Quarterly Report • Aug 5, 2015
Quarterly Report
Open in ViewerOpens in native device viewer
| in EUR million | 2015 | 2014 | ||||||
|---|---|---|---|---|---|---|---|---|
| 1.1. – 31.3. |
1.4. – 30.6. |
+/ – previous year |
1.1. – 30.6. |
+/ – previous year |
1.4. – 30.6. |
1.1. – 30.6. |
31.12. | |
| Results | ||||||||
| Gross written premium | 4,400.2 | 4,186.3 | +21.7% | 8,586.5 | +21.5% | 3,440.5 | 7,064.9 | |
| Net premium earned | 3,431.9 | 3,587.5 | +22.6% | 7,019.4 | +20.2% | 2,926.6 | 5,839.4 | |
| Net underwriting result | (6.2) | (33.7) | (39.9) | 12.0 | 14.5 | |||
| Net investment income | 415.7 | 383.1 | +10.6% | 798.8 | +12.9% | 346.4 | 707.5 | |
| Operating profit (EBIT) | 429.0 | 360.4 | +7.9% | 789.4 | +15.5% | 334.1 | 683.7 | |
| Group net income | 279.7 | 252.2 | +19.3% | 531.9 | +19.7% | 211.5 | 444.4 | |
| Balance sheet | ||||||||
| Policyholders´ surplus | 11,185.9 | 9,839.5 | -3.9% | 8,563.5 | 10,239.5 | |||
| Equity attributable to shareholders of Hannover Rück SE |
8,524.2 | 7,672.6 | +1.6% | 6,411.7 | 7,550.8 | |||
| Non-controlling interests | 673.8 | 677.4 | -3.5% | 660.9 | 702.2 | |||
| Hybrid capital | 1,987.9 | 1,489.5 | -25.0% | 1,490.9 | 1,986.5 | |||
| Investments (excl. funds withheld by ceding companies) |
39,683.8 | 37,399.6 | +3.2% | 32,382.7 | 36,228.0 | |||
| Total assets | 67,158.2 | 64,962.7 | +7.5% | 55,435.4 | 60,457.6 | |||
| Share | ||||||||
| Earnings per share (basic and diluted) in EUR |
2.32 | 2.09 | +19.3% | 4.41 | +19.7% | 1.75 | 3.69 | |
| Book value per share in EUR | 70.68 | 63.62 | +1.6% | 53.17 | 62.61 | |||
| Share price at the end of the period in EUR |
96.20 | 86.79 | +15.8% | 65.81 | 74.97 | |||
| Market capitalisation at the end of the period |
11,601.4 | 10,466.6 | +15.8% | 7,936.5 | 9,041.2 | |||
| Ratios | ||||||||
| Combined ratio (property and casualty reinsurance) 1 |
95.7% | 95.0% | 95.4% | 95.6% | 95.0% | |||
| Large losses as percentage of net premium earned (property and casualty reinsurance) 2 |
3.3% | 6.7% | 5.1% | 4.3% | 3.1% | |||
| Retention | 88.6% | 88.0% | 88.3% | 87.1% | 87.7% | |||
| Return on investment 3 (excl. funds withheld by ceding companies) |
3.5% | 3.0% | 3.4% | 3.1% | 3.3% | |||
| EBIT margin4 | 12.5% | 10.0% | 11.2% | 11.4% | 11.7% | |||
| Return on equity (after tax) | 13.9% | 12.5% | 14.0% | 13.3% | 14.5% |
1 Including funds withheld
2 Hannover Re Group´s net share for natural catastrophes and other major losses in excess of EUR 10 million gross as a percentage of net premium earned
3 Excluding effects from ModCo derivatives and inflation swaps
4 Operating result (EBIT)/net premium earned
Ulrich Wallin, Chairman of the Executive Board
In the first half of 2015 your company increased its Group net income to around EUR 532 million, a rise of almost 20 percent compared to the previous year's corresponding period. This pleasing performance enables us to raise our profit target for the full year from EUR 875 million to a figure in the order of EUR 950 million. We booked stronger earnings in property and casualty reinsurance, life and health reinsurance and, most notably, from our investments. Gross written premium also fared well with growth of 9 percent adjusted for exchange rate effects.
The favourable development of Hannover Re's business borne out by these figures is all the more remarkable because the general environment facing the international reinsurance industry remains challenging. Property and casualty reinsurance, in particular, continues to be intensely competitive, not least owing to the entry of new capacity providers from the capital markets. The resulting negative impact on the rate trend in reinsurance business has been felt since as long ago as mid-2013. A further factor is that investment returns are coming under increasing pressure from the protracted low interest rate environment. Needless to say, these adverse developments for international reinsurers also have implications for Hannover Re. Nevertheless, we have so far been able to position the company for continued success even in this climate. Particularly helpful in this regard are our low administrative expense ratio and our extensive diversification both within our business groups of Property&Casualty and Life&Health reinsurance and between the two business groups. This is in keeping with the goal that we set ourselves last year in our revised strategy under the heading: Long-term success in a competitive business.
I would like now to take a somewhat closer look at the development of our two business groups and the investment portfolio:
In Property&Casualty reinsurance we achieved a combined ratio of 95.4 percent and thus virtually maintained the level of the previous year. In view of the rate erosion that has been particularly noticeable in the most recent underwriting years, however, we must also assume that the confidence level of the loss reserves established in these underwriting years is below the initial levels of older underwriting years, especially 2002 to 2012. Despite this, the confidence level should still be very comfortable thanks to the considerable cushion built up in the past. The development of the underwriting result, which rose by another 8 percent compared to the corresponding period of the previous year, reinforces the assertion that we have made over the past two years to the effect that we have positioned our property and casualty portfolio in such a way as to be able to preserve the stability of the underwriting result even in the current difficult market environment. Gross written premium, which recorded a currencyadjusted increase of 10 percent in the first six months, also delivered particularly pleasing growth. The increase was driven by a number of sizeable individual transactions in which we offered our clients specially tailored conditions that still meet our margin requirements. This is particularly applicable to treaties from Asia, North America and in the area of agricultural risks. A further factor was that our specialty unit for Insurance-Linked Securities substantially enlarged its business volume. Furthermore, the various rounds of renewals as at 1 April, 1 June and 1 July of this year also demonstrated the healthy demand among our clients for Hannover Re's reinsurance products and services. As a result, we were able to book a pleasing expansion of our business volume at satisfactory rates. Major loss expenditure in the first half-year came in below the budgeted level of EUR 294 million for the period at EUR 197 million. It should, however, be noted that particularly in the second quarter the incidence of large losses associated with individual risks rather than natural disasters rose sharply. This is especially true of offshore energy and aviation business.
All in all, the operating profit (EBIT) for property and casualty in the first six months climbed by 12 percent to just under EUR 584 million and Group net income increased by 20 percent to EUR 418 million.
In our Life&Health reinsurance business group EBIT rose by 29 percent to EUR 200 million and Group net income grew by as much as 26 percent to around EUR 146 million. This is in line with the improved profitability that we had anticipated for life and health reinsurance in 2015, as already announced at the beginning of the year. Nevertheless, it must be noted that the results in the second quarter fell short of our expectations. This was due once again to an unfavourable development affecting parts of our US mortality portfolio, with both the mortality and the lapse risk showing negative divergences from the expected figures. As a further factor, our branch in Paris also posted significantly poorer results than had been the case in the past. This was connected with restructuring of the business relationship with one of our major clients in France. Although this gave rise to a negative result in the second quarter under IFRS accounting, it should have positive implications for Hannover Re's profitability over the medium and long term.
In volume terms, on the other hand, the development of our portfolio gave grounds for satisfaction. Gross written premium grew by 9 percent adjusted for exchange rate effects. What is especially gratifying is that this increase derived from a wide range of different areas: we generated a substantial new business volume with longevity transactions, but also considerably expanded the business written in South America, Australia and at our branches.
Similarly, we are thoroughly satisfied with the performance of our assets under own management, which grew by around 13 percent to EUR 601 million as at 30 June 2015. Most notably, ordinary income excluding interest on deposits came in significantly above the level of the comparable period. This was due to higher income from fixed-income securities and our real estate portfolio as well as a special effect from life and health reinsurance in the first quarter. We were thus able to comfortably offset the lower net realised gains and the reduced result from our assets measured at fair value through profit or loss. The annualised average return on our investments under own management remains at a pleasing 3.4 percent. Our portfolio of investments under own management has grown to a good EUR 37 billion since the end of 2014.
Shareholders' equity increased to EUR 7.7 billion as at 30 June 2015 despite the dividend payment of more than EUR 500 million. The annualised return on equity stood at 14 percent and thus remains on a level very comfortably in excess of our minimum target.
As already mentioned at the outset, we are raising our full-year guidance for Group net income to a figure in the order of EUR 950 million. As you are aware, this forecast is subject to the proviso that major loss expenditure does not significantly exceed the expected level of EUR 690 million and that there are no unforeseen downturns on capital markets.
I would like to thank you – also on behalf of my colleagues on the Executive Board – most sincerely for your trust in Hannover Re. Going forward, as in the past, our paramount concern will be to lead your company responsibly and securely into a profitable future.
Yours sincerely,
Ulrich Wallin Chairman of the Executive Board
| Report on economic position | 5 |
|---|---|
| Business development | 5 |
| Results of operations, financial position and net assets | 6 |
| Property and casualty reinsurance | 6 |
| Life and health reinsurance | 7 |
| Investments | 8 |
| Opportunity and risk report | 10 |
| Risk report | 10 |
| Opportunity report | 23 |
| Outlook | 25 |
| Forecast | 25 |
| Events after the reporting date | 26 |
Our reinsurance business developed highly satisfactorily in the first half of 2015. In property and casualty reinsurance we booked substantial currency-adjusted growth in gross premium, despite our selective underwriting policy. Even though a number of smaller major losses were incurred in the second quarter together with some belatedly reported large losses for the first quarter, total expenditure on major losses remained below the budget set aside for the first six months of 2015. In life and health reinsurance we were able to act on various opportunities, most notably in Asian markets, and improved our result relative to the previous year's period.
Gross written premium in our total reinsurance business increased sharply – especially due to the strong US dollar – by 21.5% as at 30 June 2015 to EUR 8.6 billion (EUR 7.1 billion); at constant exchange rates, growth would have still been as high as 9.5%. This figure for the first six months shows that we are progressing very much as planned towards stronger gross premium growth for the full year. The level of retained premium rose to 88.3% (87.7%). Net premium earned climbed by 20.2% to EUR 7.0 billion (EUR 5.8 billion); growth would have amounted to 8.3% at constant exchange rates.
In view of the continued low interest rate environment, we are very satisfied with the development of our investments. Having surged substantially in the first quarter, our portfolio of assets under own management retreated appreciably to EUR 37.4 billion, but it remains above the level of 31 December 2014 (EUR 36.2 billion). The decline relative to the first quarter was driven principally by lower valuation reserves as a consequence of higher interest rates at the long end of the maturity curve. Despite the broadly sustained low interest rate environment, ordinary investment income excluding interest on deposits was sharply up on the comparable period at EUR 598.7 million (EUR 490.1 million). This includes not only increased earnings from fixed-income securities but also sharply higher income from our real estate investments and the special effect in life and health reinsurance amounting to EUR 39.3 million. Interest on deposits increased to EUR 197.4 million (EUR 174.9 million).
Net realised gains on disposals were lower than in the corresponding period of the previous year at EUR 66.6 million (EUR 88.5 million). The higher realised gains recorded in the previous year were driven in particular by repayment of a subordinated bond. Fair value changes in our financial assets measured at fair value through profit or loss were negative on balance at EUR 1.6 million, as against a positive amount of EUR 10.0 million in the comparable period. The impairments taken in the period under review were once again only very minimal.
Income from investments under own management climbed sharply as at 30 June 2015 to EUR 601.3 million (EUR 532.6 million) on the back of the stronger ordinary income. The lower net realised gains and a reduced result from our financial assets measured at fair value through profit or loss were thus comfortably offset. The annualised return generated on investments under own management (excluding ModCo derivatives and inflation swaps) stood at 3.4% (3.3%).
The operating profit (EBIT) for the first half-year was thoroughly satisfactory at EUR 789.4 million (EUR 687.3 million). Group net income improved by a further 19.7% on the already very good result of the previous year to reach EUR 531.9 million (EUR 444.4 million). Earnings per share amounted to EUR 4.41 (EUR 3.69).
The shareholders' equity of Hannover Re remained at a robust EUR 7.7 billion as at 30 June 2015 (31 December 2014: EUR 7.6 billion) despite the dividend payment of EUR 512.5 million. The book value per share amounted to EUR 63.62 (31 December 2014: EUR 62.61). The annualised return on equity for the first six months stood at 14.0% (31 December 2014: 14.7%).
Property and casualty reinsurance continues to be fiercely competitive, with the supply of reinsurance coverage still outstripping demand. The most important drivers here are the absence of market-changing large losses, the tendency among ceding companies to retain more risks for own account thanks to their healthy capital resources and the availability of additional capacities from the ILS market, especially in US natural catastrophe business. Taken together, these factors are putting prices and conditions under sustained pressure. A trend towards some easing of the premium erosion can nevertheless be observed in certain lines and markets.
The outcome of the round of treaty renewals as at 1 April 2015 proved satisfactory for Hannover Re. Business in Japan is traditionally renegotiated on this date, along with further treaty renewals – albeit smaller in volume – in the markets of Australia, New Zealand and South Korea. Although the pressure on rates for natural catastrophe covers in Japan continued to grow as expected, we nevertheless obtained prices that were broadly commensurate with the risks. Price declines in personal accident insurance and in the area of per risk property covers were very minimal. In casualty business, on the other hand, rates again moved slightly higher. By improving our position with specific core customers we were even able to book modest growth in the total gross premium volume of our Japanese portfolio in the original currency. We successfully maintained our market position thanks to our good, long-term relationships with our ceding companies.
In Korea, where just a small part of our business was up for renewal, market conditions remain challenging – prompting us to further consolidate our portfolio. In India the treaty renewals proved to be more difficult than anticipated. Prices for traditional property and casualty reinsurance covers fell while at the same time exposures increased. With this in mind, we scaled back our involvement in this market.
A small portion of US property catastrophe business was also up for renewal as at 1 April. We saw continued premium erosion here of between 5% and 10% as expected, although no further softening in conditions was observed. Our premium volume rose slightly owing to the fact that we wrote more business with our main clients.
All in all, we are highly satisfied with the premium growth in property and casualty reinsurance as at 30 June 2015: gross premium climbed by 21.9% to EUR 5.0 billion (EUR 4.1 billion). At constant exchange rates an increase of 10.0% would have been booked. The level of retained premium contracted year-on-year to 89.6% (91.1%). Net premium earned rose by 15.5% to EUR 3.9 billion (EUR 3.4 billion); adjusted for exchange rate effects, growth would have amounted to 4.4%.
Expenditure on major losses in the first half of 2015 was below the expected level of EUR 294 million at EUR 197.4 million (EUR 104.7 million). The most costly individual losses for Hannover Re were the storm "Niklas" at EUR 35.4 million and the explosion on an oil platform in the Gulf of Mexico, which resulted in expenditure of EUR 32.9 million.
The underwriting result for total property and casualty reinsurance improved by 7.9% to EUR 170.9 million (EUR 158.3 million) and thus closed on a very good level. The combined ratio of 95.4% (95.0%) was positive and hence in line with our goal of staying below 96% for the full year.
Income from assets under own management in property and casualty reinsurance grew by a pleasing 6.6% to EUR 415.0 million (EUR 389.4 million). Significantly higher ordinary income was the key driver here.
The operating profit (EBIT) in property and casualty reinsurance increased by 12.0% to EUR 583.7 million (EUR 521.0 million) as at 30 June 2015. The EBIT margin of 15.0% (15.5%) comfortably surpassed the minimum target of 10%. Group net income surged by a pleasing 20.3% to EUR 418.4 million (EUR 347.9 million). Earnings per share stood at EUR 3.47 (EUR 2.89).
| in EUR million | 2015 | 2014 | |||||
|---|---|---|---|---|---|---|---|
| 1.1. –31.3. | 1.4. –30.6. | +/ – previous year |
1.1. –30.6. | +/ – previous year |
1.4. –30.6. | 1.1. –30.6. | |
| Gross written premium | 2,617.1 | 2,355.1 | +19.5% | 4,972.2 | +21.9% | 1,970.4 | 4,078.1 |
| Net premium earned | 1,882.3 | 2,011.9 | +15.7% | 3,894.2 | +15.5% | 1,738.6 | 3,370.2 |
| Underwriting result | 76.6 | 94.3 | +33.3% | 170.9 | +7.9% | 70.7 | 158.3 |
| Net investment income | 195.1 | 230.1 | +18.6% | 425.2 | +6.6% | 194.0 | 398.8 |
| Operating result (EBIT) | 255.2 | 328.5 | +36.6% | 583.7 | +12.0% | 240.5 | 521.0 |
| Group net income | 171.4 | 247.0 | +64.6% | 418.4 | +20.3% | 150.1 | 347.9 |
| Earnings per share in EUR | 1.42 | 2.05 | +64.6% | 3.47 | +20.3% | 1.24 | 2.89 |
| EBIT margin1 | 13.6% | 16.3% | 15.0% | 13.8% | 15.5% | ||
| Combined ratio 2 | 95.7% | 95.0% | 95.4% | 95.6% | 95.0% | ||
| Retention | 88.9% | 90.3% | 89.6% | 91.1% | 91.1% |
1 Operating result (EBIT)/net premium earned
2 Including funds withheld
Current developments on international capital and financial markets did not have any significant implications for our life and health reinsurance portfolio in the reporting period just ended. We were able to act on promising business opportunities and this has been reflected in a good result.
In the United Kingdom the market for enhanced annuities has shrunk considerably following the pension reform announced last year. Contrary to this trend, however, we were able to maintain a stable business volume in the UK enhanced annuities market compared to the previous year's period. What is more, we substantially expanded our longevity portfolio by writing blocks of annuity business. In addition, our new automated underwriting system for the sale of life insurance products through bank distribution channels was successfully rolled out on 1 June 2015 in cooperation with a primary insurance partner. Not only that, at the beginning of April we were the first reinsurer – working together with our partners – to successfully launch a comprehensive lifestyle insurance concept on the US market that offers life insurance coverage while at the same time actively promoting a healthy lifestyle.
In the second quarter we achieved another exceptionally strong performance in our US financial solutions portfolio. The health and special risk business written in this market also delivered a positive profit contribution as anticipated. Our US mortality portfolio, on the other hand, did not entirely live up to our expectations. Both in terms of the mortality risk and the lapse risk, results were in some cases well below what had been anticipated. In France results fell slightly short of our expectations. To some extent, however, this was offset by improved risk experiences in Eastern and Central Europe as well as Germany. Asian markets also played a positive part in the overall result, especially in the area of financial solutions.
Gross written premium as at 30 June 2015 amounted to EUR 3.6 billion (EUR 3.0 billion), equivalent to a very pleasing increase of 21.0%. Growth would have totalled 8.9% at constant exchange rates. Net premium earned climbed by 26.6% to EUR 3.1 billion (EUR 2.5 billion); adjusted for exchange rates, growth of 13.8% would have been generated. The retention rose to 86.5% (83.1%).
Investment income including interest on deposits totalled EUR 366.7 million (EUR 299.5 million) in the reporting period just ended. The good result was helped in part by a special effect from the first quarter. The performance of investments held for our account by US cedants declined in the first half of 2015 relative to the corresponding period of the previous year to stand at -EUR 6.4 million (EUR 4.6 million). Assuming that the experience develops as planned, these valuation gains and losses will fully offset in the period until maturity of the securities, which means that this position should close out with no effect on income over the entire duration.
