando, USA, was appropriately expanded in order to hold individual properties (“special purpose companies ”) or satisfy requirements of company law (“holding companies ”). In this connection an amount of altogether EUR 123.5 million was invested for the acquisition of corresponding companies. No contingent liabilities, conditional payments or separate transactions as defined by IFRS 3 were identified.
This included in the third quarter of 2013 the acquisition of all shares in the company HR GLL Europe Holding S. à. r. l. (company name after renaming in the context of acquisition) by HR GLL Central Europe GmbH & KG. The company was included in the consolidated financial statement for the first time with effect from 30 September 2013.
HR GLL Central Europe Holding GmbH was established in the first quarter of 2013 and included in the consolidated financial statement for the first time with effect from 30 September 2013. All shares in the company are held by HR GLL Central Europe GmbH & KG. Both holding companies commenced their investment activities in special purpose property companies. Consequently, the special purpose companies HR GLL Roosevelt Kft, HR GLL CDG Plaza S.r.l., HR GLL Liberty Corner Sp. z.o.o. and HR GLL Griffin House Sp. z.o.o. were established in the year under review. Lastly, the special purpose company Akvamarine Beta s.r.o. was acquired.
With effect from 1 January 2013 Glencar Underwriting Managers, Inc., based in Chicago, United States (Glencar), was consolidated for the first time in view of the expansion recorded in the business volume. The business object of the company is to write specialty lines as well as property and casualty program business in the US market with a focus on small to mid-sized programs. In the second quarter of 2011 Funis GmbH & Co. KG, a wholly owned subsidiary of Hannover Rück SE, participated in Glencar with a capital contribution of USD 98,000 (corresponding to 49.0% of the share capital). Preference shares in an amount of roughly USD 2.3 million were purchased in the course of the third quarter of 2011; of these, preference shares amounting to USD 1.6 million constitute voting, puttable equity instruments and were therefore recognised as debt pursuant to IAS 32. The remaining preference shares in an amount of roughly USD 0.7 million have the features of nonvoting, non-puttable equity instruments and are classified as equity pursuant to IAS 32. Given that Hannover Re holds a majority of the voting rights in Glencar, it has the possibility of exercising control over the company. For reasons of materiality Glencar was carried as a participating interest until the fourth quarter of 2012. At the time of initial consolidation and as at the balance sheet date, Funis held an interest of 49.0% in the share capital. The liabilities-side difference arising out of initial consolidation in an amount of EUR 0.2 million was recognised in income.
With effect from 16 December 2013 Clarendon Insurance Group, Inc., Wilmington / USA (CIGI), which was wholly owned through the intermediate holding company Hannover Finance, Inc., Wilmington, was liquidated. The net assets of CIGI were transferred to Hannover Finance, Inc., by way of a so-called Section 332 liquidation; a capital reduction was also implemented at CIGI. As reported, the operational companies of CIGI had already been sold in 2011. The transaction had no implications for the consolidated financial statement.
Within the US subgroup Hannover Re Real Estate Holdings, Inc., the special purpose property companies 5115 Sedge Boulevard Associates, L.P., Chicago and 465 Broadway, LLC, Wilmington were liquidated in November 2013 and October 2013 respectively after the relevant properties had been sold.
“Part VII transfer”. The branch trades as Hannover Re UK Life Branch and was registered on 3 December 2012 under the Companies Act 2006. Hannover Life Reassurance (UK) Ltd. was deleted from the Commercial Register on 8 January 2013 and liquidated with effect in the first quarter of 2013. Since this internal restructuring within the Group involves a transaction between companies under common control, the transaction does not give rise to goodwill nor does it have any implications for Group net income.
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 non-life reinsurance and life and health reinsurance. With regard to the object of business operations within the two segments please see the corresponding remarks in the management report.
The segment information shown follows the system used for internal reporting purposes, on the basis of which the full Executive Board regularly evaluates the performance of segments and decides on the allocation of resources to them.
