Growth in earnings per share (year-on-year comparison) ≥ 10% 10.1% 5.4% 40.2% 17.6%
Hannover Re offers insurance solutions designed to minimise the uncertainties associated with risks, for example, in connection with the accident-related absence of sporting figures or the loss of income or profits due to weather events or other natural disasters.
Regular premium annuity treaty Retirement related liabilities substantially increased during the last years due to improved life expectancy and current low interest rates. For corporations offering occupational pensions and pension funds this is problematic as the uncertainty about future liabilities makes mergers and acquisitions difficult. In addition, corporations are frequently pressurised from shareholders to focus on their core business. Therefore, they are looking for a way to reduce their longevity risk. Hannover Re offers a solution that conserves the company’s liquidity position while providing planning reliability about future liabilities: the regular premium annuity treaty. Hannover Re considers the diversification for its portfolio to be beneficial and is therefore able to offer competitive conditions to its clients for longevity transactions.
Growth in Europe was supported by further monetary policy measures taken by the European Central Bank (ECB) in June and September of 2014 as well as by the sharp drop in the price of oil towards year-end.
Investment income from assets under own management for property and casualty reinsurance rose by 7.4% year-on-year to reach EUR 823.2 million (EUR 766.2 million). This was assisted inter alia by an improved result from the fair value development of the inflation swaps, which stood at -EUR 28.8 million after -EUR 41.0 million in the comparable period, and higher realised gains. We use inflation swaps to help hedge inflation risks associated with part of the loss reserves in our technical account.
The underwriting result was also thoroughly gratifying at EUR 351.5 million (EUR 335.5 million). With major loss expenditure coming in well below the expected level, the combined ratio of 94.7% showed another slight improvement on the previous year’s very good figure (94.9%). The operating profit (EBIT) as at 31 December 2014 climbed by 12.2% to EUR 1,190.8 million (EUR 1,061.0 million). The EBIT margin amounted to 17.0% (15.5%), thereby comfortably beating the target of at least 10% and reflecting the outstanding performance in property and casualty reinsurance. Group net income in property and casualty reinsurance reached EUR 829.1 million (EUR 807.7 million), the highest figure to date in the company’s history. This represents an increase of 2.7% on the previous year.
The gross premium in our total business increased slightly by 2.9% as at 31 December 2014 to EUR 14.4 billion (EUR 14.0 billion ). At constant exchange rates the increase would have been 2.8%. We thus achieved our guidance, which had anticipated stable to slightly higher gross premium volume in the original currencies. The level of retained premium retreated slightly to 87.6% (89.0%), while net premium earned rose by 1.6% to EUR 12.4 billion (EUR 12.2 billion). At unchanged exchange rates growth would have come in at 1.5%.
The total policyholders’ surplus, consisting of shareholders’ equity, non-controlling interests and hybrid capital, amounted to EUR 10.2 billion (EUR 8.8 billion) as at 31 December 2014.
Hannover Re counters this fiercely competitive climate with a profit-oriented underwriting policy and is thus well placed to handle the challenging market conditions. In regions and lines where prices failed to satisfy our profitability requirements we systematically reduced our shares. In areas where margins were commensurate with the risks we expanded our business. This strategy of active cycle management enables us – despite soft market conditions – to preserve the high rate quality of our portfolio. Overall, Hannover Re again benefited from its enduring customer relationships as well as its position as one of the world’s leading and most financially robust reinsurance groups.
The rate increases that have prevailed in the original market since 2011 flagged appreciably over the course of the year under review. In most lines, however, increases of 1% to 2% were still recorded. In some property insurance lines the trend turned negative. This was especially true of large programmes, whereas under small and mid-sized programmes the situation remained relatively stable. Casualty business in the original market continued to see rate increases, albeit at a declining pace. Conditions here for the most part remained unchanged. Sporadic rate increases were observed in Canada on the back of the flood losses in 2013, but overall rates here were flat or softened slightly.
