Wasco County is named after a local tribe of Native Americans, the Wasco, part of the Chinook tribe
We further reduced our already low exposure to countries with high credit spreads. It remains the case that our portfolio does not contain any Greek-issued bonds.
Continuing restructuring efforts on the part of banks brought about further changes among our analysts in 2012. During the year altogether four banks and brokers, namely the Royal Bank of Canada, Redburn, WestLB and UniCredit, ceased their research activities in relation to the Hannover Re share. On the other hand, two brokers – Raymond James and Primavenue – began to cover our share. With this in mind, and against the backdrop of a year of relatively light losses, around 300 analyst recommendations – some 50 fewer than in the previous year – were published for Hannover Re and the insurance sector in the year under review. As at the end of the financial year 34 analysts had handed down opinions on Hannover Re: ten analysts recommended the Hannover Re share as “buy” or “overweight”; altogether seventeen opinions were a “hold”,
• Foster customer relationships to both parties’ mutual benefit irrespective of the size of the account
Non-life reinsurance: Gross written premium in non-life reinsurance in EUR million
The claims situation in the engineering lines was satisfactory in the 2012 financial year. Despite its highly international orientation overall, engineering business is exhibiting growing potential domestically too – especially in the field of renewable energies: we work together here with our partners on solutions that enable the insurability of energy-efficient technologies.
Responding to an improved pricing climate, we further expanded our business in the year under review. We succeeded in doing this despite the fact that many insurers increased their retentions. In property lines, we achieved rate increases averaging between 5% and 10% in the catastrophe sector and in per risk reinsurance. On the casualty side prices rose in virtually all lines – for the second year in succession in workers’ compensation business.
Insurance-Linked Securities Demand for ILS products on the capital market and among investors from the traditional reinsurance and primary insurance market remained unabated. Thus, for example, we were able to increase our “K” quota share – a modelled quota share cession consisting of non-proportional reinsurance treaties in the property, catastrophe, aviation and marine (including offshore ) lines that we have placed inter alia on the ILS market for almost 20 years – by around USD 20 million for 2012 to USD 350 million.
All in all, we are satisfied with the development of catastrophe reinsurance. Responding to the heavy losses incurred in 2011, rates showed a very promising trend in the renewals as at 1 January 2012. We were able to secure appreciable price increases, particularly for loss-impacted programmes. This tendency was sustained as at the 1 April 2012 renewal date. It was only as the year progressed that the price increases began to lose impetus. Although this was principally applicable to North America, original rates here continued to move clearly higher.
We are satisfied with our result in global catastrophe business. The combined ratio improved to 50.9% after 119.4% in the previous year. Our gross premium volume grew by 11% in the year under review to EUR 407 million (EUR 364 million).
For the most part, we are similarly satisfied with the development of our business in Latin America. This market is served primarily from our office in Bogotá. Although in some markets we have withdrawn from casualty covers with exposure to basic losses, we were able to enlarge our premium volume overall in Latin America. We also grew in Central Europe, where we are confident of further good business opportunities going forward.
As was also the case in the traditional reinsurance sector, rate increases in facultative business were attainable in those markets that had seen heavy losses in the previous year – such as Thailand or Japan.
Our portfolio of assets under own management is subject to appropriate currency and duration matching as well as asset liability management; we also attach considerable importance to the high quality and diversification of our investments. In the US reinsurance market we carry the investment risk associated with securities deposited with ceding companies to cover benefit reserves. The “mark-to-market” measurement of these reserves can give rise to sharp annual fluctuations that are directly reflected in our income statement. A valuation gain in the mid-double-digit million euro range was recognised in the year under review. If the securities perform as planned all valuation gains and losses are, however, entirely reversed upon maturity, which means that – provided there are no insolvencyrelated defaults – this item has no implications for profit or loss when looked at over the entire duration.
Altogether, we booked total investment income of EUR 685.1 million (EUR 512.6 million) in 2012; of this amount, EUR 343.4 million (EUR 188.3 million) derived from assets under own management and EUR 341.7 million (EUR 324.3 million) was attributable to deposits with ceding companies.
Hannover Re’s investment policy continues to be guided by the following core principles: • generation of stable and risk-commensurate returns while at the same time maintaining the high quality standard of the portfolio; • ensuring the liquidity and solvency of Hannover Re at all times; • high diversification of risks; • limitation of currency exposures and maturity risks in accordance with the principle of matching currencies and maturities.
