7.3 Share-based payment
Stock Appreciation Rights Plan
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 share-based remuneration with cash settlement is governed by the requirements of IFRS 2 “Share-based Payment”.
For the year under review the Conditions for the Granting of Stock Appreciation Rights were cancelled by a resolution of the Supervisory Board dated 8 November 2010, insofar as the members of the company’s Executive Board could be granted stock appreciation rights on the basis of these Conditions (partial cancellation). Awarded stock appreciation rights continue to be exercisable until the end of their period of validity. For all other eligible recipients the Conditions continue to apply in the year under review.
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 criterion is the relative development of the share price in the allocation year. The benchmark used in this regard is the (weighted) RBS 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 Re.
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 other 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 arithmetic 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 arithmetic 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 2002 to 2004 as well as 2006, 2007, 2009 and 2010 gave rise to commitments in the 2011 financial year shown in the following table. No allocations were made for 2001, 2005 or 2008.
| Stock appreciation rights of Hannover Re | Allocation year | ||||||
|---|---|---|---|---|---|---|---|
| 2010 | 2009 | 2007 | 2006 | 2004 | 2003 | 2002 | |
| Award date | 08.03.2011 | 15.03.2010 | 28.03.2008 | 13.03.2007 | 24.03.2005 | 25.03.2004 | 11.04.2003 |
| Period | 10 years | 10 years | 10 years | 10 years | 10 years | 10 years | 10 years |
| Waiting period | 4 years | 2 years | 2 years | 2 years | 2 years | 2 years | 2 years |
| Basic price (in EUR) | 33.05 | 22.70 | 34.97 | 30.89 | 27.49 | 24.00 | 23.74 |
| Participants in year of issue | 129 | 137 | 110 | 106 | 109 | 110 | 113 |
| Number of rights granted | 1,681,205 | 1,569,855 | 926,565 | 817,788 | 211,171 | 904,234 | 710,429 |
| Fair value at 31.12.2011 (in EUR) | 5.09 | 7.65 | 6.93 | 7.57 | 12.49 | 8.99 | 8.79 |
| Maximum value (in EUR) | 8.92 | 8.76 | 10.79 | 10.32 | 24.62 | 8.99 | 8.79 |
| Weighted exercise price | — | — | 5.85 | 9.93 | 12.40 | 8.99 | n.a. |
| Number of rights existing at 31.12.2011 | 1,665,960 | 1,495,890 | 844,231 | 252,443 | 119,439 | 2,714 | — |
| Provisions at 31.12.2011 (in EUR million) |
1.72 | 8.35 | 5.59 | 1.91 | 1.49 | 0.02 | — |
| Amounts paid out in the 2011 financial year (in EUR million) |
— | — | 0.24 | 4.34 | 0.09 | 0.01 | 0.02 |
| Expense in the 2011 financial year (in EUR million) |
1.72 | 4.45 | (0.27) | (0.23) | (0.47) | — | — |
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 35.985 as at the reference date of 14 December 2011, expected volatility of 41.33% (historical volatility on a five-year basis), a dividend yield of 5.56% and risk-free interest rates of 0.27% for the 2003 allocation year, 0.51% for the 2004 allocation year, 1.05% for the 2006 allocation year, 1.31% for the 2007 allocation year, 1.79% for the 2009 allocation year and 1.99% for the 2010 allocation year.
In the 2011 financial year the waiting period expired for 100% of the stock appreciation rights awarded in 2002 to 2004, 80% of those awarded in 2006 and 60% of those awarded in 2007.
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 | 2010 | 2009 | 2007 | 2006 | 2004 | 2003 | 2002 |
| Granted in 2003 | — | — | — | — | — | — | 710,429 |
| Exercised in 2003 | — | — | — | — | — | — | — |
| Lapsed in 2003 | — | — | — | — | — | — | 23,765 |
| Number of options at 31.12.2003 |
— | — | — | — | — | — | 686,664 |
| Granted in 2004 | — | — | — | — | — | 904,234 | — |
| Exercised in 2004 | — | — | — | — | — | — | — |
| Lapsed in 2004 | — | — | — | — | — | 59,961 | 59,836 |
| Number of options at 31.12.2004 |
— | — | — | — | — | 844,273 | 626,828 |
| Granted in 2005 | — | — | — | — | 211,171 | — | — |
| Exercised in 2005 | — | — | — | — | — | — | 193,572 |
| Lapsed in 2005 | — | — | — | — | 6,397 | 59,834 | 23,421 |
| Number of options at 31.12.2005 |
— | — | — | — | 204,774 | 784,439 | 409,835 |
| Granted in 2006 | — | — | — | — | — | — | — |
| Exercised in 2006 | — | — | — | — | — | 278,257 | 160,824 |
| Lapsed in 2006 | — | — | — | — | 14,511 | 53,578 | 22,896 |
| Number of options at 31.12.2006 |
— | — | — | — | 190,263 | 452,604 | 226,115 |
| Granted in 2007 | — | — | — | 817,788 | — | — | — |
| Exercised in 2007 | — | — | — | — | 12,956 | 155,840 | 110,426 |
| Lapsed in 2007 | — | — | — | 8,754 | 13,019 | 38,326 | 10,391 |
| Number of options at 31.12.2007 |
— | — | — | 809,034 | 164,288 | 258,438 | 105,298 |
| 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 |
| Granted in 2009 | — | — | — | — | — | — | — |
| Exercised in 2009 | — | — | — | — | 1,500 | 79,262 | 560 |
| 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 |
| Granted in 2010 | — | 1,569,855 | — | — | — | — | — |
| Exercised in 2010 | — | — | 10,399 | 95,380 | 29,832 | 52,581 | 7,682 |
| Lapsed in 2010 | — | 34,255 | 8,380 | 2,642 | — | — | — |
| Number of options at 31.12.2010 |
— | 1,535,600 | 889,858 | 691,751 | 126,622 | 3,316 | 2,365 |
| Granted in 2011 | 1,681,205 | — | — | — | — | — | — |
| Exercised in 2011 | — | — | 41,583 | 437,491 | 7,183 | 602 | 2,365 |
| Lapsed in 2011 | 15,245 | 39,710 | 4,044 | 1,817 | — | — | — |
| Number of options at 31.12.2011 |
1,665,960 | 1,495,890 | 844,231 | 252,443 | 119,439 | 2,714 | — |
2,365 stock appreciation rights from the 2002 allocation year, 602 stock appreciation rights from the 2003 allocation year, 7,183 stock appreciation rights from the 2004 allocation year, 437,491 stock appreciation rights from the 2006 allocation year and 41,583 stock appreciation rights from the 2007 allocation year were exercised. The total amount paid out stood at EUR 4.7 million.
