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8.3 Share-based payment
In the 2016 financial year the following share-based payment plans with cash settlement existed within the Hannover Re Group:
- Stock Appreciation Rights Plan (in effect since 2000, cancelled in stages from 2011 onwards and currently being wound up)
- Share Award Plan (valid since 2011)
Stock Appreciation Rights Plan
With effect from 1 January 2000 the Executive Board of Hannover Rück SE, 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 shares of Hannover Rück SE, but merely to payment of a cash amount linked to the performance of the Hannover Rück SE share.
The Conditions for the Granting of Stock Appreciation Rights were cancelled for all eligible recipients. Awarded stock appreciation rights continue to be exercisable until the end of their period of validity.
Stock appreciation rights were first granted for the 2000 financial year and were awarded separately for each subsequent financial year (allocation year) until cancellation of the plan, provided the performance criteria defined in the Conditions for the Granting of Stock Appreciation Rights were satisfied.
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. Upon expiry of a fouryear 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 further 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 Rück SE.
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 Rück SE share at the time of exercise. In this context, the basic price corresponds to the arithmetic mean of the closing prices of the Hannover Rück SE share on all trading days of the first full calendar month of the allocation year in question. The current market price of the Hannover Rück SE share at the time when stock appreciation rights are exercised is determined by the arithmetic mean of the closing prices of the Hannover Rück SE 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 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 2007 and 2009 to 2011 gave rise to commitments in the 2016 financial year shown in the following table. No allocations were made for the years 2005 or 2008.
| Stock appreciation rights of Hannover Rück SE | ||||||
| Allocation year | ||||||
| 2011 | 2010 | 2009 | 2007 | |||
| Award date | 15.3.2012 | 8.3.2011 | 15.3.2010 | 28.3.2008 | ||
| Period | 10 years | 10 years | 10 years | 10 years | ||
| Waiting period | 4 years | 4 years | 2 years | 2 years | ||
| Basic price (in EUR) | 40.87 | 33.05 | 22.70 | 34.97 | ||
| Participants in year of issue | 143 | 129 | 137 | 110 | ||
| Number of rights granted | 263,515 | 1,681,205 | 1,569,855 | 926,565 | ||
| Fair value at 31 December 2016 (in EUR) | 32.13 | 8.92 | 8.76 | 10.79 | ||
| Maximum value (in EUR) | 32.21 | 8.92 | 8.76 | 10.79 | ||
| Weighted exercise price | 32.21 | 8.92 | 8.76 | 10.79 | ||
| Number of rights existing at 31 December 2016 | 110,310 | 398,639 | 42,159 | 8,356 | ||
| Provisions at 31 December 2016 (in EUR million) | 3.25 | 3.56 | 0.37 | 0.09 | ||
| Amounts paid out in the 2016 financial year (in EUR million) | 4.40 | 2.73 | 0.18 | 0.03 | ||
| Expense in the 2016 financial year (in EUR million) | 0.65 | 0.54 | – | (0.05) | ||
The existing stock appreciation rights are valued on the basis of the Black-Scholes option pricing model.
The calculations were based on the price of the Hannover Re share of EUR 103.00 as at the reference date of 15 December 2016, expected volatility of 21.09% (historical volatility on a five-year basis), an expected dividend yield of 4.61% and risk-free interest rates of -0.79% for the 2007 allocation year, -0.71% for the 2009 allocation year, -0.59% for the 2010 allocation year and -0.43% for the 2011 allocation year.
In the 2016 financial year the waiting period expired for 100% of the stock appreciation rights awarded in 2007 and 2009, for 80% of those awarded in 2010 and for 60% of those awarded in 2011. 2,443 stock appreciation rights from the 2007 allocation year, 20,809 stock appreciation rights from the 2009 allocation year, 305,726 stock appreciation rights from the 2010 allocation year and 136,746 stock appreciation rights from the 2011 allocation year were exercised. The total amount paid out stood at EUR 7.3 million.
On this basis the aggregate provisions – included in the sundry non-technical provisions – amounted to EUR 7.3 million (EUR 13.5 million) for the 2016 financial year. The expense totalled altogether EUR 1.1 million (EUR 3.6 million).
