2 Incl. financial reinsurance and specialty insurance 3 Adjusted on the basis of IAS 8
Book value per share in EUR 37.39 +21.4% 30.80 23.47 27.77 24.03
Return on investment (excl. funds withheld by ceding companies) 3.9% 4.0% 0.4% 4.6% 5.0%
1 Adjusted on the basis of IAS 8 2 Dividend proposal 3 Bonus 4 Incl. funds withheld 5 Natural catastrophes and other major losses in excess of EUR 5 million gross for the Hannover Re Group‘s share as percent of net premium earned 6 Operating result (EBIT)/net premium earned
German version shall be authoritative in case of any discrepancies in the translation.
Picture credits Thomas Bach: cover Manfred Zimmermann: portraits on pages 2, 51, 79; group photo on page 9 Frank Bauer: portraits on pages 27, 39 Corbis/Blaine Harrington III: pages 26/27 Corbis/Owen Franken: pages 38/39 Corbis/David Madison: pages 50/51 Getty Images/Mark Lewis: pages 78/79
Printed on paper from environmentally responsible, socially compatible and economically viable forest management
Consolidated segmental report 110 notes 112 –186 1. Company information 113 2. Accounting principles 113 3. Accounting policies 115 5. Notes on the individual items of the balance sheet 133 6. Notes on the individual items of the statement of income 166 7. Other notes 174
Hannover Re. In the fourth quarter, for example, we reached an agreement on the sale of the operational units of our subsidiary Clarendon Insurance Group. Although this put a strain on the result for the year under review, it will save us considerable administrative expenses from the coming year onwards while at the same time relieving us of the operational risks associated with a US primary insurer. What is more, we can use the expected cash inflow and the freeing up of risk capital previously committed to Clarendon in order to further strengthen our core business of reinsurance.
We were, however, able to more than offset this burden thanks to a gratifyingly low incidence of basic losses, very healthy investment income and the release of provisions following a favourable ruling for our company by the Federal Fiscal Court.
Your company was therefore able to further improve on the record result of 2009.
The net income of EUR 749 million even surpassed our expectations.
Reducing the volatility of results and hence also improving the reliability of dividend payments has been and continues to be one of our central objectives. With a view to achieving this goal, we maintained our risk appetite for property catastrophe risks unchanged despite the increased shareholders’ equity while at the same time further enlarging the proportion of the total portfolio generated by the comparatively less volatile life and health business.
The operating profit (EBIT) amounted to EUR 880 million, corresponding to a highly gratifying EBIT margin of 16.3 percent. Net income after tax was also thoroughly satisfactory at EUR 581 million.
– as the first foreign reinsurer – to qualify as an “Eligible Reinsurer”; the state of New
York followed suit at the beginning of 2011. Thanks to this status we are now able to write our non-life reinsurance business in these US states under significantly improved conditions. In the past, ceding companies were only able to recognise technical reserves ceded to foreign reinsurers as balance sheet relief if collateral for these reserves was posted in the full amount. In the two US states mentioned above this requirement has now been reduced to 20 percent for Hannover Re.
Kingdom, is accounting for an ever-increasing market share of UK annuity business –
Secondly, we significantly stepped up our acceptances of longevity risks from pension funds. Particularly noteworthy is the fact that we were able to act as the largest participating reinsurer in the highest-volume transaction of this type to date. The returns on our longevity business are thoroughly satisfactory overall. In accordance with current IFRS accounting practice, however, only future financial years will be able to significantly profit from this development; this is because the income is only booked after a delay, since the longevity risk builds up over time. Nevertheless, the considerable appeal of this business is already evident now in the substantial value of new business, which recognises all expected future cash flows on a discounted basis.
We again expanded particularly vigorously in China, generating growth of more than 50 percent thanks to our status as a locally licensed reinsurer. Most notable here is that we were the first reinsurer to write liquidity-affecting financing arrangements in
China. These transactions were concluded in consultation with the local regulator.
The results of our life and health reinsurance business in the year under review were similarly highly satisfactory. If the figures for the previous year are adjusted for the already described non-recurring effects, we achieved a substantial increase. Investment income, which was better than expected, was a particularly significant factor
here, while the experience of our biometric risks of mortality and morbidity came in somewhat below expectations. With an operating profit (EBIT) of EUR 284 million we generated an EBIT margin of 6.1 percent; this is within the range of our target return.
Net income after tax was highly satisfactory at around EUR 220 million.
Our investment performance continues to be overshadowed by the low level of interest rates. While this curtailed the investment income, we were able to book gains on the sale of government bonds. During the second half of the year under review – in accordance with our strategic asset allocation – we stepped up investments in corporate bonds as part of our reinvestment activities. We increased the percentage share of this asset class overall, while always paying close attention to the quality of debtors and a broad spread of the risks. What is more, in the third quarter of 2010 we began to move back into listed equity with a limited budget. At the end of the year under review 2.1 percent of our investment portfolio was invested in this asset class – a proportion that we plan to increase moderately during the current year. Thanks not least to the continued highly positive cash flow from operating activities, our portfolio of assets under own management grew by almost EUR 3 billion to more than
EUR 25 billion. This led to a pleasing increase of 8.6 percent in current investment income. All in all, then, we generated income of EUR 943 million from the assets under own management – a performance with which we are thoroughly satisfied.
Even though the trend towards softer markets in non-life reinsurance looks set to continue in the current financial year, we expect to achieve a very good result for 2011.
In life and health reinsurance it is our expectation that the business written in past
years will generate increasing income in 2011. What is more, we continue to assess the prospects for writing new business as good to very good, and we therefore take an optimistic view of the results trend in life and health reinsurance over the medium term as well.
Chairman of the Executive Board f or o u r in ve st or s
Seated from left to right: Jürgen Gräber, ulrich Wallin, andré arrago Standing from left to right: dr. Klaus miller, dr. Wolf Becke, roland vogel, dr. michael Pickel
The stock market environment was broadly favourable in the 2010 financial year, despite considerable volatility and uncertainty among the market players. A brief upswing at the turn of the year very quickly gave way to a sharp correction – triggered by reports of possible sovereign default by Greece and discussions surrounding the solvency of a number of other European countries. From the end of February onwards markets underwent repeated swings – sometimes of a violent nature – in various directions. These lasted several weeks at a time and were fed largely by economic news. The protracted uncertainty prevailing on financial markets prompted further restraint as the third quarter got underway. This was due to growing concern about a possible double-dip recession in the United States. The prospect of a further cut in interest rates and the supply of liquidity by the
Federal Reserve nevertheless served to soothe investors as the weeks passed. Finally, towards the end of the third quarter, the major equity markets also began to recover appreciably.
The performance in the first three months of the year was determined largely by the reporting on the treaty renewals as well as the publication of the year-end results for the 2009 financial year. On the back of the company’s favourable development the price of the Hannover Re share climbed to
Chile and the sinking of the “Deepwater Horizon” drilling rig in the Gulf of Mexico – adversely impacted the share performance in the second quarter. Between June and November the share price then moved in a sideways direction. However, the publication of the figures for the first nine months and the associated raising of the guidance for the full year prompted vigorous price increases – the share reached its highest point of the year on 22 December at EUR 41.38. At the end of the financial year on 31 December 2010 the Hannover Re share was listed at EUR 40.14, an improvement of 22.7% on the previous year-end closing. We thus comfortably outperformed our benchmark, the RBS Global Reinsurance Index, which put on just 14.8%.
EUR 4,840.8 million as at year-end. With a free float market capitalisation of EUR 2,384.6 million our company ranked seventh in the MDAX at the end of December, while our share came in at number 10 in the MDAX according to the criterion
“trading volume over the past twelve months” with a volume of EUR 3,227.7 million. According to both criteria the Hannover Re Group thus ranks among the 50 largest listed companies in Germany.
With a book value per share of EUR 37.39 the Hannover Re share showed a price-to-book (P/B) ratio of 1.1 as at year-end 2010; compared to the average MDAX P/B ratio of 1.9 as at year-end the share is thus very moderately valued. A comparison of the price-to-earnings (P/E) ratios reveals a similar picture, although it makes sense here to base the comparison on the expected earnings for 2011 since the results posted by many MDAX companies in 2010 were still heavily impacted by the economic crisis. Based on current guidance for the 2011 financial year, the P/E ratio for Hannover Re at the turn of the year stood at just 7.4 as against 14.9 for the MDAX.
General Meeting on 3 May 2011 that an amount of EUR 2.30
The Annual General Meeting of Hannover Re in the year under review was held on 4 May 2010 in the Kuppelsaal of Hannover
Most strikingly, the number of roadshow days was almost double that of the previous year. Altogether, we held 22 roadshows and took part in nine investor conferences. On these trips and also by way of separate conference calls and visits to our offices in Hannover we were able to cultivate a personal dialogue in numerous discussions with institutional investors and analysts. Along with the financial centres of New York,
Munich and Zurich in the year under review and added Toronto, Chicago, Los Angeles and Geneva to our itinerary. Investors and analysts had another opportunity for a lively exchange with the Executive Board at our analysts’ conferences, which we again held same-day in Frankfurt and London one day after the press briefing on the annual results. Conference calls for investors and analysts were also held following the publication of the quarterly results and in connection with any exceptional developments.
Annual Report moved up 13 places in the Kirchhoff ranking to number 4 in the MDAX.
Our annual Investors’ Day – the thirteenth time this event has been held – was again well attended by analysts and investors alike in the year under review. The most notable topics covered included the future challenges facing the insurance industry against the backdrop of Solvency II, the significance of
Hannover Re going forward as well as – along with an update on the level of our reserves – the handling of retrocessions within the Hannover Re Group.
Based on the data for the first nine months of 2010, 33 analysts published their opinion at year-end: twelve analysts recommended the Hannover Re share as “buy” or “overweight”; altogether fifteen opinions were a “hold”, making this the most common, while only six “underweight” or “sell” recommendations were handed down.
42.0% Institutional investors 7.8% Private investors shareholding structure by countries (free float)
Market capitalisation at year-end in EUR million 4,840.8 3,944.7 2,713.4 3,804.8 4,230.5
Strategic objectives 1. Profitable growth Return on equity of at least 750 basis points above the
and “A+” from A.M. Best 4. Motivated employees Skills and motivation just as crucial to success as capital resources 5. Lean organisation Effective and efficient organisation geared to business processes; safeguarding of know-how and cost leadership
“Performance Excellence” ensures consistent execution of our strategy. We improve our performance systematically and continuously under all excellence criteria and subject our accomplishments to both internal and external assessments.
Business group strategies non-life reinsurance Not one of the largest, but one of the most profitable non-life reinsurers in the world – special attention paid to the correct assessment of risks – pricing and conditions guided by technical considerations and appropriate level of reserves
The 2010 financial year was a very pleasing one for Hannover Re. We generated vigorous growth and our highest Group net income to date of EUR 749 million. Although our operational business was impacted by a heavy major loss incidence and the sale of our US subsidiary Clarendon Insurance Group, this was more than offset by a special effect associated with the release of provisions for tax proceedings that have now been resolved.
The global economic recovery continued in 2010. Yet after initially vigorous increases in the winter half-year of 2009/2010, the pace of the economic upturn slowed somewhat. The picture varied widely, however, in the individual economic regions and countries. In emerging markets – especially in Asia – the expansion began to flatten out even as the year got underway; by this time, though, growth levels were for the most part already back to those seen in past years. The industrialised nations only began to lose impetus in the middle of the year, although they did not quite manage to regain precrisis levels. Persistent structural problems in the financial and real estate sectors as well as strong pressure to consolidate prevented a swift return to earlier heights.
was exceptionally high, reaching a historic record level among the long-term unemployed. Private consumption, one of the mainsprings of the US economy, was therefore muted, and a sustained return to economic growth failed to materialise.
moved back into growth in the year under review, albeit only to the tune of 2.9%.
The speed of the economic recovery varied widely in the individual member states, however. Export-oriented countries with relatively healthy public finances, such as Germany, the
Netherlands, Finland and Austria, profited from the upswing in world demand. Their growth rate was above-average by
Eurozone standards. The situation in Greece, Ireland, Portugal and Spain was quite different. In response to their borrowing difficulties these countries were obliged to adopt stringent austerity measures, which proved to be a drag on business activity. France, Italy and Belgium, on the other hand, recorded economic growth in line with the Eurozone average. While the employment situation in Germany, Finland and the Netherlands continued to improve, jobless figures elsewhere – including Spain and Ireland – rose sharply.
In Germany the economic upturn continued at a rapid tempo in the year under review. Real gross domestic product grew by 3.6% in the full year. Having been the tailender for many years in the Eurozone, the German economy thus delivered aboveaverage growth contributions to gross domestic product within the area of the single currency. The most significant growth engine in the year under review was the domestic economy.
In Japan the recovery that followed the sharp economic downturn associated with the financial market crisis was sustained.
The pace of growth nevertheless slowed appreciably over the course of the year. This was due in part to the ending of government assistance measures; as a further factor, the economic slowdown in major export markets and the stronger yen led to a decline in exports.
Against the backdrop of the after-effects of the financial and economic crises, the market climate for equities was still characterised by considerable volatility and uncertainty. Among other things, the overextended state of national budgets in several European countries prompted marked fluctuations during the year. Yet despite this volatile climate European equity markets remained relatively stable. The German market, in particular, was able to divorce itself from the broader con-
Owing to the continued expansionary monetary policy in our main currency areas, yields on many government bonds fell to record lows during the year. The yield on ten-year German government bonds declined to 2.1% at one point. These levels were assisted by a monetary policy that remained committed to a strong supply of liquidity as the prescription for combating the economic and financial crisis. Most central banks were a long way away from raising key interest rates. Spreads for bonds in countries on the European periphery increased sharply in light of the historic deficits, however, prompting stronger demand for German government bonds as a secure form of investment.
The international insurance industry has overcome the repercussions of the financial market crisis relatively quickly. It demonstrated its ability to rebuild its capital base – which had been eroded by the crisis – in a relatively short space of time.
The global reinsurance industry remained robust. It was able to absorb a large number of natural disasters, some of which resulted in substantial loss expenditures. One of the challenges facing reinsurers in the year under review, however, was softening rates against the backdrop of an adequate supply of reinsurance capacity. Overall, though, insurance undertakings fared well in the year under review and again proved to be a stabilising factor for the economy.
(EUR 733.7 million) surpassed both our forecast and the record profit reported in the previous year.
We are also highly satisfied with the development of our investments. Thanks to positive cash inflows from the technical account and improvements in fair values, our portfolio of assets under own management grew appreciably to EUR 25.4 billion (EUR 22.5 billion). Despite the overall decline in interest rate levels ordinary income consequently surpassed the comparable figure for the previous year at EUR 880.5 million
– primarily private equity funds. Write-downs of just EUR 0.6 million (EUR 3.2 million) had to be taken on equities, while on fixed-income assets they contracted sharply to EUR 7.9 million
9.3 million) on fixed-income securities written down in previous periods as well as write-ups of EUR 3.0 million (EUR 10.8 million) on alternative investments.
The unrealised losses on our assets recognised at fair value through profit or loss amounted to EUR 39.9 million, as against unrealised gains of EUR 100.6 million in the previous year. The losses derived predominantly (EUR 31.2 million)
from changes in the value of inflation swaps taken out to hedge inflation risks associated with the loss reserves in our technical account. Particularly in light of the attractive market environment for fixed-income securities, we realised amounts of altogether EUR 162.0 million (EUR 113.0 million). In the second half of the year we began to move back into listed equities; our equity allocation at year-end was 2.1%.
Compared to the previous year, we were again able to boost our net investment income from assets under own management – it totalled EUR 942.5 million (EUR 843.6 million) in the financial year just-ended. Net investment income including income on funds withheld and contract deposits amounted to
Demand for reliable reinsurance protection remained strong in the year under review. Premium income consequently grew more vigorously than anticipated: gross premium in total business increased by 11.2% to EUR 11.4 billion (EUR 10.3 billion ). At constant exchange rates – especially against the US
dollar – growth would have come in at 6.8%. The level of retained premium retreated to 90.1% (92.6%). Net premium earned climbed 7.9% to EUR 10.0 billion (EUR 9.3 billion).
13 October 2010 that taxation of foreign sourced investment income recorded by Irish subsidiaries was not permissible, we were able to release provisions that had been constituted in this regard. The core of the legal dispute revolved around the question of whether investment income generated by a reinsurance subsidiary based in Ireland was subject to taxation at the parent company in Germany. The ruling of the BFH confirmed the decision in the first instance of the Lower Saxony
Fiscal Court in Hannover. Against this backdrop, all tax risks were reassessed. This resulted in an increase of altogether
In December 2010 we reached agreement on the sale of all operational companies of our US subsidiary Clarendon Insurance Group, Inc., New York, to the Bermuda-based Enstar
Group Ltd., Hamilton. The transaction, which is still subject to the customary foreign regulatory approvals, is expected to close in the second quarter of 2011. The purchase price of
Clarendon, which has been in run-off since 2005, is equivalent to EUR 162.5 million before final price determination. The sale enables us to reduce material risks for our company, including for example those connected with reinsurance recoverables on unpaid claims. We are also able to eliminate operational risks associated with the run-off of a US primary insurer as well as considerable administrative expenses that would have been incurred in subsequent years. In accordance with IFRS
Our shareholders’ equity excluding minority interests also developed particularly favourably, rising in the year under review from EUR 3.7 billion to EUR 4.5 billion. The policyholders’
surplus increased from EUR 5.6 billion to EUR 7.0 billion. The return on equity for 2010 came in at 18.2%.
In September 2010 we used the relatively low interest rate level to place subordinated hybrid debt of EUR 500 million on the European capital market. The bond, which has a term of 30 years, serves to further optimise our capital structure as well as to back future growth with the necessary capital resources.
We use retrocession, i.e. the passing on of portions of our covered risks to other reinsurers, as a means of risk reduction.
In the course of the year the reinsurance recoverables on unpaid claims – i.e. receivables due to us from our retrocessionaires – decreased to EUR 1.0 billion (EUR 1.7 billion). Of this total reduction, an amount of EUR 0.8 billion results from the sale of Clarendon. We continue to attach considerable importance to the quality of our retrocessionaires: 92.4% of the companies with which we maintain such business relations have an investment grade rating of “BBB” or better from Standard
In the following sections we discuss the development of the financial year on the basis of our two strategic business groups, namely non-life reinsurance and life/health reinsurance. Supplementary to the information provided here, the segmental report contained in the annual financial statement shows the key balance sheet items and profit components broken down into the individual business groups.
Although the major loss situation was certainly tense throughout the year under review, our combined ratio of 98.2% still came in below our targeted maximum level of 100%.
Earnings per share in EUR 4.82 +22.9% 3.92 (1.33) 4.56 3.97 1 Including expenses on funds withheld and contract deposits
Along with traditional retrocession, we again transferred insurance risks to the capital market in the year under review so as to conserve our capital. We increased our “K6” facility, which was launched in 2009, by USD 152 million to the desired volume of more than USD 300 million – specifically USD
Even though the hurricane season in North and Central America again passed off very moderately in the year under review without any expenditures for our account, the major loss situation was exceptionally strained in 2010. Hannover Re’s total net expenditure on catastrophe losses and major claims in the year under review amounted to EUR 661.9 million, compared to EUR 239.7 million in the previous year. It thus surpassed the expected level of EUR 500 million. Against this backdrop, the combined ratio climbed to 98.2% (96.6%).
