Investments (excl. funds withheld by ceding companies) 42,197.3 +5.3% 40,057.5 41,793.5 39,346.9 36,228.0
Earnings per share (basic and diluted) in EUR 8.79 +10.5% 7.95 9.71 9.54 8.17
Market capitalisation at year- end 14,194.3 +12.2% 12,650.6 12,397.4 12,741.1 9,041.2
Combined ratio (property and casualty reinsurance) 4 96.5% 99.8% 93.7% 94.4% 94.7%
Large losses as percentage of net premium earned (property and casualty reinsurance) 5 7.9% 12.3% 7.8% 7.1% 6.1%
We transact all lines of property & casualty and life & health reinsurance and are present on all continents with more than 3,300 staff. Established in 1966, the Hannover Re Group today has a network of more than 170 subsidiaries, branches and representative offices worldwide. The German business of the Hannover Re Group is transacted by our subsidiary E+S Rück.
The rating agencies most relevant to the insurance industry have awarded both Hannover Re and E+S Rück outstanding financial strength ratings: Standard & Poor’s AA- “Very Strong” and A.M. Best A+ “Superior”.
Further information 287 Branch offices and subsidiaries of the Hannover Re Group abroad 287
This should not, however, blind us to the fact that 2018 has also posed special challenges. In life and health reinsurance, for example, we had to absorb a substantial one-time strain from our US mortality portfolio relating to a large block of business acquired at the beginning of 2009. In this regard we were compelled to exercise our right to raise reinsurance rates across a broad front; this led to extensive treaty recaptures, which in turn adversely impacted the statement of income for 2018. Allowing for the necessary release of an expense reserve set aside for the same business, we incurred one-off charges in the order of EUR 200 million before tax. In property and casualty reinsurance, too, we were faced with significant major losses that exceeded – albeit only marginally – our large loss budget. The fact that we still generated Group net income of EUR 1.06 billion can be attributed to the outstanding
The premium income booked by Hannover Re in the year under review grew to EUR 19.2 billion. This is equivalent to a gain of 11.6 percent adjusted for exchange rate effects and is particularly notable for dynamic expansion in property and casualty reinsurance, where we achieved a currency-adjusted increase of 16.2 percent. In life and health reinsurance, too, we boosted the premium volume by 4.6 percent adjusted for exchange rate effects, an increase that is within our target corridor of 3 to 5 percent per year.
Furthermore, we increased the operating profit (EBIT) in both life & health and property & casualty reinsurance by double-digit percentages. This is all the more remarkable in the case of life and health reinsurance bearing in mind the aforementioned one-time charges.
In 2018, as in prior years, we generated another very pleasing profit contribution from our investments; even in times where the state of capital markets is becoming increasingly difficult and challenging, our asset portfolio has shown itself to be a reliable source of income. The performance of our real estate portfolio has proven to be particularly gratifying. With a return on investment of 3.2 percent from assets under own management we comfortably beat the minimum target of 2.7 percent that we had set ourselves for 2018. This can be attributed not least to the continued very positive cash flow from operating activities, which once again amounted to more than EUR 2 billion in 2018 and was a contributory factor in the favourable development of the investment portfolio.
Among all the developments affecting our company in 2018, it is with our deepest regret that we must report one very sad event. Jürgen Gräber, a long-standing member of our Executive Board, passed away suddenly and entirely unexpectedly in November 2018. We shall miss Jürgen Gräber as a friend and esteemed colleague, and we shall cherish the memory of his considerable service to Hannover Re.
As 2019 got underway HDI Global Specialty SE, the joint venture undertaken by our specialty insurer Inter Hannover SE and HDI Global SE, commenced its business operations. We are convinced that Inter Hannover SE, which is at the heart of this joint venture, will be able to grow even more successfully in this new configuration. As Hannover Re, we are now in a position to focus on our core business of reinsurance. At the same time, we shall continue to participate in the development of the company’s specialty business through a corresponding quota share reinsurance arrangement, and we can thus expect to share in the company’s successful development on a long-term basis.
In life and health reinsurance we expect to see a substantial surge in profitability for 2019. This is because, thanks to the portfolio management actions successfully implemented in 2018, the strains on this business will be substantially lighter in 2019. The good underlying quality of our book of worldwide life and health reinsurance as well as our US financial solutions business will therefore be more clearly reflected in the result.
After graduating in economics Jürgen Gräber embarked on his professional career in 1981 as an underwriter with Hannover Re. In 1997 he was appointed to the Executive Board, most recently overseeing the coordination of the Property&Casualty reinsurance business group. Over the years Jürgen Gräber took on a broad range of regional and specialist responsibilities. His knowledge and energy have left an indelible mark on our company.
Our considerable performance capability is entirely at the service of our customers. We concentrate on what matters. Purposeful and efficient in our approach and assisted by flat hierarchies and the extensive decision-making powers assigned to our highly skilled and dedicated staff around the world, we deliver tailor-made solutions for our clients.
The Hannover Re share • Share performance of 17.1% including reinvested dividends • Proposed dividend of EUR 3.75 plus special dividend of EUR 1.50 per share above the previous year’s level
Capital markets proved to be highly volatile and challenging in the year under review in the face of numerous geopolitical and economic issues. The relatively carefree year enjoyed by investors in 2017 thanks to low interest rates, low inflation and robust economic growth gave way to a marked shift in sentiment in 2018 against the backdrop of the threat and initiation of tariff and trade wars between the United States and China, the repeated flare-up of concerns around Italy’s stability and the protracted lack of clarity surrounding the outcome of Brexit negotiations. While factors such as the overhaul of international trade agreements and increasing challenges associated with forming a government in Germany had little impact on financial markets in the first quarter, hope of real growth stimuli materialised in the US at the start of the year in the shape of large-scale tax reform. The picture that became evident globally as the year progressed was a nuanced one. While China maintained its growth impetus, central banks in other emerging economies were compelled to adopt a significantly tighter monetary policy in order to protect their currencies. This led to an appreciable softening in the pace of growth and initial price reactions on capital markets.