The largest single loss for our company in the year under review – coming in at EUR 63.4 million for net account – was the event in Tripoli. Reflecting these loss expenditures, the underwriting result – after years of robust profitability – posted a marked decline in the year under review. The combined ratio slipped to 112.1% (78.8%). The operating result (EBIT) consequently deteriorated to -EUR 2.4 million (EUR 101.0 million).
Having substantially enlarged our credit and surety portfolio in 2009 and 2010, we see no reason – given the current capacity surplus and the associated diminished appeal of treaty conditions – to further expand our market share. We continued to follow through on our strategy of boosting the proportion of the total portfolio deriving from business with political risks.
Global reinsurance We combine all markets worldwide under global reinsurance with the exception of our target markets and specialty lines. This segment also encompasses global catastrophe business, the reinsurance of agricultural risks and Sharia-compliant retakaful business.
Property & Casualty reinsurance: Breakdown of gross M 19 written premium in worldwide treaty reinsurance 10.7% Other 59.2% Property 23.4% Motor 6.7% Liability
Despite a number of loss events, we are thoroughly satisfied with the development and performance of our business in South and Southeast Asian markets. The result came under strain from floods in Pakistan and India as well as a cyclone that impacted India, typhoons in the Philippines and a large fire at a semiconductor factory in Thailand. The premium volume from this region once again surged vigorously in the year under review.
Overall, we are highly satisfied with the development of our business in Latin America.
In view of the highly competitive state of the markets, we are not currently guided by any specific premium targets but focus instead on preserving the profitability of our portfolio. Nevertheless, we believe that the retakaful market will continue to generate dynamic growth rates going forward.
As in the previous years, losses were very much on the moderate side for both insurers and reinsurers; there were no major natural disasters resulting in heavy losses. Neither the storms in Europe and Canada nor the earthquake in Chile had any implications for pricing on account of the relatively slight market losses. The largest single loss incurred by our company from natural catastrophe business was the low pressure area known as Ela, which swept across France, Belgium and Germany causing net loss expenditure of EUR 49.1 million. The hurricane season in the United States and the Caribbean also passed off comparatively quietly in the year under review. Only hurricane Gonzalo, which primarily impacted Bermuda, resulted in loss expenditure for Hannover Re’s account.
Structured reinsurance and Insurance-linked securities Structured reinsurance Hannover Re is one of the largest providers in the world of structured reinsurance solutions. These products are designed, among other things, to optimise the cost of capital for our ceding companies.
The year under review, in common with the two previous years, brought another strong inflow of cash into the ILS market. In the first place, investors value the low correlation with other financial assets and the associated diversification, while at the same time they also find the market for insurance risks relatively appealing in comparison with other investments. As a result, there has been no let-up in the lively demand for catastrophe bonds among investors. Prices for these bonds have consequently fallen considerably. At the same time, though, the issuance of catastrophe bonds has become a more attractive proposition. The volume of new issues in the market was once again higher at USD 8.7 billion (USD 7.7 billion).
The preservation of its capital is a key strategic objective for Hannover Re. In the 2014 financial year and in recent years hybrid capital was issued as an equity substitute in order to keep the cost of capital on a low level. The policyholders’ surplus is a key management ratio in the context of Hannover Re’s comprehensive capital management. The policyholders’ surplus is defined as follows: • shareholders’ equity excluding non-controlling interests, composed of the common shares, additional paid-in capital, other comprehensive income and retained earnings,
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 21 et seq. of this report.
Non-controlling interests in shareholders’ equity increased by EUR 60.6 million to EUR 702.2 million as at 31 December 2014. This rise was attributable primarily to the non-controlling interests in E+S Rückversicherung AG in an amount of EUR 50.3 million.
