With a book value per share of EUR 66.90 the Hannover Re share showed a price-to-book (P/B) ratio of 1.58 at the end of the year under review; compared to the average MDAX P/B ratio of 2.44 as at year-end the share thus continues to be very moderately valued.
• Grow the premium volume (by more than the market average) • Outperform the Global Reinsurance Index (GloRe) over a three-year period • Consistently pay an attractive dividend
Business model • Worldwide reinsurance, transacting all lines of property & casualty and life & health reinsurance with the goal of achieving the most balanced possible regional and line-based diversification • Competitive advantages due to our low cost of capital and administrative expense ratio • Financial strength secured through rigorous risk management
The state of the jobs market continued to improve. Average unemployment in the Eurozone decreased to 11.0%, although the picture still varies widely from country to country. Spain, along with Greece, continues to battle particularly high jobless numbers: the unemployment rate for both countries is in excess of 20%. The rise in consumer prices, on the other hand, slowed again year-on-year to 0.1%.
Capital markets The lingering effects of the Euro debt crisis on capital markets were merely indirect in 2015. A considerably more important influencing factor was a high degree of uncertainty surrounding a possible turnaround in US interest rates and a further expansion of monetary policy in Europe. The slowing growth of the Chinese economy led to a general sense of disquiet on equity markets. Falling commodity prices due to changing supply-side structures in an ambiguously evolving global economy were an additional factor. Uncertainty also permeated the assessment of markets for corporate bonds – especially in emerging markets – and led to increased risk premiums. The expansionary interest rate policy pursued by central banks in our main currency areas – namely the euro and US dollar – was consequently maintained. Having cut the prime rate for the Eurozone to 0.05% in the previous year, the European Central Bank (ECB) kept it at this level throughout the entire period under review. Even though the US Federal Reserve made its first move to raise interest rates, as had been anticipated by many market players, US interest rate policy can still be characterised as expansionary from a historical perspective. Nevertheless, the Fed had already ended its supportive purchases on the US bond market in the fourth quarter of 2014, whereas the ECB launched just such a programme in March 2015 for the European government bond market.
Stock markets, to which we devoted closer attention again due to our decision to start limited rebuilding of an equity portfolio in the third quarter of the period under review, once again soared during the year, in some cases registering new all-time highs; the German market was especially successful in booking substantial price gains throughout the year. US indices, on the other hand, were if anything left treading water year-on-year. European markets, in particular, were influenced by the ECB’s continued expansionary monetary policy and by the quest among investors for high-return investments. Ultimately, though, the elevated price levels could only partially be explained by the underlying fundamentals. Overall, stock markets proved broadly robust in the face of diverse crisis warnings.
Please find below a brief summary of the development of our two business groups – Property & Casualty and Life & Health reinsurance – and our investments. More detailed information is to be found on pages 35 to 52.
Gross premium growth for Life & Health reinsurance slight increase 1, 2 +9.5% at constant exchange rates +19.7% not adjusted for currency effects
United Kingdom, London market and direct business United Kingdom, Ireland and the London Market The property and casualty business that we reinsure for companies in the United Kingdom and on the London market developed largely satisfactorily in 2015. The intense competition in the primary sector was sustained and led to rate reductions. Exceptions here were UK motor business and parts of the Irish primary insurance portfolio. On the reinsurance side a similar picture emerged. While rates in non-proportional UK business remained stable or rose slightly at the beginning of 2015 – after sometimes appreciable increases in the years from 2011 to 2014 –, they came under more pronounced pressure in the other property and casualty lines. We managed our portfolio in keeping with our cycle management and scaled back our shares in programmes under which the prices or conditions were not considered attractive. Major losses were incurred in the form of severe flooding in the United Kingdom, for which we reserved an amount of EUR 28.3 million, as well as fire losses in a number of markets including France and Northern Europe.
Agricultural risks The insurance of agricultural risks was one of Hannover Re’s fastest growing segments in 2015. We further expanded our market position and rank among the preferred partners for agricultural covers. In addition, we have been taking an increasingly active role in product development. We entered into cooperative ventures with governments and international organisations in the year under review with a view to expanding the protection of agricultural risks.