Along with the aforementioned natural disasters, one loss event in particular attracted worldwide attention in the year under review – namely the sinking of the “Deepwater Horizon ” drilling rig, which caused extensive environmental damage. Particularly with regard to possible liability claims, very many questions remain unanswered; the loss for the insurance industry and hence also for reinsurers is therefore still difficult to assess. The loss reserves of EUR 84.7 million that we set aside in 2010 reflect all the actual and potential exposures for our portfolio from this complex loss event that are known to us at this point in time and, as things currently stand, represent a conservative level of reserving.
(EUR 563.2 million). The operating profit (EBIT) increased by 20.3% to EUR 879.6 million (EUR 731.4 million). Group net income in non-life reinsurance was positively affected to the tune of EUR 112.2 million in 2010 owing to the decision of the
With this in mind, it is our expectation that demand for reinsurance protection will increase. Reinsurance will prove particularly attractive as it serves to reduce the amount of required capital and offers greater contractual flexibility compared to other tools.
The insurance industry in Germany profited from an increase in gross domestic product. Yet after-effects of the financial and economic crisis could also still be felt: the historically low interest rates led to a sharp fall in interest income, which constitutes a key pricing component in long-tail lines such as motor liability and general liability. This prompted almost all providers to review premiums in motor business, which particularly in the last four years had been reduced, and impose sometimes appreciable surcharges. What is more, the losses incurred by property and casualty insurers in Germany climbed by around 2.4% to EUR 43.1 billion. Major factors here were winter storm “Xynthia”, which cost the industry around EUR 500 million, as well as the protracted period of
Breakdown of gross written premium in target markets 47.6% North America 52.4% Germany
frost at the beginning of the year, which resulted in additional claims expenditure of around EUR 400 million for German insurers. The combined ratio for property and casualty insurers consequently increased, especially in the homeowners’
The German market is served within the Hannover Re Group by our subsidiary E+S Rück. As the dedicated reinsurer for the
German market, the company has for decades been a soughtafter partner thanks to its good rating, highly developed customer orientation and the continuity of its business relationships.
E+S Rück is very well positioned in our domestic market and continues to be the number two player in Germany, the second -largest non-life reinsurance market in the world. It ranks first in the reinsurance of motor business.
Industrial fire business fared considerably better than expected in the year under review. We profited from the absence of significant losses in this regard.
The loss situation in the engineering lines was satisfactory overall for our company in 2010, although the insurance of wind turbines has still to turn a profit on account of various serial losses.
The German market recorded a major loss in the year under review in the shape of winter storm “Xynthia”. The impact on
E+S Rück was, if anything, below average at EUR 4 million for net account. A further strain was incurred in connection with a pharmaceutical claim. The combined ratio for our German business improved to 94.0% (103.1%) in the year under review.
We succeeded in cementing our position as one of the leading reinsurers in the profitable German market in the year under review. With our gross premium volume showing modest growth, we are highly satisfied with the development of business on our domestic market in the face of sometimes challenging conditions.
Hannover Re is very well positioned in the United States; we write our business almost exclusively through brokers. It is therefore all the more gratifying to report that in the year under review a survey of US brokers conducted by the Flaspöhler
Research Group crowned us as the best reinsurance company for the fourth time in succession. Ceding companies are of the opinion that our excellent financial standing and our service have continuously improved and they therefore consider it important for all their casualty placements to be submitted to our company.
The establishment of the Federal Insurance Office – as a point of contact on the federal level for foreign agencies and associations – heralds a significant new development in insurance regulation in the United States. We were also pleased that regulators – initially in Florida and at the beginning of 2011 in the state of New York as well – granted Hannover Re the status of “eligible reinsurer”. This enables us to write our business at improved conditions; specifically, our technical reserves no longer need to be collateralised in the full amount, but rather only to a level of 20%. We hope that further US states will follow suit with such an arrangement.
Having been largely spared natural disasters in the last two years and buoyed by the recovery on the capital market, our clients were able to generate healthy profits. As a result, their equity resources have probably improved by around 10%.
Yet the total premium booked by US primary insurers grew only minimally in the year under review by 1%. Competition continued to be very fierce in almost all areas of the insurance business, causing rates to soften appreciably – above all in industrial property business. Rate increases were only recorded under small and mid-sized commercial programmes as well as in retail business.
With a view to further diversifying our portfolio we again scaled back the share attributable to larger cedants in the year under review, while at the same time expanding our business relationships with mid-sized regional players and mutual insurers. This business segment now accounts for 20% of our total portfolio. Altogether, we work with around 500 clients in
Our clients particularly value our extensive product range and our involvement in all lines – provided prices are adequate.
Given that the market environment is still relatively soft, we again chose not to increase our market share in the year under review. However, seeing as considerably more opportunities to participate are open to us than we are able to act on in the prevailing soft market, we should be able to further expand our portfolio in a hard market phase.
All in all, we are satisfied with the development of our business in North America. Gross premium remained stable in the original currency.
R O L A N D V O G E L M I T G L I E D D E S V O R S T A N D S
The best volat i l i ty is no volat i l i ty
Nobody likes sharp fluctuations in results – least of all our investors. Hannover Re has applied profit-stabilising measures to three sensitive points: We have scaled back our underwriting volume for natural catastrophe risks both overall and in peak zones while at the same time extending it in non-peak zones. What is more, growth in other lines has caused the relative weight of catastrophe business within our portfolio to diminish. As a matter of principle, our investment portfolio is very prudently structured. We have categorised significant positions such that they are recognised at cost and hence reduce volatility in the income statement. This new investment strategy will stabilise our returns, thereby smoothing volatility and soothing nerves. Thirdly, we continue to boost the share of life and health reinsurance in our total portfolio. It now generates almost 50% of premiums and around onethird of the operating result (EBIT). Since these earnings are very stable our Group net income will be less volatile in the future.
drilling rig; in addition to the direct loss of the oil platform this caused very extensive environmental damage. Given the uncertainties still surrounding possible liability claims and the complexity of this loss event, it will be years before it is settled.
The combined ratio stood at just 89.5% (78.1%) despite the aforementioned loss expenditure.
Despite partial limitations on flight operations caused by snow chaos and cancellations due to the volcanic ash cloud over
Europe, the economic situation for airlines improved in the year under review. Passenger numbers rose, ultimately with favourable implications for (re)insurers too. The entry into service of the Airbus 380 “super jumbo” served to push up the indemnity limits purchased by airlines.
It was also noticeable that insurers raised their retentions on account of improved capital resources. As a result, the year under review was notable for a number of basic losses, albeit without major repercussions for reinsurers because for the most part they remained within the retention carried by primary insurers. For this reason, and also due to a further rise in reinsurance capacities, the pressure on prices increased as the year under review progressed. Against this backdrop our goal was essentially to maintain our current market shares.
Breakdown of gross written premium in specialty lines 16.3% Aviation 26.9% Structured reinsurance 23.8% Credit/surety 21.3% United Kingdom
Countries with high levels of sovereign debt recorded significantly slower growth, whereas emerging markets – in particular – returned to their strong growth rates. Export-oriented nations such as Germany profited from this development.
The picture in credit reinsurance was a similar one to that in the primary sector: here too claim rates improved markedly.
Reinsurance rates were also very pleasing, rising significantly for 2009 and 2010. From the middle of the year under review onwards rates held stable, only coming under pressure in isolated cases.
All in all, the development of credit and surety reinsurance was satisfactory. The decision to selectively enlarge our portfolio in the challenging crisis year of 2009 proved to be correct: in non-proportional business the portfolio was virtually loss-free. On the proportional side claims rates improved markedly in the credit line, while in surety and political risks business the claims situation was also highly gratifying. Once again, we did not incur any major losses – i.e. losses in excess of EUR 5 million – in the year under review.
We are satisfied with the development of structured reinsurance products, which offer our cedants risk equalisation over time and serve to reduce their capital requirements. Whilst the premium income contracted due to our discontinuation of certain high-volume arrangements, the operating profit nevertheless showed a very pleasing increase.
In keeping with our strategy of regional diversification, we further stepped up our activities in Europe. Yet we were also able to enlarge our client base in Latin America. In the United
States we continue to target smaller and mid-sized companies with our surplus relief contracts. Our business opportunities in Asia are improving as some countries have implemented solvency requirements based on a risk-based capital framework.
We also continue to take the role of investor by ourselves investing in catastrophe bonds. In this context, the natural disasters recorded in 2010 did not cause any losses.
We are satisfied with the business that we write in the United
In the casualty sector we again benefited from our very good rating and were able to expand our portfolio. Although we maintain a small number of long-term participations, we generally pursue a strictly profit-oriented underwriting policy in the London market. Our premium volume grew appreciably in the year under review.
Through two of our subsidiaries, International Insurance Company of Hannover Ltd. (Inter Hannover) in the United Kingdom and the South African company Compass Insurance Ltd., a subsidiary of Hannover Re Africa, we write direct business that complements our principal business activity as a reinsurer. This essentially involves acceptances concentrated on tightly defined portfolios of niche or other non-standard business.
We booked rate increases in the UK in the areas of motor own damage insurance and professional indemnity for lawyers.
North America and the specialty lines. This segment also encompasses worldwide catastrophe business, facultative reinsurance, agricultural risks and Sharia-compliant retakaful business.
The 2010 financial year in France was again notable for intense competition. The rate level continues to be unsatisfactory in some areas, and our primary goal therefore was to maintain the profitability of our portfolio. We were largely successful in accomplishing this aim.
The higher capital requirements anticipated with the advent of Solvency II prompted further mergers and acquisitions among smaller insurers in the year under review. What is more, the more exacting requirements placed on risk management are giving rise to stronger demand for natural catastrophe covers. According to the standards set down by Dutch insurance regulators, companies must now protect themselves against “200-year-events” under catastrophe covers.
After the high frequency of property claims incurred in the previous year, the loss situation in the year under review was moderate. The loss ratio consequently improved.
The primary insurance markets of Central and Eastern Europe, which had been buffeted by the financial and economic crisis, recovered somewhat in the course of the year under review.
Rates in original business nevertheless continued to slide on account of increased competition. It can, however, be assumed that markets in this region will grow at a markedly brisker pace than those in Western Europe. Rates and conditions on the reinsurance side were broadly stable in the year under review and in most cases on a level commensurate with the risks.
The most important Latin American markets for our com pany are Mexico, Argentina, Brazil, Colombia, Venezuela and
albeit in other countries too – was that workers abroad stopped sending money home. In Venezuela the political situation has created a difficult environment for insurers and reinsurers, and we therefore operate very cautiously in this market.
Our goal for 2010 was to boost premium income; we accomplished this in most markets. Within our underwriting policy we placed a greater emphasis on the casualty sector, because rates here tended to be more stable. On the other hand, the importance of industrial business in our portfolio continues to diminish.
The earthquakes in Haiti and Chile in the year under review not only represented two enormous human disasters – the
The insurance sector continues to be fiercely competitive and rates in original business consequently remained relatively stable on a low level in the year under review. Modest rate improvements were, however, recorded under some commercial and industrial fire programmes.
The claims experience in the year under review was moderate, with no major losses recorded. As expected, the premium volume was stable. Overall, we are satisfied with the results of our Japanese business.
Hannover Re’s main markets in Southeast Asia are Malaysia, the Philippines and Indonesia. Our portfolio here, which we further diversified in the year under review, is composed predominantly of property business. Lines such as personal accident, crop and livestock insurance as well as structured reinsurance products were systematically expanded. We also continued to engage in the field of microinsurance in the year under review. These products enable even low-income individuals to purchase insurance protection.
In terms of major losses, the region of Southeast Asia came under strain in 2010. Particularly devastating for the local population were the flood events in Pakistan. What is more, losses also resulted from the political unrest in Thailand. Overall, the major loss expenditure in Southeast Asia remained within the low double-digit million euro range.
The Chinese insurance market again generated strikingly vigorous growth in the year under review. Special reference should be made to the more stringent requirements adopted by the China Insurance Regulatory Commission with respect to the equity resources of insurance companies. Demand for reinsurance solutions that could serve as equity substitutes was therefore marked. Overall, the industry generated a good underwriting result. Similarly, reinsurers generated very healthy growth rates and good results in 2010. Governmentsponsored subsidy programmes have again sharply driven up sales of domestically built motor vehicles. Consequently, further substantial growth in motor insurance – the dominant line in China – was recorded in the year under review.
more importantly given the dominance of proportional business – insurance terms and conditions were maintained largely unchanged.
We are satisfied with the development of our portfolio from the Chinese market.
Australia is growing on account of more exacting capital requirements with respect to the risk capital that has to be kept available.
2010 was a difficult year for catastrophe business around the world; in the first place, a large number of catastrophe losses were recorded, and secondly, the forecast rate reductions for the most part materialised. Following a relatively untroubled major loss experience in 2009 and with primary insurers enjoying an improved capital base, prices for catastrophe covers declined in the year under review. The reductions were particularly marked in the United States. The pressure on rates increased still further during the US mid-year treaty renewals in June and July. Price increases could only be obtained under programmes that had suffered losses.
Our gross premium volume from global catastrophe business increased slightly. The result fell well short of the previous year’s very good performance on account of the heavy loss expenditure. The combined ratio for global catastrophe business came in at 121.3% and was thus significantly higher than in the previous year (31.5%).
Since the coverage of agricultural risks has taken on considerably greater importance in recent years, a steady rise in demand for reinsurance capacities was observed in the year under review. With this in mind, we again significantly boosted our premium volume.
In many countries multi-risk covers attract government subsidies, with the state paying a certain percentage of the applicable insurance premium. This form of subsidy is also tolerated by the World Trade Organisation. In economically underdeveloped countries the state assumes a share of up to 100% in these covers, while in the United States for example the level of subsidy is 50%.
The strains for our account were caused by claims associated with drought conditions in Russia, flood damage in Pakistan and severe rainfall in Mexico.
The year under review passed off very well for our company: despite rising competition we were able to increase our premium volume in casualty business and the engineering lines.
Even though the result of our retakaful business in the year under review fell somewhat short of the previous year’s performance, we are not dissatisfied with its development.
In contrast to obligatory reinsurance, which covers an insurer ’s entire portfolio, a reinsurer underwrites primarily individual risks in facultative business. The general environment for both types of reinsurance in the various markets was, however, for the most part comparable in the year under review.
Here, too, our strategy is to grow only in those areas that we believe offer adequate profitability. As planned, our premium volume in the facultative sector increased considerably in the year under review. We further improved our market position and continue to see considerable potential for profitable growth in facultative reinsurance going forward.
America, the United States and the Middle East; this was also true of Asia, where we are benefiting from our new branch in
Haiti and the loss of the “Deepwater Horizon” drilling rig. Our shares in this case were, however, relatively moderate. The combined ratio in facultative reinsurance stood at 99.4%
As expected, the repercussions of the international financial market crisis continued to reverberate beyond 2009. On the one hand, consumers in many markets showed caution when it came to demand for long-term life insurance products; on the other hand, the persistency of older in-force portfolios deteriorated owing to an increased lapse rate.
Australian disability market we noted an increase in the biometric claim frequencies; in some cases they were significantly higher than the comparative historical values. After detailed analysis of the data it is our assumption that these are temporary phenomena. Despite this sometimes difficult environment, we were again able to generate a highly satisfactory result in our life and health reinsurance business group.
We selectively strengthened our position in our relevant focus markets of the United States, United Kingdom, Germany, Australia and France.
In view of the extremely competitive market climate, we wrote new mortality and critical illness/trauma risks in the UK and
Australian markets only with considerable restraint. In large parts of these markets we no longer consider the reinsurance conditions to be commensurate with the risks.
in the medium term to becoming a relevant market player in the US mortality market with a 10% – 15% share of new business.
What is more, we are expanding activities relating to the reinsurance of sizeable pension funds in the United Kingdom through so-called longevity swaps – under which the reinsurer assumes the biometric risk of longevity associated with a portfolio (normally only the part of the portfolio on which benefits are already being paid) in exchange for payment of a regular fixed premium.
In the second half of 2010 we received requests from a number of international pension funds in Denmark, the Netherlands,
Mumbai, we moved forward with our strategic life cooperation with GIC Re and were able to acquire a number of Indian primary insurers as new clients.
In the Chinese market (Greater China) we are currently represented by three offices: the branch in Hong Kong serves both the market comprised of locally-based life insurers and the regional centres of large multinational insurance groups. It also operates as a regional service centre for East Asia. Our service office in Taipei serves the local Taiwanese market. The
The development of our business in the Islamic insurance sector (takaful), which we write through our subsidiary Hannover
In the year under review we moved a significant step closer towards attaining our longer-term goal of becoming the number three in the worldwide life reinsurance market. Outside the US we already rank third by a wide margin.
Our worldwide activities in the reinsurance of the life, annuity and health lines are brought together under the Hannover
We are able, on the one hand, to selectively tap into attractive business potential in the traditional market through conventional reinsurance offerings, while at the same time working systematically on the development of special product and sales solutions through our four specialist segments. To a significant extent Hannover Life Re is thus able to decouple itself from developments on the standard reinsurance markets.
In many instances Hannover Life Re has been able to operate as a pioneer for new markets and has played a crucial role in shaping the dynamic growth of these markets – our entry into the UK private annuity sector with enhanced annuities in the years 1994/95 may be cited as a well-known example of this approach.
At the present time conventional reinsurance accounts for the lion’s share of our portfolio. In the medium term, however, we anticipate stronger growth from the pillars of new markets and bancassurance; it should therefore be possible to restore the desired long-term balance between conventional reinsurance
We devote particularly close attention to optimal risk diversification – something which is also evident in the relevant risk models under Solvency II. The negative correlation between the biometric components of mortality and longevity plays a special role here.
United Kingdom and Germany; financial solutions provide an additional element of structural diversification.
Die längere Lebens erwartung hat vielen Unternehmen deutlich gemacht, welches Schadenpotenzial in ihren Pensionsleistun­ gen steckt. In Großbritannien haben bei­ spielsweise Pensionsfonds über 1.000 Mrd. GBP an festen Leistungsverpflichtungen – sogenannte Defined Benefits. Garantiert werden solche Leistungen von den ehema­ ligen Arbeitgebern der Pensionäre. Die Hannover Life Re bietet seit mehreren Jahren erfolgreich sogenannte Longevity Swaps an, die das Risiko von Renten­ beständen absichern.
Die Hannover Life Re hat beide Seiten im Blick. Ein Beispiel dafür sind die Enhanced Annuities in Großbritannien, ein Markt­ segment, das mit unserer Unterstützung Mitte der 90er Jahre entstand. Die Idee: Beginnende Leibrenten für angehende Pensionäre werden mit einer medizini­ schen Risikoeinschätzung versehen. Je nach Schwere der Vorerkrankung ergeben sich daraus erheblich höhere Renten. In Deutschland wiederum ist die Pflegever­ sicherung ein wichtiger Markt. Die über 60­Jährigen erkennen darin eine wichtige und notwendige Absicherung ihres exis­ tenziellen Risikos.
In geographical terms, growth impetus in the year under review derived from the United States, United Kingdom, South
Africa, Latin America and East Asia – particularly noteworthy is the rapid growth witnessed in China.