The improved profitability that we had been striving for in life and health reinsurance was achieved as at 30 June 2015: the operating profit (EBIT) fared better than expected. It climbed by 29.2% relative to the previous year's period to reach EUR 200.0 million (EUR 154.8 million) and thus delivered a solid contribution to the overall result. In terms of the EBIT margins for the various business categories, financial solutions business generated a thoroughly gratifying return of 24.9% that clearly surpassed the 2% target. Longevity business similarly met its set target of 2%, coming in at 3.5%. Mortality and morbidity business, on the other hand, fell short of their target figure (6%) at 2.7% owing to the aforementioned effects. Group net income closed at a pleasing EUR 145.6 million (EUR 115.4 million), equivalent to an increase of 26.2%. Earnings per share amounted to EUR 1.21 (EUR 0.96).
| in EUR million | 2015 | 2014 | |||||
|---|---|---|---|---|---|---|---|
| 1.1. –31.3. | 1.4. –30.6. | +/ – previous year |
1.1. –30.6. | +/ – previous year |
1.4. –30.6. | 1.1. –30.6. | |
| Gross written premium | 1,783.3 | 1,831.2 | +24.6% | 3,614.5 | +21.0% | 1,470.2 | 2,986.9 |
| Net premium earned | 1,549.5 | 1,575.2 | +32.6% | 3,124.8 | +26.6% | 1,187.9 | 2,469.0 |
| Investment income | 219.4 | 147.3 | -0.2% | 366.7 | +22.4% | 147.6 | 299.5 |
| Operating result (EBIT) | 173.3 | 26.7 | -70.1% | 200.0 | +29.2% | 89.2 | 154.8 |
| Net income after tax | 127.5 | 18.1 | -74.9% | 145.6 | +26.2% | 72.0 | 115.4 |
| Earnings per share in EUR | 1.06 | 0.15 | -74.9% | 1.21 | +26.2% | 0.60 | 0.96 |
| Retention | 88.1% | 85.0% | 86.5% | 81.7% | 83.1% | ||
| EBIT margin1 | 11.2% | 1.7% | 6.4% | 7.5% | 6.3% |
1 Operating result (EBIT)/net premium earned
Hannover Re's investment policy continues to be guided by the following core principles:
Capital markets were once again challenging in the period under review and – against a backdrop of considerable volatility – were notable for a low level of interest rates overall but also in some cases rising rates at the long end of the maturity curve as well as increased risk premiums on corporate bonds. Higher yields were similarly observed for German and UK government bonds with longer maturities. German short- and medium-term debt is nevertheless still being sold at a negative return in net terms. Yields on US Treasuries remained relatively stable in the period under review. Credit spreads on European and US corporate bonds increased, especially in the middle rating classes.
In total, the unrealised gains on our fixed-income securities decreased to EUR 1,351.0 million (EUR 1,743.6 million). Our portfolio of assets under own management reached a higher level than in the previous year at EUR 37.4 billion (31 December 2014: EUR 36.2 billion). This can be attributed primarily to effects associated with the appreciation of currencies – and especially the US dollar – against the euro, which more than offset lower valuation reserves due to a continued rise in interest rates as well as cash outflows resulting from dividend and interest payments. We left the allocation of our assets to the individual classes of securities broadly unchanged in the first six months, as a consequence of which only minimal adjustments were made in the context of regular portfolio maintenance. The modified duration of our fixed-income portfolio changed only marginally relative to the previous year at 4.5 (4.6).
Despite the prevailing low level of interest rates, ordinary investment income excluding interest on deposits was considerably higher than in the corresponding period of the previous year at EUR 598.7 million (EUR 490.1 million). This was attributable in part to the special effect in life and health reinsurance business but also to substantially higher earnings from fixed-income investments and real estate – with income booked in currencies that had appreciated against the euro an increasingly significant factor here. In addition, our exposure to high-yield investment funds played a very pleasing part here. Interest on deposits also climbed to EUR 197.4 million (EUR 174.9 million).
Impairments of altogether just EUR 14.7 million (EUR 10.3 million) were taken. This includes impairments of EUR 2.4 million (EUR 0.0 million) on fixed-income securities and EUR 1.3 million (EUR 1.3 million) on alternative investments. Scheduled depreciation on directly held real estate rose to EUR 10.8 million (EUR 9.0 million), a reflection of our increasing involvement in this area. No write-ups were made.
The net balance of gains realised on disposals stood at EUR 66.6 million (EUR 88.5 million) and was attributable in large measure to regrouping activities as part of regular portfolio maintenance and the provision of liquidity for dividend payments.
We recognise a derivative for the credit risk associated with special life reinsurance treaties (ModCo) under which securities deposits are held by cedants for our account; the performance of this derivative in the period under review gave rise to unrealised losses of EUR 6.4 million recognised in investment income. In the comparable period the amount had been positive at EUR 4.6 million. The inflation swaps taken out in 2010 to hedge part of the inflation risks associated with the loss reserves in our technical account no longer produced any unrealised gains or losses recognised in investment income because these contracts matured or were terminated in the course of the second quarter (+EUR 4.5 million). In future, we shall maintain this protection solely by way of the bonds already included in the portfolio whose coupon payments are inflation-linked. Altogether, the unrealised losses on our assets recognised at fair value through profit or loss amounted to EUR 1.6 million. These contrasted with unrealised gains of EUR 10.0 million in the corresponding period of the previous year.
Our investment income including interest on deposits therefore came in considerably higher than in the comparable period at EUR 798.8 million (EUR 707.5 million). In view of the low level of interest rates, we are highly satisfied to have been able to boost our ordinary investment income in part through increased earnings from fixed-income securities. The special effect in life and health reinsurance and stronger income from real estate were, however, also significant factors here. The reduced result from our assets measured at fair value through profit or loss and the lower realised gains were thus comfortably offset. Income from assets under own management totalled EUR 601.3 million (EUR 532.6 million), equivalent to an annualised average return (excluding effects from ModCo derivatives and inflation swaps) of 3.4%. Although the aforementioned special effect in life and health reinsurance is also reflected here, we are nevertheless very well on track to achieve the envisaged target of 3.0% for the full year.
| 2015 | 2014 | |||||
|---|---|---|---|---|---|---|
| 1.1. –31.3. | 1.4. –30.6. | +/ – previous year |
1.1. –30.6. | +/ – previous year |
1.4. –30.6. | 1.1. –30.6. |
| 312.2 | 286.5 | +15.2% | 598.7 | +22.1% | 248.7 | 490.1 |
| 2.5 | 2.1 | +52.9% | 4.6 | +7.2% | 1.4 | 4.3 |
| 45.0 | 21.6 | -37.1% | 66.6 | -24.7% | 34.4 | 88.5 |
| 8.2 | 6.5 | +36.1% | 14.7 | +42.3% | 4.8 | 10.3 |
| (10.6) | 9.0 | (1.6) | -116.3% | 2.6 | 10.0 | |
| 24.3 | 28.0 | +25.9% | 52.3 | +4.4% | 22.2 | 50.0 |
| 316.6 | 284.7 | +9.5% | 601.3 | +12.9% | 260.0 | 532.6 |
| 99.0 | 98.4 | +14.0% | 197.4 | +12.9% | 86.3 | 174.9 |
| 415.7 | 383.1 | +10.6% | 798.8 | +12.9% | 346.4 | 707.5 |
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
In the context of its business operations the Hannover Re Group enters into a broad variety of risks. These risks are deliberately accepted, steered and monitored in order to be able to act on the associated opportunities. The parameters and decisions of the Executive Board with respect to the risk appetite of the Hannover Re Group, which are based on the calculations of risk-bearing capacity, are fundamental to the acceptance of risks. Through our business operations on all continents and the diversification between our Property&Casualty and Life& Health reinsurance business groups we are able to effectively allocate our capital in light of opportunity and risk considerations and generate a higher-than-average return on equity. Along with our principal business operations as a reinsurer of property&casualty and life&health business, we also transact primary insurance in selected niche markets as a complement to our core reinsurance business. With this approach we are well positioned for further profitable growth. In this context crucial importance attaches to our risk management in order to ensure that, among other things, risks to the reinsurance portfolio remain calculable and even exceptional major losses do not have an unduly adverse impact on the result. The risk landscape of Hannover Re encompasses:
At the present time our most significant risks are the credit and spread risks within the market risks, the reserving and catastrophe risks within the underwriting risks of property and casualty reinsurance and the risk of changes in mortality within the underwriting risks of life and health reinsurance.
We revised our corporate strategy in the previous year. It encompasses ten fundamental strategic principles which safeguard the realisation of our vision "Long-term success in a competitive business" across the various divisions. The following principles of the corporate strategy constitute the key strategic points of departure for our Group-wide risk management:
The risk strategy is derived from our corporate strategy. It forms the core element in our handling of opportunities and risks. The risk strategy specifies more closely the goals of risk management and documents our understanding of risk. We have defined ten overriding principles within our risk strategy:
The risk strategy is similarly specified with an increasing degree of detail on the various levels of the company.
The risk strategy and the major guidelines derived from it, such as the Framework Guideline on Risk Management and the central system of limits and thresholds, are reviewed at least once a year. In this way we ensure that our risk management system is kept up-to-date.
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.
Regulatory developments: Solvency II is a reform of insurance supervision law in Europe, the implementation of which on 1 January 2016 poses enormous challenges for the entire (re)insurance industry. Along with redefining capital requirements, Solvency II places additional demands on companies' internal management systems and on the information to be disclosed by undertakings to the regulator and the public at large. Further more specific aspects of Solvency II were defined in 2014, including among other things a new draft of the delegated act. Hannover Re has been progressively implementing the new requirements in recent years. In view of our internal target capitalisation with a confidence level of 99.97%, which comfortably exceeds the level of 99.5% envisaged for target capitalisation under Solvency II, the capital requirements of Solvency II do not present any additional hurdle for our company. The core functions of Solvency II – the risk management function, the actuarial function, the compliance function and the internal audit function – have been implemented along existing processes and organisational structures at Hannover Re. Additional staff had to be taken on and extra systems deployed as part of the launch phase, first and foremost in order to be able to meet internal and external reporting requirements.
Parallel to the regulatory developments in Europe, we are seeing adjustments worldwide to the regulation of (re)insurance undertakings. It is often the case that various local supervisory authorities take their lead from the principles of Solvency II or the requirements set out by the International Association of Insurance Supervisors (IAIS). Countries such as Switzerland have already been granted equivalence status.
Above and beyond this, further capital requirements for large, internationally operating (re)insurance groups are to be anticipated in the future. These requirements are under development by the IAIS and the Financial Stability Board (FSB).
In the interests of our shareholders and clients we strive to ensure that our risks remain commensurate with our capital resources. Our quantitative risk management provides a uniform framework for the evaluation and steering of all risks affecting the company as well as of our capital position. In this context, the internal capital model is our central tool. The internal capital model of the Hannover Re Group is a stochastic enterprise model. It covers all subsidiaries and business groups of the Hannover Re Group. The central variable in risk and enterprise management is the economic capital, which is calculated according to market-consistent measurement principles and in many respects corresponds to the own funds under Solvency II. Hannover Re's internal capital model reflects all risks that influence the development of the economic capital. They are split into underwriting risks, market risks, counterparty default risks and operational risks. For each of these risk classes we have identified a number of risk factors for which we define probability distributions. These risk factors include, for example, economic indicators such as interest rates, exchange rates and inflation indices, but also insurance-specific indicators such as the mortality of a particular age group within our portfolio of insureds in a particular country or the number of natural catastrophes in a certain region and the insured loss amount per catastrophe. The specification of the probability distributions for the risk factors draws upon historical and publically available data as well as on the internal data resources of the Hannover Re Group. The process is further supplemented by the know-how of internal and external experts. The fit of the probability distributions is regularly checked by our specialist departments, although more importantly it is also verified in the context of the regular, company-wide use of the capital model when assessing risks and allocating the cost of capital. Hannover Re calculates the required risk capital as the Value at Risk (VaR) of the economic change in value over a period of one year with a confidence level of 99.97%. This reflects the goal of not exceeding a one-year ruin probability of 0.03%. The internal target capitalisation of the Hannover Re Group is therefore significantly higher than the confidence level of 99.5% which will be required in future under Solvency II. It goes without saying that Hannover Rück SE also meets the current capital requirements set by regulators. The capital adequacy ratio of Hannover Rück SE under Solvency I stood at 136% as at 31 December 2014. Since the corresponding calculation is neither market-consistent nor risk-based a relevant comparison with the coverage ratio under the internal capital model is not possible.
The Hannover Re Group is seeking approval of its internal model for the determination of regulatory capital under Solvency II. If approval is given and depending on the final measurement rules of Solvency II, the capitalisation with a confidence level of 99.5% constitutes an indication of the fulfilment of future regulatory requirements. Our excess capital coverage at the target confidence level of 99.97% is currently very comfortable. Hannover Re is well capitalised and our available capital comfortably exceeds the currently required capital.
We hold additional capital above all to meet the requirements of the rating agencies for our target rating and to be able to act flexibly on business opportunities. We strive for a rating from the rating agencies most relevant to our industry that facilitates and secures our access to all reinsurance business worldwide. Hannover Re is analysed by the rating agencies Standard&Poor's (S&P) and A.M. Best as part of an interactive rating process, meaning that both these rating agencies are also given access to confidential information about Hannover Re. The current financial strength ratings are assessed as "AA-" (Very Strong, stable outlook) by Standard&Poor's and "A+" (Superior, stable outlook) by A.M. Best. Standard & Poor's evaluates Hannover Re's risk management as "Very Strong", the best possible rating. The ratings highlight, in particular, the company's very good risk management, the consistent and systematic implementation of corporate strategy by management and the excellent capital resources. Hannover Re's internal capital model is also examined as part of the rating. Based on this review, Standard&Poor's factors the results of the internal capital model of the Hannover Re Group into the determination of the target capital for the rating.
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. The second line of defence consists of the core functions of risk management, the actuarial function and the compliance function. These units are responsible for monitoring and control. The third line of defence is the process-independent monitoring performed by the internal audit function. The chart on the following page provides an overview of the central functions and bodies within the overall system as well as of their major tasks and powers.
The risk management functions meet regularly, e. g. in the context of the Group Risk Management Meeting (GRiMM), in order to support Group-wide risk communication and establish an open risk culture.
Our risk strategy, the Framework Guideline on Risk Management and the system of limits and thresholds for material risks of the Hannover Re Group describe the central elements of our risk management system. The risk management system is subject to a constant cycle of planning, action, control and improvement. Systematic risk identification, analysis, measurement, steering and monitoring as well as risk reporting are especially crucial to the effectiveness of the system as a whole.
The Framework Guideline on Risk Management describes, among other things, the major tasks, rights and responsibilities, the organisational framework conditions and the risk control process. The rules, which are derived from the corporate strategy and the risk strategy, additionally take account of the regulatory minimum requirements for risk management as well as international standards and developments relating to appropriate enterprise management.
The establishment of the risk-bearing capacity involves determining the total available risk coverage potential and calculating how much of this is to be used for covering all material risks. This is done in conformity with the parameters of the risk strategy and the risk appetite defined by the Executive Board. The quantitatively measurable individual risks and the risk position as a whole are evaluated using our risk model. A central system of limits and thresholds is in place to monitor material risks. This system incorporates – along with other risk-related key figures – in particular the indicators derived and calculated from the risk-bearing capacity. Adherence to the overall risk appetite is verified using the results of the risk model. The calculation is updated half-yearly.
A key source of information for monitoring risks is the risk identification carried out on a rotating basis. All identified risks are documented in the central register containing all material risks. Risk identification takes the form of, for example, structured assessments, interviews or scenario analyses. External insights such as recognised industry know-how from relevant bodies or working groups are incorporated into the process. Risk identification is important for ensuring that our risk management consistently remains up-to-date.
In principle, every risk that is identified and considered material is quantitatively assessed. Only risk types for which quantitative risk measurement is currently impossible or difficult are qualitatively assessed (e. g. strategic risks or reputational risks). Qualitative assessment takes the form of inter alia expert evaluations. Quantitative assessment of material risks and the overall risk position is performed by Group Risk Management using the Hannover Re risk model. The model makes allowance as far as possible for risk accumulations and concentrations.
The steering of all material risks is the task of the operational business units on the divisional and company level. In this context, the identified and analysed risks are either consciously accepted, avoided or minimised. The risk /reward ratio and the required capital are factored into the division's decision. Risk steering is assisted by, among other things, the parameters of the central and local underwriting guidelines and by defined limits and thresholds.
The monitoring of all identified material risks is a core task of Group Risk Management. This includes, inter alia, monitoring execution of the risk strategy as well as adherence to the defined limits and thresholds and to risk-related methods and processes. A further major task of risk monitoring is the ascertainment of whether risk steering measures were carried out and whether the planned effect of the measures is sufficient.
Risk management is firmly integrated into our operational processes. It is assisted by transparent risk communication and the open handling of risks as part of our risk culture. Risk communication takes the form, for example, of internal and external risk reports, information on current risk complexes in the intranet and training opportunities for staff. The regular sharing of information between risk-steering and risk-monitoring units is also fundamental to the proper functioning of risk management.
Our risk reporting provides systematic and timely information about all material risks and their potential implications. The central risk reporting system consists primarily of regular risk reports, e. g. on the overall risk situation, adherence to the parameters defined in the risk strategy or on the capacity utilisation of natural catastrophe scenarios. Complementary to the regular risk reporting, immediate internal reporting on material risks that emerge at short notice takes place as necessary. The already existing range of risk reports will be supplemented in the context of Solvency II implementation by further reports, including for example the "Regular Supervisory Report" (RSR) and the "Solvency and Financial Condition Report" (SFCR). The "RSR" was generated in the second quarter of 2015 as part of the preparatory phase.
The Executive Board is responsible for the orderly organisation of the company's business irrespective of internally assigned competencies. This also encompasses monitoring of the internal risk steering and control system. Process-independent monitoring and quality assurance of risk management is carried out by the internal audit function and external instances (regulators, independent auditors and rating agencies). Most notably, the independent auditors review the trigger mechanism and the internal monitoring system. The entire system is rounded off with process-integrated procedures and rules, such as those of the internal control system.
We organise our business activities in such a way that they are always in conformity with all legal requirements. The internal control system (ICS) is an important subsystem that serves, among other things, to secure and protect existing assets, prevent and reveal errors and irregularities and comply with laws and regulations. The core elements of Hannover Re's ICS are documented in a Framework Guideline that establishes a common understanding of the differentiated execution of the necessary controls. In the final analysis, it is designed to systematically steer and monitor the implementation of our corporate strategy. The Framework Guideline defines concepts, stipulates responsibilities and provides a guide for the description of controls. In addition, it forms the basis for the accomplishment of internal objectives and the fulfilment of external requirements imposed on Hannover Re. The ICS consists of systematically structured organisational and technical measures and controls within the enterprise.
This includes, among other things:
The proper functioning of the ICS necessitates the involvement of management, executive staff and employees on all levels. The financial reporting of the parent company and the Group must satisfy international and national financial reporting standards as well as regulatory requirements. This is safeguarded in the area of accounting and financial reporting by processes with integrated controls which ensure the completeness and accuracy of the annual and consolidated financial statements. A structure made up of differentiated criteria, control points and materiality thresholds assures our ability to identify and minimise the risk of material errors in the annual and consolidated financial statements at an early stage.
We use a central IT solution with standardised accounting and consolidation processes, posting rules and interfaces for data delivery in order to draw up the consolidated financial statement. Access rights for the reporting systems are assigned through an approval process. All components of the accounting-related internal control system, the processes for the organisation and implementation of consolidation tasks and for the preparation of the consolidated financial statement as well as the accompanying controls are consistently documented. In order to safeguard and continuously improve the adequacy of the control system it is subject to regular review and evaluation. In this regard, the internal audit function ensures that the quality of the control system is constantly monitored. All relevant accounting principles are collated in a Group Accounting Manual that sets out uniform Group-wide rules for the recognition, measurement and reporting of items in the consolidated financial statement. The process for updating and, if necessary, adjusting these rules is clearly regulated with respect to information channels, responsibilities and period of validity. Not only that, we provide prompt Groupwide notification of significant developments and modified requirements in Group financial reporting.
Within the scope of our control system the Group companies are responsible for Group-wide adherence to the accounting policies and the internal control guidelines. The managing directors and chief financial officers of the Group companies defined as material in our control system affirm to the Executive Board of Hannover Rück SE at each closing date the completeness, correctness and reliability of the financial data that they pass on to Group Accounting. Data for the preparation of the consolidated financial statement is delivered using a Web-based IT application. The relevant data for Group financial reporting is collected in a database and processed via automatic interfaces in a consolidation system. As part of the financial reporting process we perform preventive and detective checks on the reported figures in order to minimise the probability and reduce the impacts of a potentially incorrect disclosure. Depending upon the results of our checks, these figures can be corrected if necessary. Given that our Group financial reporting is heavily dependent on IT systems, these systems also need to be subject to controls. Authorisation concepts regulate system access and for each step content-based as well as system-side checks have been implemented, by means of which errors are analysed and promptly eliminated.
Hannover Re calculates the economic equity as the difference between the market-consistent value of the assets and the market-consistent value of the liabilities. The corresponding measurement principles also largely apply to the Intrinsic Value Creation (IVC). While fair values are available for most investments, the market-consistent valuation of reinsurance treaties necessitates a specific valuation model. We establish the market-consistent value of technical items as the present value of projected payments using actuarial methods. This is adjusted by a risk loading that factors in the fluctuation in future payments. Such fluctuations result from risks that cannot be hedged by means of capital market products, such as underwriting risks. We use risk-free interest rates derived from yields on the highest-quality government bonds for discounting of our future cash flows. Market prices for options and guarantees embedded in insurance contracts are determined or approximated using option valuation models from the field of financial mathematics. The methods used are the same as those adopted in the calculation of our Market Consistent Embedded Value (MCEV). The significance of these options and guarantees in our portfolio is, however, minimal.
