Investments are classified and measured in accordance with IAS 39 “Financial Instruments: Recognition and Measurement”.

Hannover Re classifies investments according to the following categories: held-to-maturity, loans and receivables, financial assets at fair value through profit or loss and available-forsale. The allocation and measurement of investments are determined by the investment intent.

The investments under own management also encompass investments in associated companies, real estate and real estate funds (also includes: investment property), other invested assets, short-term investments and cash.

The following table shows the regional origin of the investments under own management.

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The stated maturities may in individual cases diverge from the contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.

Variable-rate bonds (so-called “floaters”) are shown under the maturities due in one year and constitute our interest-related, within-the-year reinvestment risk.

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The carrying amount of the portfolio held to maturity is arrived at from the cost or amortised cost plus accrued interest.

Hannover Re reclassified fixed-income securities at fair values of altogether EUR 1.3 billion from the available-for-sale to the held-to-maturity portfolio. The securities gave rise to cumulative hidden reserves of EUR 46.5 million, which as a consequence of reclassification are to be amortised in the statement of income across the maturities of the instruments. These securities are permanently available to the relevant companies of the Hannover Re Group in light of cash flow projections. The intention and the ability to hold them until maturity enable the companies to reduce balance sheet volatility.

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The carrying amount of the loans and receivables is arrived at from the cost or amortised cost plus accrued interest.

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The carrying amounts of the fixed-income securities and equity securities classified as available for sale as well as the short-term investments allocated to this category correspond to their fair values, in the case of interest-bearing assets including accrued interest.

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The carrying amounts of the financial assets at fair value through profit or loss correspond to their fair values including accrued interest.

Hannover Re recognised in this category as at the balance sheet date derivative financial instruments in an amount of EUR 21.0 million (EUR 54.8 million) that are originally allocable to this item as well as fixed-income securities amounting to EUR 161.1 million (EUR 217.6 million) designated in this category.

Analysis of the fair value changes in the portfolio of fixed-income securities at fair value through profit or loss indicated that an amount of –EUR 4.1 million was due to changes in the ratings of callable bonds. This contrasted with an increase in fair values of EUR 0.6 million in the previous year.

We additionally use an internal rating method to back up this analysis. Our internal rating system is based on the corresponding credit ratings of securities assigned by the agencies Standard & Poor’s and Moody’s and in each case reflects the lowest of the available ratings.

For further information please see the explanatory remarks in Section 7.1 “Derivative financial instruments”.

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For further explanatory remarks on the impairment criteria please see Section 3.2 “Summary of major accounting policies”.

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The maximum credit risk of the items shown here corresponds to their carrying amounts.

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The maximum credit risk of the items shown here corresponds to their carrying amounts.

Public price listings are not available for companies valued at equity. The net book value of associated companies includes goodwill in the amount of EUR 18.3 million (EUR 18.4 million). For further details of our major participating interests please see Section 4 “Consolidation”.

Real estate

Real estate is divided into real estate for own use and thirdparty use (investment property). The investment property in the portfolio which is used to generate income is shown under the investments. Real estate is valued at cost of acquisition less scheduled depreciation with useful lives of at most 50 years. Own-use real estate is recognised under other assets.

Income and expenses from rental agreements are included in the investment income.

In addition, we held indirect real estate investments in the year under review in an amount of EUR 128.1 million (EUR 90.7 million).

The fair value of investment property amounted to EUR 397.2 million (EUR 305.4 million) as at the balance sheet date.

The market value of the real estate was determined using the discounted cash flow method.

The additions to this item are attributable in large part to the sharply increased investment activities of the real estate companies belonging to the Hannover Re Group.

In the year under review a property was classified as an asset held for sale pursuant to IFRS 5. The gross book value of the property amounted to EUR 5.0 million and the cumulative depreciation totalled EUR 2.6 million at the time of reclassification. The carrying amount of the reclassified property at amortised cost was EUR 2.4 million.

Other invested assets

The other invested assets consisted largely of participating interests in partnerships measured at fair value in an amount of EUR 833.8 million (EUR 779.5 million). The amortised cost of these participations amounted to EUR 612.8 million (EUR 536.4 million); in addition, unrealised gains of EUR 222.9 million (EUR 244.5 million) and unrealised losses of EUR 1.9 million (EUR 1.5 million) were recognised from these participations.

Short-term investments

This item comprises investments with a maturity of up to one year at the time of investment.

Fair value hierarchy

For the purposes of the disclosure requirements pursuant to IFRS 7 “Financial Instruments: Disclosures”, the financial instruments recognised at fair value in the balance sheet are to be assigned to a three-level fair value hierarchy. This hierarchy, which reflects characteristics of the price data and inputs used for measurement purposes, is structured as follows:

• Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities.
• Level 2: Inputs used for measurement that are based on observable market data and are not included within level 1. This level includes, in particular, prices for comparable assets and liabilities, prices on markets that are not considered active as well as inputs derived from such prices or market data.
• Level 3: Inputs used for measurement that are not based on observable market data (unobservable inputs).

The following table shows the breakdown of the financial instruments recognised at fair value into the three-level fair value hierarchy.

In the year under review financial instruments with a fair value of EUR 306.8 million (EUR 289.4 million) were no longer allocable to level 1 – as in the previous year – but rather to level 2. The reclassification was necessary owing to the reduced liquidity of the instruments. Financial instruments with a fair value of EUR 103.5 million (EUR 21.6 million), which in the previous year were recognised as level 2 instruments, were allocated to level 1 in the current reporting period. The reclassifications principally affected fixed-income securities carried as available for sale.

The following table provides a reconciliation of the fair values of financial instruments included in level 3 at the beginning of the financial year with the fair values as at 31 December of the financial year.

The breakdown of income and expenses recognised in the statement of income in the financial year in connection with financial instruments assigned to level 3 is as follows.

If models are used to measure financial instruments included in level 3 under which the adoption of reasonable alternative inputs leads to a material change in fair value, IFRS 7 “Financial Instruments: Disclosures” requires disclosure of the effects of these alternative assumptions. Of the financial instruments included in level 3 with fair values of altogether EUR 913.6 million (EUR 862.1 million) as at the balance sheet date, Hannover Re measures financial instruments with a volume of EUR 863.5 million (EUR 839.4 million) using the net asset value method, in respect of which alternative inputs within the meaning of the standard cannot reasonably be established. For the remaining financial instruments included in level 3 with a volume of EUR 50.1 million (EUR 22.7 million), the effects of alternative inputs and assumptions are immaterial.

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