Hannover Finance (Luxembourg) S.A., subordinated debt, EUR 500 million; 2010 / 2040 14.9.2010 5.75 498.4 498.2
Cash and cash equivalents at the beginning of the period 642.9 572.2
Information on Hannover Rück SE (condensed version in accordance with the Commercial Code (HGB))
Our capital and reserves – excluding the disposable profit – stood at EUR 1,381.7 million (EUR 1,381.7 million). The total capital, reserves and technical provisions – comprised of the capital and reserves excluding disposable profit, the subordinated liabilities, the equalisation reserve and similar provisions as well as the net technical provisions – grew during the year under review to EUR 35,406.7 million (EUR 30,866.0 million). Based on the increase in the total capital, reserves and technical provisions, the balance sheet total of Hannover Rück SE grew to EUR 45.0 billion (EUR 35.9 billion).
Staff turnover / absenteeism Hannover Home Office M 49 in %
We manage our total enterprise risk such that we can expect to generate positive Group net income with a probability of 90% p. a. and the likelihood of the complete loss of our economic capital and shareholders’ equity does not exceed 0.03% p. a. These indicators are monitored using our internal capital model and the Executive Board is informed quarterly about adherence to these key parameters as part of regular reporting. The necessary equity resources are determined according to the requirements of our economic capital model, solvency regulations, the expectations of rating agencies with respect to our target rating and the expectations of our clients. Above and beyond that, we maintain a capital cushion in order to be able to act on new business opportunities at any time.
Default risks decreased owing to the improved average credit status of our counterparties and a reduced volume of receivables due from retrocessionaires. To some extent the reduction was cancelled out by model adjustments. Due to the rise in the required capital for almost all risk categories, the diversification effect also increased.
• counterparty default risks resulting from our diverse business relationships and payment obligations inter alia with clients and retrocessionaires,
Survival ratio in years and reserves for asbestas-related claims and pollution damage M 62 in EUR million 2014 2013
For further details of the activities of the Supervisory Board committees please see the explanations provided in the Supervisory Board Report on pages 240 to 242.
The risk management system applicable throughout the entire Hannover Re Group is based on the risk strategy, which in turn is derived from the corporate strategy. A core component is the systematic and comprehensive recording of all risks that from the current standpoint could conceivably jeopardise the company ’s profitability and continued existence. Further details in this regard may be obtained from the risk report contained in this Annual Report on page 74 et seq.
Of the total amount of defined variable remuneration, a partial amount of 60% is paid out in the month following the Supervisory Board meeting that approves the consolidated financial statement. The remaining amount of 40% is initially withheld as explained below with a view to encouraging long-term value creation: Payment procedures for the total variable remuneration M 81
3 An annual premium of EUR 98,300 (25% of the pensionable income) was paid for Mr. Vogel for 2014. The guaranteed interest rate of his commitment is 3.25%. The values shown include his entitlements prior to appointment to the Executive Board (1 April 2009), which in accordance with a resolution of the company’s Supervisory Board (May 2014) shall remain unaffected by his pension commitment as a member of the Executive Board.
Dealings in shares, options and derivatives of Hannover Rück SE effected by members of the Executive Board or Supervisory Board of Hannover Re or by other persons with managerial functions who regularly have access to insider information concerning the company and who are authorised to take major business decisions – as well as such dealings conducted by certain persons closely related to the aforementioned individuals – in excess of EUR 5,000 are to be reported pursuant to § 15a Securities Trading Act (WpHG). The reportable transactions listed in the following table took place in the 2014 financial year.
Members of staff on the levels of Chief Manager, Senior Manager and Manager are also able to participate in a variable remuneration system through the Group Performance Bonus (GPB). The Group Performance Bonus (GPB) is a remuneration model launched in 2004 that is linked to the success of the company. This tool is geared to the minimum return on equity of 750 basis points above the risk-free interest rate and the return on equity actually generated. For those participating in the GPB 14.15 monthly salary payments are guaranteed; a maximum of 16.7 salary payments is attainable. Since its launch the maximum amount of the GPB was paid out in 2006, 2007, 2009, 2010, 2012 and 2013.