On this basis the aggregate provisions – included in the sundry non-technical provisions – amounted to EUR 19.1 million for the 2011 financial year (EUR 18.6 million). The expense totalled altogether EUR 5.2 million (EUR 9.4 million).
Share Award Plan
With effect from the 2011 financial year the Supervisory Board of Hannover Re resolved to implement 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”) and encompasses 20% of the defined variable remuneration. The Share Award Plan replaces the Stock Appreciation Rights Plan that was cancelled with effect from the year under review. Please see our remarks under “Stock Appreciation Rights Plan” in this section. With effect from the 2012 financial year the Executive Board of Hannover Re has resolved that this plan shall also be adopted for certain managerial levels at Hannover Re.
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 of Hannover Re who are eligible recipients under the Share Award Plan are those who have been allowed an entitlement to the granting of share awards pursuant their contract of employment and whose 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 are granted separately to the members of the Executive Board for the first time for the 2011 financial year and then for each financial year (allocation year) thereafter.
The total number of share awards granted is based on the value per share of Hannover Re. The value per share is established according to the unweighted arithmetic mean of the Xetra closing prices of the Hannover Re share in 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. The total number of share awards granted is established by dividing the amount available for the granting of share awards to the relevant member of the Executive Board (20% of the defined variable remuneration) by the value per share, rounded up to the next full share.
The share awards are granted automatically without any requirement for a declaration by Hannover Re or the member of the Executive Board. 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 member of the Executive Board 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. Any taxes and social security contributions payable shall be deducted.
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 period 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.
If the Board mandate or the employment relationship with the member of the Executive Board ends, the member of the Executive Board shall retain his claims to payment of the value of already granted share awards after expiry of the vesting period, unless the termination of the Board mandate or contract of employment is based on (i) resignation of office/voluntary termination on the part of the Board member with the exception of resignation/termination by the Board member for a compelling reason, (ii) non-acceptance by the Board member of a contract extension offered on at least the same contract terms (exception: the Board member has reached the age of 60 and served as a member of the Executive Board for two terms of office), (iii) extraordinary termination without notice of the Board member’s contract of employment by Hannover Re for a compelling reason, or (iv) dismissal of the Board member for a compelling reason within the meaning of § 84 Para. 3 German Stock Corporation Act (exception: withdrawal of confidence).
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. All share awards including the dividend shall be paid out to the eligible party irrespective of any remaining vesting period at a disbursement date to be determined once the status as heir has been documented to Hannover Re. The value of all share awards shall be determined by the value per share of Hannover Re calculated as at this disbursement date.
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 member of the Executive Board in the event of exit from the company on account of non-reappointment, occurrence of the pensionable event or death.
If a change occurs in the share capital of Hannover Re or restructuring measures are carried out during the period of the Share Award Plan which directly impact the share capital of Hannover Re or (as in the case of a stock split or reverse stock split) the total number of shares issued by Hannover Re (in each case referred to as a “structural measure”), and if this results in a (positive or negative) change in the value of the share awards of cumulatively 10% or more, Hannover Re shall appropriately adjust the method of calculating the value of the individual share awards or the number of share awards in order to offset the change in value of the share awards caused by the structural measure.
The adjustment shall be made by the Supervisory Board of Hannover Re in such a way that the total value of the share awards granted to a Board member immediately after implementation of the structural measure corresponds as closely as possible to the total value of the share awards immediately before implementation of the structural measure.
The Share Award Plan is recognised as share-based payment with cash settlement.
The provisional fair value amounts to EUR 38.325 per share with a probable allocation of altogether 24,390 shares plus the total present value of the dividend entitlements acquired until the end of the period. No allowance is made for expected dividend payments. No entitlements from dividends in the year under review had arisen as at the balance sheet date. The fair value is measured according to the market price of the share on the valuation date (30 December 2011). In this context, the share price is multiplied by the probable number of shares to be allocated. The regular determination of the value per share according to the unweighted arithmetic mean of the Xetra closing prices of the Hannover Re share in 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 gives rise to an adjustment of the fair value recognised in the present consolidated financial statement and of the number of share awards to be granted; this adjustment is recognised in the year subsequent to the balance sheet date.
The personnel expense from share awards is spread on an accrual basis across the period of the contracts of employment of the Board members. Personnel expenses of EUR 0.2 million were allocated to the provision for share awards for the first time in the year under review in the context of the proportionate write-up of fair values. The amount is shown under the sundry provisions.