5. Major acquisitions, new formations and other corporate changes

5.1 Acquisitions and new formations

FUNIS GmbH & Co. KG was established on 23 October 2009 with registered office in Hannover. Hannover Re is the company’s managing limited partner and holds a capital contribution of EUR 100,000, which had not been paid in as at the balance sheet date. The capital contribution was paid on 25 January 2010. The company’s business object is to hold, acquire and sell participating interests in other companies.

On 13 July 2009 GLL HRE Core Properties L. P. based in Wilmington, Delaware/United States, commenced business operations. The company is 99.9% owned by Hannover Re Real Estate Holdings, Inc., Orlando/United States and is fully consolidated in the latter’s sub-group financial statement. The company’s business object is to acquire, hold and manage real estate in the United States.

On 20 February 2009 Hannover Re completed the acquisition of the US ING life reinsurance portfolio under a reinsurance and asset purchase transaction with Scottish Re Group Limited, Hamilton, Bermuda, through its subsidiaries Hannover Life Reassurance Company of America, Orlando (HLRUS), and Hannover Life Reassurance (Ireland) Ltd., Dublin (HLRIr). Within the scope of the transaction the two aforementioned companies assumed the technical liabilities associated with this portfolio and, in return, received the necessary assets to fund the said liabilities. The reinsurance contracts were concluded effective 1 January 2009; no purchase price was paid.

In addition to the materialisation of the reinsurance contracts, HLRUS acquired the infrastructure and operating assets needed to administer the life reinsurance business in North America for a purchase price of EUR 12.9 million. The infrastructure mainly encompasses the IT systems for administration and quotation of the business. A portion of the workforce was consequently also taken over from Scottish Re Group. In accordance with the requirements of IFRS 3 “Business Combinations” Hannover Re recognises this acquisition as a business combination since the reinsurance contracts and the systems needed for their administration in conjunction with the assumed workforce are to be considered a separate and independent business for the purposes of IFRS 3.

The acquired business was included in the consolidated financial statement for the first time as at 1 January 2009, since the significant part of the economic risks and benefits was apportionable to Hannover Re from this date onwards when the reinsurance transactions acquired contractual force. For the purpose of first-time consolidation, assumptions and estimations based on forecasts of future cash flows were in some cases used to establish the fair values of the acquired assets and liabilities within the framework of appropriate measurements methods. The acquired business was therefore initially included in the consolidated financial statement on a provisional basis, using the best available information.

IFRS 3 requires that this provisional recognition be completed within twelve months of the date of acquisition. Resulting changes in the values of recognised assets and liabilities are to be carried as if their adjusted fair value at the time of initial consolidation had been recognised from this point in time onwards. In the course of the year under review the provisional carrying amounts of the assets and liabilities assumed in this transaction were analysed and as a result partially adjusted.

Following completion of the provisional recognition, the adjusted assets and liabilities of the acquired business as at the time of initial consolidation are as follows:

In connection with the acquisition of the life reinsurance portfolio, an intangible asset was carried in accordance with IFRS 4 in conjunction with the standards of US GAAP relevant to the recognition of items of the technical account; this amount represents the present value of future cash flows from the assumed reinsurance contracts (known as the “present value of future profits/PVFP” or “value of business acquired/VOBA”). The PVFP was initially recognised at fair value on the basis of generally accepted actuarial methods (“actuarial appraisal method”), while in the subsequent periods scheduled amortisation is taken on the PVFP over the period of the underlying reinsurance contracts in proportion to the future premium income. In addition, the intangible asset is regularly tested for impairment. As a consequence of detailed revision of the actuarial appraisal models, this asset was increased by EUR 14.2 million to EUR 104.3 million compared to the initial carrying amount.

Fresh insights from the scrutiny and individual measurement of the assumed reinsurance contracts resulted in a reduction of the benefit reserve by EUR 30.3 million to EUR 981.7 million, derecognition of the provisionally recognised reinsurance recoverables on the benefit reserve in an amount of EUR 26.9 million as well as other, altogether minimal adjustments.

After recognition of all adjusted fair values of the identifiable assets, liabilities and contingent liabilities from the initial consolidation, total net assets after tax amounted to EUR 105.5 million.

Negative goodwill resulted from the acquisition described above and in consideration of the purchase price of EUR 12.9 million paid for the other assets described above; this was recognised immediately in income as required by IFRS 3.56.

In accordance with the requirements of IFRS 3 as applicable to this reinsurance and asset purchase transaction, the directly allocable incidental costs of the entire transaction – i.e. including fees for consulting and audit services rendered by third parties – are counted towards the acquisition costs.

The incidental costs, the final amount of which was definitely established in the fourth quarter of 2009, amounted to EUR 6.2 million. Where there is negative goodwill, these incidental costs shall be deducted from the negative goodwill recognised in income, as a consequence of which the transaction produced a one-time net gain of altogether EUR 86.4 million. As at the balance sheet date the negative goodwill booked to income was recognised under other operating income. The incidental costs are included in the other operating expenses in the consolidated statement of income.

The gross written premium of the acquired business amounted to EUR 833.7 million from the date of initial consolidation until the balance sheet date. A net profit of EUR 44.8 million was booked for the same period from the acquired business. This figure does not include the other operating income from the reversal of the negative goodwill.