The overall capital structure of Hannover Re and the composition of our liabilities are heavily determined by our activity as a reinsurer. By far the largest share is attributable to technical provisions and liabilities. Further elements are equity and equity substitutes, which help to substantially strengthen our financial base and optimise our cost of capital. The following chart shows our capital structure as at 31 December 2012, split into equity, loans and subordinated capital, technical provisions and other liabilities, in each case as a percentage of the balance sheet total.
Several Group companies have also taken up long-term debt – principally in the form of mortgage loans – amounting to EUR 167.8 million (EUR 202.8 million).
As an internationally operating company, Hannover Re bears responsibility in various senses. This is true of its compliance with relevant laws and regulations, but also applies to its relationship with staff, shareholders, the public at large and the cultural values within which the company operates. 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 (DCKG), cf. page 80. What is more, our Code of Conduct serves as a further guide for our day-to-day actions.
Our detailed Sustainability Report can be accessed on our website (www.hannover-re.com / sustainability / index.html).
Our range of reinsurance products and services is geared to the needs of the market and our clients. In response to changing social challenges, new economic, social and ecological risks – known as emerging risks – are increasingly reflected in our risk assessment. Examples include climate change and its impacts on global development (natural disasters, environmental damage, shortage of resources) as well as pandemics and demographic change. We use all internally and externally acquired insights in order to be able to offer better insurance solutions. In so doing, we devote special attention to protecting against risks that result from climate change and providing insurance coverage for socially vulnerable groups in developing countries.
The Hannover Re Group’s Framework Guideline on Risk Management describes the existing elements of the risk management system that has been put in place. It is intended to establish homogeneous Group standards for risk management. The Framework Guideline defines, among other things, the major tasks, rights and responsibilities, the organisational framework conditions and the risk control process. Principles are also set out governing the evaluation of new products in light of risk considerations as well as risk reporting. Internal risk reporting safeguards systematic and timely communication within the company about all material risks. Risk reporting takes place quarterly and covers inter alia the defined limits and thresholds, key ratios of our internal capital model, expert assessments (e. g. emerging risks) and a summary presentation of the risk situation. The regular quarterly reporting is supplemented as necessary by immediate internal reporting on material risks and limit oversteps that emerge suddenly. The criteria for this reporting are also specified in the Framework Guideline on Risk Management. Within the central system of limits and thresholds for the material risks of the Hannover Re Group, key ratios have been specified for steering and monitoring. Risk steering and monitoring is operationalised through the specification of suitable limits and thresholds for quantitatively measurable material risks. Material risks that cannot be quantified or are difficult to quantify (such as reputational risks) are primarily steered using appropriate processes and practices and are monitored with the aid of qualitative measurement methods, such as expert assessments.
Combined ratio (non-life reinsurance) 95.8 104.3 98.2 96.6 95.4 99.7 100.8 112.8 97.2 96.0 1 Including financial reinsurance and specialty insurance 2 Based on US GAAP figures 3 Net share of the Hannover Re Group for natural catastrophes and other major claims in excess of EUR 10 million gross as a percentage of net premium earned (until 31 December 2011: in excess of EUR 5 million gross)
We transact primary insurance business that complements our reinsurance activities in selected market niches. In so doing, just as on the reinsurance side, we always work together with partners from the primary sector – such as insurance brokers and underwriting agencies. This gives rise to risks associated with such sales channels, although these are minimised through the careful selection of agencies, mandatory underwriting guidelines and regular checks.
Management by Objectives 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 strategic parameters.
IVC – the decisive management ratio In order to fine-tune the portfolios and individual treaties we apply underwriting-year-oriented measurement principles based on expected cash flows that appropriately accommodate the specific characteristics of non-life and life / health reinsurance. The accomplishment of targets in a particular financial year is also of interest – especially from the standpoint of shareholders. Based on our economic capital model, the foundation of our enterprise management, we strive to generate a profit in excess of the cost of capital. This return, which is the decisive ratio for the management of our business activities, is referred to as Intrinsic Value Creation (IVC).
