F or o u r in ve st or s success of our capital measures as well as the good underlying quality of our portfolio in both property & casualty and life & health reinsurance. This result marks the third occasion – after 2015 and 2016 – that we have achieved Group net income in excess of EUR 1 billion. The return on equity comfortably outperformed our minimum target of 900 basis points above the risk-free interest rate to reach a level of 12.2 percent. Based on this good performance, the Executive Board and Supervisory Board will propose to the Annual General Meeting that an increased dividend of EUR 5.25 per share should be distributed to you, our valued shareholders, for the 2018 financial year. The total dividend payment is split into an ordinary dividend of EUR 3.75 per share plus an unchanged special dividend of EUR 1.50 per share.
We have lost a colleague and friend in Jürgen Gräber, who played his part with exemplary dedication, a profound sense of responsibility and powerful charisma. Both within and beyond the ranks of our company he gained an enduring reputation. The successful development of Hannover Re was inextricably linked to the name of Jürgen Gräber.
Going about things differently – that is precisely what sets Hannover Re apart. Thanks to lean structures and an efficient organisation, we are able to respond quickly, flexibly and pragmatically to market opportunities and customer requirements.
Reinsurance business is founded on the comprehensive understanding and active management of risks. Our specialists therefore continuously analyse known risks with an eye to changes in their structure and probability of occurrence, while at the same time focusing on the early detection of newly emerging risks and working to provide our clients with appropriate solutions tailored to their needs. Above and beyond this, Hannover Re makes systematic efforts to identify new business opportunities in order to achieve sustainable growth and strengthen the profitable development of the company (cf. here also the Opportunity report on page 118 et seq.).
Bond markets continued to be shaped in part by a generally low level of interest rates. An exception here was once again the US dollar area, which recorded further appreciable rate increases. Pound sterling bonds similarly saw rate rises, although they were limited to the short and medium maturity segments. Yields on euro bonds, however, which had already started the year on a low level, even experienced further declines in the medium and long maturity segments. As a result, negative returns persisted well into the medium maturity range. Risk premiums on European and US corporate bonds rose – in some instances markedly – in the period under review in virtually all rating classes. For the most part, the risk premiums are still very low by historical standards owing to the declines of recent years.
The protracted low interest rate environment in Germany similarly had implications for life and health reinsurance in the area of traditional life insurance products: not only have they now lost a considerable part of their appeal, they have also to some extent been supplanted by new policies which have been adapted to the changed interest rate situation. Demand for solvency-oriented reinsurance solutions remained robust following the implementation of Solvency II and – especially for longevity business – the associated more exacting capital requirements. On a global scale the progressive demographic shift and increasing ageing of the population continue to drive stronger demand for retirement provision products – on the reinsurance as well as the insurance side. Lifestyle products, which primarily offer risk coverage tailored to protecting the policyholder’s specific life situation, are also enjoying a surge in demand. These include, in particular, policies under which the premium is linked to the insured’s health-related behaviour (e. g. fitness, nutrition). Although the purchasers of such products have hitherto tended to be in Anglo-Saxon and Asian markets, a tangible interest in this trend can now also be detected in Europe. The issue of “digitalisation ” is attracting growing attention. Requests for process optimisations and the – to some extent associated – deployment of automated underwriting systems are increasingly prevalent. Power of innovation is called for here in order not only to keep pace with the competition but also to stay one step ahead.
Property & Casualty reinsurance: Key figures for individual markets and lines in 2018 M 12
Continental Europe We group together the markets of Northern, Eastern and Central Europe as Continental Europe. The largest single market here is Germany. The premium volume for our business in Continental Europe totalled EUR 1,562.6 million (EUR 1,447.3 million) in the year under review. The combined ratio deteriorated to 97.1% (93.1%). The operating profit (EBIT) declined to EUR 189.4 million (EUR 264.3 million).
Given the intensity of the competition, we have only written risks in this segment on a highly selective basis in recent years. Positive results were, however, booked in the motor, general liability, householders’ and accident lines.
