8.2 Related party disclosures
IAS 24 defines related parties inter alia as parent companies and subsidiaries, subsidiaries of a common parent company, associated companies, legal entities under the influence of management and the management of the company itself. In the year under review the following significant business relations existed with related parties.
HDI Haftpflichtverband der Deutschen Industrie V.a.G. (HDI) holds an unchanged majority interest of 50.22 % in Hannover Re through Talanx AG.
With effect from the 1997 financial year onwards all new business and renewals written on the German market have been the responsibility of E+S Rück, while Hannover Re has handled foreign markets. Internal retrocession arrangements ensure that the percentage breakdown of the business applicable to the previously existing underwriting partnership is largely preserved between these companies.
Within the contractually agreed framework Ampega-Gerling Asset Management GmbH performs investment and asset management services for Hannover Re and some of its subsidiaries. Assets in special funds are managed by Ampega-Gerling Investment GmbH. Ampega-Gerling Immobilien Management GmbH performs services for Hannover Re under a management contract.
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 collision insurance. In addition, Talanx AG billed Hannover Re and E+S Rück pro rata for the directors’ and officers’ (D&O) insurance of the Talanx Group. Divisions of Talanx AG also performed services for us in the areas of taxes and general administration.
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.
Protection Reinsurance Intermediaries AG grants Hannover Re and E+S Rück a preferential position as reinsurers of cedants within the Talanx Group. In addition, Hannover Re and E+S Rück are able to participate in the protection covers on the retention of Group cedants and share in the protection afforded by them.
The reinsurance relationships with related parties in the year under review are summarised in the following table.
| Business assumed and ceded in Germany and abroad in EUR thousand | 31.12.2009 | ||
|---|---|---|---|
| Premium | Underwriting result | ||
| Business assumed | |||
| Non-life reinsurance | 392,009 | 6,240 | |
| Life and health reinsurance | 351,713 | 48,151 | |
| 743,722 | 54,391 | ||
| Business ceded | |||
| Non-life reinsurance | (896) | (6,282) | |
| Life and health reinsurance | (5,551) | (2,683) | |
| (6,447) | (8,965) | ||
| Total | 737,275 | 45,426 | |
Effective 31 December 2008 Hannover Re assumed the life insurance business of a related party that had previously been retroceded to a reinsurer outside the Group by exercising its right of novation. This restructuring gave rise to non-recurring income of EUR 37.0 million as at 1 January 2009, which was opposed by a technical expense of EUR 36.9 million in connection with the non-Group reinsurer.
In the 2007 financial year Hannover Re (Bermuda) Ltd. extended a loan due on 31 May 2012 with a coupon of 4.98% to Talanx AG, the volume of which as at the balance sheet date was EUR 51.5 million (EUR 51.5 million). The carrying amount includes accrued interest of EUR 1.5 million (EUR 1.5 million). This instrument was recognised under other invested assets.
The Group companies E+S Rück, Hannover Finance (Luxembourg) S.A., Hannover Reinsurance (Ireland) Ltd. and Hannover Re (Bermuda) Ltd. invested in a nominal amount of EUR 150.0 million in a bearer debenture of Talanx AG with a term until 8 July 2013 and a coupon of 5.43%. The carrying amount of the instrument, which is recognised under fixed-income securities held to maturity, was EUR 153.9 million and included accrued interest of EUR 3.9 million (EUR 3.9 million) as at the balance sheet date.
As at 31 December 2009 Hannover Reinsurance (Ireland) Ltd. recognised loan receivables due from Aspecta Lebensversicherung AG and Aspecta Assurance International Luxembourg S.A. in an amount of altogether EUR 259.6 million (EUR 255.9 million). The loans result from a group of reinsurance contracts for which Talanx AG had furnished guarantees, which in 2007 were transferred to Hannover Reinsurance (Ireland) Ltd. In accordance with IAS 39 the contracts in question were classified as financial instruments with the character of loans and receivables measured at amortised cost, and the corresponding changes in income are recognised in ordinary investment income.