Segmentation of assets Non-life reinsurance in EUR thousand 31.12.2013 31.12.2012 1
Gross written premium 7,817,866 7,717,490 thereof: From insurance business with other segments – 264
Net investment income 781,192 944,537 thereof: Change in fair value of financial instruments (38,432) 32,363
Net income 854,320 756,459 thereof: Non-controlling interest in profit or loss 46,587 70,890
Maturities of the fixed-income and variable-yield securities in EUR thousand 2013 2012
Held to maturity due in one year 587,925 594,854 908,601 916,267 due after one through two years 1,062,548 1,114,378 606,525 629,138 due after two through three years 513,930 546,127 1,089,354 1,171,603 due after three through four years 140,576 148,806 532,996 577,930 due after four through five years 95,480 98,983 150,735 162,378 due after five through ten years 264,473 286,236 315,208 350,218 due after more than ten years 1,855 2,255 2,537 3,198
Available for sale due after one through two years 2,789,025 2,838,390 2,758,881 2,797,560 due after two through three years 1,848,794 1,899,960 2,525,881 2,616,092 due after three through four years 2,318,986 2,384,389 1,775,135 1,862,419 due after four through five years 2,700,046 2,728,465 2,436,644 2,549,947 due after five through ten years 7,765,540 7,896,895 7,132,799 7,617,225 due after more than ten years 2,657,402 2,749,944 2,709,969 3,033,562
Financial assets at fair value through profit or loss due in one year 8,339 8,339 69,544 69,544 due after one through two years 4,337 4,337 15,626 15,626 due after two through three years 2,182 2,182 17,619 17,619 due after three through four years 5,991 5,991 14,823 14,823 due after four through five years – – 4,936 4,936 due after five through ten years – – 7,276 7,276 due after more than ten years 15,212 15,212 17,589 17,589 1 Including accrued interest 2 Including short-term investments and cash
The maturities stated for loans and receivables of the previous year were corrected. Originally recognised amortised costs of EUR 30.7 million and fair values of EUR 37.5 million were reclassified for certain securities from the category “due in one year” to “due after more than ten years”.
Debt securities issued by semi-governmental entities 518,178 23,185 – 8,015 549,378
Debt securities issued by semi-governmental entities 650,493 39,766 – 9,744 700,003
Amortised cost, unrealised gains and losses and accrued interest on loans and receivables as well as their fair value in EUR thousand 2013
Debt securities issued by semi-governmental entities 1,822,223 145,725 4,554 29,970 1,993,364
Amortised cost, unrealised gains and losses and accrued interest on loans and receivables as well as their fair value in EUR thousand 2012
Government debt securities of EU member states 10,271 590 – 204 11,065
Debt securities issued by semi-governmental entities 2,005,258 238,045 58 30,095 2,273,340
The carrying amount of the loans and receivables is arrived at from the amortised cost plus accrued interest.
Debt securities issued by semi-governmental entities 3,803,818 117,838 24,549 45,377 3,942,484
Government debt securities of EU member states 1,837,251 80,205 2,625 17,715 1,932,546
Covered bonds / asset-backed securities 11,547 79,634 55 – 11,602 79,634
Fixed-income securities – available-for-sale 5,575,538 6,422,823 5,936,222 3,609,584 644,251 106,301 13,835 101,338 22,409,892
Fixed-income securities – held-to-maturity 1,168,278 1,645,096 664,632 127,950 – – – – 3,605,956
Fixed-income securities – available-for-sale 6,944,659 5,264,820 5,465,979 3,342,703 578,716 84,977 9,780 90,438 21,782,072
Public price listings are not available for companies valued at equity. The net book value of associated companies includes goodwill in the amount of EUR 17.9 million (EUR 18.3 million). For further details of our major participating interests please see Section 4 “Consolidation”.