Share-Award-Plan
With effect from the 2011 financial year the Supervisory Board of Hannover Rück SE implemented a Share Award Plan for the members of the Executive Board of Hannover Re; this provides for the granting of stock participation rights in the form of virtual shares (referred to as “share awards”). The Executive Board of Hannover Re decided to adopt a Share Award Plan for certain management levels at Hannover Re as well with effect from the 2012 financial year.
The Share Award Plan replaces the cancelled Stock Appreciation Rights Plan. Please see our remarks under “Stock Appreciation Rights Plan” in this section. The share awards do not establish any claim against Hannover Re to the delivery of stock, but merely to payment of a cash amount in accordance with the conditions set out below.
The members of the Executive Board and management of Hannover Re who are eligible recipients under the Share Award Plan are those who have been allowed a contractual claim to the granting of share awards and whose service / employment relationship exists at the time when the share awards are granted and does not end through cancellation or a termination agreement on an effective date prior to expiry of the vesting period.
Share awards were granted separately for the first time for the 2011 financial year and then for each financial year (allocation year) thereafter. The first payout of share awards took place in the 2016 financial year for those share awards that had been allocated in the 2011 financial year to the eligible members of the Executive Board.
The total number of share awards granted is based on the value per share of Hannover Rück SE. The value per share is established according to the unweighted arithmetic mean of the Xetra closing prices of the Hannover Re share. In the conditions applicable to members of the Executive Board a period of five trading days before to five trading days after the meeting of the Supervisory Board that approves the consolidated financial statement for the financial year just-ended is envisaged for the calculation. For senior executives a period of twenty trading days before to ten trading days after the meeting of the Supervisory Board that approves the consolidated financial statement for the financial year just-ended has been agreed. The prices calculated in this way also determine the payout value of the share awards that have become payable. The total number of share awards granted is established by dividing the amount available for the granting of share awards to the respective eligible recipients by the value per share, rounded up to the next full share. For members of the Executive Board 20% and for senior executives 40% or 35% – according to management levels – of the defined variable remuneration shall be granted in the form of share awards.
The share awards are granted automatically without any requirement for a declaration. Following expiry of a vesting period of four years the value of one Hannover Re share calculated at the disbursement date is paid out for each share award. This value is calculated according to the provisions of the preceding paragraph.
The eligible recipient shall be paid an amount that corresponds to the sum total of the values of the share awards calculated at the disbursement date for which the vesting period of four years has expired. The amount is to be paid in the month after expiry of the determinative period for calculating the value per share according to the preceding paragraphs.
In addition, upon payment of the value of the share awards, a sum shall be paid out in the amount of the dividend insofar as dividends were distributed to shareholders. The amount of the dividend is the sum total of all dividends per share paid out during the term of the share awards multiplied by the number of share awards due for disbursement to the eligible recipient at the disbursement date. In the event of early disbursement of the share awards, the value of the dividends shall only be paid out for the period until occurrence of the event that triggers early disbursement. No pro rata allowance shall be made for dividends that have not yet been distributed.
In the event that the Board mandate or service relationship with the member of the Executive Board or the employment relationship with the manager ends, the eligible recipient shall retain his claims to payment of the value of already granted share awards after expiry of the applicable vesting period, unless such termination is based on resignation of office / voluntary termination on the part of the member of the Executive Board or voluntary termination on the part of the manager or dismissal by Hannover Re for a compelling reason. In the event of death the claims arising out of the already granted and / or still to be granted share awards pass to the heirs.
Any entitlement to the granting of share awards after leaving the company is excluded. This shall not apply with respect to claims to variable remuneration acquired (pro rata) in the last year of service of the eligible recipient in the event of exit from the company on account of non-reappointment, occurrence of the pensionable event or death.