Declaration of the Executive Board regarding the Corporate Governance of the Company as defined by § 289 a Para. 1 Commercial Code (HGB): German Corporate Governance Code In the previous year Hannover Re was not in compliance with one recommendation of the German Corporate Governance Code (DCGK); this year, the company’s implementation of the recommendations of the Code as amended 15 May 2012 diverges from the recommendations in three respects. The recommendations in question are that a cap on severance payments should be included when concluding or renewing an Executive Board contract (Code Item 4.2.3 Para. 4), that the Chairman of the Supervisory Board should not chair the Audit Committee (Code Item 5.2 Para. 2) and that the Chairman of the Audit Committee should be independent (Code Item 5.3.2). The reasons for these divergences are set out in the following Declaration of Conformity pursuant to § 161 Stock Corporation Act (AktG). The present and all previous Declarations of Conformity of the company are published on its website ( hannover-re.com / about / corporate / declaration / index.html).
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. It also handles issues relating to compliance and the information system for the Supervisory Board and discusses the interim reports as well as the semi-annual reports prior to their publication.
The Supervisory Board regularly reviews the system of remuneration for the Executive Board.
Negative variable total bonus = payment of EUR 0 variable remuneration Any minus value of the variable total bonus for a financial year is transferred in full to the bonus bank (see “Medium-term” column).
7 The stock appreciation rights granted in 2011 for 2010 were included at their fair value (according to the Black-Scholes option pricing model) at the time when they were granted (8 March 2011). On account of the changeover from the stock appreciation rights programme to the Share Award Plan in 2011 and the different booking rules applicable to these schemes, DRS 17 requires that both share-based payment programmes be shown in 2011 even though they refer to different years. The stock appreciation rights granted to Dr. Becke in 2012 for 2011 were recognised at their fair value on the date when they were granted (13 March 2012).
Total 1 Remuneration for seats with Group bodies that is counted towards the variable remuneration accrues in the year of occurrence. 2 Dr. Becke left the company on 31 December 2011. Any exercises of stock appreciation rights on his part are therefore no longer reported for 2012 with respect to the active members of the Executive Board.
Sideline activities of the members of the Executive Board 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 the parent company Hannover Re. The remuneration received for such seats at Group companies and other board functions is deducted when calculating the variable bonus and shown separately in the table of total remuneration.
If a member of the Executive Board is permanently incapacitated for work during the period of the service contract, the service contract shall terminate at the end of the sixth month after which the permanent incapacity for work is established – although no later than the end of the service contract. A permanent incapacity for work exists if the Board member will probably be permanently unable to perform without reservation the tasks assigned to him. If the Board member is permanently incapacitated for work, he shall receive after termination of the service contract – in the event that HDI Unterstützungskasse does not grant him a disability pension – a pension that the said HDI Unterstützungskasse would grant him if he were at least 50% incapable of exercising his profession or another occupation that can be performed on the basis of his training and experience and that corresponds to his existing position in life.
The spouse’s pension and orphan’s pension combined may not exceed the pension that the eligible benefit recipient received or would have received if he had been incapacitated for work at the time of his death; otherwise, they are reduced pro rata.
In 2012 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.
Overview Market developments in the non-life reinsurance have been broadly satisfactory so far, although competition has intensified sharply in the current financial year. The greater competitive intensity can be attributed above all to the fact that sufficient capacity is generally available in the market, as a consequence of which the supply of reinsurance protection – especially in mature markets – exceeds demand. A further factor here was the move by many ceding companies to retain more business for net account. The situation is different in many emerging markets, where demand for reinsurance covers is rising on the back of increased business in the primary sector.
As a financially robust and expert partner equipped with an excellent rating of AA- (Standard & Poor’s), we shall support our primary insurance customers going forward, as we have in the past, with capital market products and reinsurance concepts designed to afford solvency relief.
Consolidated statement of changes in shareholders’ equity 2012 in EUR thousand Common shares Additional paid-in capital
Intangible assets: in accordance with IFRS 3 “Business Combinations ” scheduled depreciation is not taken on goodwill; instead, impairments may be taken after an annual impairment test or as indicated. For the purposes of the impairment test, goodwill is to be allocated pursuant to IAS 36 “Impairment of Assets” to so-called “cash generating units” (CGUs). Each CGU to which goodwill is allocated should represent the lowest level on which goodwill is monitored for internal management purposes and may not be larger than a segment. Following allocation of the goodwill it is necessary to determine for each CGU the recoverable amount, defined as the higher of the value in use and the fair value less costs to sell. The recoverable amount is to be compared with the book value of the CGU including goodwill. When the latter exceeds the recoverable amount, an impairment expense is to be recognised. For detailed information on the impairment method used and the goodwill recognised as at the balance sheet date, please see Section 6.5 “Goodwill”.