Hannover Re writes the bulk of this business in the form of proportional treaties. It ranks among the market leaders in worldwide credit and surety reinsurance and in the reinsurance of political risks. Existing accounts were expanded and new clients added in the year under review, thereby further diversifying the portfolio.
Direct business We write a large portion of our direct business in the London Market and through our Swedish branch. We were satisfied with the development of this segment despite the prevailing intense competition, even though profitability in direct business was particularly impacted by the business that we wrote in the London Market. While this year’s hurricane season was noticeably more benign and caused appreciably fewer losses, some markets and products saw hardening in the second half of the year. Rather than continuing to fall, the premium level here held stable or even trended higher. We were able to act on promising business opportunities in the year under review and enlarged our premium volume.
Its activities essentially remain centred on primary insurance, as has been the case to date. The business predominantly consists of tightly defined portfolios of niche or other non-standard business for which we provide reinsurance.
In the first six months of the year under review it remained the case that extended coverage concepts and price reductions were observed in many areas. Faced with this market environment, we wrote our business selectively and increasingly focused on major, long-established customer relationships.
We see considerable potential to further grow our agency business. Additional expansion into other African markets is also conceivable, as soon as the local regulatory authorities give their backing to cross-border reinsurance solutions.
Markets in Europe similarly showed dynamic growth. In Western and Central Europe we acquired new customers and were successful in generating new business. In Italy and Spain, for example, we enjoyed a robust business development throughout the reporting period and achieved a healthy
Digitalisation, innovation and automation have significantly influenced the entire insurance industry around the world. This trend, which was already clearly evident in the previous reporting period, continued to shape the 2018 financial year.
In the context of the complex range of issues relating to digitalisation and innovation, we have increasingly engaged in a dialogue with start-ups specialising in insurance solutions – frequently in the form of (online) platforms. The trend towards policyholders tracking and systematically evaluating their health with the aid of wearables – small, smart electronic devices worn on the body – is no longer a new one. Quite the contrary, an attractive market has grown up around digital wellness – one in which we, too, are seeking to get actively involved. Working with our cooperation partners, we offer insurance products geared to a healthy and responsible lifestyle. These products enable insurers to combine broad-ranging technical solutions for health-conscious consumers with an innovative, digital experience while at the same time providing insurance coverage. The blend of our long-standing worldwide underwriting expertise and technical innovation opens up new possibilities in risk analysis, product design and health management.
Holdings of alternative investment funds increased slightly overall. As at 31 December 2018 an amount of EUR 896.8 million (EUR 776.3 million) was invested in private equity funds; a further EUR 675.3 million (EUR 818.3 million) was attributable predominantly to investments in high-yield bonds and loans. In addition, altogether EUR 433.9 million (EUR 385.0 million) was invested in structured real estate investments. The uncalled capital with respect to the aforementioned alternative investments totalled EUR 1,326.4 million (EUR 1,201.9 million).
Hannover Re uses “Intrinsic Value Creation” (IVC) as its central value-based management tool. As part of this methodology, we apply the principles of economic allocation of equity and efficient use of debt as an equity substitute in order to achieve the lowest possible weighted cost of capital. This concept as well as the objectives and principles in accordance with which we conduct our enterprise management and capital management are described in greater detail in our remarks on value-based management on page 20 et seq. of this report.
Net unrealised gains on investments stood at EUR 346.5 million, a drop of EUR 471.8 million compared to the beginning of the year under review. This reflected the yield increases observed in the course of the reporting period, especially in the area of USD- and GBP-denominated sovereign bonds, as well as higher risk premiums on corporate bonds across all rating categories.
The annual financial statement of Hannover Rück SE – from which the balance sheet and profit and loss account in particular are reproduced here in condensed form – has been submitted to the operator of the electronic Federal Gazette and can be accessed via the webpage of the Companies
Register. This annual financial statement can also be accessed on the company’s website (www.hannover-re.com) and may be requested from Hannover Rück SE, KarlWiechert -Allee 50, 30625 Hannover, Germany.