The core of our activities is in the life and annuity lines, which accounted for altogether 87.6% of worldwide premium income in the year under review.
As a general principle, a distinction must be made between the following profit components: • Biometric risks 1: development of the biometric risks of mortality and morbidity, which are reflected in the area of conventional reinsurance and in bancassurance
• Structural risk associated with the persistency of the business in force, which influences the performance of financial solutions
• Investment risk 2: Investment performance of the deposits with ceding companies
Irregularities were observed in the mortality risk in some subsegments of the US portfolio, which – especially in the second half of the year – was impacted by an unusually large number of claims with high sums insured. In total, additional expenditure in the mid-double-digit million euro range was incurred.
The results of the longevity risk, which at the present time we write primarily in the United Kingdom, are inconspicuous and currently in line with our actuarial assumptions.
We subjected the risk associated with the persistency of the business in force – a risk which for our company was particularly evident in financing arrangements in continental Europe for unit-linked products – to a stress test in the year under review. In the case of some clients we noted substantially increased lapse rates in the reinsured portfolios, which have an influence on repayment of the previously provided pre-financing.
The portfolio of assets under own management is invested within the scope of the Hannover Re Group’s investment policy and is thus subject to the usual requirements as regards matching (currency, duration), quality and diversification. In the first half of 2010 we made limited use of developments on capital markets for the tactical realisation of investment income.
To a large extent we do not carry any investment risk with respect to the investments that we deposit with ceding companies under reinsurance contracts financed from premiums; this is because the reinsurer is credited with fixed interest income irrespective of whether or not the primary insurer generates this rate of return.
Net premium incl. premium deposits 6,068.6 –2.2% 6,204.5 4,911.8 3,579.0 3,457.8
life reinsurance portfolio as well as fair value adjustments on reinsurance deposits in the US and UK. The EBIT margin came in at 6.1% and was thus within the bounds of our expectations.
With an average tax ratio of 21.4% and after allowance for minority interests, consolidated net income in life and health reinsurance amounted to EUR 219.6 million (EUR 298.1 million ). This was equivalent to earnings of EUR 1.82 per share.
The low level of interest rates for fixed-income securities, which account for by far the largest share of the assets held by German life insurers, has both short- and long-term implications. In the second half of 2010, for example, a vigorous debate raged among German actuaries – in consultation with the Federal Financial Supervisory Authority (BaFin) – about the level of the future actuarial interest rate, which currently stands at 2.25% per year. While the regulator suggests a reduction to 1.75% per year, the actuaries and the German
Insurance Association take the view that 2.0% constitute an appropriate guaranteed level.
(so-called “Riester” and “Rürup” pensions), which are offered in a number of variants, continue to enjoy broad popularity. Variable annuities, which were heavily pushed by some providers in recent years, have seen a sharp decline, while risk-oriented covers intended for individual provision (such as disability covers) or to provide for surviving dependants
Within the Hannover Re Group the German market is served from Hannover by our subsidiary E+S Rückversicherung AG.
A focus of our activities on the life and annuity side is the customer group consisting of German mutual insurers and those life insurers with a close affinity to product distribution through banks (bancassurance). With a portfolio of more than 40 clients we have achieved a pleasing degree of market penetration and were able in recent years to acquire several new accounts despite a fiercely competitive environment.
In the UK market, which remains Europe’s largest life reinsurance market, we have operated for many years on two levels: our subsidiary HLR United Kingdom in Virginia Water/London handles the conventional reinsurance market with a comprehensive range of services in the areas of underwriting, claims management and administration, while the parent company
Hannover Re in Hannover concentrates on the rapidly expanding longevity segment.
The hallmark of the traditional reinsurance market in the United Kingdom continues to be extremely fierce competition for
The risk experience and investment performance were gratifying, as a consequence of which the operating profit (EBIT)
of EUR 26.7 million surpassed the previous year’s level by 35.6%. The EBIT margin in the year under review stood at 18.4% in relation to the net premium earned of EUR 144.7 million. The result amounted to EUR 19.9 million after allowance for taxes on income.
Since the mid-1990s Home Office in Hannover has taken the lead responsibility for writing private pension business, an area in which we have focused on immediate annuity products for individuals with a reduced life expectancy (enhanced annuities ). This market segment is showing consistent growth, and our clients rank among the leading providers of this type of product.
As lead reinsurer, Hannover Re has a share of almost 50% in this transaction. On this basis we are able to generate a premium in the order of EUR 89.8 million. In addition, we wrote a number of smaller transactions of this type in the second half of 2010.
to EUR 12.6 million (EUR 7.9 million); profitability was also thoroughly satisfactory.
Responsibility for our client relationships in this region traditionally rests with our service offices in Milan and Madrid; we concentrate here on conventional risk-oriented covers, which are complemented by reinsurance solutions with financing characteristics.
Our Stockholm branch is responsible for relations with ceding companies in the Scandinavian markets – including the three
EUR 5 million mark for the first time and results were satisfactory.
US business was also increased to USD 10 million. These efforts proved successful in numerous instances, and for many sizeable US primary insurers HLR America thus ranks for the first time among the group of obligatory life reinsurers. The market share for new business is in the range of 4% – 5%; we consider our goal of obtaining a market share of at least 10%
US senior health market owing to the uncertainties in connection with health reform in the United States. We continue to be active in the area of group covers.
1,090.7 million (EUR 1,020.6 million), of which EUR 266.6 million was retained for own account. The risk experience for own account and the investment income were in line with expectations, enabling us to post an operating profit of EUR
This company’s business developed favourably. The written premium amounted to EUR 155.8 million (EUR 113.2 million), of which EUR 146.8 million was retained for own account. The operating profit came in at EUR 15.5 million (EUR 15.9 million ), corresponding to an EBIT margin of 10.5%. The company ’s net income after tax is identical to the operating profit.
In addition, we have developed special expertise for alternative distribution channels in South Africa, most notably direct sales and Internet sales. It is our expectation that not only in
America is on bancassurers. We moved forward with our strategic cooperation in Brazil with Malucelli Re.
Within the Hannover Life Re network the major growth region of Asia is served by a number of branches and service offices of Hannover Re. In this context the life branches in
Business in the entire East Asian region is growing at a very dynamic pace. Particularly in China, we were able to extend our position as one of the two leading foreign life reinsurers.
A groundbreaking development occurred in this regard in the first half of 2010 with the first-ever completion of a financing arrangement for the in-force portfolio of a mid-sized primary insurer in the local currency – a transaction that we executed in close cooperation with and with the explicit consent of the
Both these markets are served by our Sydney-based subsidiary HLR Australasia, which we acquired in 1993. The company writes traditional risk-oriented business from Australia and New Zealand, with an emphasis on mortality and critical illness covers as well as disability annuity business.
In addition, in the role of primary insurer, we assume the biometric risks of Australian funds for occupational retirement provision (superannuation funds) and cooperate with a major
Although the Australian reinsurance market showed scarcely any growth potential, HLR Australasia succeeded in significantly expanding its business volume overall. Premium income rose to EUR 324.4 million after EUR 251.3 million in the previous year, due in part to the strength of the Australian dollar against the euro.
The highly unsatisfactory biometric risk experience in some areas was largely cushioned by quota share retrocessions, leaving an attractive operating profit of EUR 23.7 million for the net retention. This was equivalent to an EBIT margin of 15.4%.
The return on ten-year US treasury bonds fell from 3.8% to 3.3% in the course of the year. A comparable trend was also observed for German government bonds, with the decrease from 3.4% to 3.0% in this case only marginally more moderate. The risk premiums on government bonds from a small number of European countries rose in some instances substantially during the year, leading to a patchy and volatile yield environment in Europe.
Having begun to move back into listed equities in the third quarter of the year, we have already been able to profit from the pleasing market trend in most areas since then – as reflected in an increase of EUR 30.2 million in fair values.
With these goals in mind we engage in active risk management on the basis of balanced risk/return analyses. In this context we observe centrally implemented investment guidelines and are guided by the insights of dynamic financial ana lysis. These measures are intended to safeguard the generation of an appropriate level of return while at the same time staying within our clearly defined risk appetite. In so doing, it must be ensured that we are able to meet our payment obligations at all times.
Thanks to a positive cash flow from the technical account and the investments, and assisted by the development of our fixedincome investments, our portfolio of assets under own management grew to EUR 25.4 billion (EUR 22.5 billion).
Breakdown of investments 84.2% Fixed-income securities 2.1% Equities 1.9% Private equity 7.9% Short-term investments and cash 2.0% Other 1.9% Real estate investments in EUR million
Self-managed assets Funds withheld and contract deposits 1 Adjusted on the basis of IAS 8
M an ag em en t re p or tinvestment performance
Thanks to increased fair values, these write-downs contrasted with write-ups of EUR 24.1 million (EUR 9.3 million) on fixedincome securities and funds that had been written down in prior periods. The attractive market climate enabled us to realise net gains of EUR 162.0 million (EUR 113.0 million) on disposals. Unrealised losses on our asset holdings measured at fair value through profit or loss amounted to EUR 39.9 million, contrasting with an unrealised gain of EUR 100.6 million in the previous year. The bulk of this amount (EUR 31.2 million ) derived from the performance of inflation swaps taken out to hedge inflation risks associated with the loss reserves in our technical account. The balance of our deposit interest and expenses was sharply higher at EUR 316.4 million (EUR
The portfolio of fixed-income securities excluding short-term investments climbed again to EUR 21.4 billion (EUR 19.7 billion ), principally due to inflows of cash from the technical account and the market development. New investments were made predominantly in corporate bonds and public-sector covered bonds (Pfandbriefe) as well as asset-backed securities. Hidden reserves for available-for-sale fixed-income securities recognised in shareholders’ equity totalled EUR 268.4 million (EUR 252.3 million). The spread of asset classes shifted as planned towards corporate bonds, while the share of net investment income Figures in EUR million
Net investment income from assets under own management 942.5 +11.7% 843.6 78.9 901.6 967.0
Net investment income from funds withheld 316.4 +14.3% 276.8 199.6 220.1 221.9 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
government and semi-government bonds was reduced. The quality of the bonds – measured in terms of rating categories
– was maintained on a consistently high level. The proportion of securities rated “A” or better stood at 91.0% (91.7%) in the year under review.
We held a total amount of EUR 2.0 billion (EUR 1.8 billion) in short-term assets and current assets at the end of the year under review. Funds withheld by ceding companies amounted to EUR 12.6 billion (EUR 10.8 billion).
Re as a very good employer. Compared to the level in 2007
The Hannover Re Group employed 2,192 (2,069) staff as at 31 December 2010. The turnover ratio at Home Office in Hannover of 1.9% was lower than in the previous year (2.3%).
For many years Hannover Re has been offering a practicetested trainee programme focused on graduates in economics
law as well as graduates in cultural studies. The purpose of this cross-divisional programme is to systematically train young talents for our core business, namely underwriting.
Hannover Re in a highly structured manner. We offer this programme for both of our business groups, i.e. life and health reinsurance and non-life reinsurance; what is more, participants also experience the areas of risk management and quotation, Hannover Re Advanced Solutions Germany and the
Insurance-Linked Securities unit. In some instances trainees are already able to participate in projects, but they also familiarise themselves with line functions from the ground up.
Along with internal opportunities for further training, including for example language courses, programme participants are able to begin studying towards certification as an actuary
DAV just a year after entry. Ideally, their final placement is at one of our locations abroad.
We are delighted that the first trainees will soon have completed their programme and will be able to go on to assume stimulating tasks within our company.
Going forward, Hannover Re intends to continue recruiting trainees not only for reinsurance business but also in the field of mathematics. In this way, dedicated graduates have the chance to familiarise themselves with reinsurance business from many different perspectives – and eighteen months later
Nothing is as constant as change: what was true of Heraclitus of Ephesus roughly 2,500 years ago is just as true of our internal training. We know the value attached to solid and stateof -the-art internal training. For this reason, we have continuously expanded and enhanced this system in recent years. The positive feedback received from our staff testifies to its quality.
In 2010 we again dedicated ourselves to this topic. On the one hand, we were driven by the latest areas of knowledge, where the task was to provide more in-depth training within the company (e.g. Solvency II), while at the same time we also seek to rise to the challenges posed by new forms of learning. To date, so-called presence seminars (i.e. training activities offered by experienced members of staff or outside trainers) have formed the backbone of our internal (specialist) training programme; now, however, we have begun to add a second pillar of learning methodology known as “blended learning”. This refers to a learning arrangement in which online study phases and presence training are intelligently combined and synthesised into a single unit. Learning thus becomes more self-manageable and, not least, more independent of time and space, enabling us to integrate colleagues at our locations abroad more easily.
S I L K E S E H M M A N A G I N G D I R E C T O R
H A N N O V E R R E A D V A N C E D S O L U T I O N S
Was die europäische Solvenzregelung mit sich bringen wird und schon gebracht hat (!), verlangt nach innovativen und maß­ geschneiderten Lösungen. Zum einen, was die Vola tilität des Geschäfts der Erstver­ sicherer angeht, zum anderen, was den Schutz der Bilanz und insbesondere die Deckung des versicherungstechnischen Risikos betrifft. Solvency II macht den Nut­ zen und Mehrwert von Rückversicherung sichtbarer und messbarer. Aus Faktoren wie Volatilität, Exponierung bezüglich Katastrophenrisiken oder Prämien­ und Reservevolumen wird sich der Erstver­ sicherer seinen Kapitalbedarf berechnen. Die Hannover Rück bietet sich als Partner an, der auf diese Aufgabenstellungen bes­ tens vorbereitet ist.
Die erweiterte Produktpalette an Rück ver­ sicherung, die von Solvency II gefordert wird, ist bei uns in der „strukturierten Rückversicherung“ schon angelegt. Der profil genaue Kapitalschutz des Erstver­ sicherers, für den die Hannover Rück ihre „Advanced Solutions“ bietet, entspricht dabei der Grundidee von Solvency II, einer risiko gerechteren Deckung.
Despite its long run-up Solvency II has the potential to be a success story. Uniform solvency rules will apply to the European insurance industry from the beginning of 2013 onwards.
We conducted a survey of our entire workforce for the fifth time in the year under review. Of the 998 staff contacted, 834 took part in the survey. The response rate of 84% is very pleasing and represents another appreciable improvement on the level of participation in 2007 (76%).
The Executive Board would like to thank all employees for their dedication in the past year. At all times the workforce identified with the company’s objectives and purposefully pursued them. We would also like to express our appreciation to the representatives of staff and senior management who participated in our co-determination bodies for their critical yet always constructive cooperation.
As a company based in Germany, the formal framework that shapes our corporate governance is determined by German law. With few exceptions Hannover Re fulfils all the recommendations of the German Corporate Governance Code. What is more, our Code of Conduct – which we adopted Group-wide in 2003 – serves as a further guide for our day-to-day activities.
M an ag em en t re p or t social commitment
Hannover Re’s commitment as a sponsor of learning, art, culture and social projects dates back to its founding in 1966.
Essentially, our social involvement can be subdivided into four areas: sponsorship, foundation support, donations and assistance with words and deeds. The latter encompasses the voluntary activities performed by our staff as well as their passing on of know-how at our various locations worldwide.
Hannover Re already maintains long-standing partnerships with different areas of society in the role of sponsor. Particularly close to our heart are support for research and learning as well as music and art.
Since 2009 Hannover Re has also supported the Global Earthquake Model (GEM) project initiated by the OECD with financial backing of altogether EUR 1 million. The model, which should be developed by 2013, is intended among other things to help local authorities in earthquake-exposed zones to draw up more efficient contingency plans and, if disaster strikes, to facilitate the more rapid delivery of aid.
In 1991 Hannover Re launched an art foundation that benefits the Sprengel Museum in Hannover. It was launched in 1991 to mark the company’s twenty-fifth anniversary. The Sprengel
Museum ranks among the foremost German museums of twentieth-century art thanks to its extensive collection and diverse range of temporary exhibitions. The Foundation’s mission is to promote Hannover as a centre for the fine arts through the acquisition of contemporary pieces, which are then made available to the Sprengel Museum on permanent loan. The Foundation is further tasked with financing publications and events to accompany the exhibitions.
In the year under review Hannover Re adopted a new Donations Guideline, under which the company donates a total of
EUR 100,000 per year in support of various projects; the funds are shared equally between the following categories: • social and scientific causes,
The basic idea underlying this project is to combine economic profit with ecological benefit through preventive environmental protection. The energy-saving successes already achieved are regularly publicised in the relevant project publications.
Hannover Re is playing its part in efforts to accomplish the state capital’s goal of cutting climate-threatening greenhouse gas emissions to levels 40% lower than in 1990 by the year 2020. Hannover Re’s specific contributions will be regularly checked every two years from 2011 onwards.
Through its products Hannover Re plays a general part in enabling many people around the world to enjoy insurance protection. Only thanks to internationally operating reinsurers are primary insurers even able to protect people against potential major losses – such as earthquakes – in exposed regions. Going forward, Hannover Re will dedicate itself with even greater vigour to ensuring that especially the poorest population groups are able to protect themselves by buying so-called micro-insurance products. Furthermore, we intend to increasingly add to our portfolio insurance products that systematically promote some aspect of sustainability. With this in mind, we launched the “Energy Savings Warranty” programme on the market in the year under review. The new insurance product is designed to give US homeowners incentives to invest in energy-saving technologies and energyefficient construction methods. The programme provides an insurance backstop for energy saving guarantees given by
Waste (in kg) 297,000 327,000 no data no data no data
The corporate strategy and risk strategy as well as the guidelines derived from them are subject to regular review. Through this scrutiny of our assumptions and any resulting adjustments, we ensure that our guidelines and hence the principles on which our actions are based are always kept up-to-date.
The overriding goal of our risk management is to adhere to the strategically defined risk positions of the Hannover Re
Group which are enshrined in our risk strategy. In order to ensure that our shareholders’ equity is protected, we seek to manage and control individual risks such that the total risk remains within the permissible defined tolerances. Divergences may occur as a result of external influencing factors, and the company must always be in a position to immediately initiate appropriate countermeasures. We attach central importance to the following aspects: • Regular review of the efficiency of systems and, as appropriate, adjustment to the business environment and/or the changed risk situation
Central guidelines: investments, exposure management, central underwriting guidelines (non-life and life/health reinsurance) …
Local guidelines: e.g. local underwriting guidelines, signature rules, local contingency plans, deputising arrangements
• Reporting to the Risk Committee and the Executive Board that is counterparty-oriented and encompasses all the various types of risk
• Good financial strength and risk management ratings from the rating agencies of greatest relevance to our company
A.M. Best is “A” (“Excellent”, positive outlook). Hannover Re’s risk management is assessed by Standard & Poor’s as “strong”, the second-best S&P rating. This evaluation testifies to the quality of our holistic approach to risk management.
The interplay of the individual functions and bodies within the overall system is vital to an efficient risk management system.
Hannover Re has developed an internal capital model for risk quantification as a central risk management tool. The purpose of risk quantification inter alia is to assess the capital resources of the Hannover Re Group and its individual companies. In addition, the model is used to establish the risk contribution made by individual business groups and business segments to the total company risk as well as the risk-appropriate allocation of the cost of capital.