The available economic capital, which is available as liable capital for policyholders, is composed of the economic equity and the hybrid capital. The internal capital model is based on current methods from actuarial science and financial mathematics. In the case of underwriting risks, we are able to draw on a rich internal data history to estimate the probability distributions, e.g. for the reserve risk. For risks from natural perils we use external models, which are adjusted in the context of a detailed internal review process such that they reflect our risk profile as closely as possible. In the area of life and health reinsurance long-term payment flows are modelled under various scenarios. With respect to all the aforementioned risks we use internal data to define scenarios and probability distributions. The internal data is enhanced by way of parameters set by our internal experts. These parameters are especially significant in relation to extreme events that have not previously been observed.
When it comes to aggregating the individual risks, we make allowance for dependencies between risk factors. Dependencies arise, for example, as a consequence of market shocks, such as the financial crisis, which simultaneously impact multiple market segments. What is more, several observation periods may be interrelated on account of market phenomena such as price cycles. In dealing with these dependencies, however, it is our assumption that not all extreme events occur at the same time. The absence of complete dependency is referred to as diversification. Hannover Re's business model is based inter alia on building up the most balanced possible portfolio so as to achieve the greatest possible diversification effects and in order to deploy capital efficiently. Diversification exists between individual reinsurance treaties, lines, business segments and risks. We define the cost of capital to be generated per business unit according to the capital required by our business segments and lines and based on their contribution to diversification.
Risk management in property and casualty reinsurance has defined various overall guidelines for efficient risk steering. These include, among other things, the limited use of retrocessions to reduce volatility and conserve capital. It is also crucially important to consistently maximise the available risk capacities on the basis of the risk management parameters of the Hannover Re Group and to steer the acceptance of risks systematically through the existing central and local underwriting guidelines. Our conservative reserving level is a crucial factor in our risk management. We make a fundamental distinction between risks that result from business operations of past years (reserve risk) and those stemming from activities in the current or future years (price / premium risk). In the latter case, special importance attaches to the catastrophe risk. Diversification within the Property&Casualty reinsurance business group is actively managed through allocation of the cost of capital according to the contribution made to diversification. A high diversification effect arises out of the underwriting of business in different lines and different regions with different business partners.
The reserve risk, i. e. the risk of under-reserving losses and the resulting strain on the underwriting result, is the overriding priority in our risk management. We attach the utmost importance to a conservative reserving level and therefore traditionally have a high confidence level. In order to counter the risk of under-reserving we calculate our loss reserves based on our own actuarial estimations and establish, where necessary, additional reserves supplementary to those posted by our cedants as well as the segment reserve for losses that have already occurred but have not yet been reported to us.
Statistical run-off triangles are another monitoring tool used by our company. They show the changes in the reserve over time as a consequence of paid claims and in the recalculation of the reserves to be established as at each balance sheet date. Their adequacy is monitored using actuarial methods.
In order to partially hedge inflation risks Hannover Re has taken out bonds with inflation-linked coupon payments that protect parts of the loss reserves against inflation risks. An inflation risk exists particularly inasmuch as the liabilities (e.g. loss reserves) could develop differently than assumed at the time when the reserve was constituted because of inflation.
Licensed scientific simulation models, supplemented by the expertise of our own specialist departments, are used to assess our material catastrophe risks from natural hazards (especially earthquake, windstorm and flood). Furthermore, we establish the risk to our portfolio from various scenarios in the form of probability distributions. The monitoring of the risks resulting from natural hazards is rounded out by realistic extreme loss scenarios. Within the scope of this process, the Executive Board defines the risk appetite for natural perils once a year on the basis of the risk strategy by specifying the portion of the economic capital that is available to cover risks from natural perils. This is a key basis for our underwriting approach in this segment. 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. For the purposes of risk limitation, maximum amounts are also 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, Executive Board and P&C Executive Committee are kept regularly updated on the degree of capacity utilisation.
The price / premium risk lies primarily in the possibility of a random claims realisation that diverges from the claims expectancy on which the premium calculation was based. Regular and independent reviews of the models used for treaty quotation as well as central and local underwriting guidelines are vital management components. We have put in place a multi-step quotation process to ensure the quality of our portfolios. In addition, Hannover Re's regional and treaty departments prepare regular reports on the progress of their respective renewals. The reporting in this regard makes reference inter alia to significant changes in conditions, risks (such as inadequate premiums) as well as to emerging market opportunities and the strategy pursued in order to accomplish targets. The development of the combined ratio in property and casualty reinsurance is shown in the table below:
| in % | 1H 2015 | 2014 | 2013 | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 | 2006 | 20051 |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Combined ratio (property and casualty reinsurance) |
95.4 | 94.7 | 94.9 | 95.8 | 104.3 | 98.2 | 96.6 | 95.4 | 99.7 | 100.8 | 112.8 |
| Thereof catastrophe losses 2 |
5.1 | 6.1 | 8.4 | 7.0 | 16.5 | 12.3 | 4.6 | 10.7 | 6.3 | 2.3 | 26.3 |
1 Including financial reinsurance and specialty insurance
2 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)
All risks directly connected with the life of an insured person are referred to as biometric risks. They include in particular the miscalculation of mortality, life expectancy, morbidity and occupational disability. Biometric risks are the material risks for our company in the area of life and health reinsurance. Our goal is to strike a balance between biometric risks. Counterparty and lapse risks are also material since we additionally prefinance our cedants' new business acquisition costs. Furthermore, we are exposed to catastrophe risks, especially catastrophes involving a high number of fatalities in our insurance portfolio.
The reserves are determined on the basis of secure biometric actuarial bases in light of the information provided by our clients. The biometric actuarial bases used and the lapse assumptions are continuously reviewed with an eye to their adequacy and if necessary adjusted. This is done using the company's own empirical data as well as market-specific insights. Our current risk profile in life and health reinsurance is dominated by mortality and longevity risks. This is due to the fact that under some of our contracts we pay death benefits, while under others we pay survival benefits. The volume of our annuity portfolios has continued to grow and contributes to diversification within life and health reinsurance.
Diversification is a central management tool for our company. We seek to spread risks as far as possible across different risk classes and different regions. In our pricing of reinsurance treaties we provide incentives to further increase diversification.
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. By monitoring compliance with these underwriting guidelines we minimise the risk of an inability to pay or of deterioration in the financial status of cedants. Regular reviews and holistic analyses (e.g. with an eye to lapse risks) are carried out with respect to new business activities and the assumption of international portfolios. The actuarial reports and documentation required by local regulators ensure that regular scrutiny also takes place on the level of the subsidiaries. The interest rate risk, which in the primary sector is important in life business owing to the guarantees that are given, is of only minimal relevance to our company thanks to the design of our reinsurance treaties. We have confidence in the entrepreneurial abilities of our underwriters and grant them the most extensive possible powers. In our decentralised organisation we manage risks where they arise using a consistent Group-wide approach in order to obtain an overall view of the risks in life and health reinsurance. Our global underwriting guidelines provide underwriters with an appropriate framework for this purpose. Another major element of risk management in life and health reinsurance is the Market Consistent Embedded Value (MCEV). The 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 included in this business. For detailed information please see the MCEV report for 2014 published on our website.
Faced with a challenging capital market climate, particularly high importance attaches to preserving the value of assets under own management and the stability of the return. Hannover Re's portfolio is therefore guided by the principles of a balanced risk /return profile and broad diversification. Based on a risk-averse asset mix, the investments reflect both the currencies and durations of our liabilities. Market price risks include equity risks, interest rate risks, currency risks, real estate risks, spread risks and credit risks.
With a view to preserving the value of our assets under own management, we constantly monitor adherence to a trigger mechanism based on a clearly defined traffic light system that is applied across all portfolios. This system defines clear thresholds and escalation channels for the cumulative fluctuations in fair value and realised gains /losses on investments since the beginning of the year. These are unambiguously defined in conformity with our risk appetite and trigger specified information and escalation channels if a corresponding fair value development is overstepped. Despite the conservative orientation of our investment portfolio, it profited substantially from movements in interest rates and spreads over the course of the year and consistently boosted its fair value reserves. The escalation levels of the trigger mechanism were not activated at any point in time.
The short-term loss probability measured as the "Value at Risk" (VaR) is another vital tool used for monitoring and managing market price risks. It is calculated on the basis of historical data, e. g. the volatility of the securities positions under own management and the correlation between these risks. As part of these calculations the decline in the fair value of our portfolio is simulated with a certain probability and within a certain period. The VaR of the Hannover Re Group determined in accordance with these principles specifies the decrease in the fair value of our securities portfolio under own management that with a probability of 95% will not be exceeded within ten trading days. A multi-factor model is used to calculate the VaR indicators for the 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 macro-economic variables). All asset positions are mapped on the level of individual positions within the multi-factor 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 incorporated into the overall calculation. The model takes into account interest rate risks, credit and spread risks, systematic and specific equity risks, commodity risks and option-specific risks.
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 events.
| in EUR million | Szenario | Portfolio change on a fair value basis |
Change in equity before tax |
|---|---|---|---|
| Equity securities and private | Share prices -10% | -79.4 | -79.4 |
| equity | Share prices -20% | -158.9 | -158.9 |
| Share prices +10% | +79.4 | +79.4 | |
| Share prices +20% | +158.9 | +158.9 | |
| Fixed-income securities | Yield increase +50 basis points | -771.3 | -666.8 |
| Yield increase +100 basis points | -1,507.3 | -1,303.0 | |
| Yield decrease -50 basis points | +793.0 | +683.9 | |
| Yield decrease -100 basis points | +1,618.8 | +1,395.9 |
Further significant risk management tools – along with the 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, 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 in our portfolio. We hold such assets only on a very modest scale as part of strategic participations. The scenarios for changes in equity prices consequently have only extremely slight implications for our portfolio.
The portfolio of fixed-income securities is exposed to the interest rate risk. Declining market yields lead to increases and rising market yields to decreases in the fair value of the fixed-income securities portfolio.
The credit spread risk should also be mentioned. The credit spread refers to the interest rate differential between a riskentailing bond and risk-free bond with the same maturity. Changes in these risk premiums, which are observable on the market, result – analogously to changes in pure market yields – in changes in the fair values of the corresponding securities.
Currency risks are especially relevant if there is a currency imbalance between the technical liabilities and the assets. Through extensive matching of currency distributions on the assets and liabilities side, we reduce this risk on the basis of the individual balance sheets within the Group. The shortterm Value at Risk therefore does not include quantification of the currency risk. We regularly compare the liabilities per currency with the covering assets and optimise the currency coverage in light of various collateral conditions such as different accounting requirements by regrouping assets. Remaining currency surpluses are systematically quantified and monitored within the scope of economic modelling.
Real estate risks result from the possibility of unfavourable changes in the value of real estate held either directly or through fund units. They may be caused by a deterioration in particular qualities of a property or by a general downslide in market values. Real estate risks continued to grow in importance for our portfolio owing to our ongoing involvement in this sector. We spread these risks through broadly diversified investments in high-quality markets of Germany, Europe as a whole and the United States; each investment is preceded by detailed analyses of the property, manager and market in question.
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 situations on capital markets. A modest portion of our cash flows from the insurance business as well as currency risks arising because currency matching cannot be efficiently achieved are partially hedged using forward exchange transactions. Hannover Re holds further derivative financial instruments to hedge interest rate risks from loans taken out to finance real estate. 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 derivative 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. We then assess the credit risk first on the level of individual securities (issues) and in subsequent steps on a combined basis on the issuer level.
In order to limit the risk of counterparty default we set various limits on the issuer and issue level as well as in the form of dedicated rating quotas. A comprehensive system of risk reporting ensures timely reporting to the functions entrusted with risk management.
| Rating classes | Government bonds | Securities issued by semi-governmental entities 2 |
Corporate bonds | Covered bonds / asset backed securities |
||||
|---|---|---|---|---|---|---|---|---|
| in % | in EUR million | in % | in EUR million | in % | in EUR million | in % | in EUR million | |
| AAA | 70.9 | 6,052.8 | 59.7 | 4,036.5 | 1.6 | 204.6 | 64.0 | 2,919.6 |
| AA | 15.0 | 1,282.4 | 35.7 | 2,415.5 | 15.2 | 1,984.3 | 14.9 | 677.8 |
| A | 9.3 | 797.1 | 2.8 | 189.6 | 42.9 | 5,606.7 | 10.5 | 476.8 |
| BBB | 3.7 | 319.1 | 1.4 | 91.5 | 33.1 | 4,320.7 | 6.0 | 274.3 |
| < BBB | 1.0 | 87.8 | 0.4 | 27.2 | 7.2 | 946.0 | 4.7 | 214.1 |
| Total | 100.0 | 8,539.2 | 100.0 | 6,760.3 | 100.0 | 13,062.5 | 100.0 | 4,562.6 |
1 Securities held through investment funds are recognised pro rata with their corresponding individual ratings.
2 Including government-guaranteed corporate bonds
The measurement and monitoring mechanisms that have been put in place safeguard a prudent, broadly diversified investment strategy. This is reflected inter alia in the fact that within our portfolio of assets under own management the exposures to government bonds or instruments backed by sovereign guarantees issued by the so-called GIIPS states (Greece, Ireland, Italy, Portugal, Spain) amount to altogether just EUR 234.1 million on a fair value basis. This corresponds to a proportion of 0.6%. The individual countries account for the following shares: Spain EUR 125.7 million, Italy EUR 65.1 million, Portugal EUR 25.9 million and Ireland EUR 17.4 million. No impairments had to be taken on these holdings. Our portfolio does not contain any bonds of Greek issuers. On a fair value basis EUR 4,372.3 million of the corporate bonds held by our company were issued by entities in the financial sector. Of this amount, EUR 3,656.9 million was attributable to banks. The vast majority of these bank bonds (74.0%) are rated "A" or better. Our investment portfolio under own management does not contain any written or issued credit default swaps.
The counterparty default risk consists primarily of the risk of complete or partial failure of the counterparty and the associated default on payment. Since the business that we accept is not always fully retained, but instead portions are retroceded as necessary, the counterparty default risk is material for our company in reinsurance transactions. 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, which entail a risk inter alia through the potential loss of the premium paid by the cedant to the broker. We minimise these risks, among other things, by reviewing all broker relationships with an eye to criteria such as the existence of professional indemnity insurance, payment performance and proper contract implementation. The credit status of retrocessionaires is continuously monitored. On the basis of this ongoing monitoring a Security Committee decides on measures where necessary to secure receivables that appear to be at risk of default. This process is supported by a Web-based 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. 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 across a broader front, e. g. following a major 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. Alongside traditional retrocessions in property and casualty reinsurance we also transfer risks to the capital market.
Counterparty default risks are also relevant to our investments and in life and health reinsurance because we prefinance acquisition costs for our ceding companies. Our clients, retrocessionaires and broker relationships as well as our investments are therefore carefully evaluated and limited in light of credit considerations and are constantly monitored and controlled within the scope of our system of limits and thresholds. In terms of the Hannover Re Group's major companies, EUR 347.4 million (9.0%) of our accounts receivable from reinsurance business totalling EUR 3,849.0 million were older than 90 days as at the balance sheet date. The average default rate over the past three years was 0.1%.
Operational risks refer to the risk of losses occurring because of the inadequacy or failure of internal processes or as a result of events triggered by employee-related, system-induced or external factors. In contrast to underwriting risks (e. g. the reserve risk), which we enter into in a deliberate and controlled manner in the context of our business activities, operational risks are an indivisible part of our business activities. The focus is therefore on risk avoidance and risk minimisation. As a derivation from our strategic principle "We manage risks actively", we act according to the following principles in relation to operational risks:
With the aid of the Self-Assessment for Operational Risks we determine the maturity level of our operational risk management system and define action fields for improvements. The assessment is carried out, for example, by assessing the maturity level of the respective risk management function or of the risk monitoring and reporting. The system enables us, among other things, to prioritise operational risks and is used inter alia to calculate the capital commitment in our internal model.
The change in risk capital in the period under review can be attributed primarily to the increased business volume and the resulting higher exposure for operational risks.
Within the overall framework of operational risks we consider, in particular, business process risks, compliance risks, risks associated with sales channels and outsourcing of functions, fraud risks, personnel risks, information technology risks/information security risks and business interruption risks.
Business process risks are associated with the risk of deficient or flawed internal processes, which can arise as a consequence of an inadequate process organisation. We have defined criteria to evaluate the maturity level of the material processes, e.g. for the reserving process. This enables us to ensure that process risks are monitored. In cooperation with the process participants, the process owner evaluates the risks of the metaprocess and develops measures for known, existing risks. Data quality is also a highly critical success factor, especially in risk management, because – among other things – the validity of the results delivered by the internal model depends primarily on the data provided. The overriding goal of our data quality management is the sustainable improvement and safeguarding of data quality within the Hannover Re Group.
Compliance risks are associated with the risk of breaches of standards and requirements, non-compliance with which may entail lawsuits or official proceedings with not inconsiderable detrimental implications for the business activities of the Hannover Re Group. Regulatory compliance, compliance with the company's Code of Conduct, data privacy and compliance with anti-trust and competition laws have been defined as issues of particular relevance to compliance. The compliance risk also extends to tax and legal risks. Responsibilities within the compliance organisation are regulated and documented Group-wide and interfaces with risk management have been put in place. The set of tools is rounded off with regular compliance training programmes.
In selected market niches we transact primary insurance business that complements our reinsurance activities. 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.
Risks associated with the outsourcing of functions can result from such outsourcing of functions, services and /or organisational units to third parties outside Hannover Re. Mandatory rules have been put in place to limit this risk; among other things, they stipulate that a risk analysis is to be performed prior to a material outsourcing. In the context of this analysis a check is carried out to determine, inter alia, what specific risks exist and whether outsourcing can even occur in the first place.
Fraud risks refer to the risk of intentional violations of laws or regulations by members of staff (internal fraud) and/or by externals (external fraud). This risk is reduced by the internal control system as well as by the audits conducted by Group Auditing on a Group-wide and line-independent basis.
The proper functioning and competitiveness of the Hannover Re Group can be attributed in large measure to the expertise and dedication of our staff. In order to minimise personnel risks, we pay special attention to the skills, experience and motivation of our employees and foster these qualities through outstanding personnel development and leadership activities. Regular employee surveys and the monitoring of turnover rates ensure that such risks are identified at an early stage and scope to take the necessary actions is created.
Information technology risks and information security risks arise, inter alia, out of the risk of the inadequate integrity, confidentiality or availability of systems and information. By way of example, losses and damage resulting from the unauthorised passing on of confidential information, the malicious overloading of important IT systems or from computer viruses are material to the Hannover Re Group. Given the broad spectrum of such risks, a diverse range of steering and monitoring measures and organisational standards, including for example the requirement to conclude confidentiality agreements with service providers, have been put in place. In addition, our employees are made more conscious of such security risks through practically oriented tools provided online in the intranet or by way of training opportunities.
When it comes to reducing business interruption risks, the paramount objective is the quickest possible return to normal operations after a crisis, for example through implementation of existing contingency plans. Guided by internationally accepted standards, we have defined the key framework conditions and – among other measures – we have assembled a crisis team to serve as a temporary body in the event of an emergency. The system is complemented by regular exercises and tests. In the previous year, for example, we compiled a leaflet on correct behaviour in the event of a business interruption; this condenses in compact form the key information that all employees need to know (e.g. information channels in a crisis situation). Regular risk reporting to the Risk Committee and the Executive Board has also been put in place.
Of material importance to our company in the category of other risks are primarily emerging risks, strategic risks, reputational risks and liquidity risks.
The hallmark of emerging risks is that the content of such risks cannot as yet be reliably assessed – especially on the underwriting side with respect to our treaty portfolio. Such risks evolve gradually from weak signals to unmistakable tendencies. It is therefore vital to detect these risks at an early stage and then determine their relevance. For the purpose of early detection we have developed an efficient process that spans divisions and lines of business and we have ensured its linkage to risk management. Operational implementation is handled by an expert working group assembled specially for this task. The analyses performed by this working group are used Group-wide in order to pinpoint any necessary measures (e.g. the implementation of contractual exclusions or the development of new reinsurance products). By way of example, the risks associated with possible climate change are analysed by this working group. Global warming would have implications not only for natural perils, but also for human health, the world economy, agriculture and so on. These problematic issues may also be relevant to our treaty portfolio – in the form not just of risks but also opportunities, e.g. through increased demand for reinsurance products. Other emerging risks include nanotechnology, resource scarcity and supply chain risks.