Motor Gross premium for the motor line grew by 31.8% to EUR 2,452.3 million (EUR 1,860.8 million). The loss ratio decreased from 85.6% to 78.4%. The underwriting result closed at EUR -176.5 million after EUR -247.5 million in the previous year. An amount of EUR 27.5 million was allocated to the equalisation reserve and similar provisions, following a withdrawal of EUR 60.5 million in the previous year.
The total gross premium volume in the other lines grew by 11.9% to EUR 3,202.8 million (EUR 2,862.4 million). The net loss ratio decreased from 80.9% to 65.6%. The underwriting result came in at EUR 269.3 million after EUR -202.3 million in the previous year. An amount of EUR 39.4 million (EUR 37.2 million) was allocated to the equalisation reserve and similar provisions.
In view of the interrelations between the parent company and the Group companies and the former’s large share of business within the Group, we would refer here to our remarks contained in the section entitled “Outlook for 2019” on page 150 et seq., which also reflect the expectations for Hannover Rück SE.
Raise employee awareness of the topic of sustainability by expanding internal communication and developing a training concept
The term “compliance” can be defined as the totality of all content-related and organisational safeguards that ensure lawful conduct on the part of the Hannover Re companies, the members of their governing bodies and their employees with regard to all legal and ethical standards as well as the internal corporate policies in the major areas of the organisation and operating processes.
In the year under review work began on the creation of a Groupwide compliance plan and a consistent Group-wide Compliance Risk Matrix was elaborated in cooperation with the European locations. The compliance reports of the international offices are evaluated and analysed on an ongoing basis.
The consideration given to sustainability in our business operations relates principally to our reinsurance products and services as well as the management of our investments and is taking on added importance given the growing awareness among the general public of sustainability issues.
The health management programme, which has been expanded in recent years, continued unchanged in the year under review. Seminars and workshops geared to enhancing the resilience and relaxation skills of our staff and managers are integral components of our preventive support measures.
Last but by no means least, we took steps to further improve our occupational reintegration management, a process that is required by law in Germany. A company agreement was concluded in this regard in 2018, ensuring a harmonised internal process with the participation of all relevant areas of the company.
In a survey conducted after its completion both mentees and mentors alike expressed considerable satisfaction with the process and the individually attained learning outcomes. This positive feedback strengthened our resolve to continue the programme. Two informational events were already held in 2018, giving interested employees an opportunity to learn more about the contents and objectives and subsequently to apply for the next implementation round in 2019 / 2020.
Joint venture with HDI Global Specialty: In the year under review Hannover Rück SE and HDI Global SE already began making preparations, under the umbrella of Talanx AG, to launch a joint initiative in worldwide specialty business. To this end, the two companies are transferring their specialty activities to a new joint venture. The new company, HDI Global Specialty SE, will write agency and specialty business in lines including professional indemnity, directors’ & officers’ liability, legal expenses, sports and entertainment, aviation, offshore energy and pet and farm pack. Subject to regulatory approval, the joint venture will commence operational business on 1 January 2019.
Risk Committee Operational risk management, monitoring and coordinating body as well as implementation and safeguarding of a con- sistent Group-wide risk management culture
The available economic capital increased to EUR 13,323.1 million as at 31 December 2018, compared to EUR 13,041.0 million as at 31 December 2017 (pursuant to the final Solvency II year-end reporting for 31 December 2017). The primary factors here were the positive business result and the adoption of the volatility adjustment. The development of shareholders ’ equity was adversely impacted by, among other things, the increase in credit spreads and associated valuation declines in fixed-income securities, the large loss expenditure in property and casualty reinsurance and one-time charges in US mortality business.
The loss-absorbing effect of taxes remained stable. The slight decline in the diversification effect reflects the increase in certain key risks, namely the market risk and the underwriting risk in property and casualty reinsurance.