Executive Board • Overall responsibility for Group-wide risk management • Responsibility for the proper functioning of risk management • Definition of the risk strategy • Appointment of the Chief Risk Officer and the members of the Risk Committee • Release and approval of new products and new business areas
Chief Risk Officer Process-integrated monitoring • Responsibility for holistic risk monitoring across business groups (systematic identification and assessment, control/monitoring and reporting) of all material assets- and liabilities-side risks from the Group perspective
Process-integrated monitoring • Holistic risk monitoring across business groups (identification, assessment, monitoring and reporting of all material assets- and liabilities-side risks from the company perspective)
Board • The key aspects of the auditing tasks performed by the internal auditing function are based upon the Rules of Procedure and department strategy approved by the Executive Board 1 Treaty departments and service departments in the non-life and life/health reinsurance business groups as well as the investments sector
The model draws on statistical, stochastic and actuarial methods and practices in order to ensure the most realistic possible representation of the company and its environment. The risk capital is calculated on the basis of a Value at Risk (VaR) with a confidence level of 99.97% and an observation period of one year. This level of confidence also ensures that future regulatory capital requirements, e.g. the confidence level of 99.5% required under Solvency II, are satisfied or exceeded.
The required risk capital of the Hannover Re Group in connection with business-related risks increased in the year under review by EUR 792.1 million to EUR 5,410.6 million. This increase was attributable principally to the regrouping of investments into a higher-risk portfolio and the growth in the volume of assets due to a positive cash flow. We successively raised our equity allocation in 2010 and moved investments out of government bonds into corporate bonds. The slight increase in the underwriting risks reflects the enlarged business volume in the non-life and life/health reinsurance business groups. The increased credit risk can also be attributed to the larger business volume, above all in life and health reinsurance, since the value of accounts receivable from ceding companies has risen.
Available capital and required risk capital1 in EUR million 2010 20092
2 Adjusted on the basis of IAS 8 1 Adjusted on the basis of IAS 8
The available economic capital grew by EUR 1,055.5 million from EUR 7,326.2 million to EUR 8,381.7 million in the course of the year under review. This was principally due to the rise in the IFRS shareholders’ equity. Our hybrid bond issued in the year under review also increased the available capital.
Of special significance to our company is the overarching diversification between our business segments and lines. As a result, we are able to significantly reduce the total capital actually required. We define the cost of capital to be generated per business unit according to the capital required by our business segments and lines as well as their contribution to diversification.
Our qualitative methods and practices support our internal risk management and control system. The system is subject to a constant cycle of planning, action, control and improvement.
Guideline on the Internal Control System (ICS). The purpose of this set of rules is to ensure systematic execution of our corporate strategy with a special eye to capital protection. In accordance with these principles, the Framework Guideline puts in place a consistent understanding of controls as well as a uniform procedure and standards for implementation of the
The Framework Guideline defines concepts, stipulates responsibilities and provides a guide for the description of controls.
Diversification effect within the non-life reinsurance business group Risk capital per line of business for the 99.5% VaR in EUR million 55.8% diversification
The risk landscape of Hannover Re encompasses technical risks, market risks, credit risks, operational risks and other risks. The specific risk characteristics and the principal monitoring and steering mechanisms are described in the following sections.
risk of under-reserving losses and the associated strain on the underwriting result. In order to counter this risk we calculate our loss reserves based on our own actuarial loss estimations; where necessary we also establish additional reserves supplementary to those posted by our cedants as well as an IBNR
Liability claims are a key influencing factor for the IBNR reserve. The IBNR reserve is calculated on a differentiated basis according to risk categories and regions. The IBNR reserve established by the Hannover Re Group amounted to EUR
The table below lists the catastrophe losses and major claims that occurred in the 2010 financial year.
For the purposes of risk limitation, maximum underwriting limits (capacities) are stipulated for various extreme loss scenarios and return periods in light of profitability criteria. Adherence to these limits is continuously verified by Group Risk
Management. The Risk Committee, the Executive Board and the body responsible for steering non-life reinsurance are kept regularly updated on the degree of capacity utilisation. The limits and thresholds for the 100-year and 200-year aggregate loss as well as the utilisation thereof are set out in the table on the following page.
As part of our holistic approach to risk management across business groups, we take into account numerous relevant scenarios and extreme scenarios, determine their effect on portfolio and performance data, evaluate them in relation to the planned figures and identify alternative courses of action.
Flooding in Southern Thailand 30 October – 2 November 6.7 6.7
Windstorm and rain in the United States 30 April – 4 May 6.5 3.9
Thunderstorm in Stuttgart, Germany 4 July 6.0 3.9 1 Natural catastrophes and other major claims > EUR 5 million gross
The development of the combined ratio in non-life reinsurance is shown in the table below.
All risks directly connected with the life of an insured person are referred to as biometric risks (especially the miscalculation of mortality, life expectancy, morbidity and occupational disability ); they constitute material risks for our company in the area of life and health reinsurance. Counterparty, lapse and catastrophe risks are also material since we additionally prefinance our cedants’ new business acquisition costs. As in non-life reinsurance, the reserves are essentially calculated according to information provided by our clients and are also determined on the basis of secure biometric actuarial bases.
Through our quality assurance measures we ensure that the reserves established by ceding companies in accordance with local accounting principles satisfy all requirements with respect to the calculation methods used and assumptions made
(e.g. use of mortality and morbidity tables, assumptions regarding the lapse rate). New business is written in all regions in compliance with underwriting guidelines applicable worldwide, which set out detailed rules governing the type, quality, level and origin of risks. These global guidelines are revised annually and approved by the Executive Board. Special underwriting guidelines give due consideration to the particular features of individual markets.
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 owing to the structure of the contracts. The actuarial reports and documentation required by local regulators ensure that regular scrutiny also takes place on the level of the subsidiaries.
The Market Consistent Embedded Value (MCEV) is a ratio used for the valuation of life insurance and reinsurance business; it is calculated as the present value of the future shareholders ’ earnings from the worldwide life and health reinsurance portfolio plus the allocated capital. The calculation makes allowance as far as possible for all risks underlying the covered business. The Market Consistent Embedded Value is established on the basis of the principles of the CFO Forum published in October 2009. Based on the latest available data
Combined ratio (non-life reinsurance) 98.2 96.6 1 Incl. financial reinsurance and specialty insurance 2 Based on US GAAP figures 3 Natural catastrophes and other man-made major losses > EUR 5 million gross for the share of the Hannover Re Group as a percentage of net premium earned stress tests for natural catastrophes after retrocessions in EUR million 2010 2009 effect on forecast net income 100-year loss European windstorm (146,5) (114,7)
M an ag em en t re p or t published on 4 May 2010 (valid as of 31 December 2009), the table shows the MCEV 2009 and its sensitivity to selected scenarios in comparison with the corresponding sensitivities of the MCEV 2008.
MCEV for the 2010 financial year on our Internet website at the same time as the quarterly report for the first quarter of
Hannover Re Group. It is based on time series of selected representative market parameters (equity prices, yield curves, spread curves, exchange rates, commodity prices and macroeconomic variables). All correlations between these time series are reduced by analysis to a sensible number of main components. All asset positions are mapped on the level of individual positions through the APT model, i.e. the market price risks of all individual positions are reduced through mathematical operations to the market price risk factors of the model. Residual risks (e.g. market price risks that are not directly explained by the multi-factor model) can be determined through back-calculation and are accommodated in the overall calculation on the supposition of non-correlation.
1 More extensive information is provided in the MCEV reports published on our website. The presentation is based on the principles for publication of the MCEV defined by the CFO Forum. The CFO Forum is an international organisation of Chief Financial Officers from major insurance and reinsurance enterprises.
2 Before consolidation, excluding minority interests sensitivity analysis of the Market Consistent embedded value (MCev)1,2
Stress tests are conducted in order to be able to map extreme scenarios as well as normal market scenarios for the purpose of calculating the Value at Risk. In this context, the loss potentials for fair values and shareholders’ equity (before tax) are simulated on the basis of already occurred or notional extreme value at Risk1 for the investment portfolio of the Hannover Re Group in %
Utilisation by Hannover Re Warning level 1 Warning level 2 Warning level 3 utilisation of the trigger system in %
Currency risks are especially relevant if there is a currency imbalance between the technical liabilities and the assets.
A detailed presentation of the currency spread of our investments is provided in Section 5.1, “Investments under own management”.
M an ag em en t re p or t events. Further significant risk management tools – along with various stress tests used to estimate the loss potential under extreme market conditions – include sensitivity and duration analyses and our asset/liability management (ALM). The internal capital model provides us with quantitative support for the investment strategy as well as a broad diversity of VaR calculations. In addition, tightly defined tactical duration ranges are in place, within which the portfolio can be positioned opportunistically according to market expectations. The parameters for these ranges are directly linked to our calculated risk-bearing capacity.
Share price risks derive from the possibility of unfavourable changes in the value of equities, equity derivatives or equity index derivatives held in the portfolio. In the second half of the year under review we began to invest again in listed equities. The scenarios for changes in equity prices consequently have implications again for our portfolio. We spread the risks through systematic diversification. Please see also our comments in Section 5.1 of the notes, “Investments under own management”.
We use derivative financial instruments to a very limited extent. The primary purpose of such financial instruments is to hedge against potentially adverse situations on capital markets. In the year under review we took out inflation swaps to hedge part of the inflation risks associated with the loss reserves in our technical account. In addition, as in the previous year, a modest portion of our cash flows from the insurance business was hedged using forward exchange transactions.
The contracts are concluded solely with first-class counterparties and exposures are controlled in accordance with the restrictive parameters set out in the investment guidelines so as to avoid risks – especially credit risks – associated with the use of such transactions.
The credit risk consists primarily of the risk of complete or partial failure of the counterparty and the associated default on payment. Also significant here is the so-called migration risk, which results from a deterioration in the counterparty credit quality and is reflected in a change in fair value. Since the business that we accept is not always fully retained, but instead portions are retroceded as necessary, the credit risk is also material for our company in non-life reinsurance. Our retrocession partners are carefully selected and monitored in light of credit considerations in order to keep the risk as small as possible. This is also true of our broker relationships, under which risks may occur inter alia through the loss of the premium paid by the cedant to the broker or through double payments of claims. We minimise these risks, inter alia, by reviewing all broker relationships once a year with an eye to criteria such as the existence of professional indemnity insurance, payment performance and proper contract implementation. A Security Committee continuously monitors the credit status of retrocessionaires and approves measures where necessary to secure receivables that appear to be at risk of default. This process is supported by our “Cession Limits” Webbased risk management application, which specifies cession limits for the individual retrocessionaires participating in protection cover programmes and determines the capacities still available for short-, medium- and long-term business (cession management). Depending on the type and expected run-off duration of the reinsured business, the selection of reinsurers takes into account not only the minimum ratings of the rating agencies Standard & Poor’s and A. M. Best but also internal and external expert assessments (e.g. market information from brokers). Overall, retrocessions conserve our capital, stabilise and optimise our results and enable us to act on opportunities without restriction, e.g. following a catastrophe loss event. Regular visits to our retrocessionaires give us a reliable overview of the market and put us in a position to respond quickly to capacity changes. Through these close contacts with our retrocessionaires we are consistently able to provide a stable renewals forecast. The determination of our gross capacity is based on this forecast. Our assumptions are continuously updated during each renewal phase and also include a built-in safety margin. Not only that, additional capacities are kept available for potential defaults – although they are not normally required. The table on the following page shows how the proportion of assumed risks that we do not retrocede (i.e. that we run in our retention) has changed in recent years.
The key ratios for management of our bad debt risk are as follows: • 92.4% of our retrocessionaires have an investment grade rating (“AAA” to “BBB”),
• Since 2006 we have reduced the level of recoverables by altogether 66%.
• 31.7% 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.
The chart shows the development of our reinsurance recoverables – split by rating quality – due from our retrocessionaires. The decrease in the 2010 financial year was largely due to the balance sheet reclassification of the Clarendon Group as held for sale.
timely reporting to the persons involved within the scope of risk management.
1 (Shareholders‘ equity + minority interests + hybrid capital)/net written premium 2 Hybrid capital/(shareholders‘ equity + minority interests)
on these holdings. There is no risk of default here on account of bailout mechanisms existing on the European level (Eurozone safety net).
On a fair value basis EUR 3,097.5 million of the corporate bonds held by our company were issued by entities in the financial sector. Of this amount, EUR 2,648.0 million was attributable to banks. The vast majority of these bank bonds
(almost 91.3%) are rated “A” or better. Our investment portfolio under own management does not contain any directly written credit derivatives.
Core elements of risk management – for example with an eye to business interruptions and the failure of technical systems
– are our contingency plans. These are designed to ensure the continuity of mission-critical enterprise processes and systems (recovery plans, back-up computer centre). The flexible working model of alternating telecommuting adopted by Hannover Re is, among other things, also a risk-minimising measure inasmuch as alternative workplaces and the requisite infrastructure are kept available on a decentralised basis. At the same time, we are thus able to offer the possibility of a healthy work/family balance. An important element of our human resources management policy, teleworking also reduces the risk of potentially losing key personnel by facilitating an attractive working environment.
As far as possibly unlawful or unauthorised acts are concerned, we enable our staff and partners to report serious breaches of the law pertaining to Hannover Re anonymously through our electronic whistleblower system. The information provided is brought to the attention of Hannover Re’s Compliance Office so that it can investigate potentially suspicious circumstances. All tips are handled in the strictest confidence.
Corporate bonds Covered bonds/assetbacked securities in % in EUR million in % in EUR million in % in EUR million in % in EUR million 1 Securities held through investment funds are recognised pro rata with their corresponding individual ratings
A good corporate reputation is an indispensable prerequisite for our core business as a reinsurer. It often takes decades to build up a positive reputation, yet this reputation can be damaged or even destroyed within a very brief space of time. Management of this risk is made possible by our set communication channels, a professional approach to corporate communications, tried and tested processes for defined crisis scenarios as well as our established Code of Conduct.
The above remarks describe the diverse spectrum of risks to which we, as an internationally operating reinsurance company, are exposed as well as the steps taken to manage and monitor them. The specified risks can potentially have a significant impact on our assets, financial position and net income. Yet consideration solely of the risk aspect does not fit our holistic conception of risk, since risks always go hand-inhand with opportunities. Our effective management and monitoring tools as well as our organisational and operational structures ensure that we are able to identify our risks in a timely manner and maximise our opportunities. For additional information on the opportunities and risks associated with our business please see the Forecast contained in the management report.
The implementation of Solvency II effective 1 January 2013 will, among other things, place more exacting regulatory demands on risk management. Hannover Re has long adopted a risk-based and value-based management approach of the type which regulators will then require. We began to make our preparations for the requirements of Solvency II at an early stage: this includes participation in all Quantitative Impact
Studies (QIS) and entering the pre-application phase for approval of an internal capital model. We see Solvency II as an opportunity for the convergence of international regulatory and internal corporate approaches.
In the previous year we reported that, contrary to a very clear opinion expressed by tax attorneys, the revenue authority was of the view that not inconsiderable investment income generated by the Hannover Re Group’s reinsurance subsidiaries domiciled in Ireland was subject to taxation of foreign sourced income at the parent companies in Germany on the basis of the provisions of the Foreign Transactions Tax Act. Insofar as tax assessments to this effect had already been received, appeals were filed – also with respect to the amounts already recognised as a tax expense. After our opinion had been confirmed in full by the court of the first instance in 2009, we regarded as slight the risk that tax assessments containing taxation of foreign sourced investment income generated by
In October 2010 the Federal Fiscal Court (BFH) subsequently confirmed the lower-court decision. In the first quarter of 2011 we received amended tax assessments from the revenue authority for some years; further amended tax assessments have been announced.
Based on our currently available insights arrived at from a holistic analysis of the risk situation, the Executive Board of
Hannover Re cannot at present discern any risks that could jeopardise the continued existence of our company in the short or medium term or have a material and lasting effect on our assets, financial position or net income.
In order to achieve this objective we have developed tools that enable us, on the one hand, to measure in light of value-based considerations how close we are to accomplishing our objective and, on the other, to break down the goals and value contributions to the level of individual profit centres.
With the aid of IVC it is possible to compare the value contributions of the Group as a whole, its two business groups and the individual operational units. This enables us to reliably identify value creators and value destroyers. In this way, we can
system of value-based management: Performance excellence (Pe) combines the strategic and operational levels 1 All managers of the Hannover Re Group worldwide come together once a year at the Global Management Forum (GMF) to define strategic orientations. The parameters developed here serve as the basis for the subsequent planning process.
P la n n in g p ro ce ss executive Board retreat/GMF1
The targets that emerge out of the planning process are integrated into the individual agreements on objectives with managers. When it comes to the definition of objectives, the participants take into account not only profit-oriented but also non-financial variables derived from the activity planning.
The annual Management Reporting presents in detail the attainment of targets for each individual operational unit and for the Group as a whole. On this basis appropriate performance controlling is carried out, potential scope for improvement and refinement is identified and performance-oriented remuneration components defined in the context of Management by
Value Creation): Adjusted operating profit (EBIT) − (capital allocated x weighted cost of capital) = IVC
Checks as well as Activity Planning) is used by the treaty departments and service units to develop – making allowance for the strategic parameters – detailed strategies and activity plans. These central documents also serve as a basis for the planning cycle – both for the operational planning and for the planning of resources and costs. The PE Check is carried out annually as part of the strategic discussions conducted by individual units.
5 The MCEV as at 31 December 2010 will be published on our website at the same time as the quarterly financial report for the first quarter of 2011.
7 Risk-free interest rate + cost of capital 8 750 basis points above the risk-free return 9 Excluding tax effect targets until 2010
Increase in the value of new business ≥ 10% n. a.5 (44.2%) 41.4% 65.7% (24.2%)6
Growth in earnings per share ≥ 10% 2.1% > 100% (117.6%) 8.3%9 > 100%
Growth in book value per share ≥ 10% 21.4% 31.2% (15.5%) 15.6% 11.4%
The adjusted operating profit (EBIT) consists of the recognised Group net income after tax and the change in the balancing items for differences between economic present values and amounts stated in the balance sheet (one adjustment for non-life and one for life/health reinsurance). In addition, the interest on hybrid capital, minority interest in profit and loss and extraordinary gains and losses are eliminated. We consider the allocated capital to be the shareholders’ equity plus minority interests, the balancing items for differences between present values and carrying amounts as well as the hybrid capital. Capital is allocated to the profit centres according to the risk content of the business in question. In order to be able to distinguish in future on the Group level between the value contribution from investments and from the technical account, a separate IVC is shown for the functional area of investments from 2010 onwards.
Capital Asset Pricing Model (CAPM) approach – is that the investor’s opportunity costs are 450 basis points above the risk-free interest rate, meaning that value is created above this threshold. Our strategic return on equity target of 750 basis points above “risk-free” thus already contains a not insignificant target value creation. We allocate equity sparingly and make efficient use of equity substitutes to optimise our average cost of capital. At 7.4%, we can point to a very attractive average cost of capital – not only in absolute terms but also relative to our competitors.