Non-controlling interests are shares in the equity of affiliated companies not held by companies belonging to the Group. IAS 1 “Presentation of Financial Statements” requires that noncontrolling interests be recognised separately within Group shareholders’ equity. The non-controlling interest in profit or loss is shown separately as profit appropriation following the net income (“thereof” note). This item refers mainly to noncontrolling interests in E+S Rückversicherung AG.
For further information please see the explanatory remarks in Section 8.1 “Derivative financial instruments and financial guarantees”.
In addition, we held indirect real estate investments in the year under review in an amount of EUR 156.3 million (EUR 128.1 million). The amortised cost of these investments amounted to EUR 126.2 million (EUR 103.5 million). In addition, unrealised gains of EUR 31.7 million (EUR 24.5 million) and unrealised losses of EUR 1.6 million (previous year: none) were recognised from these investments.
In the year under review financial instruments with a fair value of EUR 84.4 million (EUR 306.8 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 473.6 million (EUR 103.5 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.
The increase in own-use real estate is due to the purchase of the office building at Karl-Wiechert-Allee 57, Hannover, by Hannover Re and E+S Rück.
Due after ten through twenty years 2,054,096 146,595 1,907,501 855,499 7,709 847,790
The average maturity of the reserves is determined using actuarial projections of the expected future payments. A payment pattern is calculated for each homogenous category of our portfolio – making allowance for the business sector, geographical considerations, treaty type and the type of reinsurance – and applied to the outstanding liabilities for each underwriting year and run-off status.
Net provisions for pensions at 31 December of the year under review 86,464 88,299
The sundry liabilities include, most notably, distributions within the year of EUR 53.0 million (EUR 53.4 million) from interests in private equity funds that had still to be recognised in income as at the balance sheet date.
Other financial facilities Letter of credit (LoC) facilities exist with a number of financial institutions. With respect to the syndicated facility taken out in 2011 with a volume equivalent to EUR 758.6 million (EUR 772.5 million), the first renewal option was utilised and the maturity extended from the beginning of 2017 to the beginning of 2018. In addition, several bilateral loan agreements were taken out and existing such agreements were expanded.
Commissions and brokerage, change in deferred acquisition costs (net) 2,649,693 2,336,128
The following table presents a reconciliation of the expected expense for income taxes with the actual expense for income taxes reported in the statement of income. The pre-tax result is multiplied by the Group tax rate in order to calculate the Group’s expected expense for income taxes.
Availability of non-capitalised loss carry-forwards Unused tax loss carry-forwards of EUR 233.7 million (EUR 286.9 million) existed as at the balance sheet date. Making allowance for local tax rates, EUR 152.4 million (EUR 151.5 million) thereof was not capitalised since realisation is not sufficiently certain.
Remuneration and shareholdings of the management boards of the parent company The remuneration of the Executive Board of Hannover Re amounted to altogether EUR 7.5 million (EUR 9.4 million). The total remuneration (excluding pension payments) of former members of the Executive Board and their surviving dependants stood at EUR 2.4 million (EUR 0.1 million). The pension payments to previous members of the Executive Board and their surviving dependants, for whom 13 (13) pension commitments existed, totalled EUR 1.4 million (EUR 1.2 million) in the year under review; altogether, a provision of EUR 22.5 million (EUR 15.8 million) has been set aside for these commitments.
On 4 November 2009 the Supervisory Board of Hannover Re decided to extend the waiting period applicable to members of the Executive Board from two to four years for stock appreciation rights granted from the 2010 allocation onwards; on 23 November 2009 the Executive Board decided to extend the waiting period accordingly for the other members of the Group’s management. Upon expiry of this waiting period a maximum 60% of the stock appreciation rights awarded for an allocation year may be exercised. The waiting period for each additional 20% of the stock appreciation rights awarded for this allocation year to a member of the managerial staff is one year.
Number of options at 31.12.2004 – – – – – – 844,273
Rental income totalled EUR 47.3 million (EUR 36.7 million) in the year under review. The rental income resulted principally from the renting out of properties by the Group’s real estate companies.
Special purpose entity (SPE): entity with specific characteristics not bound to a particular legal form that is used to conduct closely defined activities or to hold assets and for which the traditional concept of consolidation – based on voting rights – is often inadequate for determining who exercises control over the entity.
Structured products: reinsurance with limited potential for profits and losses; the primary objective is to strive for risk equalisation over time and to stabilise the cedant’s balance sheet.