Gross book value at 31 December of the year under review 872,905 505,727
Cumulative depreciation at 31 December of the previous year 14,067 39,837
Cumulative depreciation at 31 December of the year under review 25,741 14,067
Net book value at 31 December of the year under review 847,164 491,660
The additions to this item are due to the sharply increased investment activities of the real estate companies belonging to the Hannover Re Group. For the most part, they are attributable in an amount of EUR 344.9 million (EUR 63.2 million) to investments in Europe and in an amount of EUR 49.2 million (EUR 182.6 million) to investments in the United States.
In addition, we held indirect real estate investments measured at fair values in an amount of EUR 247.4 million (EUR 156.3 million ) in the year under review, the amortised costs of which amounted to EUR 204.9 million (EUR 126.2 million). The differences between the carrying amounts and amortised costs were recognised as unrealised gains of EUR 43.7 million (EUR 31.7 million ) and unrealised losses of EUR 1.2 million (EUR 1.6 million) under cumulative other comprehensive income.
Real estate which is held for sale as defined by IFRS 5 is recognised separately in the consolidated balance sheet. Intentions to sell are substantiated by individual real estate market conditions and specific property circumstances, taking into consideration current and future opportunity / risk profiles. In the year under review one property was reclassified to assets held for sale, while the two properties classified as held for sale in the previous year were sold. At the time of reclassification and at the end of the reporting period the net book value of the assets shown under this balance sheet item amounted to EUR 11.2 million (EUR 6.3 million). The measurement of real estate as long-term assets held for sale in the context of reclassification did not give rise to any impairment.
Other invested assets The other invested assets consisted largely of participating interests in partnerships measured at fair value in an amount of EUR 898.6 million (EUR 881.4 million), the amortised cost of which amounted to EUR 622.7 million (EUR 619.5 million). The differences between the carrying amounts and the amortised costs were recognised as unrealised gains of EUR 282.1 million (EUR 267.8 million) and unrealised losses of EUR 6.2 million (EUR 5.9 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 90.2 million (EUR 62.5 million).
consolidated financial statement. Given that the criteria for level allocation were only specified and standardised with IFRS 13 and bearing in mind that the standard is to be applied prospectively to financial years beginning on or after 1 January 2013, the previous year’s figures shown for comparative purposes have not been restated accordingly. In view of the short period between adoption of IDW RS HFA 47 and preparation of the consolidated financial statement a detailed portfolio analysis will only be carried out in the following months. The results of this analysis may give rise to corrections of the amounts recognised in the fair value hierarchy as at 31 December 2013.
Other financial assets – at fair value through profit or loss – 70,082 – 70,082
Fair value hierarchy of financial assets and liabilities recognised at fair value in EUR thousand 2012
Movements in level 3 financial assets and liabilities in EUR thousand 2013
Net book value at 1 January of the year under review 27,329 8 1,061,953 54,812
Income and expenses recognised in the statement of income 1,090 – (4,135) (987)
Closing balance at 31 December of the year under review 5,179 8 1,199,851 68,827
Movements in level 3 financial assets and liabilities in EUR thousand 2012
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 1,205.0 million (EUR 1,089.3 million) as at the balance sheet date, Hannover Re measures financial assets with a volume of EUR 1,109.7 million (EUR 990.4 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 95.3 million (EUR 98.9 million) relate in very large part to acquired life insurance policies, the valuation of which is based on technical parameters. Derivative financial instruments in connection with the reinsurance business were recognised under the other liabilities included in level 3 in the year under review. Their performance is dependent upon the risk experience of an underlying group of primary insurance contracts with statutory reserving requirements. The application of alternative inputs and assumptions has no material effect on the consolidated financial statement.
Fair value hierarchy of financial assets and liabilities measured at amortised cost in EUR thousand 2013
The funds withheld totalling EUR 14,267.8 million (EUR 14,627.8 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 exchange rate effects.
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 189 et seq. as well as the remarks in the risk report on page 79 et seq.