Non-life rein1 From 2005 to 2007 the present value components are based on the European Embedded Value (EEV), from 2008 onwards they are based on the
Within the scope of our asset/liability management (ALM) the allocation of investments by currencies and maturities is determined by the technical liabilities. The modified duration of our bond portfolio – at 3.5 (3.7) – is geared largely to the average maturity of the technical liabilities. We thereby adjust the maturity pattern of the fixed-income securities to the expected payment patterns of our liabilities and reduce the economic exposure to the interest rate risk. In addition, through active and regular management of the currency spread in our fixedincome 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 no significant influence on our result. At year-end 2010 we held 44.6% (44.6%) of our investments in euro, 35.4%
5,621.6 million) as at the balance sheet date, an increase of 24.3% in the year under review.
Hannover Re uses “Intrinsic Value Creation” (IVC) as its central value-based management tool. With the aid of this tool we apply the principles of economic allocation of equity and efficient use of debt as an equity substitute in order to achieve the lowest possible weighted cost of capital. This concept as well as the objectives and principles in accordance with which we conduct our enterprise management and capital management are described in greater detail in our remarks on value-based management on page 70 et seq. of this report.
We ensure that our business is sufficiently capitalised at all times through continuous monitoring and by taking appropriate steering actions as necessary. For further information please see the section “Management of policyholders’ surplus ”.
In view of the thoroughly favourable result, the development of the shareholders’ equity of the Hannover Re Group was highly gratifying. Compared to the position as at 31 December 2009, it increased by EUR 861.3 million in the year under review to EUR 5.1 billion. After adjustment for minorities, it increased by EUR 794.5 million to EUR 4.5 billion. The book value per share increased accordingly by 21.4% to EUR 37.39.
This rise derived in particular from the positive development of markets for alternative investments and the decline in yields, especially on US treasuries and some non-EU government bonds.
66.8 million to EUR 608.9 million as at 31 December 2010.
Common shares and additional paid-in capital 1 Adjusted on the basis of IAS 8 development of policyholders’ surplus in EUR million
In addition to the financing effect of the changes in shareholders ’ equity described above, debt financing on the capital market is a key component of Hannover Re’s financing. It was essentially composed of subordinated bonds issued to ensure lasting protection of our capital base in observance of rating requirements. The total volume of debt and subordinated capital stood at EUR 2,056.8 million (EUR 1,481.3 million) as at the balance sheet date.
Finance (Luxembourg) S.A. It has a term of 30 years and carries a fixed coupon of 5.75% p.a. in the first ten years. The bond has a first scheduled call option after ten years, after which the coupon steps up to a floating rate of three-month
In addition, unsecured syndicated guarantee facilities exist with a number of financial institutions as collateral for our technical liabilities as letters of credit. For detailed information on existing contingent liabilities please see the notes,
Section 5.12 “Debt and subordinated capital” and 7.7 “Contingent liabilities and commitments”.
The table below summarises the carrying amounts of our subordinated bonds.
Hannover Finance (Luxembourg) S.A., subordinated debt, EUR 350 million; 2001/20311,2 14.03.2001 6.25 138.1 137.9
1 This bond was exchanged in an amount of EUR 211.9 million in 2005 2 Repayment of the outstanding volume of this debt in an amount of EUR 138.1 million is planned for 14 March 2011
The cash flow from operating activities, which also includes inflows from interest received and dividend receipts, amounted to EUR 1.7 billion in the year under review as opposed to
For further information on our liquidity management please see page 69 et seq. of the risk report.
Cash and cash equivalents at the end of the period1 475.2 457.4
Outlook stable positive 1 Thereof attributable to disposal groups: EUR 27.5 million
M an ag em en t re p or t issue ratings of issued debt
As part of the process of rating Hannover Re the rating agencies also assess the debt issued by the Hannover Re Group.
information pursuant to § 315 Para. 4 German Commercial Code (HGB)
§§ 179 et seq. Stock Corporation Act in conjunction with § 16
The powers of the Executive Board with respect to the issue and repurchase of shares are defined in Hannover Re’s Articles of Association as well as in §§ 71 et seq. Stock Corporation Act. In this connection the Annual General Meeting authorised the Executive Board on 4 May 2010 pursuant to § 71
The following paragraphs explain major agreements concluded by the company that are subject to reservation in the event of a change of control, inter alia following a takeover bid, and describe the resulting effects. The letter of credit lines extended to Hannover Re contain standard market change-ofcontrol clauses that entitle the banks to require early repayment if Talanx AG loses its majority interest or drops below the threshold of a 25 percent participation or if a third party acquires the majority interest in Hannover Rückversicherung
AG. For details of the letter of credit lines please see our explanatory remarks on other financial facilities in the notes,
G R O U P R I S K M A N A G E M E N T M O D E L L I N G
Die Frage nach der Versicherbarkeit von Naturkatastrophen taucht regelmäßig auf, wenn Großschäden neuer Dimension fest­ gestellt werden. Die Antwort bleibt gleich­ wohl: Ja, Naturgefahren sind versicherbar! Wenn die Solvabilität des Erst­ und Rück­ versicherungsmarktes und die Prämien risikogerecht kalkuliert wurden und ausrei­ chend sind.
J ö R G s t E f f E N s E N G E N E R A L m A N A G E R
The insurability of natural disasters is an issue that regularly rears its head whenever catastrophe losses of a new magnitude are recorded. The answer nevertheless continues to be: yes, natural perils are insurable – if the solvency of the insurance and reinsurance market as well as the pre miums were calculated on a risk-appropriate basis and are sufficient.
The actual question is therefore: how should premiums react to the new magnitude of catastrophe losses produced inter alia by increasing accumulations of values in peak zones? As long as rising damages are matched by higher premiums, even hurricanes, typhoons and earthquakes are insurable. Similarly, the reinsurance industry has a grip on the climate-related natural disasters – storms, floods and hail events – that are noticeably on the increase against a backdrop of climate change, always assuming the „if“ has not been overlooked!
Our underwriters are assisted in their acceptances by sophisticated risk management processes. Not only that, we invest heavily in the development of mathematical methods and software models in order to be able to evaluate and manage all risks from a qualified standpoint. Our own scientists in-house support us with the assessment of natural perils. In a nutshell: we trust to our expertise.
Governance of the Company as defined by § 289 a Para. 1
Executive Board contract. The reason for this divergence is set out in the following Declaration of Conformity pursuant to § 161 Stock Corporation Act (AktG) regarding compliance with the German Corporate Governance Code. The present and all previous Declarations of Conformity of the company are published on its website (
Hannover Re’s objective continues to be the further expansion of its position as a major, well diversified reinsurer of aboveaverage profitability with a fast, flexible and undogmatic business approach. With motivation, power of innovation and the quality of our services we strive to be one of the three most profitable reinsurers in the world by boosting our profit and the value of the company by a double-digit percentage every year. All other goals, such as profitable growth, the protection of capital, motivated staff and a lean organisation, are derived from this overriding objective (
Corporate Governance are driven by the goal of achieving sustainable growth in the value of the company and consolidating the trust placed in the enterprise through integrity at all times in our dealings with business partners, staff, shareholders and the general public. On this basis Hannover Re supports the principles of value-based and transparent enterprise management and supervision as defined in the German Corporate
Law Requirements for Remuneration Schemes in the Insurance Sector (VersVergV) as well as statements released by the
Code’s recommendations and suggestions found that Hannover Re once again – as in previous years – ranked as one of the leaders among DAX- and MDAX-listed companies when it came to compliance with the provisions of the Code. Based on the version of the German Corporate Governance Code as amended 18 June 2009 which was used in the survey, Hannover Re fulfilled the recommendations to a level of 98.8% with one divergence and thereby comfortably surpassed the degree of fulfilment of both DAX- and MDAX-listed enterprises. On average, companies listed on the DAX and MDAX satisfied 79 and 74.7 respectively of the 82 recommendations, hence achieving acceptance levels of 96.3% and 90.9%.
The above-average level of compliance alone testifies to the considerable importance that Hannover Re attaches to good enterprise management and supervision in the spirit of stateof -the-art Corporate Governance. It continues to be enshrined in the company’s business practices as a matter of course and is not limited to rigid adherence to formal rules. The Executive
Board and Supervisory Board consistently address changes in the relevant legal framework conditions in a timely manner and the latest legal developments are promptly codified in internal corporate standards. With this in mind, the Rules of Procedure of the Supervisory Board underwent a thorough revision in the year under review with an eye to the amendments of the German Corporate Governance Code; the Code recommendations concerning the composition of the supervisory board (Item 5.4.1) were a special focus of discussion in this context. The Supervisory Board consequently specified in its Rules of Procedure its intention that at least two members of the Supervisory Board should be women. In addition, the requirements for membership of the Supervisory Board were clarified with respect to the necessary knowledge, skills and specialist experience (expert knowledge). In this context, expert knowledge is taken to mean “sound industry knowhow combined with a fundamental understanding of the company ’s international business activities as well as specialist and methodological expertise”. Furthermore, the members of the Supervisory Board undertake to ensure that they have sufficient time at their disposal to discharge their mandate and to engage in the (further) training measures required for their tasks at their own responsibility. They shall be appropriately supported by the company in this regard. The Code recommendation concerning the reduction of the maximum number of supervisory board mandates at non-group listed companies from five to three was also included in the Rules of Procedure.
Board in anonymised and aggregated form at its meeting held on 10 March 2010 in strict confidentiality. One outcome of this survey that should be noted is that reporting by the Supervisory Board committees to the full Supervisory Board is to be stepped up. Henceforth, such reporting is to be provided on a regular basis as a separate item on the agenda.
Grounded on our corporate strategy and our Corporate Governance principles, our Code of Conduct enshrines on a sustainable basis the key rules governing integrity in our dealings with business partners, staff, shareholders and the general public. The Executive Board is expressly committed to observance of these rules, which are also binding upon all employees of the Hannover Re Group worldwide. They are intended to help us cope with the ethical and legal challenges that we face as part of day-to-day work. Each of us is jointly responsible for upholding the reputation of our company and Group in the eyes of the public at large, avoiding conflicts of interest and fostering trust through correct and value-based conduct.
Executive Board, matters of fundamental importance such as the approval of strategic principles and objectives, the planning of the annual results or the adoption/modification of investment guidelines require the consent of the Supervisory
Supervisory Board stays in regular contact with the Chairman of the Executive Board in order to discuss with him the company ’s strategy, business development and risk management.
The composition of the Executive Board (including areas of responsibility) as well as of the Supervisory Board and its committees is set out on pages 8 and 192 respectively of the present Annual Report.
Only persons under the age of 65 may be appointed to the Executive Board. The term of appointment shall be determined such that it expires no later than the end of the month in which the member of the Executive Board turns 65.
The Rules of Procedure of the Supervisory Board provide inter alia that each member of the Supervisory Board must have the knowledge, skills and professional experience required
The Finance and Audit Committee monitors the accounting process and the effectiveness of the internal control system, the risk management system and the internal auditing system.
In addition, the committee prepares the Supervisory Board’s decision on the commissioning of the independent auditor for the financial statements. It considers matters associated with the necessary independence of the auditor, the awarding of the audit mandate to the independent auditor, the determination of the audit concentrations and the fee agreement.
Board on the content, formation, amendment and termination of contracts of employment with the members of the Executive
Board with the exception of remuneration-related content as well as resolutions regarding their implementation. It bears responsibility for the granting of loans to the group of persons specified in §§ 89 Para. 1, 115 Stock Corporation Act and those considered equivalent pursuant to § 89 Para. 3 Stock
Corporation Act as well as for the approval of contracts with
Corporation Act. It exercises the powers arising out of § 112
Stock Corporation Act in lieu of the Supervisory Board and – in cooperation with the Executive Board – ensures that long-term succession planning is in place.
Information on share-based payment pursuant to Item 7.1.3 of the German Corporate Governance Code is provided in section 7.3 “Share-based payment” of the notes and in the remuneration report with respect to the members of the Executive
The remuneration report summarises the principles used to determine the remuneration of the Executive Board of Hannover Re and explains the amount of income received by the
In addition, the amount of remuneration paid to the Supervisory Board on the basis of its work for Hannover Re and its
affiliated companies and the principles according to which this remuneration is determined are described.
Supervision Act in conjunction with the Regulation on the Supervisory Law Requirements for Remuneration Schemes in the
Insurance Sector (VersVergV) – which entered into force on 13 October 2010 – have been observed. In addition, we took into account the more specific provisions of GAS 17 “Reporting on the Remuneration of Members of Governing Bodies”.
Executive Board with the exception of remuneration-related content. The latter shall be decided upon at a full meeting of the Supervisory Board.
(EPS) on a rolling three-year average, the capping of the profit bonus to a maximum 1.5 times the average target EPS of the last three financial years and the elimination of the guaranteed portion of the profit bonus.
The members of the Executive Board are also entitled to receive stock appreciation rights under the virtual stock option plan implemented in 2000 for certain members of the Group’s management.
Conditions for the Granting of Stock Appreciation Rights. Under these conditions, stock appreciation rights are awarded separately for each financial year provided the internal and external performance criteria defined in advance by the Supervisory Board are met.
Exercise of the stock appreciation rights does not give rise to any entitlement to the delivery of Hannover Re stock, but merely to payment of a cash amount linked to the performance of the Hannover Re share. The amount paid out is limited to a maximum calculated as a quotient of the total volume of compensation to be granted in the allocation year and the total number of stock appreciation rights awarded in the year
M an ag em en t re p or t in question. With the aim of making greater allowance for the long-term effect in the remuneration structure, the Supervisory Board decided to extend the waiting period from two to four years for the Executive Board with respect to stock appreciation rights granted from the 2010 allocation year onwards.
Upon expiry of this waiting period a maximum 60 percent of the stock appreciation rights awarded for an allocation year may be exercised. The waiting period for each additional 20 percent of the stock appreciation rights awarded for this allocation year is one year. Stock appreciation rights lapse if they are not exercised within ten years of the date when they were awarded.
Profit bonus Earnings per share (EPS), calculated on a rolling three-year average, x individual EPS basic amount (graduated according to area of responsibility and professional experience), capped to at most 1.5 times the average target EPS of the last three financial years
Pension entitlement (contracts prior to 2009: defined benefit system geared to the fixed annual remuneration; contracts from 2009 onwards: defined contribution system)
Retirement, insured event, premature termination or non-extension of employment contract under certain circumstances
For further details of the virtual stock option plan please see the explanatory remarks in the notes to this Group Annual
Hannover Re on the basis of its work for Hannover Re and its affiliated companies is calculated from the sum of all components that resulted in a charge in the financial year concerned, irrespective of whether they accrued to the relevant Board member. Pecuniary advantages from non-cash compensation are also included. The stock appreciation rights awarded for the financial year in question have also been included in the total remuneration at their fair value on the date when they were awarded.
Change in the value of stock appreciation rights already awarded but not exercised 1,119.4 704.2
The Annual General Meeting of Hannover Re held on 12 May 2006 resolved by a voting majority of 85.5% to avail itself until 31 December 2010 of the option contained in the Act on the Disclosure of Management Remuneration (VorstOG)
Board members in the year under review. An amount of EUR
Board and their surviving dependants, for whom thirteen (thirteen ) pension commitments existed, totalled EUR 1.3 million
(EUR 1.3 million) in the year under review. Altogether, an amount of EUR 15.5 million (EUR 13.8 million) has been set aside for these commitments.
The members of the Executive Board require the approval of the Supervisory Board to take on sideline activities. This ensures that neither the remuneration granted nor the time required for this activity can create a conflict with their responsibilities on the Executive Board. If the sideline activities involve seats on supervisory boards or comparable control boards, these are listed and published in the Annual Report of Hannover Re. The remuneration received for such seats at
Re was subject to further revision as a consequence of regulatory developments. These amendments, which were undertaken with the assistance of an independent firm of consultants specialising in the field of remuneration systems, ensure that the total remuneration and the split into fixed and variable components conform to regulatory requirements – especially the provisions of the Act on the Adequacy of Management
Insurance Sector (VersVergV) – and are both competitive and in line with market standards.
The revised remuneration model for the Executive Board comes into effect on 1 January 2011 and contains the following new features worthy of special note: • measurement of the profit bonus according to the return on equity generated by Hannover Re (instead of the previous measurement based on EBIT and EPS), giving due consideration to the cost of capital,
• explicit allowance for the business group development in the performance bonus in the form of the business group
• integration of a bonus bank for the partial deferment of payment over three years
• issue of virtual Hannover Re Share Awards as a participation component with a deferment in payment of four years
variable remuneration (60% of total remuneration upon 100% goal accomplishment) from 2011 onwards
Fixed remuneration (40% of total remuneration upon 100% goal accomplishment) from 2011 onwards
Group return on equity (RoE); x individual basic amount (graduated according to area of responsibility and professional experience) for each 0.1 percentage point by which the average RoE of the past three financial years exceeds the risk-free interest rate; Cap max: 200% Cap min: –100% (penalty); Change in the risk-free interest rate by 1 percentage point or more necessitates adjustment of the bonus calculation; RoE calculation: IFRS Group net income (excluding minority inter ests ) . /. arithm. mean of IFRS Group shareholders’ equity (excluding minority interests) at the beginning and end of the financial year.
Proportion of variable remuneration: Chief Executive Officer/ Chief Financial Officer: 30%; Board members except for CEO/CFO: 25%
The Supervisory Board determines degree of goal accomplishment according to its best judgement
Payment of the value calculated at the payment date after a waiting period of four years; Value of the share on awarding/payment: unweighted arithm. mean of the Xetra closing prices five trading days before to five trading days after the meeting of the Supervisory Board that approves the consolidated financial statement; additional payment of the sum total of all dividends per share paid out during the period; changes in a cumulative amount of 10% or more in the value of the Share Awards caused by structural measures trigger an adjustment.
A non-pensionable fixed remuneration component is to be introduced for members of the Executive Board with a defined benefit commitment.
In accordance with § 12 of the Articles of Association as amended on 9 August 2010, the members of the Supervisory
(EBIT) reported by the company in the consolidated financial statement drawn up in accordance with International Financial
Reporting Standards (IFRS). Variable remuneration is not paid if the EBIT is negative.
Herbert K. Haas Chairman of the – Supervisory Board – Standing Committee – Finance and Audit Committee – Nomination Committee
Karl Heinz Midunsky Member of the – Supervisory Board – Nomination Committee
Ass. jur. Otto Müller2 Member of the Supervisory Board Fixed remuneration 10.0 10.0
Dr. Immo Querner Member of the Supervisory Board Fixed remuneration 15.01 15.0
In 2010 no loan relationships existed with members of Hannover Re’s Executive Board or Supervisory Board, nor did the company enter into any contingent liabilities for members of the management boards.
The reportable transactions listed above took place in the 2010 financial year.
Hannover Re as well as their spouses or registered partners and first-degree relatives hold less than 1.0% of the issued shares. The total holding as at 31 December 2010 amounted to 0.055% (0.055%) of the issued shares, i.e. 66,146 (66,086)
Re’s virtual stock option plan (cf. Section 7.3 of the notes).
The Management-by-Objectives process is overseen by Human Resources Management and Group Controlling Services; approval of the degree of goal accomplishment is subject to the approval of the full Executive Board.
It is to be expected that the recovery in the global economy will continue in 2011. In this context, the inconsistent picture across regions – moderate growth in the industrial nations, vigorous growth in emerging markets – is likely to remain unchanged. In countries whose economic recovery was not hampered by structural problems, the crisis-induced slump has been largely made good. Consequently, economic growth here is likely to slow somewhat in 2011. In countries experiencing structural problems, on the other hand, the available options for delivering economic stimuli are largely exhausted.