Strategic risks derive from a possible imbalance between the corporate strategy of the Hannover Re Group and the constantly changing general business environment. Such an imbalance might be caused, for example, by incorrect strategic policy decisions, a failure to consistently implement the defined strategies and business plans or an incorrect allocation of resources. We therefore regularly review our corporate strategy in a multi-step procedure and adjust our processes and the resulting guidelines as and when required. The Group Strategy was reviewed in the previous year and the revised corporate strategy was unveiled to investors at the Investors' Day held in London on 23 October 2014. We have defined performance criteria and indicators for the operational implementation of the strategic guidelines; these are authoritative when it comes to determining fulfilment of the various targets. With the "Strategy Cockpit" the Executive Board and responsible managers have at their disposal a strategy tool that assists them with the planning, elaboration and management of strategic objectives and measures and safeguards their overall perspective on the company and its strategic risks. In addition, the process for the management of strategic risks is assessed annually as part of the monitoring of business process risks.
Reputational risks refer to the risk that the trust put in our company by clients, shareholders, employees or the public at large may be damaged. This risk has the potential to jeopardise the business foundation of the Hannover Re Group. A good corporate reputation is therefore an indispensable prerequisite for our core business as a reinsurer. Reputational risks may arise out of all business activities conducted by the Hannover Re Group. Reputational damage may be caused, inter alia, by a data mishap that becomes public knowledge or financial difficulties on account of an underwriting risk. In addition to the risk identification methods already described, we use a number of different techniques for risk minimisation, such as our defined communication channels (e. g. Crisis Communication Guideline), a professional approach to corporate communications, tried and tested processes for specific crisis scenarios as well as our established Code of Conduct.
The liquidity risk refers to the risk of being unable to meet our financial obligations when they become due. The liquidity risk consists of the refinancing risk, i. e. the necessary cash cannot be obtained or can only be raised at increased costs, and the market liquidity risk, meaning that financial market transactions can only be completed at a poorer price than expected due to a lack of market liquidity. Core elements of the liquidity management of our investments are, in the first place, management of the maturity structure of our investments on the basis of the planned payment profiles arising out of our technical liabilities and, secondly, regular liquidity planning as well as the asset structure of the investments. Above and beyond the foreseeable payments, unexpected and exceptionally large payments may pose a threat to liquidity. In reinsurance business, however, significant events (major losses) are normally paid out after a lead time that can be reliably planned. As part of our liquidity management we have nevertheless defined asset holdings that have proven to be highly liquid even in times of financial stress. In addition, we manage the liquidity of the portfolio by checking on each trading day the liquidity of the instruments contained therein; their underlying parameters are verified on a regular and ad hoc basis. These measures serve to effectively reduce the liquidity risk.
Speed is one of the qualities used to measure a successful knowledge transfer. Quick solutions and staying one step ahead of the competition is the name of the game. Hannover Re searches systematically for new business opportunities in order to generate sustainable growth and strengthen the company's profitable development. With a view to identifying opportunities and successfully translating ideas into business, Hannover Re adopts a number of closely related approaches in order to achieve holistic opportunity and risk management. Of significance here is the interplay without overlaps of the various functions within opportunity and risk management, which is ensured by defined interfaces.
Key elements in Hannover Re's opportunity management include its various market-specific innovations in the Life&Health and Property&Casualty reinsurance business groups. What is more, innovative and creative ideas are generated by our employees. If they can be successfully translated into additional profitable premium volume, such ideas are financially rewarded. Further elements are the working group on "Emerging Risks and Scientific Affairs" and the "Future Radar" initiative. Not only that, Hannover Re has set up a stand-alone organisational unit for "Business Opportunity Management". This service unit deals exclusively and systematically with ideas and opportunities and it concentrates its activities on generating additional premium volume with profit potential. To this end, ideas are translated into business opportunities and business models with the backing of project teams, and these are then acted upon in cooperation with primary insurance partners. Such business approaches are subsequently evaluated and fleshed out more concretely by the "Business Opportunity Management" service unit. This unit also supports selected projects from the conceptual design of holistic business models right through to operational implementation or handover to line responsibility. The goal is to generate new business and thereby sustainably promote Hannover Re's profitable growth. Several initiatives and projects have grown out of some 100 ideas contributed by the global network since the unit was set up. As part of an attractive employee incentive scheme, a number of projects have been financially rewarded – including the opportunity management projects "Weather" and "Energy Savings Protect".
Since as long ago as 2010 the stand-alone service unit "Business Opportunity Management" has been assigned to the Chief Executive Officer's area of responsibility. This is a clear reflection of the considerable importance that Hannover Re attaches to opportunity management. The monitoring and active networking carried out by the innovative minds involved give rise to close links with other projects, working groups and bodies, such as with the working group on "Emerging Risks und Scientific Affairs" in regard to emerging risks and opportunities (see page 22 "Other risks"). The working group carries out qualitative assessments of emerging risks. As a result, however, not only are the potential risks analysed but also any available business opportunities. In the year under review, for example, issues such as general environmental pollution, climate change and associated questions of liability, e-cigarettes and the risks of lithium-ion batteries as well as cyber-risks were explored by the working group.
If a business idea is translated into reality and a new reinsurance product results, the normal procedure – provided the criteria defined for this purpose by Risk Management are applicable – is to work through the so-called new product process. This process is supported by Risk Management at Hannover Re. The process is always worked through if a contractual commitment is to be entered into in a form not previously used by Hannover Re or if the exposure substantially exceeds the existing scope of coverage. If this is the case, all material internal and external influencing factors are examined beforehand by Risk Management (e.g. implications for the overall risk profile or the risk strategy) and an assessment is made. Risk Management ensures that before it can be used or sold a new reinsurance product must be approved by the Executive Board.
Based on our currently available insights arrived from a holistic analysis of the opportunities and risks, the Executive Board of Hannover Re cannot discern any risks that could jeopardise the continued existence of the Hannover Re Group in the short or medium term or have a material and lasting effect on its assets, financial position or net income. We are convinced that:
As an internationally operating reinsurance group, we move in a highly complex environment. Nevertheless, thanks to our business activities in all lines of reinsurance we are able to achieve optimal risk spreading through geographical and risk-specific diversification while at the same time maintaining a balanced opportunity /risk profile. We consider the risks described in the above sections to be manageable, particularly because our steering and monitoring measures are effectively and closely interlinked. Despite these diverse mechanisms, individual and especially accumulation risks can decisively affect our assets, financial position and net income. In accordance with our understanding of risk, however, we consider not only risks but also at the same time opportunities. We therefore only enter into those risks that go hand-in-hand with opportunities. Our steering and monitoring tools as well as our organisational and operational structure ensure that we identify risks at an early stage and are able to act on our opportunities. Our central monitoring tool is the system of risk management that we have installed Group-wide, which brings together both qualitative and quantitative information for the purpose of effective risk monitoring. Most notably, the interplay between domestic and foreign risk management functions affords us a holistic and Group-wide overview.
Our own evaluation of the manageability of existing risks is confirmed by various financial indicators and external assessments. Key monitoring indicators, reporting limits and potential escalation steps are defined on a mandatory basis in our central system of limits and thresholds for the material risks of the Hannover Re Group. As a result, the system provides us with a precise overview of potentially undesirable developments in the defined risk tolerances and enables us to react in a timely manner. One testament to our financial stability, for example, is the growth of our shareholders' equity. Since 2010 we have been able to increase our total policyholders' surplus (hybrid capital, non-controlling interests and shareholders' equity) by 150%. In this context, the necessary equity resources are determined by the requirements of our economic capital model, solvency regulations, the assumptions of rating agencies with respect to our target rating and the expectations of our clients and shareholders. This increase gives us a sufficient capital cushion to be able both to absorb risks and act on business opportunities that may arise. Similarly, our very good ratings also testify to our financial stability. The quality of our Enterprise Risk Management (ERM) is evaluated separately by Standard&Poor's. In the year under review Standard&Poor's gave our risk management its highest possible grade of "very strong". Most notably, our established risk culture promotes the development of appropriate risk monitoring systems and strategic risk management. The evaluation encompasses above all the areas of risk culture, risk controls, the management of emerging risks, risk models and strategic risk management. This external appraisal confirms the quality of our holistic approach to risk management. In addition, the risk trigger mechanism and internal monitoring system are reviewed annually by the independent auditor. The Group-wide risk management system is also a regular part of the audits conducted by the internal audit function. For additional information on the opportunities and risks associated with our business please see the Group Annual Report 2014.
Despite the challenging business conditions facing the international (re)insurance industry and the protracted low level of interest rates, it is Hannover Re's expectation that even in this environment it can continue to operate with sustained success. Based on constant exchange rates, the company anticipates growth in the range of 5% to 10% in gross premium income for its total business in the current financial year.
In property and casualty reinsurance we expect to book an increased premium volume – adjusted for exchange rate effects – in the full 2015 financial year despite our systematically practised policy of selective underwriting. As a financially robust reinsurer we still see encouraging business potential in a number of segments: special mention should be made here of Asia-Pacific markets, North and Latin America as well as business with agricultural risks. The areas of facultative and structured reinsurance also offer growth prospects. In view of the very pleasing premium development in the first half-year, we are confident that full-year growth in property and casualty reinsurance will be stronger than originally forecast.
The outcome of the treaty renewals as at 1 June and 1 July was also largely positive. This is traditionally the time of year when some parts of our business in North America, agricultural risks and the portfolio in Latin America come up for renewal. This was also the main renewal season for business in Australia, which passed off very successfully for Hannover Re in view of the increased market share secured by the company. Broadly speaking, we are also satisfied with the outcome of the renewals in Latin America and the Caribbean as at 1 July as well as with the treaty conditions that were obtained. Despite significant capacities in the natural catastrophe market for proportional and non-proportional covers, our extensive product range enabled us to act on new business opportunities in Latin America and the Caribbean as well as to further diversify our portfolio. In the area of agricultural risks, too, markets around the world are competitive. We nevertheless wrote attractive new business and expanded our good position in this market segment.
In North America the pressure on rates and conditions remains undiminished due to the very good results booked by both the primary and reinsurance sectors in the absence of large losses; the rate reductions were, however, smaller than anticipated. Stronger demand driven by the improved state of the economy was the key factor here.
Despite below-average natural catastrophe expenditure and relatively modest fire losses, the renewals in US property business passed off favourably. This is in part because, in view of our very good rating, ceding companies consider us a preferred partner to whom they offer the entire spectrum of business for underwriting. Rates for non-proportional reinsurance programmes that had been spared losses saw a decline of 5%, reflecting the currently prevailing competitive climate. For loss-impacted programmes, on the other hand, rate increases running into double-digit percentages were obtained in some cases. In US property catastrophe business the pressure on prices eased compared to the previous year's renewals. Conditions in proportional reinsurance remained largely stable. Although casualty business in the United States remains fiercely competitive, we were nevertheless able to act on attractive new opportunities – opened up, for example, by increased demand for coverage of cyber-risks. The development of our business in Canada, where we booked gratifying premium growth, was also satisfactory. Despite continued adherence to our selective underwriting policy, our overall premium volume for North America increased as at 1 July 2015.
Our targeted EBIT margin of at least 10% for our total Property&Casualty reinsurance business group remains unchanged. We are aiming for a combined ratio of less than 96%.
In life and health reinsurance we expect further promising business opportunities in the second half of the year. Most notably, the global (re)insurance industry is focused on the impending implementation of new solvency-based prudential regimes in Europe, South Africa and parts of Asia, and this is likely to generate fresh business prospects. The regulatory solvency requirements impose more rigorous standards on insurers' capital resources and risk management systems. As a result, our clients can be expected to take an increasingly keen interest in reinsurance concepts in the area of financial solutions. In this context, we put considerable emphasis on solutions that are individually tailored to provide capital relief and improve the solvency position of our clients.
In our assessment, longevity risks continue to offer attractive business opportunities. Hannover Re has already completed initial transactions in this area outside the United Kingdom and is confident that demand will continue to rise on the back of ongoing demographic shifts.
The markets of Asia as well as Eastern and Central Europe continue to offer interesting business prospects. A constantly expanding urban middle class is boosting demand for products that offer financial security for the family, coverage for disability and long-term care as well as retirement provision.
For the second half of 2015 our expectation of organic, currency-adjusted gross premium growth in our life and health reinsurance portfolio coupled with rising profitability remains unchanged. In addition, we continue to aim for a value of new business in excess of EUR 180 million. The target EBIT margins set for our reporting categories still apply, namely at least 2% for financial solutions and longevity business and at least 6% for mortality and morbidity business.
With regard to our IVC targets – which we use to map economic value creation –, we anticipate at least 2% xRoCA for property and casualty reinsurance and at least 3% xRoCA for life and health reinsurance.
The expected positive cash flow that we generate from the technical account and our investments should – subject to stable exchange rates and yield levels – lead to further growth in our asset portfolio. In the area of fixed-income securities our focus remains on the high quality and diversification of our portfolio. When it comes to the allocation of new investments resulting from cash flows and maturities, we are looking to gradually increase the shares of holdings in the category BBB- and in lower rating segments while at the same time investing proportionately more strongly in top-quality, highly liquid government bonds. The focus here remains primarily on stability while maintaining an adequate risk /return ratio, thereby enabling us to respond flexibly to general developments and opportunities that may present themselves. We are targeting a return on investment of 3.0% for 2015.
In view of the good results for the first half-year, we are raising our guidance for Group net income in the full 2015 financial year. Assuming that the burden of major losses does not significantly exceed the expected level of EUR 690 million and that there are no unforeseen downturns on capital markets, Hannover Re now anticipates Group net income in the order of EUR 950 million.
Hannover Re envisages a payout ratio in the range of 35% to 40% of its IFRS Group net income for the dividend in the current financial year. This figure could increase in light of capital management considerations if the company's comfortable level of capitalisation remains unchanged.
Matters of special significance arising after the closing date for the quarterly consolidated financial statements are discussed in Section 7.6 of the notes "Events after the end of the quarter" on page 65.
| Consolidated balance sheet as at 30 June 2015 | 28 |
|---|---|
| Consolidated statement of income as at 30 June 2015 | 30 |
| Consolidated statement of comprehensive income as at 30 June 2015 | 31 |
| Consolidated statement of changes in shareholders' equity as at 30 June 2015 | 32 |
| Consolidated cash flow statement as at 30 June 2015 | 34 |
| Notes to the consolidated financial statements as at 30 June 2015 | 37 |
| Assets in EUR thousand |
30.6.2015 | 31.12.2014 |
|---|---|---|
| Fixed-income securities – held to maturity | 1,688,898 | 2,139,742 |
| Fixed-income securities – loans and receivables | 3,057,935 | 2,988,187 |
| Fixed-income securities – available for sale | 28,091,699 | 26,817,523 |
| Fixed-income securities – at fair value through profit or loss | 86,115 | 64,494 |
| Equity securities – available for sale | 34,372 | 32,804 |
| Other financial assets – at fair value through profit or loss | 54,857 | 66,394 |
| Real estate and real estate funds | 1,372,032 | 1,299,258 |
| Investments in associated companies | 147,380 | 154,822 |
| Other invested assets | 1,432,320 | 1,316,604 |
| Short-term investments | 541,227 | 575,300 |
| Cash and cash equivalents | 892,788 | 772,882 |
| Total investments and cash under own management | 37,399,623 | 36,228,010 |
| Funds withheld | 17,770,758 | 15,826,480 |
| Contract deposits | 155,020 | 92,069 |
| Total investments | 55,325,401 | 52,146,559 |
| Reinsurance recoverables on unpaid claims | 1,409,235 | 1,376,432 |
| Reinsurance recoverables on benefit reserve | 870,885 | 676,219 |
| Prepaid reinsurance premium | 211,881 | 149,257 |
| Reinsurance recoverables on other technical reserves | 7,600 | 5,446 |
| Deferred acquisition costs | 2,137,757 | 1,914,598 |
| Accounts receivable | 3,848,961 | 3,113,978 |
| Goodwill | 60,057 | 58,220 |
| Deferred tax assets | 359,220 | 393,923 |
| Other assets | 721,833 | 618,280 |
| Accrued interest and rent | 7,262 | 4,672 |
| Assets held for sale | 2,620 | – |
| Total assets | 64,962,712 | 60,457,584 |
| Liabilities in EUR thousand |
30.6.2015 | 31.12.2014 |
|---|---|---|
| Loss and loss adjustment expense reserve | 26,131,490 | 24,112,056 |
| Benefit reserve | 12,786,369 | 11,757,132 |
| Unearned premium reserve | 3,537,008 | 2,748,594 |
| Other technical provisions | 325,059 | 324,240 |
| Funds withheld | 812,528 | 817,137 |
| Contract deposits | 7,127,087 | 6,072,338 |
| Reinsurance payable | 1,110,481 | 1,101,317 |
| Provisions for pensions | 152,855 | 171,501 |
| Taxes | 209,040 | 260,137 |
| Deferred tax liabilities | 1,894,014 | 1,875,591 |
| Other liabilities | 731,970 | 694,234 |
| Long-term debt and subordinated capital | 1,794,856 | 2,270,347 |
| Total liabilities | 56,612,757 | 52,204,624 |
| Shareholders' equity | ||
| Common shares | 120,597 | 120,597 |
| Nominal value: 120,597 Conditional capital: 60,299 |
||
| Additional paid-in capital | 724,562 | 724,562 |
| Common shares and additional paid-in capital | 845,159 | 845,159 |
| Cumulative other comprehensive income | ||
| Unrealised gains and losses on investments | 929,079 | 1,169,255 |
| Cumulative foreign currency translation adjustment | 519,896 | 190,454 |
| Changes from hedging instruments | (7,474) | (8,748) |
| Other changes in cumulative other comprehensive income | (36,343) | (48,288) |
| Total other comprehensive income | 1,405,158 | 1,302,673 |
| Retained earnings | 5,422,281 | 5,402,926 |
