Other information

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 Hannover Re Group’s senior 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 criterion is achievement of the target performance defined by the Supervisory Board, which is expressed in terms of the diluted earnings per share (EPS) calculated in accordance with IAS 33 “Earnings per Share”. 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 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% (tranches two to four of each allocation year) of the stock appreciation rights 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 of Hannover Re decided to extend the waiting period accordingly for the other members of the Group’s senior 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 20 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, 2006, 2007 and 2009 gave rise to the following commitments in the 2010 financial year. No allocations were made for 2001, 2005 or 2008.

Stock appreciation rights of Hannover Re

Allocation year

2009

2007

2006

2004

2003

2002

2000

Award date

15.03.2010

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

10 Years

Waiting period

2 Years

2 Years

2 Years

2 Years

2 Years

2 Years

2 Years

Basic price (in EUR)

22.70

34.97

30.89

27.49

24.00

23.74

25.50

Participants in year of issue

137

110

106

109

110

113

95

Number of rights granted

1,569,855

926,565

817,788

211,171

904,234

710,429

1,138,005


Fair value at 31.12.2010 (in EUR)

7.30

7.86

9.77

16.16

8.99

8.79

5.49

Maximum value (in EUR)

8.76

10.79

10.32

24.62

8.99

8.79

5.49

Weighted exercise price

1.52

5.32

8.51

8.99

8.79

5.49

Number of rights existing at 31.12.2010

1,535,600

889,858

691,751

126,622

3,316

2,365

Provisions at 31.12.2010 (in EUR million)

3.90

6.10

6.48

2.05

0.03

0.02

Amounts paid out in the 2010 financial year (in EUR million)

0.02

0.50

0.25

0.49

0.07

0.01

Expense in the 2010 financial year (in EUR million)

3.90

2.40

2.53

0.59

0.01

In the 2010 financial year the waiting period expired for 100% of the stock appreciation rights awarded in 2000 and 2002 to 2004, 60% of those awarded in 2006 and 40% of those awarded in 2007. 1,503 stock appreciation rights from the 2000 allocation year, 7,682 stock appreciation rights from the 2002 allocation year, 52,581 stock appreciation rights from the 2003 allocation year, 29,832 stock appreciation rights from the 2004 allocation year, 95,380 stock appreciation rights from the 2006 allocation year and 10,399 stock appreciation rights from the 2007 allocation year were exercised. The total amount paid out stood at EUR 1.3 million.

The stock appreciation rights of Hannover Re developed as follows:

Development of the stock appreciation rights of Hannover Re/Number of options

Allocation year

2009

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

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

Granted in 2010

1,569,855

Exercised in 2010

10,399

95,380

29,832

52,581

7,682

1,503

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

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 41.38 as at 22 December 2010, expected volatility of 39.69% (historical volatility on a five-year basis), a dividend yield of 5.32% and risk-free interest rates of 1.02% for the 2002 allocation year, 1.39% for the 2003 allocation year, 1.76% for the 2004 allocation year, 2.38% for the 2006 allocation year, 2.64% for the 2007 allocation year and 3.05% for the 2009 allocation year.

On this basis the aggregate provisions, which are recognized in the sundry non-technical provisions, amounted to EUR 18.6 (10.5) million for the 2010 financial year. The expense totaled altogether EUR 9.4 (7.5) million.