The short-term loss probability measured as the Value at Risk (VaR) is another vital tool used for operational monitoring and management of the market price risks associated with our securities positions. It is calculated on the basis of historical data, e. g. the volatility of the securities positions under own management and the correlation between these risks. As part of these calculations the decline in the fair value of our securities portfolio is simulated with a certain probability and within a certain period. The VaR of the Hannover Re Group determined in accordance with these principles specifies the decrease in the fair value of our securities portfolio under own management that with a probability of 95% will not be exceeded within ten trading days. A standard market model is used to calculate the VaR indicators for the Hannover Re Group; the risk model used in the previous reporting period was replaced with a more state-of-the-art variant in the year under review as part of our continuous efforts to strengthen our risk models. It is based on historical time series of relevant market parameters (equity prices, yield curves, spread curves and exchange rates). Against the backdrop of what was still a difficult capital market and interest rate environment, volatilities – especially of fixed-income assets – were again on a high level in the year under review. Based on continued broad risk diversification and the orientation of our investment portfolio, our VaR was nevertheless clearly below the VaR upper limit defined in our investment guidelines. It amounted to 0.5% (previous year: adjusted 0.5%) as at the end of the reporting period.
Further significant risk management tools – along with the various stress tests used to estimate the loss potential under extreme market conditions – include sensitivity and duration analyses and our asset / liability management (ALM). The internal capital model provides us with quantitative support for the investment strategy as well as a broad diversity of VaR calculations. In addition, tactical duration ranges are in place, within which the portfolio can be positioned opportunistically according to market expectations. The parameters for these ranges are directly linked to our calculated risk-bearing capacity.
Information on share-based payment pursuant to Item 7.1.3 of the German Corporate Governance Code is provided in section 8.3 of the notes “Sharebased payment”, page 262 et seq., and in the remuneration report with respect to the members of the Executive Board.
Measurement bases / conditions of payment for variable remuneration M 85
Name Function Type of remuneration 2018 2017 in EUR thousand 1
Members of staff on the levels of Chief Manager, Senior Manager and Manager are also able to participate in a variable remuneration system through the Group Performance Bonus (GPB). The Group Performance Bonus (GPB) is a remuneration model launched in 2004 that is linked to the success of the company. This tool is geared to the minimum return on equity of 750 basis points above the risk-free interest rate and the return on equity actually generated. For those participating in the GPB 14.15 monthly salary payments are guaranteed; a maximum of 16.7 salary payments is attainable.
The pace of growth in China is set to retreat again. Expansion will soften in the other emerging economies owing to more challenging fiscal framework conditions, but it is nevertheless expected to remain vigorous for the most part. Following an election year overshadowed by political uncertainty in Brazil and Mexico, growth in both of these Latin American powerhouse economies will pick up again in the current year. The negative growth contributions from Venezuela and Chile will likely be less marked in 2019. The Turkish economy is currently fading sharply in the midst of the crisis facing the country’s currency, and the growth rate in 2019 is expected to be just 0.4%.
The basic starting point for the world economy should nevertheless still be viewed as positive. While the general pace of expansion appears to be flagging, the resurgent emerging economies can still deliver stable growth. Just as the drop in the price of oil has the potential to hamper growth in the oil-exporting part of the world, it can stimulate growth in petroleum -processing economies.
In contrast to the situation just one year ago, alternative capital providers for ILS business took a more restrained approach in the 1 January 2019 renewals. The capacity originating from the ILS sector nevertheless remains a significant part of the reinsurance market.
Aviation After years of intense competition the consolidation drive in aviation reinsurance appears to have been largely completed. Improved conditions are evident in original business. Similarly, the rate erosion observed in non-proportional reinsurance was extensively halted in this year’s 1 January round of renewals. Based on rising premiums in the original market, we also expect a modest increase for our proportional portfolio.
No matters of special significance occured after the closing date for the consolidated financial statements.