| Equity attributable to shareholders of Hannover Rück SE | 7,672,598 | 7,550,758 |
| Non-controlling interests | 677,357 | 702,202 |
| Total shareholders' equity | 8,349,955 | 8,252,960 |
| Total liabilities and shareholders´ equity | 64,962,712 | 60,457,584 |
| in EUR thousand | 1.4. –30.6.2015 | 1.1. –30.6.2015 | 1.4. –30.6.2014 | 1.1. –30.6.2014 |
|---|---|---|---|---|
| Gross written premium | 4,186,311 | 8,586,536 | 3,440,453 | 7,064,892 |
| Ceded written premium | 501,398 | 1,004,296 | 444,088 | 866,059 |
| Change in gross unearned premium | (105,622) | (618,181) | (63,707) | (387,466) |
| Change in ceded unearned premium | 8,215 | 55,297 | (6,034) | 27,993 |
| Net premium earned | 3,587,506 | 7,019,356 | 2,926,624 | 5,839,360 |
| Ordinary investment income | 286,453 | 598,678 | 248,737 | 490,143 |
| Profit/loss from investments in associated companies |
2,118 | 4,619 | 1,385 | 4,307 |
| Realised gains and losses on investments | 21,646 | 66,644 | 34,393 | 88,498 |
| Change in fair value of financial instruments | 9,013 | (1,625) | 2,550 | 9,997 |
| Total depreciation, impairments and appreciation of investments |
6,526 | 14,712 | 4,795 | 10,336 |
| Other investment expenses | 28,010 | 52,265 | 22,246 | 50,049 |
| Net income from investments under own management |
284,694 | 601,339 | 260,024 | 532,560 |
| Income / expense on funds withheld and contract deposits |
98,418 | 197,427 | 86,330 | 174,945 |
| Net investment income | 383,112 | 798,766 | 346,354 | 707,505 |
| Other technical income | 436 | 1,025 | 1,223 | 1,611 |
| Total revenues | 3,971,054 | 7,819,147 | 3,274,201 | 6,548,476 |
| Claims and claims expenses | 2,710,539 | 5,423,386 | 2,230,315 | 4,409,101 |
| Change in benefit reserves | 40,556 | (810) | (35,122) | 14,697 |
| Commission and brokerage, change in deferred acquisition costs |
760,027 | 1,422,810 | 626,324 | 1,210,300 |
| Other acquisition costs | 858 | 2,220 | 1,043 | 2,384 |
| Other technical expenses | 180 | 2,225 | 1,227 | 4,133 |
| Administrative expenses | 109,454 | 210,438 | 92,094 | 185,871 |
| Total technical expenses | 3,621,614 | 7,060,269 | 2,915,881 | 5,826,486 |
| Other income and expenses | 10,949 | 30,509 | (24,257) | (38,304) |
| Operating profit (EBIT) | 360,389 | 789,387 | 334,063 | 683,686 |
| Interest on hybrid capital | 23,456 | 48,453 | 21,053 | 48,847 |
| Net income before taxes | 336,933 | 740,934 | 313,010 | 634,839 |
| Taxes | 58,486 | 184,162 | 93,325 | 155,655 |
| Net income | 278,447 | 556,772 | 219,685 | 479,184 |
| thereof | ||||
| Non-controlling interest in profit and loss | 26,255 | 24,869 | 8,217 | 34,762 |
| Group net income | 252,192 | 531,903 | 211,468 | 444,422 |
| Earnings per share (in EUR) | ||||
| Basic earnings per share | 2.09 | 4.41 | 1.75 | 3.69 |
| Diluted earnings per share | 2.09 | 4.41 | 1.75 | 3.69 |
| in EUR thousand | 1.4. – 30.6.2015 |
1.1. – 30.6.2015 |
1.4. – 30.6.2014 |
1.1. – 30.6.2014 |
|---|---|---|---|---|
| Net income | 278,447 | 556,772 | 219,685 | 479,184 |
| Not reclassifiable to the consolidated statement of income | ||||
| Actuarial gains and losses | ||||
| Gains (losses) recognised directly in equity | 37,839 | 19,513 | (6,197) | (18,950) |
| Tax income (expense) | (12,118) | (6,275) | 1,976 | 6,049 |
| 25,721 | 13,238 | (4,221) | (12,901) | |
| Income and expense recognised directly in equity that cannot be reclassified | ||||
| Gains (losses) recognised directly in equity | 37,839 | 19,513 | (6,197) | (18,950) |
| Tax income (expense) | (12,118) | (6,275) | 1,976 | 6,049 |
| 25,721 | 13,238 | (4,221) | (12,901) | |
| Reclassifiable to the consolidated statement of income | ||||
| Unrealised gains and losses on investments | ||||
| Gains (losses) recognised directly in equity | (629,703) | (266,320) | 326,003 | 622,985 |
| Transferred to the consolidated statement of income | (37,167) | (83,324) | (30,017) | (65,074) |
| Tax income (expense) | 201,650 | 96,381 | (84,108) | (155,665) |
| (465,220) | (253,263) | 211,878 | 402,246 | |
| Currency translation | ||||
| Gains (losses) recognised directly in equity | (187,709) | 362,652 | 73,995 | 86,631 |
| Transferred to the consolidated statement of income | – | – | – | 50 |
| Tax income (expense) | 15,832 | (27,743) | (8,659) | (9,829) |
| (171,877) | 334,909 | 65,336 | 76,852 | |
| Changes from the measurement of associated companies | ||||
| Gains (losses) recognised directly in equity | (4) | 388 | 9 | 23 |
| Transferred to the consolidated statement of income | – | (424) | – | – |
| (4) | (36) | 9 | 23 | |
| Changes from hedging instruments | ||||
| Gains (losses) recognised directly in equity | (1,621) | 2,200 | 76 | 580 |
| Tax income (expense) | 336 | (884) | (24) | (185) |
| (1,285) | 1,316 | 52 | 395 | |
| Reclassifiable income and expense recognised directly in equity | ||||
| Gains (losses) recognised directly in equity | (819,037) | 98,920 | 400,083 | 710,219 |
| Transferred to the consolidated statement of income | (37,167) | (83,748) | (30,017) | (65,024) |
| Tax income (expense) | 217,818 | 67,754 | (92,791) | (165,679) |
| (638,386) | 82,926 | 277,275 | 479,516 | |
| Total income and expense recognised directly in equity | ||||
| Gains (losses) recognised directly in equity | (781,198) | 118,433 | 393,886 | 691,269 |
| Transferred to the consolidated statement of income | (37,167) | (83,748) | (30,017) | (65,024) |
| Tax income (expense) | 205,700 | 61,479 | (90,815) | (159,630) |
| (612,665) | 96,164 | 273,054 | 466,615 | |
| Total recognised income and expense | (334,218) | 652,936 | 492,739 | 945,799 |
| thereof | ||||
| Attributable to non-controlling interests | 4,811 | 18,548 | 21,398 | 60,021 |
| Attributable to shareholders of Hannover Rück SE | (339,029) | 634,388 | 471,341 | 885,778 |
| Unrealised Currency gains /losses translation Balance as at 1.1.2014 120,597 724,562 533,745 (246,279) Changes in ownership interest with no change of control status – – 959 – Changes in the consolidated group – – – – Capital increase / additions – – – – Acquisition/disposal of treasury shares – – – – Total income and expense recognised directly in equity – – 376,152 76,374 Net income – – – – |
|---|
| Dividends paid – – – – |
| Balance as at 30.6.2014 120,597 724,562 910,856 (169,905) |
| Balance as at 1.1.2015 120,597 724,562 1,169,255 190,454 |
| Changes in ownership interest with no change of control status – – – – |
| Changes in the consolidated group – – – – |
| Capital increase / additions – – – – |
| Acquisition/disposal of treasury shares – – – – |
| Total income and expense recognised directly in equity – – (240,176) 329,442 |
| Net income – – – – |
| Dividends paid – – – – |
| Balance as at 30.6.2015 120,597 724,562 929,079 519,896 |
| Total shareholders' equity |
Non-controlling interests |
Equity attributable to shareholders of Hannover Rück SE |
Retained earnings | Continuation: Other reserves (cumulative other comprehensive income) |
|
|---|---|---|---|---|---|
| Other | Hedging instruments |
||||
| 6,530,027 | 641,591 | 5,888,436 | 4,781,718 | (16,452) | (9,455) |
| – | 738 | (738) | (1,697) | – | – |
| (1,387) | (1,387) | – | – | – | – |
| – | – | – | – | – | – |
| (13) | – | (13) | (13) | – | – |
| 466,615 | 25,259 | 441,356 | – | (11,565) | 395 |
| 479,184 | 34,762 | 444,422 | 444,422 | – | – |
| (401,808) | (40,017) | (361,791) | (361,791) | – | – |
| 7,072,618 | 660,946 | 6,411,672 | 4,862,639 | (28,017) | (9,060) |
| 8,252,960 | 702,202 | 7,550,758 | 5,402,926 | (48,288) | (8,748) |
| – | – | – | – | – | – |
| (56) | (56) | – | – | – | – |
| 58 | 58 | – | – | – | – |
| (10) | – | (10) | (10) | – | – |
| 96,164 | (6,321) | 102,485 | – | 11,945 | 1,274 |
| 556,772 | 24,869 | 531,903 | 531,903 | – | – |
| (555,933) | (43,395) | (512,538) | (512,538) | – | – |
| 8,349,955 | 677,357 | 7,672,598 | 5,422,281 | (36,343) | (7,474) |
| in EUR thousand | 1.1. –30.6.2015 | 1.1. –30.6.2014 |
|---|---|---|
| I. Cash flow from operating activities |
||
| Net income | 556,772 | 479,184 |
| Appreciation/depreciation | 21,357 | 18,835 |
| Net realised gains and losses on investments | (66,644) | (88,498) |
| Change in fair value of financial instruments (through profit or loss) | 1,625 | (9,997) |
| Realised gains and losses on deconsolidation | (424) | (2,602) |
| Amortisation of investments | 54,982 | 35,662 |
| Changes in funds withheld | (838,937) | (123,085) |
| Net changes in contract deposits | 563,128 | (114,012) |
| Changes in prepaid reinsurance premium (net) | 562,403 | 359,726 |
| Changes in tax assets /provisions for taxes | 29,154 | 70,703 |
| Changes in benefit reserve (net) | (23,908) | 13,124 |
| Changes in claims reserves (net) | 750,266 | 717,593 |
| Changes in deferred acquisition costs | (101,880) | (63,890) |
| Changes in other technical provisions | (15,538) | (4,060) |
| Changes in clearing balances | (533,933) | (576,961) |
| Changes in other assets and liabilities (net) | (109,979) | (52,327) |
| Cash flow from operating activities | 848,444 | 659,395 |
| in EUR thousand | 1.1. –30.6.2015 | 1.1. –30.6.2014 |
|---|---|---|
| II. Cash flow from investing activities |
||
| Fixed-income securities – held to maturity | ||
| Maturities | 515,198 | 387,412 |
| Purchases | – | (241) |
| Fixed-income securities – loans and receivables | ||
| Maturities, sales | 111,213 | 232,579 |
| Purchases | (97,001) | – |
| Fixed-income securities – available for sale | ||
| Maturities, sales | 5,036,713 | 5,965,672 |
| Purchases | (5,211,552) | (6,011,660) |
| Fixed-income securities – at fair value through profit or loss | ||
| Maturities, sales | 18,358 | 9,636 |
| Purchases | (36,354) | (24,147) |
| Equity securities – available for sale | ||
| Sales | 3,467 | 9,809 |
| Purchases | (4,038) | (8,397) |
| Other financial assets – at fair value through profit or loss | ||
| Sales | 47,228 | 19,609 |
| Purchases | (10,982) | (6,005) |
| Other invested assets | ||
| Sales | 89,933 | 66,795 |
| Purchases | (146,588) | (105,334) |
| Affiliated companies and participating interests | ||
| Sales | 111 | – |
| Purchases | (11,224) | (33,759) |
| Real estate and real estate funds | ||
| Sales | 41,546 | 31,075 |
| Purchases | (94,300) | (103,610) |
| Short-term investments | ||
| Changes | 62,342 | 64,241 |
| Other changes (net) | (13,781) | (20,724) |
| Cash flow from investing activities | 300,289 | 472,951 |
| in EUR thousand | 1.1. –30.6.2015 | 1.1. –30.6.2014 |
|---|---|---|
| III. Cash flow from financing activities | ||
| Contribution from capital measures | 663 | 1,325 |
| Payment on capital measures | (459) | (4,587) |
| Structural change without loss of control | – | – |
| Dividends paid | (555,933) | (401,808) |
| Proceeds from long-term debts | 23,035 | 59,543 |
| Repayment of long-term debts | (517,425) | (750,957) |
| Other changes | (10) | (13) |
| Cash flow from financing activities | (1,050,129) | (1,096,497) |
| IV. Exchange rate differences on cash | 21,302 | 12,272 |
| Cash and cash equivalents at the beginning of the period | 772,882 | 642,936 |
| Change in cash and cash equivalents (I.+II.+III.+IV.) | 119,906 | 48,121 |
| Changes in the consolidated group | – | (4,059) |
| Cash and cash equivalents at the end of the period | 892,788 | 686,998 |
| Supplementary information on the cash flow statement 1 | ||
| Income taxes paid (on balance) | (142,457) | (58,259) |
| Dividend receipts 2 | 39,108 | 9,909 |
| Interest received | 755,703 | 587,741 |
| Interest paid | (87,124) | (93,896) |
1 The income taxes paid, dividend receipts as well as interest received and paid are included entirely in the cash flow from operating activities.
2 Including dividend-like profit participations from investment funds
| Notes | 38 | |
|---|---|---|
| 1. | General reporting principles | 38 |
| 2. | Accounting principles including major accounting policies | 38 |
| 3. | Consolidated companies and consolidation principles | 41 |
| 4. | Group segment report | 44 |
| 5. | Notes on the individual items of the balance sheet | 48 |
| 6. | Notes on the individual items of the statement of income | 59 |
| 7. | Other notes | 60 |
Hannover Rück SE and its subsidiaries (collectively referred to as the "Hannover Re Group" or "Hannover Re") are 50.2% (rounded) owned by Talanx AG and included in its consolidated financial statement. Talanx AG is majority-owned by HDI Haftpflichtverband der Deutschen Industrie V.a.G. (HDI). Hannover Re is obliged to prepare a consolidated financial statement and group management report in accordance with § 290 German Commercial Code (HGB). Furthermore, HDI is required by §§ 341 i et seq. German Commercial Code (HGB) to prepare consolidated annual accounts that include the annual financial statements of Hannover Rück SE and its subsidiaries. Hannover Rück SE is a European Company, Societas Europaea (SE), and its registered office is located at Karl-Wiechert-Allee 50, 30625 Hannover, Germany.
The consolidated financial statement of Hannover Re was drawn up in compliance with the International Financial Reporting Standards (IFRS) that are to be used within the European Union. This also applies to all figures provided in this report for previous periods. Since 2002 the standards adopted by the International Accounting Standards Board (IASB) have been referred to as "International Financial Reporting Standards (IFRS)"; the standards dating from earlier years still bear the name "International Accounting Standards (IAS)". Standards are cited in our notes accordingly; in cases where the notes do not make explicit reference to a particular standard, the term IFRS is used. In view of the fact that reinsurance contracts, in conformity with IFRS 4 "Insurance Contracts", are recognised according to the pertinent provisions of United States Generally Accepted Accounting Principles (US GAAP) as applicable on the date of initial application of IFRS 4 on 1 January 2005, we cite individual insurance-specific standards of US GAAP using the designation "Statement of Financial Accounting Standard (SFAS)" that was valid at that time.
As provided for by IAS 34, in our preparation of the consolidated quarterly financial statement, consisting of the consolidated balance sheet, consolidated statement of income, consolidated statement of comprehensive income, consolidated cash flow statement, consolidated statement of changes in shareholders' equity and selected explanatory notes, we draw on estimates and assumptions to a greater extent than is the case with the annual financial reporting. This can have implications for items in the balance sheet and the statement of income as well as for other financial obligations. Although the estimates are always based on realistic premises, they are of course subject to uncertainties that may be reflected accordingly in the result. Losses from natural disasters and other catastrophic losses impact the result of the reporting period in which they occur. Furthermore, belatedly reported claims for major loss events can also lead to substantial fluctuations in individual quarterly results. Gains and losses on the disposal of investments are accounted for in the quarter in which the investments are sold.
The present consolidated quarterly financial statement was prepared by the Executive Board on 23 July 2015 and released for publication.
The quarterly accounts of the consolidated companies included in the consolidated financial statement were drawn up as at 30 June 2015.
The consolidated quarterly financial report was compiled in accordance with IAS 34 "Interim Financial Reporting". Consequently, the accounting policies adopted in the period under review were the same as those applied in the preceding consolidated annual financial statement; changes made in specific justified cases pursuant to IAS 8 are reported separately in the section entitled "Changes in accounting policies". For more details of the accounting policies please see the Group annual financial report for the previous year.
All standards adopted by the IASB as at 30 June 2015 with binding effect for the period under review have been observed in the consolidated financial statement.
In December 2013 the IASB issued "Annual Improvements to IFRSs 2011 – 2013 Cycle". The annual improvements involve minor amendments and clarifications relating to the following standards: IFRS 1 "First-time Adoption of International Financial Reporting Standards", IFRS 3 "Business Combinations", IFRS 13 "Fair Value Measurement" and IAS 40 "Investment Property". The improvements are effective for annual periods beginning on or after 1 July 2014 and were endorsed by the EU in December 2014. Initial application of the revised standards did not give rise to any significant implications for Hannover Re.
In December 2014 the IASB published "Amendments to IFRS 10, IFRS 12 and IAS 28: Investment Entities: Applying the Consolidation Exception". The amendments address issues that have arisen in the context of applying the consolidation exception for investment entities. They are effective for annual periods beginning on or after 1 January 2016 and have still to be endorsed by the EU.
In December 2014 the IASB also issued "Amendments to IAS 1: Disclosure Initiative". The amendments provide clarifications in relation to materiality considerations, the aggregation and disaggregation of disclosures and the understandability and comparability of the notes to the IFRS financial statements. They are effective for annual periods beginning on or after 1 January 2016 and have still to be endorsed by the EU.
In September 2014 the IASB published the "Annual Improvements to IFRSs 2012 – 2014 Cycle". These annual improvements involve amendments and clarifications relating to the following standards: IFRS 5 "Non-current Assets Held for Sale and Discontinued Operations", IFRS 7 "Financial Instruments: Disclosures", IAS 19 "Employee Benefits" and IAS 34 "Interim Financial Reporting". The amendments are effective for annual periods beginning on or after 1 July 2016 and have still to be endorsed by the EU.
In September 2014 the IASB also published "Amendments to IFRS 10 and IAS 28: Sales or Contributions of Assets between an Investor and its Associate or Joint Venture". These clarify that the extent of gain or loss recognition for transactions between an investor and its associate or joint venture depends upon whether the assets sold or contributed constitute a business. The amendments are effective for annual periods beginning on or after 1 July 2016 and have still to be endorsed by the EU.
In July 2014 the IASB published the final version of IFRS 9 "Financial Instruments", which replaces all previous versions of this standard. The standard now contains requirements governing classification and measurement, impairment based on the new expected loss impairment model and general hedge accounting. The originally included model for macro hedge accounting, which considers risk management that assesses risk exposures on a continuous basis and at a portfolio level, is being treated separately from general hedge accounting by the IASB outside of IFRS 9. Initial mandatory application of the standard, which has still to be endorsed by the EU, is tentatively set for annual periods beginning on or after 1 January 2018. Hannover Re is currently reviewing the implications of this standard and anticipates significant implications for the consolidated financial statement.
In May 2014 the IASB issued IFRS 15 "Revenue from Contracts with Customers". The standard specifies when and in what amount revenue is to be recognised and which disclosures are required for this purpose. IFRS 15 provides a single five-step model to be applied to all contracts with customers. Financial instruments and other contractual rights and obligations which are to be recognised under separate standards as well as (re)insurance contracts within the scope of IFRS 4 are expressly exempted from the standard's scope of application. According to the original IASB timetable, the standard was to be applied to an annual reporting period beginning on or after 1 January 2017. The IASB has since proposed deferral of the effective date for one year to annual reporting periods beginning on or after 1 January 2018 in order to allow time for consultation on specific amendments that would provide further clarification. The standard has still to be endorsed by the EU.
In May 2014 the IASB also amended a number of existing standards.
The "Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation" provide additional guidance on the methods that can be used to calculate depreciation or amortisation of property, plant and equipment and intangible assets. The new guidelines are effective for annual periods beginning on or after 1 January 2016, but have still to be endorsed by the EU.
The "Amendments to IFRS 11: Accounting for Acquisitions of Interests in Joint Operations" clarify the accounting for acquisitions of an interest in a joint operation when the operation constitutes a business as defined in IFRS 11. These amendments are effective for annual periods beginning on or after 1 January 2016, but have still to be endorsed by the EU.
In January 2014 the IASB issued IFRS 14 "Regulatory Deferral Accounts". The standard permits an entity which is a first-time adopter of IFRS to continue to account, with some limited changes, for "regulatory deferral account balances" in accordance with its previous GAAP, both on initial adoption of IFRS and in subsequent financial statements. Regulatory deferral account balances, and movements in them, are presented separately in the statement of financial position and statement of profit or loss and other comprehensive income, and specific disclosures are required. IFRS 14 applies to an entity's first annual IFRS financial statements for a period beginning on or after 1 January 2016, but has still to be endorsed by the EU.
In December 2013 the IASB issued "Annual Improvements to IFRSs 2010 – 2012 Cycle". The annual improvements involve minor amendments and clarifications relating to the following standards: IFRS 2 "Share-based Payment", IFRS 3 "Business Combinations", IFRS 8 "Operating Segments", IFRS 13 "Fair Value Measurement", IAS 16 "Property, Plant and Equipment", IAS 24 "Related Party Disclosures" and IAS 38 "Intangible Assets". The improvements were endorsed by the EU in December 2014 and are effective for annual periods beginning on or after 1 February 2015 pursuant to Commission Regulation (EU) 2015/28.
In November 2013 the IASB issued "Defined Benefit Plans: Employee Contributions (Amendments to IAS 19)" and thereby clarified the requirements that relate to how contributions from employees or third parties that are linked to service should be attributed to periods of service. The amendments are intended to provide relief in that entities are allowed to deduct contributions from service cost in the period in which the service is rendered. The amendments were endorsed by the EU in December 2014 and are effective for annual periods beginning on or after 1 February 2015 pursuant to Commission Regulation (EU) 2015/29.