Dieter Kroll is a General Manager with Hannover Re. Working out of the company’s Home Office in Hannover, he is responsible for Asian life and health business including financial solutions
Continental Europe In Germany, the largest single market within our Continental Europe segment, Hannover Re was again able to expand its already excellent position. Here, too, competition nevertheless remained keen and the trend towards primary insurers carrying higher retentions was sustained. While the loss situation of past years enabled us to catch up on rate increases or hold prices stable in some lines, such as motor own damage and homeowners comprehensive, the move observed in previous years towards exposure-based rate increases ground to a halt. Particularly in non-proportional motor liability business, the premium increases needed on account of continuously rising long-term care costs in relation to bodily injury claims proved to be unattainable. The strained situation in industrial fire insurance also remained unchanged. Fierce competition and a large number of basic losses put adequate results in this segment out of reach. With this in mind, we wrote our business here selectively. Our total portfolio in the domestic German market closed with a premium gain due to a number of new customer relationships.
Turning to Australia and New Zealand, thanks to our strong local presence and established customer relationships we expect to be able to preserve our portfolio in these markets on a stable level. Particularly attractive opportunities for growth may open up in niche markets.
Preparations for the impending implementation of the Solvency II Framework Directive are also playing a major role. The new reporting and disclosure requirements enter into effect on 1 January 2016. In the course of the current year we shall step up our efforts to ensure that all requirements are satisfied as early as possible. As far as our business is concerned, we shall cooperate even more closely with our customers in 2015 in order to offer attractive reinsurance solutions for solvency and capital relief under the new Solvency II regime.
Changes in regulatory provisions will affect us not only in Germany but also globally in the year ahead. China, for example, plans to implement new solvency directives with effect from 2015: the new China Risk Oriented Solvency System (C-ROSS) puts the focus on risk-based capital requirements and imposes more detailed reporting. The adoption of C-ROSS will significantly improve comparability with Solvency II – which in principle must be viewed favourably with an eye to progressive globalisation. We are monitoring the implications of C-ROSS implementation particularly closely in order to be able to respond flexibly and appropriately to the requirements. The South African insurance industry is similarly seeing moves to roll out risk-based capital requirements. This will serve to close the gap and improve comparability both with Europe’s Solvency II regulatory regime and with other international riskoriented systems of prudential regulation.
New accounting standards or accounting standards applied for the first time
Hannover Re Euro PE Holdings GmbH & Co. KG, Hannover / Germany 1 91.20 EUR 175,845 2,385
E+S Rückversicherung AG, Hannover / Germany 1 64.79 EUR 691,413 126,000
Hannover Re Risk Management Services India Private Limited, New Delhi / India 13 100.00 INR 36,451 (3,549)
Commercial & Industrial Acceptances (Pty) Ltd., Johannesburg / South Africa 20.40 ZAR 5,279 20,366
Consolidated structured entities The following structured entities were consolidated as at the balance sheet date: • Hannover Re (Guernsey) PCC Limited, St Peter Port, Guernsey
The securitisation of reinsurance risks is largely structured through the use of structured entities.
The income and expenses from business relations with unconsolidated structured entities are shown in investment income insofar as they result from general investment activities or investments in catastrophe bonds and are recognised in the technical account insofar as they are attributable to retrocessions and securitisations.
Loans and receivables due in one year 261,575 265,156 237,228 240,952 due after one through two years 373,036 390,647 220,144 228,825 due after two through three years 268,376 283,396 376,062 399,698 due after three through four years 143,511 152,077 280,019 298,656 due after four through five years 197,584 219,375 141,240 149,437 due after five through ten years 979,791 1,122,393 1,106,317 1,184,496 due after more than ten years 764,314 954,282 848,090 923,723
Hannover Re recognised in this category as at the balance sheet date derivative financial instruments in an amount of EUR 66.4 million (EUR 70.1 million) that are originally allocable to this item as well as fixed-income securities amounting to EUR 64.5 million (EUR 36.1 million) designated in this category.