Finland, Austria and the Netherlands, the economy should grow at an above-average pace and unemployment should fall.
In Japan the government and central bank are trying to counteract the slowdown in economic growth. In November 2010, for example, the government approved a further economic stimulus package, while the Bank of Japan launched another asset purchasing plan. A more modest rate of expansion than in 2010 should nevertheless be anticipated.
International bond markets will likely continue to see low yields in 2011. The first cautious hike in prime rates by the
As a consequence of the prevailing expansionary monetary policy, yields on German government bonds will likely remain on a low level in 2011. The same is true of the United States, where yields will probably rise only marginally by the end of 2011. Bonds issued by peripheral countries of the European
While the budgetary situation of these countries will likely improve, concerns about possible insolvency after expiry of the EU/IMF rescue package will doubtless persist – especially as regards Greece, Ireland and Portugal. Should the economic upturn lead to an increase in corporate profits, this would open up price potential on the equity markets. Any increases in prices in 2011 will, however, probably be subject to considerable volatility.
The treaty renewals for US catastrophe business were, however, disappointing. Rates for the most part declined in the absence of losses from hurricanes. In keeping with our policy of active cycle management we reduced our exposure. In areas where major disasters occurred, such as the earthquake in Chile, the positive effects on the price level remained within regional bounds and failed to usher in a worldwide trend
reversal. Nevertheless, we anticipate further price increases in the April and July treaty renewals, especially for Australia in the aftermath of the severe flooding of December 2010 and
The renewals in global treaty business produced a mixed picture. Although the markets of Central and Eastern Europe typically saw rate reductions, business there is still profitable.
In Western Europe we scaled back our portfolio in response to unsatisfactory prices. Market conditions in the Middle East were very favourable.
Having cemented our position as one of the leading reinsurers in our target market of Germany in 2010, we are looking ahead optimistically to the current financial year. With premium volume stable overall, prices for loss-impacted programmes rose while rates declined under programmes that had been spared losses.
In motor business the primary insurance market bottomed out in 2010, as a consequence of which premium volume can be expected to grow by around 3% in motor liability and roughly 5% in motor own damage in the current financial year. This development, combined with improved conditions, will have favourable implications for our result in proportional motor business and also – indirectly – for our non-proportional motor liability portfolio. In the treaty renewals as at 1 January 2011 we generated rate increases averaging 5% in this line. In industrial fire business, where the resurgence of business activity led to an increase in loss events, we reduced our volume.
In terms of premium volume, we expect to see a modest increase (+1%) for the current financial year. Growth will be driven by Canadian business. Given our very good market position and the excellent relations that we enjoy with our clients, we continue to see good business prospects going forward in our target market of North America.
Thanks to our very good positioning we continue to see attractive business opportunities in aviation reinsurance. Prices on the reinsurance market are broadly stable; rate erosion can be observed in non-proportional business. We successfully expanded our customer base, especially in emerging markets such as China and India. For the current financial year we expect growth of around 12% in our gross premium volume.
II, we expect more business opportunities to open up in the
Spanish market we expect to see further rate reductions. The premium volume is therefore likely to contract in 2011. In
France, on the other hand, the premium volume should expand slightly.
Owing to the severe earthquakes in Chile and Haiti, rates for natural catastrophe covers in these countries increased. Overall, though, prices in Latin America are likely to remain stable both in the current financial year and in 2012. We anticipate somewhat lower gross premium in the face of growing competition.
In the Southeast Asian region we anticipate further growth in the area of agricultural insurance. Conditions are expected to improve under programmes that suffered losses in the year under review. With no easing in the intensely competitive environment, the soft market phase is likely to be sustained in 2011.
The price situation in facultative reinsurance, i.e. the underwriting of individual risks, remains tense in the current financial year. At this point in time it is our expectation that rates will for the most part decline, with the exception of prices for offshore energy covers. Nevertheless, given the varied nature
M an ag em en t re p or t of demand and the diversification of the markets, our facultative portfolio should again generate profitable growth in 2011.
We anticipate that the rate erosion in conventional property and casualty business will be offset by the writing of niche segments.
In the coming years, as in the past, we expect to see a positive basic direction and further dynamic growth in international life and health reinsurance business; this can be attributed to the demographic changes in mature markets, progressive urbanisation and the ongoing formation of a stable middle class in emerging markets as well as the professional competition conducted among the six leading life reinsurers. The high entry barriers and long-term orientation of life and health reinsurance continue to act as stabilising structural factors in our markets.
On a global level the growth recorded in life and health reinsurance should continue to outpace the comparable growth on primary markets.
United Kingdom and Germany towards emerging markets such as China, India, Brazil and Latin America. This trend assists internationally positioned life insurers and offers this group of clients – as multinational insurers – considerable opportunities going forward.
For Hannover Life Re, the evolution of our tried and tested
“Five Pillar” model continues to shape the development of our business; new markets will remain the principal engines of growth over the coming two to three years. We also see good potential in the bancassurance sector, especially in emerging markets.
States, Arab countries and the key emerging markets of Asia and Latin America.
With other markets such as South Africa, Australia and Bermuda also picking up on this model and aspiring to regulatory equivalence, we see the implementation of Solvency II in 2013 as an essentially global model.
What is more, in numerous lines there is a correlation between the state of the overall economy and the claims frequency. A
Japan, United Kingdom and Germany this assessment is coloured by the demographic trend, i.e. the ageing of the population, which is reflected in heightened demand – especially for annuity and health insurance products.
China, India and Brazil is fostering a rapidly growing middle class, which to a greater extent than before is clamouring for insurance solutions designed to protect surviving dependants and afford individual retirement provision for policyholders.
and risk management. In the coming years we expect the reinsurance market to develop a more vigorous growth momentum than the primary market. Furthermore, it is our expectation that earnings prospects will remain on a satisfactory level.
However, since we anticipate substantially greater volatility on equity markets, we shall manage this asset class particularly tightly according to risk considerations. The above notwithstanding, we shall counteract a potential increase in volatility through broad diversification of asset classes and individual debtors.
Our strategy of progressively stepping up investments in real estate will continue in 2011. We anticipate further attractive opportunities here in our focus markets of Germany and the
M an ag em en t re p or t outlook for 2012/2013
Looking beyond the current financial year, we expect largely favourable conditions in non-life reinsurance and life/health reinsurance.
In life and health reinsurance we have set ourselves an annual growth target of 10% to 12% for gross premium income.
On the Group level our return-on-equity target is at least 750 basis points above the risk-free interest rate. Both the earnings per share and the book value per share also constitute central management ratios and performance indicators for our company. Our strategic objective is to increase these key figures – together with the operating profit (EBIT) – by doubledigit margins every year.
Fixed-income securities – at fair value through profit or loss 5.1 217,597 235,149 equity securities – available for sale 5.1 536,755 19,357
Other financial assets – at fair value through profit or loss 5.1 54,756 58,273
Real estate and real estate funds 5.1 394,087 216,801 investments in associated companies 5.1 127,644 128,316 other invested assets 5.1 841,896 578,861 short-term investments 5.1 1,570,502 1,352,475 total investments and cash under own management 25,411,071 22,507,012 total investments 38,047,149 33,292,873
total assets 46,725,293 40,837,568 1 adjusted on the basis of ias 8
Consolidated BalanCe sheet Consolidated aCCounts as at 31 December 2010 1 adjusted on the basis of ias 8 liabilities in eUR thousand notes 31. 12. 2010 31. 12. 20091 loss and loss adjustment expense reserve 5.7 18,065,395 17,425,293
total liabilities 41,607,425 36,581,011 shareholders‘ equity nominal value: 120,597 Conditional capital: 60,299 5.13 additional paid-in capital 724,562 724,562
Figures in eUR thousand notes 1.1.– 31. 12. 2010 1.1.– 31. 12. 20091
Unrealised gains and losses on investments 6.2 (39,893) 100,571 total depreciation, impairments and appreciation of investments 6.2 (3,448) 122,430 other investment expenses 6.2 67,409 53,121 net income from investments under own management 942,527 843,609
Operating profit/loss (EBIT) 1,173,800 1,142,479 interest on hybrid capital 5.12 85,266 76,650 net income before taxes 1,088,534 1,065,829 net income 830,905 774,059 thereof
Gains (losses) recognised directly in equity (4,240) 2,490 tax income (expense) 2,517 (2,651)
Changes in the consolidated group (23) 47 total recognised income and expense 1,143,209 927,224 thereof: attributable to minority interests 94,177 42,477 attributable to the Group 1,049,032 884,747
total income and expense recognised after tax – – 171,104 130,760 (1,722) 748,890 94,177 1,143,209 1 adjusted on the basis of ias 8
The reporting on cash flows within the Group is based on
IAS 7 “Statement of Cash Flows”. In addition, we observed the principles set out in German Accounting Standard No. 2
Consolidated cash flow statement 2010 1 adjusted on the basis of ias 8
Other financial assets – at fair value through profit or loss sales 962 –
Cash and cash equivalents at the end of the period excluding disposal groups 447,753 457,412 income tax paid (147,966) (131,134)
At fair value through profit or loss 152,028 154,707 other invested assets 1,330,693 894,289 short-term investments 1,259,804 1,031,880 total investments and cash under own management 19,777,825 17,431,076
Reinsurance recoverables on other technical reserves 422 305 deferred acquisition costs 362,080 331,091 accounts receivable 1,805,883 1,896,362 other assets in the segment 1,262,674 1,429,320 assets held for sale 1,529,355 –
total assets 26,374,737 23,347,952 segmentation of technical and other liabilities in eUR thousand liabilities loss and loss adjustment expense reserve 15,634,491 15,393,548
C on so li d at ed a cc ou n ts
Consolidated segmental report segmental statement of income in eUR thousand non-life reinsurance
Operating profit/loss (EBIT) 879,560 731,364 interest on hybrid capital – –
net income before taxes 879,560 731,364 net income 659,197 509,409 thereof
Life/health reinsurance Consolidation total 1 adjusted on the basis of ias 8
1. Company information 113 2. Accounting principles 113 3. Accounting policies 115 3.1 Changes in accounting policies 115 3.2 Summary of major accounting policies 116 3.4 Major discretionary decisions and estimates 122 4.2 Consolidated companies and complete list of 4.3 Major acquisitions and new formations 131 4.5 Further corporate changes 132 5. Notes on the individual items of the balance sheet 133 5.1 Investments under own management 133 5.2 Funds withheld (assets) 146 5.3 Contract deposits (assets) 146 5.4 Technical assets 146 5.6 Other assets 148 5.7 Technical provisions 150 5.8 Funds withheld (liabilities) 156 5.9 Contract deposits (liabilities) 156 5.10 Provisions for pensions and other post-employment benefit obligations 156 5.11 Other liabilities 160 5.12 Debt and subordinated capital 162 5.13 Shareholders‘ equity, minority interests and treasury shares 165 6. Notes on the individual items of the statement of income 166 6.1 Gross written premium 166 6.2 Investment income 167 6.3 Reinsurance result 169 6.4 Other income/expenses 170 6.5 Taxes on income 170 7. Other notes 174 7.1 Derivative financial instruments 174 7.2 Related party disclosures 176 7.3 Share-based payment 178 7.4 Staff and expenditures on personnel 181 7.5 Earnings per share and dividend proposal 182 7.7 Contingent liabilities and commitments 183 7.8 Long-term commitments 183 7.9 Rents and leasing 184 7.10 Fee paid to the auditor 184 7.11 Events after the balance sheet date 185
The consolidated financial statement reflects all IFRS in force as at 31 December 2010 as well as all interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), application of which was mandatory for the 2010 financial year. The disclosures regarding the management of technical and financial risks arising out of IFRS 7 “Financial
are contained in the risk report. We have dispensed with an additional presentation of the same content in the notes.
Since 2002 the standards adopted by the International Accounting Standards Board (IASB) have been referred to as
The declaration of conformity required pursuant to § 161 German Stock Corporation Act (AktG) regarding compliance with the German Corporate Governance Code has been submitted and, as described in the Declaration of the Executive Board regarding the Corporate Governance of the Company, made permanently available to the shareholders on the Hannover
Hannover Rückversicherung AG is a subsidiary of Talanx AG, which in turn is wholly owned by HDI Haftpflichtverband der
“Group Cash-settled Share-based Payment Transactions”, application of which is mandatory for the 2010 financial year.
The IASB has issued the following standards, interpretations and amendments to existing standards with possible implications for the consolidated financial statement of Hannover Re, application of which is not yet mandatory for the year under review and which are not being applied early by Hannover Re: In November 2009 the IASB published the revised IAS 24
“Related Party Disclosures”. A major new feature of IAS 24 is the requirement for disclosures of “commitments”, for example guarantees, undertakings and other commitments, which are dependent upon whether (or not) a particular event occurs in the future. The definition of a related entity or a related person is also clarified. The standard, the implications of which for Hannover Re are currently under review, was ratified by the European Union effective 20 July 2010 and must be applied with effect from 1 January 2011.
Instruments” on the classification and measurement of financial instruments. IFRS 9 is the first step in a three-phase project intended to replace IAS 39 “Financial Instruments: Recognition and Measurement” with a new standard. IFRS 9 introduces new requirements for classifying and measuring financial assets. The provisions of IFRS 9 were expanded in
October 2010 with an eye to financial liabilities for which the fair value option is chosen. The standard, the implications of which for Hannover Re are currently under review, has not yet been ratified by the European Union.
– to EUR millions. Figures indicated in brackets refer to the previous year.
N ot es 3. aCCOunTInG POLICIES NOtes 3.1 Changes in accounting policies 3. Accounting policies
Hannover Re corrected the balance sheet recognition of certain life reinsurance contracts. In accordance with applicable
US GAAP (FASB ASC 340-30), technical assets and liabilities relating to these contracts are to be offset in the balance sheet.
Accounting Estimates and Errors”, we therefore adjusted the comparative figures in the present financial statement. The adjustments had no implications for Group net income or shareholders‘ equity in any of the previous reporting periods.
Relative to the figures originally shown, the balance sheet items “funds withheld” (assets side) and “contract deposits”
In addition, pursuant to the requirements of IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” it was necessary to correct the translation of intangible assets held in foreign currencies in the consolidated annual financial statement as at 31 December 2009.
Adjustments to the consolidated balance sheet pursuant to IAs 8 in EuR thousand 1. 1. 2009 31. 12. 2009
Adjustments to the consolidated statement of income pursuant to IAs 8 in EuR thousand 1.1.– 31. 12. 2009
Other income and expenses +2,527 total change in items of the statement of income +2,527
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.
Financial assets at fair value through profit or loss consist of securities held for trading and those classified as measured at fair value through profit or loss since acquisition. This refers principally to unsecured debt instruments issued by corporate issuers and derivative financial instruments. Within the scope of the fair value option provided under IAS 39 “Financial Instruments: Recognition and Measurement”, according to which financial assets may be carried at fair value on firsttime recognition subject to certain conditions, all structured securities that would have needed to have been broken down had they been recognised as available for sale or under loans and receivables are also recognised here. Hannover Re makes use of the fair value option solely for selected subportfolios of its assets. In addition, derivative financial instruments that
Hannover Re does not recognise as a valuation unit with underlying risks are recognised here. 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 unrealised gains or losses from this valuation are recognised in net 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.
With respect to impairments on securities with the character of equity, IAS 39 “Financial Instruments: Recognition and
Theoretical price Interest rate curve Present-value method unlisted structured bonds Theoretical price Interest rate curve Volatility surfaces
as an approximation of the fair value. Loans included in this item are recognised at amortised cost.
Real estate used by third parties (investment property) is valued at cost less scheduled depreciation and impairment.
Straight-line depreciation is taken over the expected useful life – at most 50 years. Under the impairment test the market value of real estate for third-party use (recoverable amount)
is determined using acknowledged valuation methods and compared with the carrying value; arising impairments are recognised. Maintenance costs and repairs are expensed.
Contract deposits: under this item we report contract deposits under insurance contracts that satisfy the test of a significant risk transfer to the reinsurer as required by IFRS 4
944-20-15 requires insurance contracts that transfer a significant insurance risk from the ceding company to the reinsurer to be differentiated from those under which the risk transfer is of merely subordinate importance. Since the risk transfer under the affected transactions is of subordinate importance, these contracts are recognised using the “deposit accounting”
method and hence eliminated from the technical account. The compensation for risk assumption booked to income under these contracts is netted under other income/expenses. The payment flows resulting from these contracts are shown in the cash flow statement under operating activities.
Accounts receivable: the accounts receivable under reinsurance business and the other receivables are carried at nominal value; value adjustments are made where necessary on the basis of a case-by-case analysis. We use adjustment accounts for value adjustments taken on reinsurance accounts receivable, while all other write-downs are booked directly against the underlying position.
N ot es basis of a five-year detailed plan and allowing for a perpetuity factor. The recoverable amount is to be compared with the book value of the CGU including goodwill. When the latter exceeds the recoverable amount, an impairment expense is to be recognised.
The other intangible assets largely consist of purchased and self-developed software. This is recognised at acquisition cost less scheduled depreciation. The other intangible assets also contain – within the scope of corporate acquisitions – the expected present value of future profits (PVFP) at the time of acquisition of already existing life reinsurance portfolios; amortisation is taken according to the periods of the underlying acquired contracts. Intangible assets are regularly tested for impairment and impairment is taken where necessary.
Own­use real estate: The portfolio of own-use real estate is measured at cost less scheduled straight-line depreciation over useful lives of 10 to 50 years. The fair values are determined using the discounted cash flow method.
Taxes” deferred tax liabilities must be recognised if assets are to be recognised in a higher amount or liabilities in a lower amount in the consolidated balance sheet than in the tax balance sheet and if these temporary differences will lead to additional tax loads in the future; please see our explanatory remarks on deferred tax assets.
Translation differences resulting from the currency translation of separate financial statements of foreign subsidiaries are recognised under gains and losses from currency translation.
Minority interests are shares in the equity of affiliated companies not held by companies belonging to the Group. IAS 1
“Presentation of Financial Statements” requires that minority interests be recognised separately within Group shareholders ‘ equity. The minority interest in profit or loss is shown separately as profit appropriation following the net income
Measurement” (held to maturity, loans and receivables, available for sale and financial assets at fair value through profit or loss with the subcategories of trading and designated financial instruments). Essentially, the following classes of financial instruments are established: • Fixed-income securities
Rather, guided by the underlying business model of reinsurance, the disclosures are made on the basis of the facts and circumstances existing in the financial year and in light of the principle of materiality.
Currency translation: financial statements of Group subsidiaries were drawn up in the currencies corresponding to the economic environment in which each subsidiary primarily operates. These currencies are referred to as functional currencies. The euro is the reporting currency in which the consolidated financial statement is prepared.
Transactions in foreign currencies reported in Group com p anies’ individual financial statements are converted into the functional currency at the transaction rate. In accordance with IAS 21 “The Effects of Changes in Foreign Exchange
Exchange differences from the translation of monetary assets and liabilities are recognised directly in the statement of in-
Exchange Rates” differences from the currency translation of financial statements of foreign Group companies must be recognised in the consolidated financial statement as a separate item in shareholders‘ equity. Currency translation differences resulting from long-term loans or lendings without specified maturity between Group companies are similarly recognised outside the statement of income as a separate item in shareholders ’ equity.