Net book value at 31 December of the previous year 1,841,279 1,926,570
Net book value at 31 December of the year under review 1,672,398 1,841,279
The value adjustments on accounts receivable that we recognise in adjustment accounts changed as follows in the year under review: Value adjustments on accounts receivable in EUR thousand 2013 2012
Cumulative value adjustments at 31 December of the previous year 40,703 35,665
Currency translation at 1 January of the year under review 1,572 40
With regard to the credit risks resulting from technical assets we would also refer the reader to our comments in the risk report on page 87 et seq.
Net book value at 31 December of the previous year 59,099 59,289
Net book value at 31 December of the year under review 57,070 59,099
Of this, other assets of EUR 4.2 million (EUR 4.0 million) are attributable to affiliated companies.
With regard to the rise in tax refund claims please see our remarks in Section 7.5 “Taxes on income”.
Net book value at 31 December of the previous year 92,100 94,985
Insurance for pension commitments Effective 1 July 2003 Hannover Rück SE took out insurance for pension commitments. The commitments involve deferred annuities with regular premium payment under a group insurance policy. In accordance with IAS 19 “Employee Benefits” they were carried as a separate asset at fair value as at the balance sheet date in an amount of EUR 71.6 million (EUR 64.6 million).
Cumulative depreciation at 31 December of the year under review 99,608 97,804
The changes in the consolidated group refer to the first-time inclusion of Glencar Underwriting Managers, Inc.; please see our explanatory remarks in Section 4.3 “Major acquisitions and new formations”.
Gross book value at 31 December of the year under review 196,689 184,725
Cumulative depreciation at 31 December of the previous year 152,589 140,195
Cumulative depreciation at 31 December of the year under review 165,846 152,589
Net book value at 31 December of the previous year 32,136 35,672
Net book value at 31 December of the year under review 30,843 32,136
The item includes EUR 3.2 million (EUR 4.5 million) for selfcreated software and EUR 19.1 million (EUR 25.2 million) for purchased software as at the balance sheet date. Scheduled depreciation is taken over useful lives of three to ten years. The additions can be broken down into EUR 5.0 million (EUR 7.9 million) for purchased software and EUR 0.9 million (EUR 0.9 million) for capitalised development costs for selfcreated software.
Loss and loss adjustment expense reserve 21,666,932 1,403,804 20,263,128 21,610,698 1,538,215 20,072,483
Loss and loss adjustment expense reserve in EUR thousand 2013 2012 gross retro net gross retro net
Net book value at 31 December of the previous year 21,610,698 1,538,215 20,072,483 20,767,317 1,550,587 19,216,730
Net book value after currency translation 20,635,097 1,460,456 19,174,641 20,650,643 1,529,144 19,121,499
Net book value at 31 December of the year under review 21,666,932 1,403,804 20,263,128 21,610,698 1,538,215 20,072,483 1 Including expenses recognised directly in shareholders’ equity
Run-off of the net loss reserve in the non-life reinsurance segment To some extent the loss and loss adjustment expense reserves are inevitably based upon estimations that entail an element of uncertainty. The difference between the previous year’s and current estimates is reflected in the net run-off result. In addition, owing to the fact that the period of some reinsurance treaties is not the calendar year or because they are concluded on an underwriting-year basis, it is frequently impossible to make an exact allocation of claims expenditures to the current financial year or the previous year.
The following table shows the net loss reserve for the non-life reinsurance business group in the years 2003 to 2013 as well as the run-off of the reserve (so-called run-off triangle). The figures reported for the 2003 balance sheet year also include the amounts for previous years that are no longer shown separately in the run-off triangle. The run-off results shown reflect the changes in the ultimate loss arising in the 2013 financial year for the individual run-off years.
The run-off profit of altogether EUR 423.6 million in the 2013 financial year derives, as in the previous year, above all from positive run-offs of reserves in the areas of marine / aviation and short-tail property business.