• Certain financial assets in the balance sheet item “Other assets”
FUNIS GmbH & Co. KG 1, Hannover / Germany 100.00 EUR 106,750 11,503
Hannover Re Global Alternatives GmbH & Co. KG 1, Hannover / Germany 94.72 EUR 318,374 6,845
Argenta Underwriting No.4 Limited 1, 9, London / United Kingdom 100.00 GBP (152) –
Hannover Reinsurance Group Africa (Pty) Ltd. 1, Johannesburg / South Africa 100.00 ZAR 201,825 95,297
320AUS LLC 1, 9, Wilmington / USA 95.15 USD 92,447 3,354
Pipera Business Park S. r.l. 1, Bucharest / Romania 87.67 RON 99,320 13,069
MUA Insurance Acceptances (Pty) Ltd. 1, Cape Town / South Africa 70.00 ZAR 7,062 3,280
Hannover Re Risk Management Services India Private Limited 14, New Delhi / India 100.00 INR 49,875 (9,723)
Fixed-income securities – held to maturity 198,596 259,284 51,347 71,898 – 5,000 249,943 336,182
Total depreciation, impairments and appreciation of investments 49,093 70,905 31 44 – – 49,124 70,949
Participating interests and other invested assets, real estate funds 2,257,080 17,900 2,167,994 21,342
• ITAS Vita S.p.A., Trento, Italy, as well as the following companies included at equity within the subgroup Hannover Reinsurance Group Africa (Pty) Ltd., Johannesburg, South Africa: • Clarendon Transport Underwriting Managers (Pty) Ltd., Johannesburg, South Africa,
The following table shows combined financial information on the Hannover Re Group’s individually non-material investments in associated companies.
In addition, acquired life insurance policies measured at fair value through profit or loss were recognised under the other invested assets in an amount of EUR 38.6 million (EUR 38.2 million). Loans granted in an amount of EUR 141.1 million (EUR 107.9 million) were similarly recognised under other invested assets.
In the financial year just ended, as in the previous year, no investments were allocable to another level of the fair value hierarchy.
Change in fair value of financial instruments – 29,037 – 350 5,775
Income and expenses from level 3 financial assets and liabilities N 38 in EUR thousand
Cumulative value adjustments at 31 December of the previous year 17,391 40,468
Cumulative value adjustments at 31 December of the year under review 29,503 17,391
We would also refer to our basic remarks in section 3.1 “Summary of major accounting policies”.
This item comprises the present value of future cash flows recognised on business acquired in 2009 in the context of the acquisition of the ING life reinsurance portfolio. This intangible asset is amortised over the term of the underlying reinsurance contracts in proportion to the future premium income. The period of amortisation amounts to altogether 30 years.
Furthermore, a change is possible with respect to the assumed mortality rates and lifespans. The underlying mortality tables were adjusted by reducing the mortalities by 10% in order to determine the longevity risk. Extending the lifespans in this way would have produced a EUR 6.6 million (EUR 6.6 million) higher pension commitment at the end of the financial year.
The brokerage commissions, performance fees and similar forms of remuneration in an amount of EUR 4.5 million were realised at a point in time in the current financial year. Of this amount, EUR 4.0 million is attributable to revenues earned in the South African market. A further EUR 0.5 million is connected with activities on the Lloyd’s market in the United Kingdom.
Breakdown of taxes on income The breakdown of actual and deferred income taxes was as follows: Income tax N 85 in EUR thousand 2018 2017
more, above and beyond the aforementioned remuneration as Supervisory Board members at Group companies, the members of the Supervisory Board were not in receipt of any remuneration or benefits for personally rendered services as defined by section 5.4.6 Para. 3 of the German Corporate Governance Code.
Within the Group an amount of roughly EUR 980 thousand was subsequently paid to KPMG in 2018 for audit services dating from 2017.
• the attached consolidated financial statement complies in all material respects with IFRS, as applicable in the EU, and with the additional requirements of German law applicable pursuant to § 315e Para. 1 Commercial Code (HGB) and gives a true and fair view of the net assets and financial position of the Group as at 31 December 2018 as well as its results of operations for the financial year from 1 January to 31 December 2018 in accordance with these requirements, and
In the context of audit procedures conducted on a caseby -case basis we critically examined the key assumptions underlying an estimate and had the company provide us with corresponding justifications for the estimate that was made. Using information on the premiums expected in the previous year, we made a comparison with the actual figures and were thus able to draw conclusions about the quality of the estimates.