Key exchange rates 1 EuR corresponds to: Mean rate of exchange on the balance sheet date average rate of exchange 3.3 SEGMEnTaTIOn NOtes
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 60 et seq. We would further refer to our explanatory remarks on the technical reserves in
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 criter ia 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.
Hannover Re‘s segmental report is based on IFRS 8 “Operating Segments” and on the principles set out in German
The segmentation in non-life reinsurance and life/health reinsurance and the segment information presented follow the system used for internal reporting purposes, on the basis of which the full Executive Board regularly evaluates the performance of the segments and decides on the allocation of resources to the segments.
The projections, which cover various model scenarios (“conservative assumptions” versus “best estimate”), constitute the starting point for numerous areas of application encompassing quotation, the determination of carrying values and embedded values as well as contract-specific analyses, e.g. regarding the appropriateness of the recognised reinsurance liabilities
Section 3.2 “Summary of major accounting policies” and on the liability adequacy tests in Section 5.7 “Technical provisions ”.
In determining the carrying values for certain financial assets it is sometimes necessary to make assumptions in order to calculate fair values. In this regard we would refer the reader to our remarks in Section 3.2 “Summary of major accounting policies” concerning financial assets at fair value through profit or loss and securities held as available for sale. Assumptions concerning the appropriate applicability criteria are necessary when determining the need for impairments on non-monetary financial assets held as available for sale. In this regard we would again refer the reader to our explanatory remarks in
IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” was performed in the year under review without adjustment of the comparative figures for previous years. For further details please see the remarks on derivative financial instruments in Section 7.1 “Derivative financial instruments”.
Subsidiaries are consolidated as soon as Hannover Re acquires a majority voting interest or de facto controlling influence. The same is true of special purpose entities, the consolidation of which is discussed separately below.
Only subsidiaries which are of minor importance – both individually and in their entirety – for the net assets, financial position and results of operations of the Hannover Re Group are exempted from consolidation. Hannover Re assesses whether a subsidiary is of minor importance on the basis of the company ‘s total assets and net income relative to the corresponding values for the Group as a whole on average over the last three years. For this reason 26 (18) companies at home and abroad, the business object of which is primarily the rendering of services for reinsurance companies within the Group, were not consolidated in the year under review.
“Business Combinations” are to be accounted for separately from goodwill, the difference between the revalued shareholders ‘ equity of the subsidiary and the purchase price is recognised as goodwill. Under IFRS 3 scheduled amortisation is not taken on goodwill. Instead, impairment is taken where necessary on the basis of annual impairment tests. Immaterial and negative goodwill are recognised in the statement of income in the year of their occurrence.
Minority interests in shareholders’ equity are reported separately within Group shareholders’ equity in accordance with
IAS 1 “Presentation of Financial Statements”. The minority interest in profit or loss, which forms part of net income and is shown separately after net income as a “thereof” note, amounted to EUR 82.0 million (EUR 40.3 million) in the year under review.
In addition to Hannover Rückversicherung AG as the parent company of the Group, the scope of consolidation of the
Minority shares in partnerships are reported under long-term liabilities in accordance with the applicable version of IAS 32
The following list of shareholdings is provided in full in the present Group annual financial report for the first time in accordance with the amended requirements of § 313 German Commercial Code (HGB) as amended by the Act on the
Modernisation of Accounting Law (BilMoG). Previously, an abridged presentation has been provided in the Group annual financial report and the complete list was published in the electronic Federal Gazette.
Hannover america Private Equity Partners II GmbH & Co. KG, Hannover/Germany3
Hannover Euro Private Equity Partners III GmbH & Co. KG, Hannover/Germany3
Hannover Euro Private Equity Partners II GmbH & Co. KG, Hannover/Germany3 57.64 EuR 5,747 EuR 454
Hannover Life Reassurance Bermuda Ltd., Hamilton/Bermuda5 100.00 EuR 163,387 EuR 15,451
Hannover Re advanced Solutions Ltd., Dublin/Ireland6 100.00 EuR 31 EuR –
Inter Hannover (no.1) Limited, London/united Kingdom4 100.00 GBP 1 GBP –
Hannover Life Reassurance africa Ltd., Johannesburg/South africa4 100.00 ZaR 411,113 ZaR 69,634
Hannover Reinsurance africa Ltd., Johannesburg/South africa4 100.00 ZaR 726,038 ZaR 151,044
Transit underwriting Managers (Pty) Ltd., Cape Town/South africa 51.00 ZaR 1,332 ZaR 2,552
Landmark underwriting agency (Pty) Ltd., Bloemfontein/South africa 41.06 ZaR 1,873 ZaR 374
Hospitality Industries underwriting Consultants (Pty) Ltd., Johannesburg/South africa 37.38 ZaR 3,071 ZaR 2,763
Thatch Risk acceptances (Pty) Ltd., Cape Town/South africa 33.64 ZaR 764 ZaR 1,008
Woodworking Risk acceptances (Pty) Ltd., Pietermaritzburg/South africa 30.60 ZaR 1,001 ZaR 209
Clarendon Transport underwriting Managers (Pty) Ltd., Johannesburg/South africa4 19.04 ZaR 3,880 ZaR 30,190 4.2 COnSOLIDaTED COMPanIES anD COMPLETE LIST OF SHaREHOLDInGS NOtes
Result for the last financial year aviation Insurance Company Limited, Johannesburg/South africa4 15.94 ZaR 6,270 ZaR (140)
Camargue underwriting Managers (Pty) Ltd., Parktown/South africa 13.26 ZaR 9,012 ZaR 1,666
Hannover Re Real Estate Holdings, Inc., Orlando/uSa5 95.10 uSD 254,774 uSD 2,838
GLL HRE CORE PROPERTIES LP, Wilmington/uSa5 95.00 uSD 111,270 uSD 2,058
GLL Terry Francois Blvd. LLC, Wilmington/uSa5 48.40 uSD 24,801 uSD 1,768
Hannover Re Services Japan K. K., Tokyo/Japan 100.00 JPy 90,297 JPy 3,690
Hannover Life Re Consultants, Inc., Orlando/uSa11 100.00 uSD 181 uSD 37
Hannover Services (México) S.a. de C.V., Mexico City/Mexico4 100.00 MXn 11,022 MXn 1,031
Hurst Holme Insurance Company Limited - account 2006 - 03 SCC, Hamilton/Bermuda11 28.50 uSD 894 uSD 241
Hurst Holme Insurance Company Limited - account 2009 - 01 SCC, Hamilton/Bermuda11 28.50 uSD 137 uSD 137
3 Financial year as at 30 September 2010 4 Provisional (unaudited) figures 5 IFRS figures 6 Company is inactive and does not compile an annual report.
10 Figures as at 31 December 2007 11 Figures as at 31 December 2009 12 Formerly WeHaCo unternehmensbeteiligungs-aG
Business relations with special purpose entities are to be examined in accordance with SIC-12 “Consolidation – Special
IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” – also falls back on the relevant standards of US
In the course of 2010, as part of its extended Insurance-Linked
Re”, under which Hannover Re has transferred a portfolio of facultative reinsurance risks to the capital market since September 2009. The contracts, which cover worldwide individual risks, are mediated by an external reinsurance intermediary, written by Hannover Re and placed on the capital market in conjunction with a service provider. The “FacPool Re” transaction consists of a quota share reinsurance arrangement and two non-proportional cessions. The total amount of capital provided is equivalent to EUR 45.3 million (EUR 41.9 million), with Hannover Re keeping a share of approximately EUR 3.8 million (EUR 3.5 million) and additionally assuming losses that exceed the capacity of “FacPool Re”. The term of the transaction is roughly two and a half years. A number of special purpose entities participate in the reinsurance cessions within “FacPool Re”; Hannover Re does not hold any shares in these special purpose entities and does not bear the majority of the economic benefits or risks arising out of their activities through any of its business relations.
Effective 1 January 2009 Hannover Re raised further underwriting capacity for catastrophe risks on the capital market by way of the “K6” transaction. This securitisation, which was placed with institutional investors in North America, Europe and Asia, involves a quota share cession on worldwide natural catastrophe business as well as aviation and marine risks. The volume of “K6”, which was increased in the year under review, was equivalent to EUR 248.5 million (EUR 123.1 million) as at the balance sheet date. The planned term of the transaction runs until 31 December 2011 or in the case of the new shares placed in the year under review until 31 December 2012. Kaith
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.
Effective 26 April 2010 Hannover Re made use of its right of early cancellation and terminated the credit default swap underlying the “Merlin” transaction. Since 2007 Hannover Re had used this transaction to transfer risks from reinsurance recoverables to the capital market. The securities serving as collateral were issued through the special purpose entity Merlin CDO I B.V., over which Hannover Re did not exercise a controlling influence.
Re has participated since 1988 in numerous special purpose entities – predominantly funds –, which for their part transact certain types of equity and debt capital investments. On the basis of our analysis of our relations with these entities we concluded that the Group does not exercise a controlling influence in any of these transactions and a consolidation requirement therefore does not exist.
In addition, effective 16 March 2010 Funis GmbH & Co. KG
Limited, London, was included in the consolidated financial statement for the first time. All shares in the company are held by International Insurance Company of Hannover Ltd., Bracknell. The object of the company, which is a corporate member of Lloyd’s of London with limited liability, is to participate in the business of one or more Lloyd’s syndicates.
On 9 December 2010 Funis GmbH & Co. KG acquired a participation of around 25% of the shares in XS Direct Holdings, based in Dublin/Ireland, by subscribing to newly issued shares. The interest amounts to EUR 2.5 million. The company held three further participations – in each case with all shares
In addition, a miscellaneous liability of EUR 4.1 million was recognised for selling expenditures and a sundry provision of
EUR 54.9 million was constituted for expenses in connection with measurement of the disposal group. The corresponding expenses were recognised in other income and expenses.
and liabilities belonging to the disposal group will only be realised in the context of deconsolidation. Profits and losses from the measurement of available-for-sale financial assets in an amount of EUR 2.5 million as at the balance sheet date will also only be realised at the time of deconsolidation.
In compliance with IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations” we recognise the assets and liabilities of the disposal group in corresponding balance sheet items that are distinct from continuing operations.
Transactions between the disposal group and the Group‘s continuing operations continue to be entirely eliminated in conformity with IAS 27 “Consolidated and Separate Financial
Effective 8 March 2010 Hannover Rück Beteiligung Verwaltungs -GmbH (HRBV), which is wholly owned by Hannover Re, reached agreement with a third party outside the Group on the sale of 0.5% of its stake in E+S Rück – by way of a share reduction without a change of control status. Upon closing of the transaction HRBV held an interest of 63.69% in E+S Rück.
Trust based in Grand Cayman, Cayman Islands, which was consolidated at equity, was also liquidated.
The following table shows the regional origin of the investments under own management.
Available for sale due in one year2 4,127,663 4,146,256 3,890,651 3,926,328 due after one through two years 1,856,401 1,892,437 1,686,180 1,725,646 due after two through three years 1,841,265 1,892,893 1,656,235 1,698,765 due after three through four years 2,184,191 2,238,279 1,718,907 1,782,188 due after four through five years 2,277,464 2,294,991 1,875,448 1,907,847 due after five through ten years 3,710,502 3,727,430 3,151,562 3,196,970 due after ten years 1,629,312 1,703,603 1,383,350 1,377,191
Financial assets at fair value through profit or loss due in one year 76,542 76,542 22,145 22,145 due after one through two years 28,498 28,498 70,245 70,245 due after two through three years 60,257 60,257 18,358 18,358 due after three through four years 4,876 4,876 39,155 39,155 due after four through five years – – 4,541 4,541 due after five through ten years – – 11,239 11,239 due after ten years 47,424 47,424 69,466 69,466
Amortised cost, unrealised gains and losses and accrued interest on the portfolio of investments classified as held to maturity as well as their fair value Figures in EuR thousand amortised cost unrealised gains unrealised losses accrued interest
Amortised cost, unrealised gains and losses and accrued interest on the portfolio of investments classified as available for sale as well as their fair value Figures in EuR thousand amortised cost unrealised gains unrealised losses accrued interest
EUR 54.8 million (EUR 58.3 million) that are originally allocable to this item as well as fixed-income securities amounting to EUR 217.6 million (EUR 235.1 million) designated in this category.
Analysis of the fair value changes in the portfolio of fixedincome securities at fair value through profit or loss indicated that an amount of EUR 0.6 million (–EUR 5.1 million) was due to changes in the ratings of callable bonds.
Participating interests and other invested assets, real estate funds 940,538 7,976 725,760 92,709
Valuation of the available­for­sale portfolio affecting shareholders‘ equity in EuR thousand
Transfer of gains/losses from the fair-value measurement of the available-for-sale portfolio to the result for the period (55,857) (86,910)
Fixed-income securities – held-to-maturity 1,685,201 723,446 496,375 115,027 4,000 3,969 – – 3,028,018
Fixed-income securities – held-to-maturity 1,776,146 579,187 473,858 120,373 3,925 – – – 2,953,489
Fixed-income securities – available-for-sale 7,946,449 2,432,341 2,276,065 779,432 90,317 221,813 7,594 51,037 13,805,048
Fixed-income securities – available-for-sale 1,223,302 455,694 5,973,882 1,478,993 100,013 5,772,300 282,866 590,584 15,877,634
Equity securities – available-for-sale – 11,515 276,625 41,725 6,528 178,737 – 21,625 536,755
Fixed-income securities – at fair value through profit or loss – – 89,587 – – 119,977 25,585 – 235,149
Real estate is divided into real estate for own use and thirdparty use (investment property). The investment property in the portfolio which is used to generate income is shown under the investments. Real estate is valued at cost of acquisition less scheduled depreciation with useful lives of at most 50 years. Own-use real estate is recognised under other assets.
Net book value at 31 December of the previous year 128,316 128,680
Balance at 1 January of the year under review 128,605 128,884
Gross book value at 31 December of the previous year 190,212 45,258
Net book value at 31 December of the previous year 162,612 21,618
In addition, we held indirect real estate investments in the year under review in an amount of EUR 90.7 million (EUR
The fair value of investment property amounted to EUR 305.4 million (EUR 167.3 million) as at the balance sheet date.
The other invested assets consisted largely of participating interests in partnerships measured at fair value in an amount of EUR 779.5 million (EUR 522.6 million). The amortised cost of these participations amounted to EUR 536.5 million (EUR
424.7 million); in addition, unrealised gains of EUR 244.5 million (EUR 98.7 million) and unrealised losses of EUR 1.5 million (EUR 0.8 million) were recognised from these participations.
IFRS 7 “Financial Instruments: Disclosures”, the financial instruments recognised at fair value in the balance sheet are to be assigned to a three-level fair value hierarchy. This hierarchy, which reflects characteristics of the price data and inputs used for measurement purposes, is structured as follows: – Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities.
– Level 3: Inputs used for measurement that are not based on observable market data.
Fair value hierarchy of financial instruments recognised at fair value in EuR thousand
Short-term investments 1,557,049 13,453 – 1,570,502 total assets measured at fair value 9,161,803 9,103,513 862,067 19,127,383 total liabilities measured at fair value 1,755 75,451 – 77,206 5.1 InVESTMEnTS unDER OWn ManaGEMEnT NOtes
In the year under review financial instruments with a fair value of EUR 289.4 million were no longer allocable to level 1 – as in the previous year – but rather to level 2. The reclassification was necessary owing to the reduced liquidity of the instruments. Financial instruments with a fair value of EUR 21.6 million, which in the previous year were recognised as level 2 instruments, were allocated to level 1 in the current reporting period. The reclassifications principally affected fixed-income securities carried as available for sale.
Currency translation at 1 January of the year under review 9,453 1 29,348
Income and expenses recognised in the statement of income 6,261 (514) (4,676)
Currency translation at 31 December of the year under review (3,896) – 2,600
Net book value at 31 December of the year under review 82,464 11 779,592
Currency translation at 31 December of the year under review (86) – (5,275)
10,160.4 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 rise in funds withheld was attributable principally to increased new business in the area of life reinsurance.
In the case of reinsurance treaties for unit-linked life insurance policies classified as “universal life-type contracts” pursuant to FASB ASC 944-20-15-26 to -30, the capitalised acquisition costs are amortised on the basis of the estimated gross profit margins from the reinsurance treaties, making allowance for the period of the insurance contracts. A discount rate based on the interest for medium-term government bonds was applied to such contracts. In the case of annuity policies with a single premium payment, these values refer to the expected policy period or period of annuity payment.
“Financial Instruments: Disclosures” requires disclosure of the effects of these alternative assumptions. Of the financial instruments included in level 3 with fair values of altogether
For further explanatory remarks please see Section 3.2 “Summary of major accounting policies”.
Within the scope of our management of receivables we expect to receive payment of accounts receivable within three months of the date of creation of the debit entry – a period for which we also make allowance in our risk analysis. Please see our comments on the credit risk within the risk report on page 66 et seq.
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 66.
Development of deferred acquisition costs in EuR thousand 2010 2009 net book value at 31 December of the previous year 1,838,450 1,860,783
Balance at 1 January of the year under review 1,953,193 1,901,760
Cumulative value adjustments at 31 December of the previous year 72,258 125,573
Gross book value of accounts receivable at 31 December of the year under review 2,877,071 2,942,132
This item principally included the goodwill from the acquisition of E+S Rückversicherung AG as well as from acquisition transactions within the subgroup of Hannover Reinsurance
Net book value at 1 January of the year under review 46,056 44,393
Net book value at 31 December of the year under review 98,368 102,408
Gross book value at 31 December of the previous year 111,425 89,110
Gross book value at 31 December of the previous year 171,899 165,959
The item includes EUR 6.6 million (EUR 7.2 million) for selfprovided software and EUR 31.6 million (EUR 36.6 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 2.9 million (EUR
Reserve at 1 January of the year under review 18,509,841 1,869,760 16,640,081 16,957,176 2,059,330 14,897,846
Reclassification pursuant to IFRS 5 (1,306,483) (827,314) (479,169) – – –
Specific value adjustment for retrocessions – 2,100 (2,100) – 10,423 (10,423)
Net book value at 31 December of the year under review 18,065,395 1,025,332 17,040,063 17,425,293 1,747,991 15,677,302 1 Including expenses recognised directly in shareholders‘ equity
The development of the euro relative to the most relevant foreign currencies is also a significant influencing factor in the analysis of run-off triangles. In particular, the depreciation of 7.5% in the euro against the US dollar compared to the previous year led to an increase in the loss and loss adjustment expense reserve on a euro basis.
The following table shows the net loss reserve (loss and loss adjustment expense reserve) for non-life reinsurance in the years 2000 to 2010 as well as the run-off of the reserve
The total amount of the net reserve before specific value adjustments, to which the following remarks apply, was EUR
EUR 214.8 million. This is equivalent to 1.4% of the original reserve.
(especially Hurricanes “Gustav” and “Ike” and the attack on the World Trade Center in New York) as well as proportional reinsurance business from the German market.
Net loss reserve and its run­off in the non­life reinsurance segment Figures in EuR million 31.12.
Cumulative payments for the year in question and previous years nine years later 8,891.4 10,734.5
Loss and loss adjustment expense reserve (net) for the year in question and previous years plus payments made to date on the original reserve nine years later 8,933.0 11,166.3
1 The net loss reserve of EuR 15,255.3 million shown in the run-off triangle for the 2010 balance sheet year includes the assets held for sale and liabilities related to assets held for sale of Clarendon Insurance Group, Inc. in an amount of EuR 479.2 million.