Due after one through five years 8,355,362 590,629 7,764,733 432,281 36,429 395,852
Due after ten through twenty years 2,076,465 119,868 1,956,597 794,098 40,280 753,818
Development of the unearned premium reserve in EUR thousand 2013 2012 gross retro net gross retro net
Net book value at 31 December of the previous year 2,339,809 138,373 2,201,436 2,215,864 91,823 2,124,041
Net book value after currency translation 2,218,849 130,521 2,088,328 2,207,322 90,837 2,116,485
The funds withheld under reinsurance treaties totalling EUR 648.0 million (EUR 821.1 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.
As at 1 July 2000 the 2000 pension plan came into force for the entire Group. Under this plan, new employees included in the group of beneficiaries are granted an indirect commitment from HDI Unterstützungskasse e.V.. The pension plan provides for retirement, disability and surviving dependants’ benefits.
The pension progression entails the risk that the anticipated development of the consumer price index factored into the trend assumptions was too low and that increased benefit obligations arise on account of the pension indexation required by law.
Return on plan assets, excluding amounts included in interest income – – 207 128 – –
Fair value of plan assets at 31 December of the financial year 13,510 14,979
Recognised pension obligations at 31 December of the financial year 116,167 126,156 thereof: Capitalised assets 245 –
In the current financial year Hannover Re anticipates contribution payments of EUR 1.9 million under the plans set out above. The weighted average duration of the defined benefit obligation is 15.9 years.
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 3.5 million higher pension commitment at the end of the financial year.
Of this, other liabilities of EUR 11.1 million (EUR 7.8 million) are attributable to affiliated companies.
On 20 November 2012 Hannover Rück SE placed a EUR 500.0 million subordinated bond in the European capital market via its subsidiary Hannover Finance (Luxembourg) S.A. The bond has a maturity of approximately 30 years, with a first scheduled call option on 30 June 2023. It carries a fixed coupon of 5.00% p.a. until this date, after which the interest basis changes to a floating rate of 3-month EURIBOR +430 basis points.
On 14 September 2010 Hannover Rück SE placed a subordinated bond on the European capital market through its subsidiary Hannover Finance (Luxembourg) S.A. This subordinated debt of nominally EUR 500.0 million has a maturity of 30 years with a first scheduled call option after ten years. The bond carries a fixed coupon of 5.75% in the first ten years, after which the interest basis changes to a floating rate of 3-month EURIBOR +423.5 basis points.
1 Excluding minority interests in partnerships; the maturities of derivative financial instruments and sundry non-technical provisions are broken down separately
Unsecured letter of credit facilities with various terms (maturing at the latest in 2022) and a total volume equivalent to EUR 2,488.0 million (EUR 2,621.2 million) exist on a bilateral basis with financial institutions; in addition, a long-term unsecured line of credit intended specifically for US life business taken out in December 2009 has a total volume equivalent to EUR 363.2 million (EUR 379.3 million).
For further information on the letters of credit provided please see our explanatory remarks in Section 8.7 “Contingent liabilities and commitments”.
A number of LOC facilities include standard market clauses that allow the banks rights of cancellation in the event of material changes in our shareholding structure or trigger a requirement on the part of Hannover Re to furnish collateral upon materialisation of major events, for example if our rating is significantly downgraded. Please see our explanatory remarks in the “Financial position and net assets” section of the management report, page 57 et seq., on the information pursuant to § 315 Para. 4 German Commercial Code (HGB).
Hannover Re | Annual Report 2013 6.13 Shareholders’ equity, non-controlling interests and treasury shares
For the disclosures arising out of IAS 1 “Presentation of Financial Statements” with regard to the management of capital, the reader is referred to page 54 et seq. of the “Financial position and net assets” section of the management report.
With regard to the claims and claims expenses as well as the change in the benefit reserve the reader is also referred to Section 6.7 “Technical provisions”. The change in the benefit reserve relates exclusively to the life and health reinsurance segment.
Commissions and brokerage, change in deferred acquisition costs in EUR thousand 2013 2012
Commissions and brokerage, change in deferred acquisition costs (net) 2,690,173 2,649,693
Other technical expenses (net) 7,874 4,575 7.4 Other income and expenses
Domestic taxes on income, comparable taxes on income at foreign subsidiaries as well as deferred taxes in accordance with IAS 12 “Income Taxes” and deferred tax assets and liabilities are recognised under this item.
