Credit risks

The credit risk consists primarily of the complete or partial failure of the counterparty and the associated default on payment. Also significant here is the so-called migration risk, which results from a rating downgrade of the counterparty and is reflected in a change in fair value.

Since the business that we accept is not always fully retained, but instead portions are retroceded as necessary, the credit risk is material for our company – especially in non-life reinsurance. Our retrocession partners are carefully selected in light of credit considerations in order to keep this risk as small as possible. This is also true of our broker relationships, under which risks may occur inter alia through the loss of the premium paid by the cedant to the broker or through double payments of claims. We reduce these risks, inter alia, by reviewing all broker relationships once a year with an eye to criteria such as the existence of professional indemnity insurance, payment performance and proper contract implementation. The Security Committee continuously monitors the credit status of retrocessionaires and approves measures where necessary to secure receivables that appear to be at risk of default.

The Group Protections unit is responsible for the Hannover Re Group's ongoing cession management. This process is supported by our “Cession Limits” 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 (cession management). Depending on the type and expected run-off duration of the reinsured business, the selection of reinsurers takes into account not only the minimum ratings of the rating agencies Standard & Poor's and A. M. Best but also internal and external (e.g. market information from brokers) expert assessments. Overall, retrocessions conserve our capital, stabilise and optimise our results and enable us to derive maximum benefit from a “hard” market (e.g. following a catastrophe loss event). Alongside traditional retrocessions in non-life reinsurance we also transfer risks to the capital market. Yet credit risks are relevant to our investments and in life and health reinsurance, too, 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.

The key ratios for management of our bad debt risk are as follows:

• 96.0% of our retrocessionaires have an investment grade rating (“AAA” to “BBB”).
• 93.9% thereof are rated “A” or better.
• Since 2005 we have reduced the level of recoverables by altogether 63%.
• 30.5% of our recoverables from reinsurance business are secured by deposits or letters of credit. What is more, for the majority of our retrocessionaires we also function as reinsurer, meaning that in principle recoverables can potentially be set off against our own liabilities.
• In terms of the Hannover Re Group's major companies, EUR 279.8 million (9.75%) of our accounts receivable from reinsurance business totalling EUR 2,869.9 million were older than 90 days as at the balance sheet date.
• The average default rate over the past three years was 0.2%.

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Retrocession gives rise to claims that we hold against our retrocessionaires. These reinsurance recoverables – i.e. the reinsurance recoverables on unpaid claims – amounted to EUR 1,748.0 million (EUR 2,079.2 million) as at the balance sheet date.

The chart shows the development of our reinsurance recoverables – split by rating quality – due from our retrocessionaires.

For further remarks on technical and other assets which are unadjusted but considered overdue as at the balance sheet date as well as on significant impairments in the year under review please see Section 6.4 “Technical assets”, Section 6.6 “Other assets” as well as section 7.2 “Investment result”.

Credit risks from investments may arise out of a failure to pay (interest and/or capital repayment) or change in the credit status (rating downgrade) of issuers of securities. We attach vital importance to credit assessment conducted on the basis of the quality criteria set out in the investment guidelines.

On a fair value basis EUR 2,569.9 million of the corporate bonds held by our company were issued by entities in the financial sector. Of this amount, 1,846.2 EUR million was attributable to banks. The vast majority of these bank bonds (almost 90%) were rated “A” or better. Our investment portfolio under own management does not contain any directly written credit derivatives.