The individual companies' statements of income prepared in the national currencies are converted into euro at the average rates of exchange and transferred to the consolidated financial statement. The conversion of foreign currency items in the balance sheets of the individual companies and the transfer of these items to the consolidated financial statement are effected at the mean rates of exchange on the balance sheet date.
| 1 EUR corresponds to: | 30.6.2015 | 31.12.2014 | 1.1. –30.6.2015 | 1.1. –30.6.2014 |
|---|---|---|---|---|
| Mean rate of exchange on the balance sheet date |
Average rate of exchange | |||
| AUD | 1.4528 | 1.4879 | 1.4416 | 1.5071 |
| BHD | 0.4221 | 0.4583 | 0.4244 | 0.5170 |
| CAD | 1.3826 | 1.4131 | 1.3876 | 1.5000 |
| CNY | 6.9252 | 7.5533 | 7.0014 | 8.4507 |
| GBP | 0.7109 | 0.7825 | 0.7349 | 0.8213 |
| HKD | 8.6557 | 9.4289 | 8.7251 | 10.6378 |
| KRW | 1,247.5193 | 1,333.7220 | 1,235.9627 | 1,433.9958 |
| MYR | 4.2045 | 4.2580 | 4.0869 | 4.4731 |
| SEK | 9.2165 | 9.4845 | 9.3342 | 8.9883 |
| USD | 1.1165 | 1.2155 | 1.1253 | 1.3714 |
| ZAR | 13.6529 | 14.1409 | 13.3789 | 14.6357 |
With effect from the first quarter of 2015 Hannover Re extended its estimation methods to include an additional partial portfolio. This expansion, which relates to estimated amounts within the year from reinsurance treaties not yet brought to account as well as the deferral of such amounts, served to improve the accuracy of our estimations. This represents a change in an accounting estimate, which pursuant to IAS 8 "Accounting Policies, Changes in Accounting Estimates and Errors" was to be performed prospectively in the period under review without restatement of the comparative figures for previous years. Retention of the parameters and methods used until 31 December 2014 would have reduced the gross premium by EUR 104.6 million, the net premium earned by EUR 36.0 million and the operating result (EBIT) by EUR 2.3 million in the period under review. The effects that this adjustment would have in future reporting periods could only be established with disproportionate effort.
The capital consolidation is carried out according to the requirements of IFRS 10 "Consolidated Financial Statements" on the basis of a consistent consolidation model for all entities that identifies control as the single basis for verifying the consolidation requirement, irrespective of whether control is substantiated in company law, contractually or economically. Group companies are consolidated from the point in time when Hannover Re gains control over them. Control exists if Hannover Re directly or indirectly has decision-making power over a Group company on the basis of voting rights or other rights, if it has exposure or rights to positive and negative variable returns from its involvement with the Group company and if it can use its power to influence these returns. All of these criteria must be met. Other circumstances may also give rise to control, for example the existence of a principal-agent relationship. In this case a party outside the Group with decision-making powers (agent) acts for Hannover Re, but does not control the company since it merely exercises decisionmaking powers that have been delegated by Hannover Re (principal). In the context of their operational activities some companies belonging to the Hannover Re Group enter into business relations with structured entities that are also to be examined in accordance with IFRS 10 in conjunction with IFRS 12 with an eye to their implications for consolidation. Structured entities are entities designed in such a way that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. Consolidation decisions are reviewed as necessary and at least once a year. Group companies are consolidated until the Hannover Re Group loses control over them. The accounting policies of Group companies are adjusted, where necessary, in order to ensure consistent application of the Hannover Re Group's accounting policies. The capital consolidation is based on the acquisition method. In the context of the acquisition method the acquisition costs, measured at the fair value of the consideration rendered by the parent company on the acquisition date, are netted with the proportionate shareholders' equity of the subsidiary at the time when it is first included in the consolidated financial statement after the revaluation of all assets and liabilities. After recognition of all acquired intangible assets that in accordance with IFRS 3 "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. Costs associated with acquisition are expensed.
Companies over which Hannover Re is able to exercise a significant influence are consolidated as associated companies using the equity method of accounting with the proportion of the shareholders' equity attributable to the Group. A significant influence is presumed to exist if a company belonging to the Hannover Re Group directly or indirectly holds at least 20% – but no more than 50% – of the voting rights. We also derive evidence of significant influence over an associated company from representation on a governing body of such company, participation in its policy-making processes – e. g. with respect to dividends or other distributions –, the existence of material inter-company transactions, the possibility of interchanging managerial personnel or the provision of key technical information for the company. Income from investments in associated companies is recognised separately in the consolidated statement of income.
Non-controlling interests in shareholders' equity are reported separately within Group shareholders' equity in accordance with IAS 1 "Presentation of Financial Statements". The noncontrolling 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 24.9 million (EUR 34.8 million) as at 30 June 2015.
For further details we would refer to the relevant information in the Group annual financial report as at 31 December 2014.
Receivables and liabilities between the companies included in the consolidated financial statement are offset against each other. Profits and expenses from business transactions within the Group are also eliminated.
Transactions between a disposal group and the continuing operations of the Group are similarly eliminated in accordance with IFRS 10.
Within the 95.1%-owned US subgroup Hannover Re Real Estate Holdings, Inc., all the shares of two special purpose property companies were acquired in the second quarter of 2015 via the subsidiary GLL HRE Core Properties, LP, Wilmington. The business object of the two companies, which are expected to commence their operations in the third quarter of 2015, is to hold and manage one property each.
The company Hannover Re Global Alternatives GmbH&Co KG was established in March 2015 with its registered office in Hannover, Germany, and has been included in the consolidated financial statement with effect from the first quarter of 2015. Hannover Rück SE and E+S Rückversicherung AG, both limited partners, hold interests of 85% and 15% respectively in the company. The personally liable partner is HAPEP II Komplementär GmbH, also based in Hannover. The business object of the company is to build, hold and manage a portfolio of investments.
The Group company Hannover Re (Ireland) Limited, Dublin, Ireland, established a branch in Canada in February 2015. The Toronto-based branch trades under the name Hannover Re (Ireland) Limited Canadian Life Branch and was registered on 26 February 2015. The business object of the branch is to transact life and health reinsurance business.
Within our subgroup Hannover Reinsurance Group Africa (Pty) Ltd, Johannesburg, South Africa ("HRGSA"), Compass Insurance Company Ltd, also based in Johannesburg, acquired 60% of the shares in Commercial&Industrial Acceptances (Pty) Ltd, Johannesburg ("CIA"), effective 1 January 2015 for a purchase price equivalent to EUR 4.1 million within the scope of a business combination made in stages. Previously, 40% of the shares in the company, which was included in the subgroup financial statement of HRGSA using the equity method of accounting, were already held by Lireas Holdings (Pty) Ltd, Johannesburg, 51% of which belongs to HRGSA. By means of the acquisition made in stages HRGSA acquired control over CIA, which is now consolidated in the subgroup financial statement of HRGSA. As part of the transaction the fair value of contingent considerations was recognised. For the purposes of initial consolidation and in accordance with appropriate measurement methods, the fair values of acquired assets and liabilities were to some extent established on the basis of assumptions and estimations based on forecasts of future cash flows. The initial inclusion of the operation in the subgroup financial statement on a provisional basis was therefore carried out using the best available information. IFRS 3 requires that this provisional recognition be finalised within twelve months of the date of acquisition. Resulting changes in the values of carried assets and liabilities are to be recognised in such a way as if their adjusted fair value at the time of initial consolidation had been carried from this date onwards. In the further course of the year under review the provisional carrying amounts of the assets and liabilities acquired in this transaction will be analysed and may in some cases be adjusted.
By means of a dividend resolution of 25 March 2015 of ASPECTA Assurance International AG, Vaduz, Liechtenstein, which had hitherto been included in the consolidated financial statement using the equity method of accounting, a purchase option on the part of the majority shareholder became exercisable. Hannover Re consequently lost its significant influence over the company, as a result of which recognition at equity
The registered office of the Group company International Insurance Company of Hannover SE, London ("Inter Hannover SE"), was relocated from the United Kingdom to Hannover, Germany. Inter Hannover SE has received approval to commence insurance operations in Germany and was entered in the commercial register in January 2015.
ended. The company was carried under other participations until the shares were returned to the majority shareholder on 4 May 2015. Disposal of the company gave rise to an expense of EUR 4.0 million, which is recognised in investment income. In addition, cumulative other comprehensive income of EUR 0.4 million was realised from currency translation.
| in EUR thousand | 30.6.2015 | 31.12.2014 |
|---|---|---|
| Assets | ||
| Fixed-income securities – held to maturity | 1,423,573 | 1,841,982 |
| Fixed-income securities – loans and receivables | 2,991,440 | 2,912,110 |
| Fixed-income securities – available for sale | 20,850,096 | 19,822,832 |
| Equity securities – available for sale | 34,372 | 32,804 |
| Financial assets at fair value through profit or loss | 88,105 | 63,648 |
| Other invested assets | 2,820,546 | 2,644,817 |
| Short-term investments | 168,723 | 242,463 |
| Cash and cash equivalents | 704,783 | 580,490 |
| Total investments and cash under own management | 29,081,638 | 28,141,146 |
| Funds withheld | 1,263,430 | 1,123,858 |
| Contract deposits | – | – |
| Total investments | 30,345,068 | 29,265,004 |
| Reinsurance recoverables on unpaid claims | 1,067,581 | 1,052,357 |
| Reinsurance recoverables on benefit reserve | – | – |
| Prepaid reinsurance premium | 211,201 | 147,846 |
| Reinsurance recoverables on other reserves | (817) | 421 |
| Deferred acquisition costs | 739,522 | 597,299 |
| Accounts receivable | 2,301,280 | 1,493,908 |
| Other assets in the segment | 1,606,285 | 1,416,187 |
| Assets held for sale | 2,620 | – |
| Total assets | 36,272,740 | 33,973,022 |
| in EUR thousand | ||
|---|---|---|
| Liabilities | ||
| Loss and loss adjustment expense reserve | 22,459,391 | 20,797,820 |
| Benefit reserve | – | – |
| Unearned premium reserve | 3,404,583 | 2,626,890 |
| Provisions for contingent commissions | 126,506 | 158,410 |
| Funds withheld | 359,139 | 442,211 |
| Contract deposits | 7,686 | 4,285 |
| Reinsurance payable | 463,682 | 358,836 |
| Long-term liabilities | 305,344 | 283,855 |
| Other liabilities in the segment | 2,069,932 | 2,042,408 |
| Total liabilities | 29,196,263 | 26,714,715 |
| Property and casualty reinsurance Life and health reinsurance Consolidation Total |
|
|---|---|
| 31.12.2014 30.6.2015 31.12.2014 30.6.2015 31.12.2014 30.6.2015 |
31.12.2014 |
| 170,766 179,209 94,559 118,551 1,688,898 |
2,139,742 |
| 2,912,110 66,495 76,077 – – 3,057,935 |
2,988,187 |
| 19,822,832 7,025,030 6,639,186 216,573 355,505 28,091,699 |
26,817,523 |
| – – – – 34,372 |
32,804 |
| 53,058 54,262 (191) 12,978 140,972 |
130,888 |
| 129,401 123,922 1,785 1,945 2,951,732 |
2,770,684 |
| 242,463 365,004 332,262 7,500 575 541,227 |
575,300 |
| 580,490 183,468 186,224 4,537 6,168 892,788 |
772,882 |
| 28,141,146 7,993,222 7,591,142 324,763 495,722 37,399,623 |
36,228,010 |
| 16,507,328 14,702,622 – – 17,770,758 |
15,826,480 |
| 155,020 92,069 – – 155,020 |
92,069 |
| 24,655,570 22,385,833 324,763 495,722 55,325,401 |
52,146,559 |
| 343,125 325,534 (1,471) (1,459) 1,409,235 |
1,376,432 |
| 870,885 676,219 – – 870,885 |
676,219 |
| 1,173 1,470 (493) (59) 211,881 |
149,257 |
| 8,417 5,025 – – 7,600 |
5,446 |
| 1,398,232 1,317,295 3 4 2,137,757 |
1,914,598 |
| 1,547,891 1,620,237 (210) (167) 3,848,961 |
3,113,978 |
| 751,484 680,215 (1,209,397) (1,021,307) 1,148,372 |
1,075,095 |
| – – – – 2,620 |
|
| 29,576,777 27,011,828 (886,805) (527,266) 64,962,712 |
60,457,584 |
| 3,673,570 | 3,315,694 | (1,471) | (1,458) | 26,131,490 | 24,112,056 |
|---|---|---|---|---|---|
| 12,786,421 | 11,757,188 | (52) | (56) | 12,786,369 | 11,757,132 |
| 132,425 | 121,704 | – | – | 3,537,008 | 2,748,594 |
| 198,553 | 165,830 | – | – | 325,059 | 324,240 |
| 453,389 | 374,926 | – | – | 812,528 | 817,137 |
| 7,119,401 | 6,068,053 | – | – | 7,127,087 | 6,072,338 |
| 647,595 | 742,649 | (796) | (168) | 1,110,481 | 1,101,317 |
| – – |
1,489,512 | 1,986,492 | 1,794,856 | 2,270,347 | |
| 2,122,677 | 1,982,821 | (1,204,730) | (1,023,766) | 2,987,879 | 3,001,463 |
| 27,134,031 | 24,528,865 | 282,463 | 961,044 | 56,612,757 | 52,204,624 |
Segment statement of income Property and casualty reinsurance Life and health reinsurance Consolidation Total
| in EUR thousand | 1.1. –30.6.2015 | 1.1. –30.6.2014 |
|---|---|---|
| Gross written premium | 4,972,221 | 4,078,141 |
| thereof | ||
| From insurance business with other segments | – | – |
| From insurance business with external third parties | 4,972,221 | 4,078,141 |
| Net premium earned | 3,894,160 | 3,370,248 |
| Net investment income | 425,189 | 398,849 |
| thereof | ||
| Change in fair value of financial instruments | (338) | 3,238 |
| Total depreciation, impairments and appreciation of investments | 12,332 | 10,226 |
| Income / expense on funds withheld and contract deposits | 10,144 | 9,460 |
| Claims and claims expenses | 2,722,852 | 2,332,410 |
| Change in benefit reserve | – | – |
| Commission and brokerage, change in deferred acquisition costs and other technical income / expenses |
892,548 | 782,667 |
| Administrative expenses | 107,845 | 96,839 |
| Other income and expenses | (12,425) | (36,212) |
| Operating profit/loss (EBIT) | 583,679 | 520,969 |
| Interest on hybrid capital | – | – |
| Net income before taxes | 583,679 | 520,969 |
| Taxes | 141,608 | 148,475 |
| Net income | 442,071 | 372,494 |
| thereof | ||
| Non-controlling interest in profit or loss | 23,644 | 24,549 |
| Group net income | 418,427 | 347,945 |
The segment information shown here is based on the same principles as those applied in the consolidated financial statement as at 31 December 2014. It follows the system used for internal reporting purposes, on the basis of which the full Executive Board regularly evaluates the performance of segments and decides on the allocation of resources to them. The "Consolidation" column includes not only the elimination of cross-segment transactions but also, more significantly, companies whose business operations cannot be unambiguously allocated to property and casualty reinsurance or life and health reinsurance. These are principally the service and financing companies belonging to the Group. Since the performance indicators used to steer the segments correspond to the system according to which the consolidated financial statement is prepared, a separate reconciliation of the segment results with the Group result is not provided. We would also refer to the relevant information in the Group annual financial report as at 31 December 2014.
The special purpose property companies acquired in the period under review within our subgroup Hannover Re Real Estate Holdings, Inc. are allocated to the property and casualty reinsurance segment, while ASPECTA Assurance International AG – which was disposed of – belonged to the life and health reinsurance segment.
| Property and casualty reinsurance | Life and health reinsurance | Consolidation | Total | |||
|---|---|---|---|---|---|---|
| 1.1. –30.6.2015 1.1. –30.6.2014 |
1.1. –30.6.2015 | 1.1. –30.6.2014 | 1.1. –30.6.2015 | 1.1. –30.6.2014 | 1.1. –30.6.2015 | 1.1. –30.6.2014 |
| 4,972,221 4,078,141 |
3,614,530 | 2,986,851 | (215) | (100) | 8,586,536 | 7,064,892 |
| – | 215 | 100 | (215) | (100) | – | – |
| 4,078,141 | 3,614,315 | 2,986,751 | – | – | 8,586,536 | 7,064,892 |
| 3,370,248 | 3,124,759 | 2,468,950 | 437 | 162 | 7,019,356 | 5,839,360 |
| 366,675 | 299,526 | 6,902 | 9,130 | 798,766 | 707,505 | |
| 3,238 | (1,352) | 6,641 | 65 | 118 | (1,625) | 9,997 |
| 10,226 | 15 | 110 | 2,365 | – | 14,712 | 10,336 |
| 9,460 | 187,283 | 165,485 | – | – | 197,427 | 174,945 |
| 2,332,410 | 2,700,534 | 2,076,702 | – | (11) | 5,423,386 | 4,409,101 |
| – | (814) | 14,698 | 4 | (1) | (810) | 14,697 |
| 533,682 | 432,539 | – | – | 1,426,230 | 1,215,206 | |
| 96,839 | 102,420 | 88,879 | 173 | 153 | 210,438 | 185,871 |
| (36,212) | 44,432 | (876) | (1,498) | (1,216) | 30,509 | (38,304) |
| 520,969 | 200,044 | 154,782 | 5,664 | 7,935 | 789,387 | 683,686 |
| – | – | – | 48,453 | 48,847 | 48,453 | 48,847 |
| 520,969 | 200,044 | 154,782 | (42,789) | (40,912) | 740,934 | 634,839 |
| 148,475 | 53,210 | 29,158 | (10,656) | (21,978) | 184,162 | 155,655 |
| 372,494 | 146,834 | 125,624 | (32,133) | (18,934) | 556,772 | 479,184 |
| 24,549 | 1,225 | 10,213 | – | – | 24,869 | 34,762 |
| 145,609 | 115,411 | (32,133) | (18,934) | 531,903 | 444,422 | |
Investments are classified and measured in accordance with IAS 39 "Financial Instruments: Recognition and Measurement". Hannover Re classifies investments according to the following categories: held-to-maturity, loans and receivables, financial assets at fair value through profit or loss and available-for-sale. The allocation and measurement of investments are determined by the investment intent.
The investments under own management also encompass investments in associated companies, real estate and real estate funds (also includes: investment property), other invested assets, short-term investments as well as cash and cash equivalents.
Real estate which is held for sale as defined by IFRS 5 is recognised separately in the consolidated balance sheet. Intentions to sell are substantiated by individual real estate market conditions and specific property circumstances, taking into consideration current and future opportunity /risk profiles. One property was reclassified to assets held for sale in the first quarter of 2015. At the time of reclassification the gross book value of the property amounted to EUR 4.8 million (EUR 4.8 million) and the accumulated depreciation totalled EUR 2.2 million (EUR 2.1 million). Measurement of the property at fair value less costs of disposal gave rise to a minimal impairment loss.
For further details we would refer to the relevant information in the Group annual financial report as at 31 December 2014.