The gross premium volume for our global catastrophe business developed favourably in the year under review, assisted in part by exchange rate movements: it rose from EUR 310.0 million to EUR 374.9 million. The combined ratio deteriorated to 50.2% (39.3%). The operating profit (EBIT) came in at EUR 154.6 million (EUR 185.6 million).
Insurance-Linked Securities (ILS) Our activities in relation to the transfer of reinsurance risks to the capital market were highly successful in the financial year just ended. By way of example, we were able to renew the protection cover for Hannover Re known as the “K cession” – a modelled quota share cession consisting of non-proportional reinsurance treaties in the property, catastrophe, aviation and marine (including offshore) lines that has been placed inter alia on the ILS market for more than 20 years now – at an increased level of roughly USD 400 million for 2015.
Our investment income (including interest and expenses on funds withheld and contract deposits) consequently came in comfortably above the previous year’s level at EUR 1,665.1 million (EUR 1,471.8 million). This can be attributed principally to the aforementioned sharp rise in ordinary income. Of this amount, income from assets under own management accounted for EUR 1,270.1 million (EUR 1,095.8 million). This produces an average return (excluding effects from ModCo derivatives and inflation swaps) of 3.5%; it is pleasing to note that this figure is higher than our forecast of 3.0%, a reflection not only of stronger income from private equity, real estate and fixed income enhancements but also of the effects associated with the appreciation of various currencies against the euro.
At the end of the year under review we held a total amount of EUR 1.9 billion (EUR 1.3 billion) in short-term investments and cash. Funds withheld amounted to EUR 14.0 billion (EUR 15.9 billion).
Several Group companies have also taken up long-term debt – principally in the form of mortgage loans – amounting to EUR 308.5 million (EUR 283.9 million).
Cash flow from financing activities The cash flow from financing activities decreased from -EUR 647.6 million to -EUR 1,054.8 million in the year under review. This was mainly due to redemption of the EUR 500.0 million subordinated debt issued by Hannover Finanz (Luxemburg) S.A. at the first scheduled call date as well as the higher dividend payments of EUR 557.4 million (EUR 403.4 million).
Major loss expenditure in the year under review was higher than in 2014. Although the hurricane season once again passed off unremarkably, a number of natural catastrophe events and other large losses were recorded. The explosion in the port of the Chinese city of Tianjin was the largest single loss for Hannover Rück SE, resulting in net loss expenditure of EUR 43.1 million. In addition, damage to an oil rig in the Gulf of Mexico and a storm in Japan led to losses of EUR 29.6 million and EUR 23.2 million respectively. The total net expenditure incurred by Hannover Rück SE from large losses was EUR 330.6 million (EUR 257.0 million).
Fire Total gross premium income for the fire line climbed by 22.5% in the 2015 financial year to EUR 1,590.3 million (EUR 1,298.2 million). The net loss ratio improved in the year under review from 61.4% to 53.9%. The underwriting profit climbed to EUR 149.4 million (EUR 140.3 million). An amount of EUR 83.6 million was withdrawn from the equalisation reserve and similar provisions in the year under review, after an allocation of EUR 186.6 million in the previous year.
Balance sheet structure of Hannover Rück SE M 41 in EUR thousand 2015 2014
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 successfully 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.
Our range of reinsurance products and services is geared to the needs of the market and our clients. Hannover Re is active in virtually all lines of reinsurance business. Our products range from traditional reinsurance to complex individual solutions for risk transfer and the optimisation of our clients’ capital requirements. As a leading player in the reinsurance industry, the commercial success of Hannover Re is crucially dependent on the correct assessment of present and emerging risks. In the process of evaluating risks we are faced today with growing complexity as a consequence of the increasing importance attached to various aspects of sustainability. These emerging risks have recently included not only the rising prevalence of geopolitical and economic uncertainties but also developments such as demographic change, shifting mobility patterns in populations, increasing digitalisation and the resulting cyber risks as well as climate changes and the associated discussions centred on food and water security. By organising topically specific conferences, visiting clients and attending trade fairs and expert gatherings we enable our customers to share our knowledge and we use the internally and externally acquired insights in order to be able to offer them better or innovative (re)insurance solutions and to strengthen our customer relationships.