Due after one through five years 6,808,647 378,545 6,430,102 366,402 46,992 319,410
The average maturity of the loss and loss adjustment expense reserve was 5.2 years (5.7 years), or 5.3 years (5.8 years)
The payment patterns are determined with the aid of actuarial estimation methods and adjusted to reflect changes in payment behaviour and external influences. The calculations can also be distorted by major losses, and these are therefore considered separately using reference samples or similar losses. The payment patterns used can be compared across years by contrasting the projected payments with the actual amounts realised.
Liabilities in liability and motor reinsurance traditionally have long settlement periods, sometimes in excess of 20 years, while liabilities in property business are settled within the first ten years.
The parameters used to calculate the benefit reserve are interest income and lapse rates as well as mortality and morbidity rates.
The values for the first two components (interest income and lapse rates) differ according to the country concerned, product type, investment year etc.
At the inception of every reinsurance contract, assumptions about the three parameters are made and locked in for the purpose of calculating the benefit reserve. At the same time, safety/fluctuation loadings are built into each of these components. In order to ensure at all times that the originally chosen assumptions continue to be adequate throughout the contract, checks are made on a regular – normally annual – basis in order to determine whether these assumptions need to be adjusted (“unlocked’).
Development of the benefit reserve in eUr thousand gross retro net gross retro net net book value at 31 December of the previous year 7,952,640 104,868 7,847,772 5,913,075 159,151 5,753,924
Reserve at 1 January of the year under review 8,314,147 77,075 8,237,072 5,989,691 156,926 5,832,765 changes in the consolidated group – – – 981,850 – 981,850
1,187.7 million (EUR 857.4 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.
the 1993 pension plan came into effect. This pension plan provides for retirement, disability and surviving dependants’
above the assessment limit of the pensionable employment income are calculated in a range of 0.7% to 1% and 1.75%
Reserve at 1 January of the year under review 1,629,303 51,645 1,577,658 1,345,414 31,357 1,314,057
Net book value at 31 December of the year under review 1,910,422 83,224 1,827,198 1,512,840 47,651 1,465,189
As part of the adequacy test for technical liabilities the anticipated future contractual payment obligations are compared with the anticipated future income. Hannover Re adopts the
From 1997 onwards it has been possible to obtain pension commitments through deferred compensation. Following the merger with Gerling-Konzern Lebensversicherungs-AG,
Deferred compensation 20 232 actuarial gain/loss 11,034 5,915 currency translation 2,447 2,366
Measurement assumptions in % 2010 2009 germany Usa australia germany Usa australia projected long-term yield on plan assets – – 7.00 – – 7.00 rate of compensation increase 2.75 – 5.00 3.00 – 5.00
The expected long-term return on plan assets was derived from the anticipated long-term yields of the individual asset classes and weighted pro rata. The plan assets consist of qualifying insurance policies as defined by IAS 19.
The following table presents a reconciliation of the funded status – calculated as the difference between the defined benefit obligations and the plan assets – with the provision for pensions recognised as at the balance sheet date.
Defined benefit obligations at 31 December of the year under review 109,962 93,462 fair value of plan assets at 31 December of the year under review 10,464 9,317
Projected benefit obligation from wholly or partially funded plans (before deduction of fair value of plan assets) 12,542 11,217
Funded status (present value of earned benefit entitlements less fund assets) 99,498 84,145
The net periodic pension cost was recognised in the consolidated statement of income in amounts of EUR 6.0 million
The following amounts were recognised for the year under review and prior years under the accounting of defined benefit plans: In the current financial year Hannover Re does not expect any contribution payments (EUR 0.6 million) under the pension plans set out above.
experience adjustments on plan assets – – – (374) 34 5.10 provisions for pensions anD oTher posT-employmenT benefiT obligaTions Notes
The liabilities from derivatives of EUR 77.2 million (EUR 21.1 million) consist of instruments to hedge currency and inflation risks as well as embedded derivatives recognised separately from the underlying insurance contract at fair value pursuant to IAS 39 “Financial Instruments: Recognition and Measurement ”. Please see our remarks on derivative financial instruments in Section 7.1 “Derivative financial instruments”.
The other liabilities include sundry non-technical provisions of EUR 131.8 million (EUR 69.1 million), which developed as shown in the following table.
In addition to the defined benefit plans, some Group companies maintain defined contribution plans that are based on length of service and the employee’s income or level of contributions. The expense recognised for these obligations in the year under review in accordance with IAS 19 “Employee
Benefits” was EUR 4.2 million (EUR 4.0 million), of which only a minimal amount was due to obligations to members of staff in key positions.
Audits and costs of publishing the annual financial statements 6,189 183 6,372 (707)
On 14 September 2010 Hannover Re placed a new subordinated bond on the European capital market through its subsidiary Hannover Finance (Luxembourg) S.A. This subordinated debt with a nominal value of 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% p.a. in the first ten years, after which the interest basis changes to a floating rate of three-month EURIBOR +423.5 basis points.
Hannover Finance (Luxembourg) S.A. The bond is perpetual and carries a fixed coupon of 5.00% in the first ten years.
It may be redeemed by Hannover Re on 1 June 2015 at the earliest and at each coupon date thereafter. If the bond is not called at the end of the tenth year, the coupon will step up to a floating-rate yield of quarterly EURIBOR +268 basis points. The interest will be serviced according to the same principles as those practised in the past. As part of the transaction, holders of the subordinated debt of EUR 350.0 million placed by Hannover Re in 2001 – which has a term of 30 years and may be called in prior to maturity by the issuer on 14 March 2011 – were offered an opportunity to exchange their existing issue for holdings in the new bond. Participation in the exchange amounted to a nominal value of EUR 211.9 million, corres ponding to EUR 240.5 million of the new bond issue. The cash component of the new bond in the amount of nominally EUR 259.5 million was placed predominantly with institutional investors in Europe. The remaining volume of the bond issued in 2001 after the exchange was unchanged at
EUR 138.1 million and carries a fixed coupon of 6.25% until
March 2011. If Hannover Re does not exercise its right of early cancellation on this date, the coupon will step up to a floating-rate yield of quarterly EURIBOR +205 basis points.
Debt and subordinated capital in eUr thousand 2009 subordinated loans coupon
accrued interest and rent fair value other long-term liabilities 86 – – 86
164 Hannover Re Group annual report 2010Notes 5.12 DebT anD sUborDinaTeD capiTal
Unsecured letter of credit facilities with various terms (maturing at the latest in 2017) and a total volume equivalent to EUR
1,207.2 million (EUR 802.2 million) exist on a bilateral basis with financial institutions.
N ot es 5.13 shareholDers‘ eqUiTy, minoriTy inTeresTs anD TreasUry shares Notes
Furthermore, a long-term unsecured line of credit with a total volume equivalent to at most EUR 565.9 million (EUR 523.2 million) was concluded in December 2009. It is intended specifically for US life business. For further information on the letters of credit provided please see our explanatory remarks in Section 7.7 “Contingent liabilities and commitments”.
A number of LoC facilities include standard market clauses that grant rights of cancellation to the banks in the event of material changes in our shareholding structure or trigger a requirement on the part of Hannover Re to furnish collateral upon materialisation of major events, for example if our rating is significantly downgraded. Please see our explanatory remarks in the “Financial position” section of the management report, page 77 on the information pursuant to § 315 Para. 4
Shareholders’ equity is shown as a separate component of the financial statement in accordance with IAS 1 “Presentation of Financial Statements” and subject to IAS 32 “Financial
IAS 39 “Financial Instruments: Recognition and Measurement ”. The change in shareholders’ equity comprises not only the net income deriving from the statement of income but also the changes in the value of asset and liability items not recognised in the statement of income.
amount to EUR 120,597,134.00. They are divided into 120,597,134 voting and dividend-bearing registered no-par value shares. The shares are fully paid up. Each share carries an equal voting right and an equal dividend entitlement.
Authorised capital of up to EUR 60,299 thousand is available with a time limit of 3 May 2015. New, no-par-value registered shares may be issued on one or more occasions for contributions in cash or kind. Of the total amount, up to EUR 1,000 thousand may be used to issue employee shares.
IAS 1 “Presentation of Financial Statements” requires separate disclosure in shareholders’ equity of treasury shares and transactions with owners acting in their capacity as such. By a resolution of the Annual General Meeting of Hannover Rückversicherung AG adopted on 5 May 2009, the company was authorised until 31 October 2010 to acquire treasury shares of up to 10% of the share capital existing on the date of the resolution. As part of this year’s employee share option plan
Hannover Re acquired altogether 23,163 treasury shares in the course of the second quarter of 2010 and delivered them to eligible employees at preferential conditions. These shares are blocked until 31 May 2014. This transaction reduced the retained earnings by EUR 0.3 million. The company was no longer in possession of treasury shares as at the balance sheet date.
Of the impairments totalling EUR 16.6 million (EUR 141.4 million ), an amount of EUR 7.7 million (EUR 92.6 million) was attributable to alternative investments. The impairments on fixed-income securities of EUR 7.9 million (EUR 45.4 million)
were taken predominantly on structured assets. An impairment loss of EUR 0.6 million (EUR 3.2 million) was recognised on equities whose fair value had fallen significantly – i.e. by at least 20% – or for a prolonged period – i.e. for at least nine months – below acquisition cost. This contrasted with writeups of EUR 27.2 million (EUR 20.1 million) on investments that had been written down in previous periods. Of this total volume, EUR 3.0 million (EUR 10.8 million) was attributable to alternative assets and EUR 24.1 million (EUR 9.3 million)
to fixed-income securities. The portfolio did not contain any overdue, unadjusted assets as at the balance sheet date since overdue securities are written down immediately.
Investment income in eUr thousand 2010 2009 income from real estate 31,410 4,762 interest income 829,855 793,269 other investment income 14,829 9,649 ordinary investment income 880,521 810,547
realised gains on investments 244,694 182,897 realised losses on investments 82,691 69,885
Impairments on participating interests and other financial assets 7,976 92,709 other investment expenses 67,409 53,121
Net income from assets under own management 942,527 843,609 interest income on funds withheld and contract deposits 436,183 455,722 interest expense on funds withheld and contract deposits 119,815 178,948 total investment income 1,258,895 1,120,383
Financial assets – at fair value through profit or loss 6,812 17,004
Net gains and losses on investments figures in eUr thousand ordinary investment income11 realised gains and losses impairments/ appreciation
Reinsurance result in eUr thousand 2010 2009 gross written premium 11,428,717 10,274,755 ceded written premium 1,127,465 759,076 change in unearned premium (287,536) (227,161)
other acquisition costs 5,302 14,137 other technical expenses 44,183 38,788 administrative expenses 280,720 246,940
Commissions and brokerage, change in deferred acquisition costs in eUr thousand commissions paid (gross) 2,266,467 2,055,809 reinsurance recoverables 147,198 83,926 change in deferred acquisition costs (gross) (158,192) (122,719)
Group tax rate of 32% unless they refer specifically to individual companies.
In the previous year we reported that, contrary to a very clear opinion expressed by tax attorneys, the revenue authority is of the view that not inconsiderable investment income generated by the Group’s reinsurance subsidiaries domiciled in
Ireland is subject to taxation of foreign sourced income at the parent companies in Germany on the basis of the provisions of the Foreign Transactions Tax Act. Insofar as tax assessments to this effect have already been received, appeals have been filed – also with respect to the amounts already recognised as a tax expense. After our opinion had already been confirmed in full by the court of the first instance in 2009, we evaluated as slight the risk that tax assessments containing taxation of foreign sourced investment income generated by Irish companies at the parent companies would be upheld.
Income tax in eUr thousand 2010 2009 current tax for the year under review 307,519 146,887 current tax for other periods (52,498) 37,804
172 Hannover Re Group annual report 2010Notes 6.5 Taxes on income
The current and deferred taxes recognised directly in shareholders ’ equity in the financial year amounted to –EUR 37.5 million (–EUR 23.3 million). They resulted from items that were charged or credited directly to equity.
Tax loss carry-forwards 45,433 117,918 loss and loss adjustment expense reserves 201,132 193,175
Present value of future profits on acquired life reinsurance portfolios (PVFP) 12,155 12,297 other valuation differences 262,076 290,337
Netting of deferred tax assets and deferred tax liabilities in eUr thousand 2010 2009
The deferred tax assets and deferred tax liabilities are shown unoffset in the above table. The deferred taxes are recognised as follows in the balance sheet after appropriate netting: 1 adjusted on the basis of ias 8 2 Thereof on tax loss carry-forwards: -eUr 43,787 thousand (-eUr 110,573 thousand)
expected expense for income taxes 348,331 341,065 change in deferred tax rates (899) 19
Tax income not attributable to the reporting period (previous year: tax expense) (54,026) 27,559
One to five years six to ten years more than ten years
In addition, tax credits of EUR 5.9 million (EUR 22.3 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 cash flows from reinsurance contracts. These transactions gave rise to recognition of other liabilities in an amount of EUR 34.9 million (other liabilities of EUR 17.8 million, other financial assets at fair value through profit or loss of EUR 0.2 million).
In the year under review Hannover Re acquired derivative financial instruments to hedge inflation risks associated with the loss reserves in the technical account. These transactions resulted in the recognition of other liabilities amounting to
EUR 31.4 million (previous year: none) and other financial assets at fair value through profit or loss in an amount of
The net changes in the fair value of these instruments produced a charge of EUR 50.9 million (EUR 17.1 million) to the result of the financial year.
A small number of treaties in life and health reinsurance meet criteria which require application of the prescriptions in
IFRS 4 “Insurance Contracts” governing embedded derivatives. These accounting regulations require that certain derivatives embedded in reinsurance contracts be separated from the underlying insurance contract (“host contract”), reported separately at fair value in accordance with IAS 39 “Financial
Hannover Re has refined the calculation logic for derivatives resulting from ModCo treaties. The risks from the aforementioned contracts are thus established on a more market-oriented basis. Retention of the parameters used until the first quarter of 2010 to calculate the derivative would have produced a value of EUR 26.5 million. The effect of this refinement of the calculation logic on the value of the derivative in future reporting periods could only have been determined with a disproportionately high effort.
Owing to the narrowing of credit spreads in the course of the year, the change in the fair value of the derivative gave rise to a positive profit contribution of EUR 10.7 million before tax
EUR 5.3 million (EUR 5.4 million) in the year under review.
insurance of the Talanx Group. Divisions of Talanx AG also performed services for us in the areas of taxes and general administration, in the latter case additionally through Talanx
Re and E+S Rück a preferential position as reinsurers of cedants within the Talanx Group. In addition, Hannover Re and
All in all, application of the standards governing the carrying of derivatives in connection with the technical account led to recognition of assets totalling EUR 54.5 million (EUR 58.0 million ) as well as recognition of liabilities from the derivatives resulting from technical items in an amount of EUR 8.5 million (EUR 3.3 million) as at the balance sheet date. Increases in investment income amounting to EUR 11.0 million (EUR
AG. The guarantees were transferred to Hannover Reinsurance (Ireland) Ltd in 2007. All claims of Hannover Reinsurance
Business assumed and ceded in Germany and abroad in eUr thousand 31. 12. 2010 premium Underwriting result
Business assumed non-life reinsurance 381,281 107,621 life and health reinsurance 276,418 (6,502)
With regard to this information please see in general the remuneration report included as part of our Corporate Governance report, in particular page 83 et seq.
The remuneration report is based on the recommendation of the German Corporate Governance Code and contains information which also forms part of the notes to the 2010 consolidated financial statement as required by IAS 24 “Related
Party Disclosures”. In addition, we took into account the more specific provisions of DRS 17 “Reporting on the Remuneration of Members of Governing Bodies”. Under German commercial law, too, this information includes data specified as mandatory for the notes (§ 314 HGB) and the management report (§ 315
Remuneration and shareholdings of the management boards of the parent company 7.3 share-based payment
The internal performance condition is achievement of the target performance defined by the Supervisory Board, which is expressed in terms of the diluted earnings per share calculated in accordance with IAS 33 “Earnings Per Share” (EPS).
Reinsurance Index. This index encompasses the performance of listed reinsurers worldwide. Depending upon the outperformance or underperformance of this index, the EPS basic number is increased – albeit by at most 400% of the EPS basic number – or reduced – although by no more than 50% of the
the waiting period is two years; for each additional 20% of the stock appreciation rights (tranches two to four of each allocation year) the waiting period is extended by one year.
The allocations for the years 2000, 2002 to 2004 as well as 2006, 2007 and 2009 gave rise to commitments in the 2010 financial year shown in the following table. No allocations were made for 2001, 2005 or 2008.
Stock appreciation rights of Hannover Re allocation year period 10 years 10 years 10 years 10 years 10 years 10 years 10 years waiting period 2 years 2 years 2 years 2 years 2 years 2 years 2 years participants in year of issue 137 110 106 109 110 113 95 fair value at 31.12.2010 (in eUr) 7.30 7.86 9.77 16.16 8.99 8.79 5.49 number of rights existing at 31.12.2010 1,535,600 889,858 691,751 126,622 3,316 2,365 –
amounts paid out in the 2010 financial year (in EUR million) – 0.02 0.50 0.25 0.49 0.07 0.01
The calculations were based on the year-end closing price of the Hannover Re share of EUR 41.38 as at 22 December 2010, expected volatility of 39.69% (historical volatility on a five-year basis), a dividend yield of 5.32% and risk-free interest rates of 1.02% for the 2002 allocation year, 1.39% for the 2003 allocation year, 1.76% for the 2004 allocation year, 2.38% for the 2006 allocation year, 2.64% for the 2007 allocation year and 3.05% for the 2009 allocation year.
Development of the stock appreciation rights of Hannover Re allocation year granted in 2001 – – – – – – 1,138,005 exercised in 2001 – – – – – – –
Number of options at 31.12.2001 – – – – – – 1,138,005 granted in 2002 – – – – – – –
Number of options at 31.12.2002 – – – – – – 1,097,235 granted in 2003 – – – – – 710,429 –
On this basis the aggregate provisions – included in the sundry non-technical provisions – amounted to EUR 18.6 million for the 2010 financial year (EUR 10.5 million). The expense totalled altogether EUR 9.4 million (EUR 7.5 million).
(claims settlement) and expenditures on the administration of investments include the following personnel expenditures: expenditures on personnel
As at the balance sheet date altogether 2,192 (2,069) staff were employed by the Hannover Re Group, with 1,089 (1,032)
Personnel information 2010 2009 number of employees (excluding board members) 2,099 2,133 2,159 2,192 2,130
Personnel expenditures in eUr thousand 2010 2009 a) wages and salaries aa) expenditures on insurance business 144,546 118,495 ab) expenditures on the administration of investments 10,578 9,742 b) social security contributions and expenditure on provisions and assistance ba) social security contributions 18,787 17,327 bb) expenditures for pension provision 16,404 11,819 bc) expenditures for assistance 2,530 1,922
2.30 per share should be paid for the 2010 financial year. This corresponds to a total distribution of EUR 277.4 million. The dividend proposal does not form part of this consolidated financial statement.
Hannover Re has placed four subordinated debts on the European capital markets through its subsidiary Hannover Finance