Change in deferred taxes due to changes in tax rates (6,739) (2,969)
Value adjustments on deferred taxes 24,076 561 1 Adjusted pursuant to IAS 8 (cf. Section 3.1)
Domestic / foreign breakdown of recognised tax expenditure / income in EUR thousand 2013 2012 1
Outside Germany (20,836) 12,770 1 Adjusted pursuant to IAS 8 (cf. Section 3.1)
Present value of future profits on acquired life reinsurance portfolios (PVFP) 10,659 11,513
Deferred tax liabilities 1,203,551 1,339,617 1 Adjusted pursuant to IAS 8 (cf. Section 3.1) 2 Thereof on tax loss carry-forwards: -EUR 45,551 thousand (-EUR 43,228 thousand)
Net deferred tax liabilities 1,203,551 1,339,617 1 Adjusted pursuant to IAS 8 (cf. Section 3.1)
Reconciliation of the expected expense for income taxes with the actual expense in EUR thousand 2013 2012 1
Tax expense / income not attributable to the reporting period 5,233 3,788
The expense for income taxes in the financial year fell sharply year-on-year by EUR 201.3 million to EUR 163.1 million (EUR 364.4 million). The decrease is due in large measure to a lower pre-tax profit in the year under review as well as to the prospective adjustment of deferred taxes on the portion of the equalisation reserve attributable to permanent establishments of Hannover Rück SE that are tax-exempt under double taxation agreements (cf. here Section 3.1 “Changes in accounting policies”). In addition, the larger volume of internal retrocessions within the Group of certain portfolios in life and health reinsurance, which results in tax-exempt income in the country of origin but gives rise to expenses that are allowable for tax purposes in Germany, contributed to a reduction in the tax burden. The tax ratio amounted to 14.8% (28.3%).
No deferred taxes were established on assets-side taxable temporary differences amounting to EUR 108.4 million (EUR 107.5 million) and liabilities-side temporary differences of EUR 36.6 million (EUR 70.7) 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.
Derivatives are financial instruments, the fair value of which is derived from an underlying instrument such as equities, bonds, indices or currencies. We use derivative financial instruments in order to hedge parts of our portfolio against interest rate and market price risks, optimise returns or realise intentions to buy / sell. In this context we take special care to limit the risks, select first-class counterparties and adhere strictly to the standards defined by investment guidelines.
Hannover Re holds derivative financial instruments to hedge interest rate risks from loans connected with the financing of real estate; these gave rise to recognition of other liabilities in an amount of EUR 1.4 million (EUR 3.9 million).
Hannover Re’s portfolio contained derivative financial instruments as at the balance sheet date in the form of forward exchange transactions predominantly taken out to hedge currency risks. These transactions gave rise to recognition of other liabilities in an amount of EUR 5.5 million (EUR 16.8 million) and other financial assets at fair value through profit or loss in an amount of EUR 16.7 million (previous year: none).
The net changes in the fair value of these instruments resulted in a charge of EUR 33.1 million to the result of the financial year (improvement of EUR 27.4 million in the result).
The derivative components of another group of contracts in the area of life and health reinsurance were measured on the basis of stochastic considerations. The measurement produced a positive derivative value of EUR 6.5 million (EUR 7.5 million) on the balance sheet date. The derivative was recognised under other financial assets at fair value through profit or loss. The valuation resulted in a charge against investment income of EUR 1.1 million (EUR 0.7 million) as at 31 December 2013.