The following table shows the regional origin of the investments under own management.
| in EUR thousand | 30.6.2015 | 31.12.2014 |
|---|---|---|
| Regional origin | ||
| Germany | 6,952,704 | 6,592,773 |
| United Kingdom | 2,798,492 | 2,674,766 |
| France | 1,695,323 | 1,769,512 |
| Other | 7,078,245 | 7,649,712 |
| Europe | 18,524,764 | 18,686,763 |
| USA | 10,962,760 | 9,875,092 |
| Other | 1,623,853 | 1,468,426 |
| North America | 12,586,613 | 11,343,518 |
| Asia | 1,909,197 | 1,819,615 |
| Australia | 2,497,635 | 2,556,507 |
| Australasia | 4,406,832 | 4,376,122 |
| Africa | 371,134 | 352,192 |
| Other | 1,510,280 | 1,469,415 |
| Total | 37,399,623 | 36,228,010 |
| in EUR thousand | 30.6.2015 | 31.12.2014 | |||
|---|---|---|---|---|---|
| Amortised cost 1 | Fair value | Amortised cost 1 | Fair value | ||
| Held to maturity | |||||
| due in one year | 1,000,403 | 1,012,470 | 1,089,446 | 1,110,905 | |
| due after one through two years | 309,357 | 324,567 | 539,118 | 561,992 | |
| due after two through three years | 58,230 | 60,947 | 145,300 | 151,217 | |
| due after three through four years | 52,784 | 55,682 | 97,896 | 103,592 | |
| due after four through five years | 34,615 | 38,478 | 32,696 | 35,894 | |
| due after five through ten years | 232,969 | 266,209 | 234,795 | 273,704 | |
| due after more than ten years | 540 | 345 | 491 | 568 | |
| Total | 1,688,898 | 1,758,698 | 2,139,742 | 2,237,872 | |
| Loans and receivables | |||||
| due in one year | 285,749 | 288,103 | 261,575 | 265,156 | |
| due after one through two years | 582,543 | 606,575 | 373,036 | 390,647 | |
| due after two through three years | 63,921 | 67,201 | 268,376 | 283,396 | |
| due after three through four years | 156,178 | 166,036 | 143,511 | 152,077 | |
| due after four through five years | 250,202 | 277,856 | 197,584 | 219,375 | |
| due after five through ten years | 989,872 | 1,126,758 | 979,791 | 1,122,393 | |
| due after more than ten years | 729,470 | 876,825 | 764,314 | 954,282 | |
| Total | 3,057,935 | 3,409,354 | 2,988,187 | 3,387,326 | |
| Available for sale | |||||
| due in one year 2 | 3,531,860 | 3,544,266 | 3,731,723 | 3,747,673 | |
| due after one through two years | 2,873,017 | 2,915,668 | 2,415,488 | 2,449,568 | |
| due after two through three years | 3,441,388 | 3,512,649 | 2,908,199 | 2,972,420 | |
| due after three through four years | 2,807,757 | 2,868,941 | 2,904,276 | 2,951,154 | |
| due after four through five years | 3,149,560 | 3,230,688 | 2,655,178 | 2,741,708 | |
| due after five through ten years | 9,515,866 | 9,884,649 | 9,181,834 | 9,760,031 | |
| due after more than ten years | 3,276,503 | 3,568,853 | 3,122,626 | 3,543,151 | |
| Total | 28,595,951 | 29,525,714 | 26,919,324 | 28,165,705 | |
| Financial assets at fair value through profit or loss |
|||||
| due in one year | 3,255 | 3,255 | 5,306 | 5,306 | |
| due after one through two years | 16,777 | 16,777 | 2,433 | 2,433 | |
| due after two through three years | 24,011 | 24,011 | 12,251 | 12,251 | |
| due after three through four years | 7,562 | 7,562 | 20,590 | 20,590 | |
| due after four through five years | 14,510 | 14,510 | 10,790 | 10,790 | |
| due after five through ten years | – | – | 146 | 146 | |
| due after more than ten years | 20,000 | 20,000 | 12,978 | 12,978 | |
| Total | 86,115 | 86,115 | 64,494 | 64,494 |
1 Including accrued interest
2 Including short-term investments and cash
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
| in EUR thousand | 30.6.2015 | ||||
|---|---|---|---|---|---|
| Amortised cost including accrued interest |
thereof accrued interest |
Unrealised gains |
Unrealised losses |
Fair value | |
| Investments held to maturity | |||||
| Fixed-income securities | |||||
| Government debt securities of EU member states |
372,650 | 7,692 | 5,381 | – | 378,031 |
| US Treasury notes | 126,126 | 771 | 668 | – | 126,794 |
| Other foreign government debt securities |
22,290 | 69 | 152 | – | 22,442 |
| Debt securities issued by semi-governmental entities |
372,364 | 5,221 | 11,149 | 28 | 383,485 |
| Corporate securities | 199,425 | 4,160 | 7,184 | 100 | 206,509 |
| Covered bonds / asset-backed securities |
596,043 | 11,941 | 45,588 | 194 | 641,437 |
| Total | 1,688,898 | 29,854 | 70,122 | 322 | 1,758,698 |
| 31.12.2014 | ||||
|---|---|---|---|---|
| Amortised cost including accrued interest |
thereof accrued interest |
Unrealised gains |
Unrealised losses |
Fair value |
| 391,809 | 7,071 | 10,099 | – | 401,908 |
| 257,279 | 1,395 | 3,067 | – | 260,346 |
| 29,196 | 96 | 200 | – | 29,396 |
| 427,611 | 6,444 | 16,019 | 1,463 | 442,167 |
| 238,426 | 3,189 | 11,051 | 159 | 249,318 |
| 795,421 | 15,527 | 59,316 | – | 854,737 |
| 2,139,742 | 33,722 | 99,752 | 1,622 | 2,237,872 |
| in EUR thousand | 30.6.2015 | ||||
|---|---|---|---|---|---|
| Amortised cost including accrued interest |
thereof accrued interest |
Unrealised gains |
Unrealised losses |
Fair value | |
| Loans and receivables | |||||
| Debt securities issued by semi-governmental entities |
1,669,062 | 26,802 | 239,879 | – | 1,908,941 |
| Corporate securities | 496,737 | 7,422 | 17,680 | 4,548 | 509,869 |
| Covered bonds / asset-backed securities |
892,136 | 19,472 | 98,503 | 95 | 990,544 |
| Total | 3,057,935 | 53,696 | 356,062 | 4,643 | 3,409,354 |
| in EUR thousand | 31.12.2014 | ||||
|---|---|---|---|---|---|
| Amortised cost including accrued interest |
thereof accrued interest |
Unrealised gains |
Unrealised losses |
Fair value | |
| Loans and receivables | |||||
| Debt securities issued by semi-governmental entities |
1,655,060 | 27,559 | 260,622 | – | 1,915,682 |
| Corporate securities | 463,830 | 5,661 | 20,578 | 453 | 483,955 |
| Covered bonds / asset-backed securities |
869,297 | 13,495 | 118,402 | 10 | 987,689 |
| Total | 2,988,187 | 46,715 | 399,602 | 463 | 3,387,326 |
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
| in EUR thousand | 30.6.2015 | ||||
|---|---|---|---|---|---|
| Amortised cost including accrued interest |
thereof accrued interest |
Unrealised gains |
Unrealised losses |
Fair value | |
| Available for sale | |||||
| Fixed-income securities | |||||
| Government debt securities of EU member states |
2,391,202 | 20,388 | 135,220 | 6,116 | 2,520,306 |
| US Treasury notes | 3,513,619 | 8,664 | 33,068 | 8,137 | 3,538,550 |
| Other foreign government debt securities |
1,875,513 | 16,437 | 23,907 | 25,633 | 1,873,787 |
| Debt securities issued by semi-governmental entities |
4,470,346 | 40,613 | 262,428 | 13,850 | 4,718,924 |
| Corporate securities | 11,955,017 | 144,140 | 408,870 | 87,505 | 12,276,382 |
| Covered bonds / asset-backed securities |
2,880,521 | 25,247 | 184,282 | 10,378 | 3,054,425 |
| Investment funds | 75,718 | – | 33,607 | – | 109,325 |
| 27,161,936 | 255,489 | 1,081,382 | 151,619 | 28,091,699 | |
| Equity securities | |||||
| Shares | 12,674 | – | 6,816 | 11 | 19,479 |
| Investment funds | 8,189 | – | 6,704 | – | 14,893 |
| 20,863 | – | 13,520 | 11 | 34,372 | |
| Short-term investments | 541,227 | 3,293 | – | – | 541,227 |
| Total | 27,724,026 | 258,782 | 1,094,902 | 151,630 | 28,667,298 |
| in EUR thousand | 31.12.2014 | |||||
|---|---|---|---|---|---|---|
| Amortised cost including accrued interest |
thereof accrued interest |
Unrealised gains |
Unrealised losses | Fair value | ||
| Available for sale | ||||||
| Fixed-income securities | ||||||
| Government debt securities of EU member states |
2,411,949 | 18,573 | 169,231 | 1,733 | 2,579,447 | |
| US Treasury notes | 2,684,743 | 7,145 | 36,544 | 4,904 | 2,716,383 | |
| Other foreign government debt securities |
1,816,756 | 16,522 | 27,294 | 33,322 | 1,810,728 | |
| Debt securities issued by semi-governmental entities |
4,183,118 | 42,250 | 305,078 | 2,954 | 4,485,242 | |
| Corporate securities | 11,371,250 | 140,368 | 557,169 | 46,694 | 11,881,725 | |
| Covered bonds / asset-backed securities |
3,030,708 | 33,214 | 222,538 | 7,547 | 3,245,699 | |
| Investment funds | 72,618 | – | 25,681 | – | 98,299 | |
| 25,571,142 | 258,072 | 1,343,535 | 97,154 | 26,817,523 | ||
| Equity securities | ||||||
| Shares | 12,323 | – | 7,215 | 17 | 19,521 | |
| Investment funds | 8,011 | – | 5,272 | – | 13,283 | |
| 20,334 | – | 12,487 | 17 | 32,804 | ||
| Short-term investments | 575,300 | 3,886 | – | – | 575,300 | |
| Total | 26,166,776 | 261,958 | 1,356,022 | 97,171 | 27,425,627 |
| in EUR thousand | 30.6.2015 | 31.12.2014 | 30.6.2015 | 31.12.2014 | 30.6.2015 | 31.12.2014 |
|---|---|---|---|---|---|---|
| Fair value before accrued interest |
Accrued interest | Fair value | ||||
| Financial assets at fair value through profit or loss |
||||||
| Fixed-income securities | ||||||
| Corporate securities | 65,743 | 63,795 | 372 | 699 | 66,115 | 64,494 |
| Covered bonds / asset-backed securities |
20,000 | – | – | – | 20,000 | – |
| 85,743 | 63,795 | 372 | 699 | 86,115 | 64,494 | |
| Other financial assets | ||||||
| Derivatives | 54,857 | 66,394 | – | – | 54,857 | 66,394 |
| 54,857 | 66,394 | – | – | 54,857 | 66,394 | |
| Total | 140,600 | 130,189 | 372 | 699 | 140,972 | 130,888 |
The methods and models set out below are used to establish the fair value of financial instruments on the assets and liabilities side of the balance sheet. The fair value of a financial instrument corresponds in principle to the amount that Hannover Re would receive or pay if it were to sell or settle the said financial instrument on the balance sheet date. Insofar as market prices are listed on markets for financial instruments, their bid price is used. In other cases the fair values are established on the basis of the market conditions prevailing on the balance sheet date for financial assets with similar credit rating, duration and return characteristics or using recognised models of mathematical finance. Hannover Re uses a number of different valuation models for this purpose. The details are set out in the following table.
| Financial instrument | Parameter | Pricing model |
|---|---|---|
| Fixed-income securities | ||
| Unlisted plain vanilla bonds, interest rate swaps |
Interest rate curve | Present value method |
| Unlisted structured bonds | Interest rate curve, volatility surfaces | Hull-White, Black-Karasinski, LIBOR market model etc. |
| Unlisted ABS/MBS, CDO/CLO | Risk premiums, default rates, prepayment speed and recovery rates |
Present value method |
| Other invested assets | ||
| Unlisted equities and equity investments | Acquisition cost, cash flows, EBIT multiples, as applicable book value |
Capitalised earnings method, discounted cash flow method, multiple-based approaches |
| Private equity funds, private equity real estate funds |
Audited net asset values (NAV) | Net asset value method |
| Unlisted bond, equity and real estate funds |
Audited net asset values (NAV) | Net asset value method |
| Other financial assets – at fair value through profit or loss | ||
| Currency forwards | Interest rate curves, spot and forward rates | Interest parity model |
| Inflation swaps | Inflation swap rates (Consumer Price Index), historical index fixings, interest rate curve |
Present value method with seasonality adjustment |
| OTC stock options, OTC stock index options |
Listing of the underlying share, implicit volatilities, money-market interest rate, dividend yield |
Black-Scholes |
| Insurance derivatives | Fair values, actuarial parameters, interest rate curve |
Present value method |
Fair value hierarchy
For the purposes of the disclosure requirements pursuant to IFRS 13 "Fair Value Measurement", it is necessary to assign financial assets and liabilities to a three-level fair value hierarchy.
The fair value hierarchy, which reflects characteristics of the price data and inputs used for measurement purposes, is structured as follows:
• Level 3: Assets or liabilities that cannot be measured or can only be partially measured using observable market inputs. The measurement of such instruments draws principally on valuation models and methods.
If input factors from different levels are used to measure a financial instrument, the level of the lowest input factor material to measurement is determinative.
The operational units responsible for coordinating and documenting measurement are organisationally separate from the operational units that enter into investment risks. All relevant valuation processes and valuation methods are documented. Decisions on fundamental valuation issues are taken by a valuation committee that meets monthly.
In the comparable period of the previous year financial assets with a fair value of EUR 26.0 million were no longer allocable to level 1 but rather to level 2 as a consequence of their reduced liquidity. The reclassifications related solely to fixedincome securities held as available for sale. The stated reclassification amounts refer in each case to the book value of the investments recognised at the beginning of the period.
The following table shows the breakdown of financial assets and liabilities recognised at fair value into the three-level fair value hierarchy.
| in EUR thousand | 30.6.2015 | |||||
|---|---|---|---|---|---|---|
| Level 1 | Level 2 | Level 3 | Total | |||
| Fixed-income securities | 33,531 | 28,144,283 | – | 28,177,814 | ||
| Equity securities | 34,363 | – | 9 | 34,372 | ||
| Other financial assets | – | 54,857 | – | 54,857 | ||
| Real estate and real estate funds | – | – | 375,581 | 375,581 | ||
| Other invested assets | – | 2,548 | 1,365,749 | 1,368,297 | ||
| Short-term investments | 541,227 | – | – | 541,227 | ||
| Other assets | – | – | – | – | ||
| Total financial assets | 609,121 | 28,201,688 | 1,741,339 | 30,552,148 | ||
| Other liabilities | – | 42,269 | 151,695 | 193,964 | ||
| Total financial liabilities | – | 42,269 | 151,695 | 193,964 |
| in EUR thousand | 31.12.2014 | ||||
|---|---|---|---|---|---|
| Level 1 | Level 2 | Level 3 | Total | ||
| Fixed-income securities | 28,752 | 26,852,743 | 522 | 26,882,017 | |
| Equity securities | 32,796 | – | 8 | 32,804 | |
| Other financial assets | – | 66,394 | – | 66,394 | |
| Real estate and real estate funds | – | – | 320,956 | 320,956 | |
| Other invested assets | – | – | 1,258,903 | 1,258,903 | |
| Short-term investments | 575,300 | – | – | 575,300 | |
| Other assets | – | 1,066 | – | 1,066 | |
| Total financial assets | 636,848 | 26,920,203 | 1,580,389 | 29,137,440 | |
| Other liabilities | – | 103,760 | 136,486 | 240,246 | |
| Total financial liabilities | – | 103,760 | 136,486 | 240,246 | |
The following table provides a reconciliation of the fair values of financial assets and liabilities included in level 3 at the beginning of the period with the fair values as at the balance sheet date.
| in EUR thousand | 1.1. –30.6.2015 | ||||
|---|---|---|---|---|---|
| Fixed-income securities |
Equities, equity funds and other variable-yield securities |
Real estate and real estate funds |
Other invested assets |
Other liabilities | |
| Net book value at 1 January of the year under review |
522 | 8 | 320,956 | 1,258,903 | 136,486 |
| Currency translation at 1 January of the year under review |
46 | 1 | 13,890 | 69,805 | 12,102 |
| Net book value after currency translation |
568 | 9 | 334,846 | 1,328,708 | 148,588 |
| Income and expenses | |||||
| recognised in the statement of income |
– | – | (308) | 7,622 | 641 |
| recognised directly in shareholders' equity |
– | – | (9,478) | (13,374) | – |
| Purchases | – | – | 91,455 | 137,096 | 36,957 |
| Sales | – | – | 40,907 | 93,304 | 34,516 |
| Settlements | 567 | – | – | – | – |
| Transfers to level 3 | – | – | – | – | – |
| Transfers from level 3 | – | – | – | – | – |
| Currency translation at 30 June of the year under review |
(1) | – | (27) | (999) | 25 |
| Closing balance at 30 June of the year under review |
– | 9 | 375,581 | 1,365,749 | 151,695 |
| in EUR thousand | 1.1. –30.6.2014 | ||||
|---|---|---|---|---|---|
| Fixed-income securities |
Equities, equity funds and other variable-yield securities |
Real estate and real estate funds |
Other invested assets |
Other liabilities | |
| Net book value at 1 January of the year under review |
5,179 | 8 | 247,400 | 952,451 | 68,827 |
| Currency translation at 1 January of the year under review |
62 | – | 863 | 4,698 | – |
| Net book value after currency translation |
5,241 | 8 | 248,263 | 957,149 | 68,827 |
| Income and expenses | |||||
| recognised in the statement of income |
– | – | – | 2,107 | (1,212) |
| recognised directly in shareholders' equity |
– | – | 7,072 | 38,443 | – |
| Purchases | – | – | 26,869 | 104,651 | 7,910 |
| Sales | 586 | – | 14,351 | 59,225 | – |
| Settlements | 4,118 | – | – | – | – |
| Transfers to level 3 | – | – | – | – | – |
| Transfers from level 3 | – | – | – | – | – |
| Currency translation at 30 June of the year under review |
(72) | – | 43 | 907 | 583 |
| Closing balance at 30 June of the year under review |
465 | 8 | 267,896 | 1,044,032 | 76,108 |
The breakdown of income and expenses recognised in the statement of income in the period in connection with financial assets and liabilities assigned to level 3 is as follows.
| in EUR thousand | 1.1. –30.6.2015 | ||
|---|---|---|---|
| Real estate and real estate funds |
Other invested assets |
Other liabilities | |
| Total in the period under review | |||
| Change in fair value of financial instruments | – | 8,875 | (641) |
| Total depreciation, impairments and appreciation of investments | (308) | (1,253) | – |
| Thereof attributable to financial instruments included in the portfolio at 30 June of the year under review |
|||
| Change in fair value of financial instruments | – | 8,875 | 3,313 |
| Total depreciation, impairments and appreciation of investments | (308) | (1,253) | – |
Income and expenses from level 3 financial assets and liabilities recognised at fair value
| in EUR thousand | 1.1. –30.6.2014 | ||
|---|---|---|---|
| Real estate and real estate funds |
Other invested assets |
Other liabilities | |
| Total in the period under review | |||
| Change in fair value of financial instruments | – | 3,442 | 1,212 |
| Total depreciation, impairments and appreciation of investments | – | (1,335) | – |
| Thereof attributable to financial instruments included in the portfolio at 30 June of the year under review |
|||
| Change in fair value of financial instruments | – | 3,442 | 1,212 |
| Total depreciation, impairments and appreciation of investments | – | (1,335) | – |
If models are used to measure financial assets and liabilities included in level 3 under which the adoption of alternative inputs leads to a material change in fair value, IFRS 13 requires disclosure of the effects of these alternative assumptions. Of the financial assets included in level 3 with fair values of altogether EUR 1,741.3 million (EUR 1,580.4 million) as at the balance sheet date, Hannover Re measures financial assets with a volume of EUR 1,637.7 million (EUR 1,474.8 million) using the net asset value method, in respect of which alternative inputs within the meaning of the standard cannot reasonably be established. The remaining financial assets included in level 3 with a volume of EUR 103.6 million (EUR 105.6 million) relate in very large part to acquired life insurance policies, the valuation of which is based on technical parameters. Derivative financial instruments in connection with the reinsurance business were recognised under the other liabilities included in level 3 in the year under review. Their performance is dependent upon the risk experience of an underlying group of primary insurance contracts with statutory reserving requirements. The application of alternative inputs and assumptions has no material effect on the consolidated financial statement.
Hannover Re recognised altogether three (four) subordinated bonds with an amortised cost of EUR 1,489.5 million (EUR 1,986.5 million) as at the balance sheet date. The subordinated debts from the 2010 and 2012 financial years in amounts of EUR 500.0 million each were placed on the European capital market through Hannover Finance (Luxembourg) S.A. The fair value of the aforementioned bonds as at 30 June 2015 was EUR 1,176.3 million (EUR 1,717.1 million). A further subordinated debt from the 2014 financial year with a volume of EUR 500.0 million, the fair value of which was EUR 496.8 million (EUR 506.6 million), was issued by Hannover Rück SE and similarly placed on the European capital market.
The subordinated debt of EUR 500.0 million issued in 2005 by Hannover Finance (Luxembourg) S.A. was called by the issuer in the full nominal amount at the first scheduled redemption date and repaid on 1 June 2015.
For further information on these bonds please see the previous year's Group annual financial report.
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 Instruments: Disclosure and Presentation" in conjunction with 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.
The common shares (share capital of Hannover Rück SE) amount to EUR 120,597,134.00. They are divided into 120,597,134 voting and dividend-bearing registered no-par shares. The shares are paid in in full. Each share carries an equal voting right and an equal dividend entitlement.
Non-controlling interests in the shareholders' equity of the subsidiaries amounted to EUR 677.4 million (EUR 702.2 million) as at the balance sheet date. They were principally attributable to non-controlling interests in the shareholders' equity of E+S Rückversicherung AG in an amount of EUR 642.3 million (EUR 671.9 million).
In addition, conditional capital of up to EUR 60,299 thousand is available. It can be used to grant shares to holders of convertible bonds and bonds with warrants as well as to holders of participating bonds with conversion rights and warrants and has a time limit of 2 May 2016.
IAS 1 requires separate disclosure of treasury shares in shareholders' equity. As part of this year's employee share option plan Hannover Rück SE acquired altogether 12,922 (21,608) treasury shares during the second quarter of 2015 and delivered them to eligible employees at preferential conditions. These shares are blocked until 31 May 2019. This transaction resulted in an expense of EUR 0.3 million (EUR 0.4 million), which was recognised under personnel expenditure, as well as a negligible increase in retained earnings recognised in equity. The company was no longer in possession of treasury shares as at 30 June 2015.