(c) The information provided by the company on written and estimated gross premium is contained in the sections of the notes to the consolidated financial statement entitled “Accounting policies” and “Notes on the individual items of the statement of income”.
We conducted our assurance engagement in accordance with the International Standard on Assurance Engagements (ISAE) 3000 (Revised): “Assurance Engagements other than Audits or Reviews of Historical Financial Information”, issued by the IAASB. This standard requires that we plan and perform the assurance engagement in such a way as to obtain limited assurance about whether facts and circumstances have become known to us that lead us to believe that the company’s non-financial information statement for the period from 1 January 2018 to 31 December 2018 has not been prepared, in all material respects, in conformity with §§ 315b and 315c in conjunction with 289b to 289e Commercial Code (HGB). In a limited assurance engagement the assurance procedures carried out are less extensive than for a reasonable assurance engagement, and hence a substantially lower level of assurance is obtained. The assurance procedures are selected according to the auditor’s professional judgement.
The Committee was provided with detailed reports on the recognition and measurement of the risk-oriented book of US life reinsurance business acquired in 2009 from Scottish Re (Brock portfolio) as well as on the rate increases that had been initiated. The Committee also considered the allocation, structure and profitability of the real estate portfolio. Furthermore, the Committee prepared various resolutions to be adopted by the Supervisory Board. Consideration of the US tax reform and its implications for the reinsurance business transacted by Hannover Rück SE was another focus of deliberations in the work carried out by the Finance and Audit Committee. The Committee’s discussions also gave appropriate consideration to the joint growth initiative in specialty lines between Hannover Rück SE and HDI Global SE.
Notwithstanding the high importance that the Supervisory Board attaches to the standards of good and responsible enterprise management defined in the German Corporate Governance Code, the Supervisory Board decided not to fully comply with the recommendations contained in Code Section 4.2.3 Para. 2 regarding caps on the amount of variable compensation elements in management board contracts, in Code Section 4.2.3 Para. 4 concerning a cap on severance payments in management board contracts, in Code Section 5.3.2 Para. 3 Sentence 3 concerning the Chair of the Audit Committee and in Code Section 5.3.2 Para. 3 Sentence 2 concerning the independence of the Chair of the Audit Committee. Justification for these divergences is provided in the Declaration of Conformity pursuant to § 161 Stock Corporation Act (AktG) regarding compliance with the German Corporate Governance Code, which is reproduced in the Group Annual Report as part of the Declaration on Corporate Governance (cf. page 122 et seq.). Further information on the topic of corporate governance is available on the website of Hannover Rück SE.
The Supervisory Board thus concurred with the opinions of the auditors and approved the annual financial statements and the consolidated financial statements; the annual financial statements are thereby adopted. Our proposal regarding the appropriation of the disposable profit for 2018 is in accordance with that of the Executive Board.
Property and casualty (re-)insurance: collective term for the lines of business concerned with the insurance of property, including for example liability, fire, hail or marine insurance.
Purchase cost, amortised: the cost of acquiring an asset item including all ancillary and incidental purchasing costs; in the case of wasting assets less scheduled and / or special amortisation.
Reinsurance: passing on of a primary insurer’s or reinsurer’s risks to a reinsurer.
M 01 Target attainment 20 M 02 System of value-based management: Performance Excellence (PE) combines the strategic and operational levels 21
M 17 Property & Casualty reinsurance: Breakdown of gross written premium in facultative reinsurance 44
N 38 Income and expenses from level 3 financial assets and liabilities 2017 219
N 82 Other technical expenses 249 N 83 Other income / expenses 249 N 84 Revenue categories 250 N 85 Income tax 251 N 86 Domestic / foreign breakdown of recognised tax expenditure / income 251 N 87 Deferred tax assets and deferred tax liabilities of all Group companies 252 N 88 Netting of deferred tax assets and deferred tax liabilities 252 N 89 Reconciliation of the expected expense for income taxes with the actual expense 253 N 90 Expiry of non-capitalised loss carry-forwards and temporary differences 254 N 91 Maturity structure of derivative financial