As part of long-term lease arrangements companies belonging to the Hannover Re Group rented out business premises in 2009 to HDI Direkt Versicherung AG, Hannover. In addition, IT and management services were performed for both HDI Direkt Versicherung AG and Protection Reinsurance Intermediaries AG, Hannover, under service contracts.
Actuarial opinions are drawn up for Hannover Re and E+S Rück by HDI-Gerling Pensionsmanagement AG under an actuarial service contract with respect to the pension commitments given to staff.
In May 2009 Hannover Re acquired shares of a non-Group financial services enterprise in the amount of EUR 12.5 million from HDI-Gerling Lebensversicherung AG, Cologne, and sold them again at short notice to Talanx Beteiligungs-GmbH & Co. KG, Hannover.
All transactions were effected at usual market conditions. We gave an account of these transactions with regard to Hannover Re and E+S Rück in the corresponding dependent company reports pursuant to § 312 Stock Corporation Act (AktG).
Remuneration and shareholdings of the management boards of the parent company
With regard to this information please see in general the remuneration report included as part of our Corporate Governance report.
The remuneration report is based on the recommendation of the German Corporate Governance Code and contains information which also forms part of the notes to the 2009 consolidated financial statement as required by IAS 24 “Related Party Disclosures”. In addition, we took into account the more specific provisions of GAS 17 “Reporting on the Remuneration of Members of Governing Bodies”. Under German commercial law, too, this information includes data specified as mandatory for the notes (§ 314 HGB) and the management report (§ 315 HGB). These details are discussed as a whole in the remuneration report. Consequently, we have not provided any further explanation in the notes.
Share-based payment
With effect from 1 January 2000 the Executive Board of Hannover Re, with the consent of the Supervisory Board, introduced a virtual stock option plan that provides for the granting of stock appreciation rights to certain managerial staff. The content of the stock option plan is based solely on the Conditions for the Granting of Stock Appreciation Rights. All the members of the Group’s management are eligible for the award of stock appreciation rights. Exercise of the stock appreciation rights does not give rise to any entitlement to the delivery of Hannover Re stock, but merely to payment of a cash amount linked to the performance of the Hannover Re share. Recognition of transactions involving stock appreciation rights with cash settlement is governed by the requirements of IFRS 2 “Share-based Payment”.
Stock appreciation rights were first granted for the 2000 financial year and are awarded separately for each subsequent financial year (allocation year), provided the performance criteria defined in the Conditions for the Granting of Stock Appreciation Rights are satisfied.
The internal performance condition is achievement of the target performance defined by the Supervisory Board, which is expressed in terms of the diluted earnings per share calculated in accordance with IAS 33 “Earnings Per Share” (EPS). If the target EPS is surpassed or undershot, the provisional basic number of stock appreciation rights initially granted is increased or reduced accordingly to produce the EPS basic number. The external performance condition is the development of the share price in the allocation year. The benchmark used in this regard is the (weighted) ABN Amro Global Reinsurance Index. This index encompasses the performance of listed reinsurers worldwide. Depending upon the outperformance or underperformance of this index, the EPS basic number is increased – albeit by at most 400% of the EPS basic number – or reduced – although by no more than 50% of the EPS basic number.
The maximum period of the stock appreciation rights is ten years, commencing at the end of the year in which they are awarded. Stock appreciation rights which are not exercised by the end of the 10-year period lapse. Stock appreciation rights may only be exercised after a waiting period and then only within four exercise periods each year. For 40% of the stock appreciation rights (first tranche of each allocation year) the waiting period is two years; for each additional 20 % of the stock appreciation rights (tranches two to four of each allocation year) the waiting period is extended by one year. Each exercise period lasts for ten trading days, in each case commencing on the sixth trading day after the date of publication of the quarterly report of Hannover Rückversicherung AG.
On 4 November 2009 the Supervisory Board of Hannover Re decided to extend the waiting period applicable to members of the Executive Board from two to four years for stock appreciation rights granted from the 2010 allocation onwards; on 23 November 2009 the Executive Board decided to extend the waiting period accordingly for the members of the Group’s management. Upon expiry of this waiting period a maximum 60% of the stock appreciation rights awarded for an allocation year may be exercised. The waiting period for each additional 20% of the stock appreciation rights awarded for this allocation year to a member of the managerial staff is one year.