The increase in the other reserves arising out of currency translation, which is recognised in equity, was attributable in an amount of EUR 24.9 million (EUR 18.2 million) to the translation of long-term debt or loans with no maturity date extended to Group companies and branches abroad.
| in EUR thousand | 1.1. –30.6.2015 | 1.1. –30.6.2014 |
|---|---|---|
| Regional origin | ||
| Germany | 836,711 | 757,249 |
| United Kingdom | 1,438,651 | 1,230,916 |
| France | 352,740 | 303,827 |
| Other | 992,778 | 830,339 |
| Europe | 3,620,880 | 3,122,331 |
| USA | 1,991,330 | 1,553,486 |
| Other | 401,668 | 332,908 |
| North America | 2,392,998 | 1,886,394 |
| Asia | 1,342,953 | 1,081,378 |
| Australia | 530,838 | 468,944 |
| Australasia | 1,873,791 | 1,550,322 |
| Africa | 248,160 | 134,257 |
| Other | 450,707 | 371,588 |
| Total | 8,586,536 | 7,064,892 |
| in EUR thousand | 1.1. –30.6.2015 | 1.1. –30.6.2014 |
|---|---|---|
| Income from real estate | 58,252 | 40,899 |
| Dividends | 1,112 | 1,974 |
| Interest income | 503,637 | 462,744 |
| Other investment income | 35,677 | (15,474) |
| Ordinary investment income | 598,678 | 490,143 |
| Profit or loss on shares in associated companies | 4,619 | 4,307 |
| Realised gains on investments | 116,597 | 99,847 |
| Realised losses on investments | 49,953 | 11,349 |
| Change in fair value of financial instruments | (1,625) | 9,997 |
| Impairments on real estate | 11,094 | 9,001 |
| Impairments on fixed-income securities | 2,365 | – |
| Impairments on participating interests and other financial assets | 1,253 | 1,335 |
| Other investment expenses | 52,265 | 50,049 |
| Net income from assets under own management | 601,339 | 532,560 |
| Interest income on funds withheld and contract deposits | 255,206 | 238,385 |
| Interest expense on funds withheld and contract deposits | 57,779 | 63,440 |
| Total investment income | 798,766 | 707,505 |
The impairments totalling EUR 3.9 million (EUR 1.3 million) were attributable largely – in an amount of EUR 2.4 million (previous year: none) – to the area of fixed-income securities. Impairments of EUR 1.3 million (EUR 1.3 million) were taken in the area of alternative investments. These were attributable exclusively to private equity investments. An impairment loss of EUR 0.3 million (previous year: none) was recognised on investments in real estate. In the reporting period and in the comparable period of the previous year no impairments were recognised on equities or equity funds because their fair values did not fall significantly – i. e. by at least 20% – or for a prolonged period – i. e. for at least nine months – below acquisition cost. As in the previous year, these write-downs were not opposed by any write-ups on investments that had been written down in previous periods. The portfolio did not contain any overdue, unadjusted assets as at the balance sheet date since overdue securities are written down immediately.
| in EUR thousand | 1.1. –30.6.2015 | 1.1. –30.06.2014 |
|---|---|---|
| Fixed-income securities – held to maturity | 36,204 | 43,862 |
| Fixed-income securities – loans and receivables | 53,503 | 54,083 |
| Fixed-income securities – available for sale | 402,463 | 357,803 |
| Financial assets – at fair value through profit or loss | 1,461 | 420 |
| Other | 10,006 | 6,576 |
| Total | 503,637 | 462,744 |
Hannover Re holds derivative financial instruments to hedge interest rate risks from loans connected with the financing of real estate; these gave rise to recognition of other liabilities in an amount of EUR 3.7 million (EUR 4.0 million) and other financial assets at fair value through profit or loss of EUR 0.3 million (EUR 0.5 million).
Hannover Re's portfolio contained derivative financial instruments as at the balance sheet date in the form of forward exchange transactions taken out to hedge currency risks. These transactions gave rise to recognition of other liabilities in an amount of EUR 32.7 million (EUR 30.6 million) and other financial assets at fair value through profit or loss in an amount of EUR 11.0 million (EUR 14.5 million). The decrease in equity from hedging instruments recognised directly in equity pursuant to IAS 39 in an amount of EUR 0.6 million derived solely from the forward exchange transactions taken out to hedge currency risks from long-term investments in foreign operations. These hedging instruments resulted in the recognition of other liabilities in an amount of EUR 0.7 million. Ineffective components of the hedge were recognised in profit or loss under other investment expenses in an amount of EUR 0.1 million.
In the course of the second quarter derivative financial instruments held to hedge inflation risks within the loss reserves were disposed of in a total volume of EUR 67.9 million, allowing for a negative exchange rate effect of EUR 4.3 million. This derivative instrument was recognised under other liabilities in an amount of EUR 63.6 million as at 31 December 2014.
In order to hedge the risk of share price changes in connection with the stock appreciation rights granted under the share award plan, Hannover Re took out hedges in 2014 in the form of so-called equity swaps. The fair value of these instruments amounted to EUR 1.6 million as at the balance sheet date and was recognised under other liabilities (EUR 1.1 million recognised under other financial assets at fair value through profit or loss). The hedge gave rise to an increase in equity from hedging instruments recognised directly in equity in an amount of EUR 2.8 million (EUR 0.4 million); ineffective components of the hedge were recognised in a minimal amount under other investment expenses.
By means of a dividend resolution of 25 March 2015 of ASPECTA Assurance International AG, Liechtenstein, which had previously been included in the consolidated financial statement using the equity method of accounting, a purchase option on the part of the majority shareholder became exercisable. Exercise of the option and the associated return of the shares of ASPECTA Assurance International AG, Liechtenstein, took place in full on 4 May 2015.
The net changes in the fair value of the aforementioned instruments resulted in a charge of EUR 3.8 million to the result of the period under review (30 June 2014: improvement of EUR 1.0 million in the result of the period under review).
Certain reinsurance treaties meet criteria which require application of the prescriptions in IFRS 4 governing embedded derivatives. These accounting regulations require that derivatives embedded in reinsurance contracts be separated from the underlying insurance contract ("host contract") according to the conditions specified in IFRS 4 and IAS 39 and recognised separately at fair value in accordance with IAS 39. Fluctuations in the fair value of the derivative components are to be recognised in income in subsequent periods.
On this basis Hannover Re recognised under financial assets at fair value through profit or loss derivatives in connection with the reinsurance business that were separated from the underlying transaction and measured at fair value in an amount of EUR 43.6 million as at the balance sheet date (EUR 51.4 million).
In addition, derivatives in connection with the reinsurance business were recognised under other liabilities in an amount of EUR 156.0 million (EUR 142.1 million) as at the balance sheet date.
Of this amount, EUR 151.7 million (EUR 136.5 million) is attributable to a number of transactions in the Life& Health reinsurance business group that are to be classified as derivative financial instruments. Under these transactions Hannover Re companies offer their contracting parties coverage for risks from possible future payment obligations arising out of hedging instruments. The payment obligations result from contractually defined events and relate to the development of an underlying group of primary insurance contracts
Structured transactions were entered into in the Life&Health reinsurance business group in order to finance statutory reserves (so-called Triple-X or AXXX reserves) of US ceding companies. In each case such structures necessitated the involvement of a special purpose entity. The special purpose entities carry extreme mortality risks securitised by the cedants above a contractually defined retention and transfer these risks by way of a fixed/floating swap to a member company of the Hannover Re Group. The total amount of the contractually agreed capacities of the transactions is equivalent to EUR 3,486.9 million (EUR 3,079.4 million); an amount equivalent to EUR 2,181.0 million (EUR 1,887.0 million) had been taken up as at the balance sheet date. The variable payments to the special purpose entities that are guaranteed by the Hannover Re Group cover their payment obligations. Under some of the transactions the payments resulting from the with statutory reserving requirements. The contracts are to be classified and recognised as stand-alone credit derivatives pursuant to IAS 39. These instruments gave rise to an improvement in investment income of EUR 7.3 million (30 June 2014: EUR 1.2 million).
Of the derivatives carried on the assets side, fair values of EUR 42.4 million (EUR 44.8 million) were attributable as at the balance sheet date to derivatives embedded in "modified coinsurance" and "coinsurance funds withheld" (ModCo) reinsurance treaties.
Within the scope of the accounting of ModCo reinsurance treaties, under which securities deposits are held by the ceding companies and payments rendered on the basis of the income from certain securities of the ceding company, the interest-rate risk elements are clearly and closely related to the underlying reinsurance arrangements. Embedded derivatives consequently result solely from the credit risk of the underlying securities portfolio. Hannover Re calculates the fair value of the embedded derivatives in ModCo treaties using the market information available on the valuation date on the basis of a "credit spread" method. Under this method the derivative is valued at zero on the date when the contract commences and its value then fluctuates over time according to changes in the credit spreads of the securities.
The ModCo derivatives gave rise to a charge to investment income of EUR 6.4 million (30 June 2014: improvement in investment income of EUR 4.6 million).
swaps in the event of a claim are reimbursed by the parent companies of the cedants by way of compensation agreements. In this case the reimbursement claims from the compensation agreements are to be capitalised separately from and up to the amount of the provision.
Under IAS 39 these transactions are to be recognised at fair value as financial guarantees. To this end Hannover Re uses the net method, according to which the present value of the agreed fixed swap premiums is netted with the present value of the guarantee commitment. The fair value on initial recognition therefore amounted to zero. The higher of the fair value and the amount carried as a provision on the liabilities side pursuant to IAS 37 is recognised at the point in time when utilisation is considered probable. This was not the case as at the balance sheet date.
IAS 24 "Related Party Disclosures" defines related parties as group entities of a common parent, associated entities, legal entities under the influence of key management personnel and the key management personnel of the entity itself. Transactions between Hannover Rück SE and its subsidiaries, which are to be regarded as related parties, were eliminated through consolidation and are therefore not discussed in the notes to the consolidated financial statement. In the period under review the following significant business relations existed with related parties.
Talanx AG holds an unchanged majority interest of altogether 50.22% in Hannover Rück SE. For its part, HDI-Haftpflichtverband der Deutschen Industrie Versicherungsverein auf Gegenseitigkeit, Riethorst 2, 30659 Hannover (HDI) holds a stake of 79.0% in Talanx AG and therefore indirectly holds 39.7% (rounded) of the voting rights in Hannover Rück SE.
The business relationship between Hannover Rück SE and its subsidiary E+S Rückversicherung AG is based on a cooperation agreement. A retrocession by Hannover Rück SE to E+S Rückversicherung AG exists in property and casualty reinsurance. The exclusive responsibilities of E+S Rückversicherung AG for German business and of Hannover Rück SE for international markets have been preserved.
Within the contractually agreed framework Talanx Asset Management GmbH performs investment and asset management services for Hannover Rück SE and some of its subsidiaries. Assets in special funds are managed by Ampega Investment
Business assumed and ceded in Germany and abroad
GmbH. Talanx Immobilien Management GmbH performs services for Hannover Re under a number of management contracts.
Companies belonging to the Talanx Group granted the Hannover Re Group insurance protection inter alia in the areas of public liability, building, group accident and business travel insurance. Divisions of Talanx AG also performed services for us in the areas of taxes and general administration.
Talanx Reinsurance Broker AG grants Hannover Rück SE and E+S Rückversicherung AG a preferential position as reinsurers of cedants within the Talanx Group. In addition, Hannover Rück SE and E+S Rückversicherung AG are able to participate in the protection covers on the retention of Group cedants and share in the protection afforded by them. In certain circumstances Hannover Rück SE and E+S Rückversicherung AG are obliged to assume unplaced shares of the reinsurance of Group cedants from Talanx Reinsurance Broker AG.
The Hannover Re Group provides reinsurance protection for the HDI Group. To this extent, numerous underwriting business relations exist with related parties in Germany and abroad which are not included in Hannover Re's consolidation. This includes business both assumed and ceded at usual market conditions.
The reinsurance relationships with related parties in the period under review are shown with their total amounts in the following table.
| in EUR thousand | 1.1. –30.6.2015 | 1.1. –30.6.2014 | ||
|---|---|---|---|---|
| Premium | Underwriting result |
Premium | Underwriting result |
|
| Business assumed | ||||
| Property and casualty reinsurance | 298,156 | (31,197) | 254,481 | 40,396 |
| Life and health reinsurance | 73,253 | 11,937 | 75,717 | 13,186 |
| 371,409 | (19,260) | 330,198 | 53,582 | |
| Business ceded | ||||
| Property and casualty reinsurance | (6,539) | 1,601 | (5,714) | (2,484) |
| Life and health reinsurance | (31,469) | (6,190) | (27,569) | (2,634) |
| (38,008) | (4,589) | (33,283) | (5,118) | |
| Total | 333,401 | (23,849) | 296,915 | 48,464 |
In the context of a bond issue by Talanx AG the Group companies Hannover Rück SE and E+S Rückversicherung AG invested in a nominal amount of EUR 47.0 million in the issued bearer debt, which has a coupon of 3.125%. The carrying amount of the instrument, which is recognised under fixed-income securities held to maturity, was EUR 47.5 million (EUR 48.3 million) including accrued interest of EUR 0.6 million (EUR 1.3 million).
The average number of staff employed at the companies included in the consolidated financial statement of the Hannover Re Group was 2,544 during the period under review (average in 2014: 2,475).
HDI Lebensversicherung AG, Cologne, participated in a nominal amount of EUR 50.0 million in the subordinated bond issued by Hannover Rück SE in September 2014 with a coupon of 3.375%.
As at the balance sheet date altogether 2,548 (2,468) staff were employed by the Hannover Re Group, with 1,315 (1,256) employed in Germany and 1,233 (1,212) working for the consolidated Group companies abroad.
| Calculation of the earnings per share | |||
|---|---|---|---|
| 1.1. –30.6.2015 | 1.1. –30.6.2014 | ||
| Group net income in EUR thousand | 531,903 | 444,422 | |
| Weighted average of issued shares | 120,596,920 | 120,596,774 | |
| Basic earnings per share in EUR | 4.41 | 3.69 | |
| Diluted earnings per share in EUR | 4.41 | 3.69 |
The earnings per share is calculated by dividing the net income attributable to the shareholders of Hannover Rück SE by the weighted average number of shares outstanding within the period under review.
Neither in the period under review nor in the previous reporting period were there any dilutive effects.
There were no other extraordinary components of income which should have been recognised or disclosed separately in the calculation of the earnings per share.
On the basis of this year's employee share option plan Hannover Rück SE acquired treasury shares in the course of the second quarter of 2015 and sold them to eligible employees. The weighted average number of shares does not include 12,922 (21,608) treasury shares pro rata temporis for the duration of the holding period. For further details please see our comments in Section 5.3 "Shareholders' equity, non-controlling interests and treasury shares".
The earnings per share could potentially be diluted in future through the issue of shares or subscription rights from the authorised or conditional capital.
Hannover Rück SE has secured by subordinated guarantee the subordinated debts issued by Hannover Finance (Luxembourg) S.A. in the 2010 and 2012 financial years in amounts of EUR 500.0 million each. A subordinated debt issued in 2005 by Hannover Finance (Luxembourg) S.A. with a volume of EUR 500.0 million, which was also secured by a subordinated guarantee, was redeemed on 1 June 2015 at the first scheduled call date.
The guarantees given by Hannover Rück SE for the subordinated debts attach if the issuer fails to render payments due under the bonds. The guarantees cover the relevant bond volumes as well as interest due until the repayment dates. Given the fact that interest on the bonds is partly dependent on the capital market rates applicable at the interest payment dates (floating rates), the maximum undiscounted amounts that can be called cannot be estimated with sufficient accuracy. Hannover Rück SE does not have any rights of recourse outside the Group with respect to the guarantee payments.
As security for technical liabilities to our US clients, we have established two trust accounts (master trust and supplemental trust) in the United States. They amounted to EUR 3,479.0 million (EUR 3,173.7 million) and EUR 26.6 million (EUR 24.4 million) respectively as at the balance sheet date. The securities held in the trust accounts are shown as available-for-sale investments. In addition, we furnished further collateral to ceding companies in an amount of EUR 1,967.6 million (EUR 979.1 million) in the form of socalled "single trust funds". This amount includes a sum equivalent to EUR 1,253.9 million (EUR 329.1 million) which was furnished by investors as security for potential reinsurance obligations from ILS transactions.
As part of our business activities we hold collateral available outside the United States in various blocked custody accounts and trust accounts, the total amount of which in relation to the Group's major companies was EUR 2,836.9 million (EUR 2,694.0 million) as at the balance sheet date.
The securities held in the blocked custody accounts and trust accounts are recognised predominantly as available-for-sale investments.
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 2,887.3 million (EUR 2,899.1 million).
In addition, we put up own investments with a book value of EUR 30.6 million (EUR 78.9 million) as collateral for existing derivative transactions. We received collateral with a fair value of EUR 6.0 million (EUR 12.9 million) for existing derivative transactions.
As collateral for commitments in connection with participating interests in real estate companies and real estate transactions the usual collateral under such transactions has been furnished to various banks, the amount of which totalled EUR 594.8 million (EUR 574.3 million) as at the balance sheet date.
Outstanding capital commitments with respect to alternative investments exist on the part of the Group in an amount of EUR 800.3 million (EUR 665.6 million). These primarily involve as yet unfulfilled payment obligations from investment commitments given to private equity funds and venture capital firms.
The application of tax regulations may not have been resolved at the time when tax items are brought to account. The calculation of tax refund claims and tax liabilities is based on what we consider to be the regulations most likely to be applied in each case. The revenue authorities may, however, take a differing view, as a consequence of which additional tax liabilities could arise in the future.
Hannover Rück SE enters into contingent liabilities as part of its normal business operations. A number of reinsurance treaties concluded by Group companies with outside third parties include letters of comfort, guarantees or novation agreements under which Hannover Rück SE guarantees the liabilities of the subsidiary in question or enters into the rights and obligations of the subsidiary under the treaties if particular constellations materialise.
No significant events occurred after the balance sheet date.
Hannover, 3 August 2015
Executive Board
Wallin Althoff Chèvre Gräber
Dr. Miller Dr. Pickel Vogel
We have reviewed the condensed consolidated interim financial statements – comprising the consolidated balance sheet, consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in shareholders' equity, consolidated cash flow statement and the notes to the consolidated financial statements – together with the interim Group management report of Hannover Rück SE, Hannover, for the period from 1 January to 30 June 2015, which are components of the half-yearly financial report pursuant to § 37 w of the German Securities Trading Act (WpHG). The preparation of the condensed consolidated interim financial statements in accordance with the IFRS applicable to interim financial reporting as adopted by the EU and of the interim management report for the Group in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports is the responsibility of the parent company's Board of Management. Our responsibility is to issue a review report on the condensed consolidated interim financial statements and on the interim management report for the Group based on our review.
We conducted our review of the condensed consolidated interim financial statements and the interim management report for the Group in accordance with German generally accepted standards for the review of financial statements
Hannover, 3 August 2015
KPMG AG Wirtschaftsprüfungsgesellschaft
Möller Bock Wirtschaftsprüfer Wirtschaftsprüfer
promulgated by the Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer – IDW). Those standards require that we plan and perform the review so that we can preclude through critical evaluation, with moderate assurance, that the condensed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU and that the interim management report for the Group has not been prepared, in all material respects, in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports. A review is limited primarily to inquiries of company personnel and analytical procedures and thus provides less assurance than an audit. Since, in accordance with our mandate, we have not performed a financial statement audit, we cannot express an audit opinion.
Based on our review, no matters have come to our attention that cause us to presume that the condensed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU or that the interim management report for the Group has not been prepared, in all material respects, in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports.
To the best of our knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the interim consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the interim management report of the Group includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal opportunities and risks associated with the expected development of the Group for the remaining months of the financial year.
Hannover, 3 August 2015
Executive Board
Wallin Althoff Chèvre Gräber
Dr. Miller Dr. Pickel Vogel
Karl Steinle Tel. +49 511 5604-1500 Fax +49 511 5604-1648 [email protected]
Tel. +49 511 5604-1502 Fax +49 511 5604-1648
Tel. +49 511 5604-1529 Fax +49 511 5604-1648
Karl-Wiechert-Allee 50 30625 Hannover, Germany Tel. +49 511 5604-0 Fax +49 511 5604-1188
Whitepark GmbH&Co., Hamburg www.whitepark.de
Printed on paper from environmentally responsible, socially compatible and economically viable forest management
Building tools?
Free accounts include 100 API calls/year for testing.
Have a question? We'll get back to you promptly.