* SCR = Solvency Capital Requirement; MCR = Minimum Capital Requirement
Hannover Re has set up risk management functions and bodies Group-wide to safeguard an efficient risk management system. The organisation and interplay of the individual functions in risk management are crucial to our internal risk steering and control system. The central functions of risk management are closely interlinked in our system and the roles, tasks and reporting channels are clearly defined and documented in terms of the so-called “3 lines of defence”. The first line of defence consists of risk steering and the original risk responsibility on the divisional or company level. Risk management ensures the second line of defence – risk monitoring. It is supported in this regard by the actuarial function and the compliance function. The third line of defence is the process-independent monitoring performed by the internal audit function. The following chart provides an overview of the central functions and bodies within the overall system as well as of their major tasks and powers.
In addition, Hannover Re’s regional and treaty departments prepare regular reports on the progress of their respective renewals.
Scenarios for changes in the fair value of material asset classes M 65 in EUR million Scenario Portfolio change on a fair value basis Change in equity before tax
Share price risks derive from the possibility of unfavourable changes in the value of equities, equity derivatives or equity index derivatives in our portfolio. In addition to such assets held to date on only a very modest scale as part of strategic participations, we acted on market opportunities in the course of the year to rebuild a broadly diversified equity portfolio. Please see our comments in Section 6.1 of the notes entitled “Investments under own management” on page 176 et seq.
We use derivative financial instruments only to the extent needed to hedge risks. The primary purpose of such financial instruments is to hedge against potentially adverse developments on capital markets. At the start of the year under review we had still held inflation swaps to hedge part of the inflation risks associated with the loss reserves in our technical account. Some of these inflation swaps reached their maturity date during the year and were not renewed. The remaining instruments were terminated, as a result of which our inflation protection is now ensured exclusively by means of bonds with inflation-linked coupons and redemption amounts. In addition, as in the previous year, a portion of our cash flows from the insurance business as well as currency risks was hedged using forward exchange transactions because currency matching could not be efficiently achieved. Hannover Re holds further derivative financial instruments to hedge interest rate risks from loans taken out to finance real estate. In addition, Hannover Re has taken out hedges in the form of equity swaps to hedge price risks in connection with the stock appreciation rights granted in the first quarter of 2014 under the Share Award Plan. These are intended to neutralise changes in the fair values of the awarded stock appreciation rights. Contracts are concluded with reliable counterparties and for the most part collateralised on a daily basis so as to avoid credit risks associated with the use of such transactions. The remaining exposures are controlled according to the restrictive parameters set out in the investment guidelines. Our investments entail credit risks that arise out of the risk of a failure to pay (interest and / or capital repayment) or a change in the credit status (rating downgrade) of issuers of securities. We attach equally vital importance to exceptionally broad diversification as we do to credit assessment conducted on the basis of the quality criteria set out in the investment guidelines. We measure credit risks in the first place using the standard market credit risk components, especially the probability of default and the potential amount of loss – making allowance for any collateral and the ranking of the individual instruments depending on their effect in each case.
• 41.7% 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 most cases recoverables can potentially be set off against our own liabilities.
Hannover Rück SE hereby provides insight into its enterprise management practices as part of the Declaration on Corporate Governance pursuant to § 289a Commercial Code (HGB): Corporate Governance
In the year under review the Supervisory Board adopted the regular procedure to evaluate the efficiency of the Supervisory Board’s work in accordance with Item 5.6 of the German Corporate Governance Code.
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. It prepares the Supervisory Board’s examination of the annual financial statement, management report and proposal for the appropriation of profit as well as of the consolidated financial statement and Group management report. In this context, the Finance and Audit Committee receives detailed information on the auditor’s view of the net assets, financial position and results of operations as well as explanations of the effects of any modified recognition and measurement principles on the net assets, financial position and results of operations together with available alternatives. 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. The minutes of the meetings of the Finance and Audit Committee are also made available to the members of the Supervisory Board who do not sit on the committee.