Upon exercise of a stock appreciation right the amount paid out to the entitled party is the difference between the basic price and the current market price of the Hannover Re share at the time of exercise. In this context, the basic price corresponds to the arithmetical mean of the closing prices of the Hannover Re share on all trading days of the first full calendar month of the allocation year in question. The current market price of the Hannover Re share at the time when stock appreciation rights are exercised is determined by the arithmetical mean of the closing prices of the Hannover Re share on the last twenty trading days prior to the first day of the relevant exercise period.
The amount paid out is limited to a maximum calculated as a quotient of the total volume of compensation to be granted in the allocation year and the total number of stock appreciation rights awarded in the year in question.
In the event of cancellation of the employment relationship or termination of the employment relationship as a consequence of a termination agreement or a set time limit, a holder of stock appreciation rights is entitled to exercise all such rights in the first exercise period thereafter. Stock appreciation rights not exercised in this period and those in respect of which the waiting period has not yet expired shall lapse. Retirement, disability or death of the member of management shall not be deemed to be termination of the employment relationship for the purpose of exercising stock appreciation rights.
The allocations for the years 2000, 2002 to 2004 as well as 2006 and 2007 gave rise to the following commitments in the 2009 financial year. No allocations were made for 2001, 2005 or 2008:
| Stock appreciation rights of Hannover Re | Allocation year | |||||
|---|---|---|---|---|---|---|
| 2007 | 2006 | 2004 | 2003 | 2002 | 2000 | |
| Award date | 28.03.2008 | 13.03.2007 | 24.03.2005 | 25.03.2004 | 11.04.2003 | 21.06.2001 |
| Period | 10 years | 10 years | 10 years | 10 years | 10 years | 10 years |
| Waiting period | 2 years | 2 years | 2 years | 2 years | 2 years | 2 years |
| Basic price (in EUR) | 34.97 | 30.89 | 27.49 | 24.00 | 23.74 | 25.50 |
| Participants in year of issue | 110 | 106 | 109 | 110 | 113 | 95 |
| Number of rights granted | 926,565 | 817,788 | 211,171 | 904,234 | 710,429 | 1,138,005 |
| Fair value at 31.12.2009 (in EUR) | 5.76 | 6.50 | 10.96 | 8.63 | 8.79 | 5.49 |
| Maximum value (in EUR) | 10.79 | 10.32 | 24.62 | 8.99 | 8.79 | 5.49 |
| Number of rights existing at 31.12.2009 | 908,637 | 789,773 | 156,454 | 55,897 | 10,047 | 1.503 |
| Provisions at 31.12.2009 (in EUR million) | 3.72 | 4.45 | 1.71 | 0.48 | 0.09 | 0.01 |
| Amounts paid out in the 2009 financial year (in EUR million) | – | – | 0.01 | 0.64 | 0.05 | 0.04 |
| Expense in the 2009 financial year (in EUR million) | 2.93 | 2.82 | 1.03 | 0.63 | 0.05 | 0.03 |
In the 2009 financial year the waiting period expired for 100% of the stock appreciation rights awarded in 2000, 2002 and 2003, 80% of those awarded in 2004 and 40% of those awarded in 2006. 6,525 stock appreciation rights from the 2000 allocation year, 560 stock appreciation rights from the 2002 allocation year, 79,262 stock appreciation rights from the 2003 allocation year and 1,500 stock appreciation rights from the 2004 allocation year were exercised. The total amount paid out stood at EUR 0.7 million.