Financial guarantees Structured transactions were entered into in the life and health reinsurance business group in order to finance statutory reserves (so-called Triple-X or AXXX reserves) of US ceding companies. In each case such structures necessitated the involvement of a special purpose entity. The special purpose entities carry extreme mortality risks securitised by the cedants above a contractually defined retention and transfer these risks by way of a fixed/floating swap to a member company of the Hannover Re Group. The total amount of the contractually agreed capacities of the transactions is equivalent to EUR 1,372.2 million (EUR 1,137.9 million); an amount equivalent to EUR 892.1 million (EUR 848.1 million) had been taken up as at the balance sheet date. The variable payments to the special purpose entities that are guaranteed by the Hannover Re Group cover their payment obligations. Under some of the transactions the payments resulting from the swaps in the event of a claim are reimbursed by the parent companies of the cedants by way of compensation agreements. In this case the reimbursement claims from the compensation agreements are to be capitalised separately from and up to the amount of the provision.
IAS 24 “Related Party Disclosures” defines related parties as group entities of a common parent, associated entities, legal entities under the influence of key management personnel and the key management personnel of the entity itself. Transactions between Hannover Rück SE and its subsidiaries, which are to be regarded as related parties, were eliminated through consolidation and are therefore not discussed in the notes to the consolidated financial statement. In the year under review the following significant business relations existed with related parties.
Within the contractually agreed framework Talanx Asset Management GmbH performs investment and asset management services for Hannover Rück SE and some of its subsidiaries. In the year under review changes were made to the billing method and fee arrangements for real estate and asset management of own-use property, including such own-use property with a leased portion. Assets in special funds are managed by Ampega Investment GmbH. Talanx Immobilien Management GmbH performs services for Hannover Re under a number of management contracts.
Talanx Reinsurance Broker AG grants Hannover Rück SE and E+S Rückversicherung AG a preferential position as reinsurers of cedants within the Talanx Group. In addition, Hannover Rück SE and E+S Rück AG are able to participate in the protection covers on the retention of Group cedants and share in the protection afforded by them. In certain circumstances Hannover Rück SE and E+S Rück AG are obliged to assume unplaced shares of the reinsurance of Group cedants from Talanx Reinsurance Broker AG.
Actuarial opinions with respect to the pension commitments given to staff are drawn up for Hannover Rück SE and E+S Rück AG by Talanx Pensionsmanagement AG and HDI Lebensversicherung AG under an actuarial service contract.
In October 2013 Hannover Rück SE concluded a service contract with Talanx Service AG in the area of flight services as well as a contract regarding the reciprocal provision of business continuity management services.
The Conditions for the Granting of Stock Appreciation Rights were cancelled for the 2011 financial year by a resolution of the Supervisory Board dated 8 November 2010, insofar as the members of the company’s Executive Board could be granted stock appreciation rights on the basis of these Conditions (partial cancellation). The Conditions for the Granting of Stock Appreciation Rights were also cancelled for the other eligible recipients for the previous year by a resolution of the Executive Board dated 14 March 2011. Awarded stock appreciation rights continue to be exercisable until the end of their period of validity.
The maximum period of the stock appreciation rights is ten years, commencing at the end of the year in which they are awarded. Stock appreciation rights which are not exercised by the end of the 10-year period lapse. Stock appreciation rights may only be exercised after a waiting period and then only within four exercise periods each year. Upon expiry of a fouryear waiting period a maximum 60% of the stock appreciation rights awarded for an allocation year may be exercised. The waiting period for each additional 20% of the stock appreciation rights awarded for this allocation year to a member of the managerial staff is one further year. Each exercise period lasts for ten trading days, in each case commencing on the sixth trading day after the date of publication of the quarterly report of Hannover Rück SE.
The allocations for the years 2006, 2007 and 2009 to 2011 gave rise to commitments in the 2013 financial year shown in the following table. No allocations were made for 2005 or 2008.
Fair value at 31 December 2013 (in EUR) 19.62 8.38 8.76 10.79 10.32 24.62
Amounts paid out in the 2013 financial year (in EUR million) – – 2.50 2.08 0.19 0.08
Expense in the 2013 financial year (in EUR million) 1.18 2.73 1.32 – – –
In the 2013 financial year the waiting period expired for 100% of the stock appreciation rights awarded in 2003, 2004, 2006 and 2007 and for 60% of those awarded in 2009.