German Corporate Governance Code, Item 4.2.5 Para. 3 – Table 1 M 77 (target / minimum / maximum remuneration as nominal amounts)
Dividend on share awards for 2013 3 36.6 0.0 0.0 0.0 6.2 0.0 0.0 0.0 12.9 0.0 0.0 0.0 26.8 0.0 0.0 0.0
3 Stock appreciation rights were awarded in 2009, exercise option at the discretion of the Executive Board until 31 December 2019 in the following tranches: 40% from 2012, 60% from 2013, 80% from 2014, 100% from 2015 onwards.
1 In EUR 2 ++ = significantly above the cost of capital
In the other markets of Continental Europe the picture was a mixed one: the expansion of existing customer accounts in France enabled us to offset the pressure on prices in loss-free programmes and the effect of discontinued treaties. In Northern European countries we were able to maintain our position as one of the preferred reinsurance providers. The markets of Southern and Eastern Europe were considerably more competitive. Broadly speaking, though, we still consider reinsurance prices here to be commensurate with the risks. Most notably, proportional and non-proportional treaties offering sufficient capital relief for the Solvency II requirements that have entered into force are enjoying a surge in demand. We were nevertheless selective in our underwriting approach with an eye to our minimum margin requirements.
With regard to the IVC targets that we use to map economic value creation, we anticipate a minimum 2% xRoCA for property and casualty reinsurance and at least 3% xRoCA for life and health reinsurance.
September 2014 Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture deferred (still to be endorsed by the EU)
Hannover Insurance-Linked Securities GmbH & Co. KG, Hannover / Germany 3 100.00 EUR 20,348 124
HR GLL Central Europe Holding GmbH, Munich / Germany 1 87.67 EUR 61,835 48
HAPEP II Komplementär GmbH, Hannover / Germany 1 82.40 EUR 36 5
Hannover Life Reassurance Company of America, Orlando / USA 1 100.00 USD 229,495 16,662
Leine Investment SICAV-SIF, Luxembourg / Luxembourg 1, 7 100.00 USD 112,717 (5,616)
Hannover Reinsurance Mauritius Ltd., Port Louis / Mauritius 100.00 MUR 40,240 (4,576)
Hospitality Industrial and Commercial Underwriting Managers (Pty) Ltd., Johannesburg / South Africa 50.54 ZAR 1,284 4,344
Woodworking Risk Acceptances (Pty) Ltd., Johannesburg / South Africa 4, 12 42.00 ZAR – (42)
Svedea Skadeservice AB, Stockholm / Sweden 14 53.00 SEK – –
Retrocession and securitisation of reinsurance risks The securitisation of reinsurance risks is largely structured through the use of structured entities.
Reinsurance recoverables on benefit reserve – – 1,367,173 676,219 – – 1,367,173 676,219
Non-controlling interest in profit or loss 58,198 65,560 5,790 13,898 – – 63,988 79,458
From insurance business with other segments – – 195 237 (195) (237) – –
Interest on hybrid capital – – – – 84,316 95,720 84,316 95,720 thereof
Fixed-income securities – loans and receivables 1,869,317 551,144 184,580 157,506 82,178 4,925 – 20,215 2,869,865
Net book value at 31 December of the year under review 128,008 154,822
Gross book value at 31 December of the previous year 1,023,281 872,905
In addition, we took specific value adjustments on reinsurance recoverables on unpaid claims in the year under review. We would refer the reader to the corresponding remarks on the loss and loss adjustment expense reserve in Section 6.7 “Technical provisions”. With regard to the credit risks resulting from technical assets we would also refer the reader to our comments on page 90 et seq. of the risk report.
Present value of future profits on acquired life reinsurance portfolios 78,261 82,390
Net book value at 31 December of the previous year 33,167 30,220
Loss and loss adjustment expense reserves Benefit reserve gross retro net gross retro net
Fair value of plan assets at 31 December of the financial year 4,533 15,533
With regard to the liabilities from derivatives in an amount of EUR 170.0 million (EUR 240.2 million), please see our explanatory remarks on derivative financial instruments in Section 8.1 “Derivative financial instruments and financial guarantees”.