Fixed-income securities – available-for-sale 1,439,895 659,360 7,638,934 2,401,680 129,003 8,888,541 232,899 1,019,580 22,409,892
Net book value after currency translation 5,828 8 261,629 1,034,679 68,827
Present value of future profits (PVFP) on acquired life reinsurance portfolios
Gross book value at 31 December of the previous year 129,828 121,815
Development of other intangible assets N 45 in EUR thousand 2014 2013
Gross book value at 31 December of the year under review 220,296 196,689
Net book value at 31 December of the previous year 21,666,932 1,403,804 20,263,128 21,610,698 1,538,215 20,072,483
Defined contribution plans In addition to the defined benefit plans, some Group companies have 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 financial year in accordance with IAS 19 “Employee Benefits” was
EUR 18.7 million (EUR 17.4 million), of which EUR 1.2 million (EUR 1.1 million) was due to obligations to members of staff in key positions and EUR 6.5 million (EUR 6.0 million) to contributions to the statutory pension insurance scheme in Germany.
Partial retirement arrangements and early retirement obligations 3,723 7 3,730 19 531 – (3) 3,215
Maturity structure of derivative financial instruments N 83 in EUR thousand 2013
In the year under review Hannover Rück SE reached an agreement with Talanx Asset Management GmbH that allows Talanx Asset Management GmbH to use software for checking sanctions lists.
Fair value at 31 December 2014 (in EUR) 26.80 8.92 8.76 10.79 10.32 24.62
In our function as the Supervisory Board we considered at length during the 2014 financial year the position and development of the company and its major subsidiaries. We advised the Executive Board on the direction of the company and monitored the management of business on the basis of written and verbal reports from the Executive Board. The Supervisory Board of Hannover Rück SE held four regular meetings and one constituent meeting in order to adopt the necessary resolutions after appropriate discussion. In addition, we were informed by the Executive Board in writing and orally about the course of business and the position of the company and the Group on the basis of the quarterly financial statements. The quarterly reports with the quarterly financial statements and key figures for the Hannover Re Group constituted an important source of information for the Supervisory Board. We received an analysis of the 2013 results in property & casualty and life & health reinsurance as well as a presentation from the Executive Board covering the profit expectations for the 2014 financial year and the operational planning for the 2015 financial year. In addition, the Chairman of the Supervisory Board was constantly advised by the Chairman of the Executive Board of major developments and impending decisions as well as of the risk situation within the company and the Group. All in all, we were involved in decisions taken by the Executive Board and assured ourselves of the lawfulness, regularity and efficiency of the company’s management as required by our statutory responsibilities and those placed upon us by the company’s Articles of Association.
Group and the accumulated prefinancing volume in life reinsurance including a comparison of the expected return flows with the repayments actually made, the risk reports, the compliance report and the report on adherence to Corporate Governance principles were discussed and reports on the major subsidiaries were received and considered. In addition, the Committee examined the investment structure and investment income – including the stress tests with regard to the investments and their implications for net income and the equity base – and defined the audit concentrations for the 2014 financial year. The Committee was provided with detailed reports on the current status of the participation in ITAS Vita S.p.A. and considered the relocation of the registered office of International Insurance Company of Hannover SE from London to Hannover as well as the further development of this subsidiary. In addition, an audit report was submitted by KPMG AG Wirtschaftsprüfungsgesellschaft on the calculation of the intrinsic value creation (IVC). The Committee prepared various resolutions to be adopted by the Supervisory Board, including resolutions on the revised corporate strategy, the acquisition of the shares of International Insurance Company of Hannover SE and the capital increase at Hannover Finance (UK) Limited. The Committee also received an explanation of the capital market risks in life and health reinsurance and was provided with a detailed report on the implications of downgrade clauses. The Finance and Audit Committee approved the issuance of a perpetual subordinated bond to refinance hybrid capital. As in the previous year, we were again updated on the status of the approval procedure for the internal model.
Hannover Re UK Life Branch 10 Fenchurch Street London EC3M 3BE
We would also be pleased to send you copies of the Annual Reports of the Hannover Re Group and Hannover Rück SE in English or German. If you wish to receive paper copies of any of these versions please contact Corporate Communications on: Fax + 49 511 5604-1648 or order them online at www.hannover-re.com under “Investors / Results and reports”.