The stock appreciation rights of Hannover Re have developed as follows:
| Development of the stock appreciation rights of Hannover Re | Allocation year | |||||
|---|---|---|---|---|---|---|
| Number of options | 2007 | 2006 | 2004 | 2003 | 2002 | 2000 |
| Granted in 2001 | – | – | – | – | – | 1,138,005 |
| Exercised in 2001 | – | – | – | – | – | – |
| Lapsed in 2001 | – | – | – | – | – | – |
| Number of options at 31.12.2001 | – | – | – | – | – | 1,138,005 |
| Granted in 2002 | – | – | – | – | – | – |
| Exercised in 2002 | – | – | – | – | – | – |
| Lapsed in 2002 | – | – | – | – | – | 40,770 |
| Number of options at 31.12.2002 | – | – | – | – | – | 1,097,235 |
| Granted in 2003 | – | – | – | – | 710,429 | – |
| Exercised in 2003 | – | – | – | – | – | – |
| Lapsed in 2003 | – | – | – | – | 23,765 | 110,400 |
| Number of options at 31.12.2003 | – | – | – | – | 686,664 | 986,835 |
| Granted in 2004 | – | – | – | 904,234 | – | – |
| Exercised in 2004 | – | – | – | – | – | 80,137 |
| Lapsed in 2004 | – | – | – | 59,961 | 59,836 | 57,516 |
| Number of options at 31.12.2004 | – | – | – | 844,273 | 626,828 | 849,182 |
| Granted in 2005 | – | – | 211,171 | – | – | – |
| Exercised in 2005 | – | – | – | – | 193,572 | 647,081 |
| Lapsed in 2005 | – | – | 6,397 | 59,834 | 23,421 | 25,974 |
| Number of options at 31.12.2005 | – | – | 204,774 | 784,439 | 409,835 | 176,127 |
| Granted in 2006 | – | – | – | – | – | – |
| Exercised in 2006 | – | – | – | 278,257 | 160,824 | 153,879 |
| Lapsed in 2006 | – | – | 14,511 | 53,578 | 22,896 | 10,467 |
| Number of options at 31.12.2006 | – | – | 190,263 | 452,604 | 226,115 | 11,781 |
| Granted in 2007 | – | 817,788 | – | – | – | – |
| Exercised in 2007 | – | – | 12,956 | 155,840 | 110,426 | 3,753 |
| Lapsed in 2007 | – | 8,754 | 13,019 | 38,326 | 10,391 | 0 |
| Number of options at 31.12.2007 | – | 809,034 | 164,288 | 258,438 | 105,298 | 8,028 |
| Granted in 2008 | 926,565 | – | – | – | – | – |
| Exercised in 2008 | – | – | 1,699 | 121,117 | 93,747 | – |
| Lapsed in 2008 | – | 3,103 | 1,443 | 2,162 | 944 | – |
| Number of options at 31.12.2008 | 926,565 | 805,931 | 161,146 | 135,159 | 10,607 | 8,028 |
| Granted in 2009 | – | – | – | – | – | – |
| Exercised in 2009 | – | – | 1,500 | 79,262 | 560 | 6,525 |
| Lapsed in 2009 | 17,928 | 16,158 | 3,192 | – | – | – |
| Number of options at 31.12.2009 | 908,637 | 789,773 | 156,454 | 55,897 | 10,047 | 1,503 |
| Exercisable at 31.12.2009 | – | 315,877 | 123,432 | 55,897 | 10,047 | 1,503 |
The existing stock appreciation rights are valued on the basis of the Black/Scholes option pricing model.
The calculations were based on the year-end closing price of the Hannover Re share of EUR 32.63 as at 21 December 2009, expected volatility of 32.97% (historical volatility on a five-year basis), a dividend yield of 6.13% and risk-free interest rates of 0.70% for the 2000 allocation year, 1.59% for the 2002 allocation year, 1.96% for the 2003 allocation year, 2.29% for the 2004 allocation year, 2.83% for the 2006 allocation year and 3.06 % for the 2007 allocation year.
The average fair value of each stock appreciation right was EUR 5.49 for the 2000 allocation year, EUR 8.79 for the 2002 allocation year, EUR 8.63 for the 2003 allocation year, EUR 10.96 for the 2004 allocation year, EUR 6.50 for the 2006 allocation year and EUR 5.76 for the 2007 allocation year.
On this basis the aggregate provisions amounted to EUR 10.5 million (EUR 3.7 million). The expense for the 2009 financial year totalled altogether EUR 7.5 million.