The Share Award Plan of Hannover Rück SE gives rise to the amounts shown in the following table.
| Share awards of Hannover Rück SE | |||||||||
| Allocation year | |||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | |||||
|---|---|---|---|---|---|---|---|---|---|
| Anticipated allocation | Final allocation 2016 for 2015 | Anticipated allocation | Final allocation 2015 for 2014 | Anticipated allocation | Final allocation 2014 for 2013 | Anticipated allocation | Final allocation 2013 for 2012 | Anticipated allocation | |
| Valuation date | |||||||||
| Executive Board | 30.12.2016 | 17.3.2016 | 30.12.2015 | 17.3.2015 | 30.12.2014 | 18.3.2014 | 30.12.2013 | 14.3.2013 | 28.12.2012 |
| Senior executives | 30.12.2016 | 24.3.2016 | 30.12.2015 | 24.3.2015 | 30.12.2014 | 25.3.2014 | 30.12.2013 | 21.3.2013 | 28.12.2012 |
| Value per share award in EUR | |||||||||
| Executive Board | 102.80 | 97.64 | 105.65 | 89.06 | 74.97 | 60.53 | 62.38 | 61.54 | 58.96 |
| Senior executives | 102.80 | 95.30 | 105.65 | 87.26 | 74.97 | 61.38 | 62.38 | 59.86 | 58.96 |
| Number of allocated share awards in the allocation year | |||||||||
| Executive Board | 10,704 | 11,244 | 9,355 | 12,172 | 13,308 | 16,631 | 14,418 | 16,452 | 16,053 |
| Senior executives | 81,322 | 79,383 | 65,107 | 85,460 | 85,159 | 99,783 | 91,660 | 102,900 | 100,531 |
| Other adjustments1 | – | (284) | – | (3,047) | – | (4,795) | – | (5,756) | – |
| Total | 92,026 | 90,343 | 74,462 | 94,585 | 98,467 | 111,619 | 106,078 | 113,596 | 116,584 |
| 1 This figure results from originally granted share awards that have since lapsed. | |||||||||
| Development of the provision for share awards of Hannover Rück SE | |||||||||
| Allocation year | Total | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| in EUR thousand | 2016 | 2015 | 2014 | 2013 | 2012 | 2011 | |||
| Allocation 2011 | – | – | – | – | – | 289 | 289 | ||
| Allocation 2012 | – | – | – | – | 1,839 | 409 | 2,248 | ||
| Allocation 2013 | – | – | – | 1,426 | 1,442 | 285 | 3,153 | ||
| Allocation 2014 | – | – | 1,534 | 2,364 | 2,549 | 529 | 6,976 | ||
| Allocation 2015 | – | 1,658 | 3,102 | 4,288 | 5,020 | 1,036 | 15,104 | ||
| Provision at 31 December of the previous year | – | 1,658 | 4,636 | 8,078 | 10,850 | 2,548 | 27,770 | ||
| Allocation 2016 | 1,918 | 2,429 | 1,920 | 2,177 | 2,133 | – | 10,577 | ||
| Utilisation 2016 | – | – | – | – | – | 2,445 | 2,445 | ||
| Release 2016 | – | – | – | – | – | 103 | 103 | ||
| Provision at 31 December of the year under review | 1,918 | 4,087 | 6,556 | 10,255 | 12,983 | – | 35,799 | ||
The aggregate provision – recognised under the sundry non-technical provisions – amounted to EUR 35.8 million (EUR 27.8 million) as at the balance sheet date.
The personnel expense for share awards in the case of members of the Executive Board is spread on an accrual basis across the relevant term of the share awards or the shorter term of the service contracts; in the case of senior executives the personnel expense is spread across the relevant term of the share awards. The allocation of the financial year recognised in the expenditures on personnel totalled altogether EUR 10.6 million (EUR 15.1 million). This consists of the expense for share awards of the 2015 financial year as well as the dividend claim and the additionally earned portion of the share awards granted in earlier financial years. The value of the share awards finally granted is also influenced by movements in the share price. The sum total of the dividends included in the expenditures on personnel for earlier financial years amounted to EUR 2.0 million (EUR 1.4 million). The distributed dividend is recognised, with no allowance made for expected dividend payments. Dividend claims are recognised in the discounted amounts.
In the year under review the 22,232 share awards finally allocated in 2011 with a value of EUR 97.64 each plus the dividend entitlement of EUR 12.35 each were paid out to the eligible members of the Executive Board. The release of the provision for this tranche results from the difference between the share price of EUR 105.65 as at the last balance sheet date and the price of EUR 97.64 from March 2016 on which the payout was based.
With regard to the effects of the equity swaps taken out to hedge price risks, please see our explanatory remarks in Section 8.1 “Derivative financial instruments and financial guarantees”.