6.12 Debt and subordinated capital

Effective 31 March 2009 Hannover Re exercised the call option allowed under the bond conditions – permitting scheduled redemption of the debt at nominal value for the first time – for the subordinated debt issued by Hannover Finance, Inc., Wilmington/USA, in the amount of USD 20.0 million that was still outstanding at that date. The debt was thus repurchased in full and cancelled in the year under review.

In order to safeguard the sustained financial strength of the Hannover Re Group, Hannover Re issued additional subordinated debt. On 26 February 2004 subordinated debt in the amount of EUR 750.0 million was placed through Hannover Finance (Luxembourg) S.A., a wholly owned subsidiary of Hannover Re, on the European capital markets. The bond has a final maturity of 20 years and for the first ten years carries a fixed coupon of 5.75 % (calculated as a spread of 163 basis points over the 10-year mid-swap rate at the time of issue). It may be redeemed by Hannover Re on 26 February 2014 at the earliest and at each coupon date thereafter. If the bond is not called at the end of the tenth year, the coupon will step up to a floating-rate yield of quarterly EURIBOR +263 basis points.

On 1 June 2005 Hannover Re issued further subordinated debt in the amount of EUR 500.0 million through its subsidiary Hannover Finance (Luxembourg) S.A. The bond is perpetual and carries a fixed coupon of 5.00 % in the first ten years. It may be redeemed by Hannover Re on 1 June 2015 at the earliest and at each coupon date thereafter. If the bond is not called at the end of the tenth year, the coupon will step up to a floating-rate yield of quarterly EURIBOR +268 basis points. As part of the transaction, holders of the subordinated debt of EUR 350.0 million placed by Hannover Re in 2001 – which has a term of 30 years and may be called in prior to maturity by the issuer on 14 March 2011 – were offered an opportunity to exchange their existing issue for holdings in the new bond. Participation in the exchange was nominally EUR 211.9 million, corresponding to EUR 240.5 million of the new bond issue. The cash component of the new bond in the amount of nominally EUR 259.5 million was placed predominantly with institutional investors in Europe. The remaining volume of the bond issued in 2001 after the exchange was unchanged at EUR 138.1 million and carries a fixed coupon of 6.25 % until March 2011. If Hannover Re does not exercise its right of early cancellation on this date, the coupon will step up to a floating-rate yield of quarterly EURIBOR +205 basis points.

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The carrying amount of this item corresponds to cost or amortised cost.

The rise of EUR 73.1 million in the debt to EUR 116.3 million results from increased borrowing requirements as a consequence of the investment activities of Hannover Re Real Estate Holdings, Inc. The largest debt with a volume of EUR 75.0 million and a term until 1 December 2012 was taken up by the company on 25 November 2009.

The aggregated fair value of the extended subordinated loans is based on quoted, active market prices. If such price information was not available, fair value was determined on the basis of the recognised effective interest rate method or estimated using other financial assets with similar rating, duration and return characteristics. Under the effective interest rate method the current market interest rate levels in the relevant fixed-interest-rate periods are always taken as a basis.

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The ordinary expenses include interest expenses of EUR 76.7 million (EUR 77.4 million) resulting from the subordinated debt placed through Hannover Finance (Luxembourg) S.A. in the years from 2001 to 2005. In addition, interest expenditures from the portions of the floating-rate loan issued by Hannover Finance, Inc., Wilmington/USA remaining in the portfolio until 31 March 2009 are recognised here.

Other financial facilities

In order to protect against possible future major losses Hannover Re had taken out a new credit line of EUR 500.0 million in 2004 in the form of a syndicated loan. The facility, which had a term of five years and ended in August 2009, was not used.

Facilities exist with various financial institutions for letters of credit, including two syndicated guarantee facilities from 2005 and 2006 each in an amount equivalent to EUR 1,395.1 million. 50 % of the first of these lines matures in January 2010 and the other 50 % in January 2012, while the second line matures in January 2013.

Unsecured letter of credit facilities with various terms (maturing at the latest in 2017) and a total volume equivalent to EUR 802.2 million exist on a bilateral basis with financial institutions.

Furthermore, in December 2009 a long-term unsecured line of credit with a total volume equivalent to at most EUR 523.2 million was concluded in December 2009. It is intended specifically for US life business. For further information on the letters of credit provided please see our explanatory remarks in Section 8.6 “Contingent liabilities and commitments”.

A number of LOC facilities include standard market clauses that allow the banks rights of cancellation in the event of material changes in our shareholding structure or trigger a requirement on the part of Hannover Re to furnish collateral upon materialisation of major events, for example if our rating is significantly downgraded. Please see our explanatory remarks in the “Financial position” section of the management report, on the information pursuant to § 315 Para. 4 German Commercial Code (HGB).

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