Due after five years 3,996 3,859 6.12 Debt and subordinated capital
The aggregated fair value of the extended subordinated loans is based on quoted, active market prices. If such price information was not available, fair value was determined on the basis of the recognised effective interest rate method or estimated using other financial assets with similar rating, duration and return characteristics. Under the effective interest rate method the current market interest rate levels in the relevant fixed-interest -rate periods are always taken as a basis.
The administrative expenses amounted to altogether 2.7% (2.9%) of net premium earned.
Other technical expenses (net) 1,348 7,461 7.4 Other income and expenses
A nn ua l f in an ci al s ta te m en ts 7.5 Taxes on income
Availability of loss carry-forwards that have not been capitalised: Expiry of non-capitalised loss carry-forwards and temporary differences N 83 in EUR thousand One to five years Six to ten years More than ten years
Business assumed and ceded in Germany and abroad N 88 in EUR thousand
All other information on the remuneration of the governing bodies, directors’ dealings and shareholdings as well as the structure of the remuneration system for the Executive Board is contained in the remuneration report from page 103 onwards. This remuneration report is based on the recommendations of the German Corporate Governance Code and contains information which also forms part of the notes to the 2015 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 HGB). These details are discussed as a whole in the remuneration report. Consequently, we have not provided any further explanation in the notes.
As security for our technical liabilities, various financial institutions have furnished sureties for our company in the form of letters of credit. The total amount as at the balance sheet date was EUR 3,064.6 million (EUR 2,899.1 million). The standard market contractual clauses contained in some of the underlying letter of credit facilities regarding compliance with stipulated conditions are explained in greater detail in the “Financial position ” section of the management report, page 59 et seq., on the information pursuant to § 315 Para. 4 German Commercial Code (HGB) as well as in Section 6.12 “Debt and subordinated capital” on other financial facilities.
Audit of the annual financial statements and consolidated financial statements The accounting, annual financial statements, consolidated financial statements and the combined management report were audited by KPMG AG Wirtschaftsprüfungsgesellschaft. The Supervisory Board selected the auditor and the Chairman of the Supervisory Board awarded the audit mandate. The auditor ’s independence declaration was received. In addition to the usual tasks performed by the auditors, key points of focus in the audit were the representation of legal disputes and associated litigation risks as well as the provision of consistent and transparent reporting on the most significant financial performance indicators in the Group management report, together with an examination of the consistent representation of life and health reinsurance treaties in the individual and consolidated financial statements with an emphasis on process and the accounting of non-traditional contracts as well as scrutiny of the recognition and measurement of real estate. Along with the audit concentrations of the German Financial Reporting Enforcement Panel (DPR), the additional audit concentrations defined by the European Securities and Markets Authority (ESMA) also formed part of the scope of the audit. The mandate for the review report by the independent auditors on the interim financial report as at 30 June 2015 was also awarded again. The special challenges associated with the international aspects of the audits were met without reservation. Since the audits did not give rise to any objections KPMG AG Wirtschaftsprüfungsgesellschaft issued unqualified audit certificates. The Finance and Audit Committee discussed the annual financial statements and the combined management report with the
Ascona, Switzerland Deputy Chairman Former member of the Executive Board of RWE AG
Victoria Place, 2nd Floor, 31 Victoria Street Hamilton, HM 10 P. O. Box 2373 Hamilton, HM JX
Funds held by ceding companies / funds held under re insurance treaties: cf. deposits with ceding companies /deposits received from retrocessionaires
(PVFP) on acquired life reinsurance portfolios 195 N 46 Fixtures, fittings and equipment 196 N 47 Development of other intangible assets 197 N 48 Technical provisions 198 N 49 Loss and loss adjustment expense reserve 199 N 50 Net loss reserve and its run-off in the property and casualty reinsurance segment 200 N 51 Maturities of the technical reserves 2015 201 N 52 Maturities of the technical reserves 2014 201 N 53 Development of the benefit reserve 202 N 54 Development of the unearned premium reserve 203 N 55 Measurement assumptions 204 N 56 Movements in net liability from defined benefit pension plans 205 N 57 Provisions for pensions 206