The performance of the MDAX, which entered the year at 26,201 points and touched its highest level of 27,455 on 19 January 2018, was not significantly better. It moved sideways in the months that followed, albeit showing elevated volatility. The MDAX ultimately closed out the year down by 17.6% at 21,588. The S&P 500 and Dow Jones Industrial indices fared less poorly, retreating by 5.2% and 6.7% respectively on the year thanks to support from growth stimuli associated with US tax reform. The MSCI World index ended the year 8.8% lower at 1,920 points.
The Hannover Re share stood at EUR 104.90 going into the year. By 3 January 2018 it had already touched its lowest point of the year at EUR 104.70. Against the backdrop of the numerous large losses incurred in 2017, Hannover Re made the most of the opportunities on the reinsurance markets in the treaty renewals as at 1 January 2018 and substantially expanded its portfolio in keeping with the company’s selective and margin-focused underwriting policy. In this context the share price rose steadily until March and remained stable through the second quarter. With a view to stemming the
Based on the year-end closing price of EUR 117.70, Hannover Re’s market capitalisation totalled EUR 14.2 billion at the end of the 2018 financial year, an increase of EUR 1.5 billion or 12.2% compared to the previous year’s figure of EUR 12.7 billion. According to the rankings drawn up by Deutsche Börse AG, the company placed fifth in the MDAX at the end of December with a free float market capitalisation of EUR 7,146.4 million and eighteenth with a trading volume of EUR 4,921.5 million over the past twelve months.
With a book value per share of EUR 72.78 the Hannover Re share showed a price-to-book (P / B) ratio of 1.62 at the end of the year under review; compared both to the average MDAX P / B ratio of 1.55 as at year-end and the P / B ratio for the peer group, the share thus continues to be significantly better valued.
The Executive Board and Supervisory Board intend to propose to the Annual General Meeting on 8 May 2019 that a dividend of EUR 3.75 plus a special dividend of EUR 1.50 per share should be distributed. The total dividend of EUR 5.25 is thus EUR 0.25 higher than in the previous year. In keeping with the previous year, the special dividend will be paid as a capital management measure because the company’s capitalisation continues to exceed the required capital. Based on the year-end closing price of EUR 117.70, this produces a dividend yield of 4.5%.
The Annual General Meeting of Hannover Rück SE was held on 7 May 2018 at Hannover Congress Centrum (HCC). Altogether, including postal ballots around 82% of the share capital (previous year: 77%) was represented.
In his address to shareholders Chief Executive Officer Ulrich Wallin took the opportunity to look back on the 2017 financial year, which was notable for significantly more loss events after five comparatively benign years. In particular, hurricanes Harvey, Irma and Maria – along with other natural catastrophes – inflicted heavy insured losses. Hannover Re, in common with other market players, was substantially impacted. The company nevertheless generated a result that translated into a return on equity of 10.9% and comfortably beat the minimum target of 900 basis points above the risk-free interest rate. Bearing in mind the loss experience, the Group net income of EUR 959 million constituted a satisfactory result.
All voting results and the attendance were published on the company’s website following the Annual General Meeting. The next Annual General Meeting will be held on Wednesday, 8 May 2019 in Hannover.
The Executive Board and representatives of the Investor Relations department cultivated the dialogue with institutional investors continuously throughout the financial year just ended. The focus of their efforts remained on the financial centres of Europe and North America. While the number of capital market conferences attended was unchanged year-onyear at 17, the interest shown by institutional investors in onsite visits in the context of roadshows was sharply lower. While the latter were down by almost half compared to the previous year, the company nevertheless noted a substantial rise in demand among investors for visits to its Hannover headquarters as well as individually tailored conference calls. As the year got underway a particularly pivotal topic of discussion was the impact of the US tax reform on Hannover Re. As the months passed the negative earnings situation in US mortality business came to play a prominent role, as did the countermeasures taken by the company and their implications for the full-year profit guidance.
In the year just ended Hannover Re once again provided information about its achievements as a responsible enterprise in the form of a stand-alone sustainability report drawn up in accordance with the current internationally recognised reporting standards of the Global Reporting Initiative (GRI). Based on its seventh Sustainability Report, the company’s sustainability performance was assessed by more than ten rating agencies, including RobecoSAM, MSCI, FTSE4Good, Sustainalytics, ISS, VigeoEIRIS and oekom research. Furthermore, Hannover Re conducted a stakeholder survey with an external partner in the financial year just ended with the aim of identifying non-financial matters of material significance to the company’s business activities. In this context consideration was given to the various materiality approaches of the Global Reporting Initiative (GRI), which forms the basis of the company’s extensive annual Sustainability Report, and to the CSR Directive Implementation Act, on which the non-financial information statement is based. Representatives of the following stakeholder groups were surveyed: clients, brokers, the capital market, employees, non-governmental organisations and the public sector. The findings were incorporated for the first time into the Group non-financial information statement, which is part of the Group management report.
Our share register showed some 51,000 shareholders at the end of the year, another increase in the number of shareholders year-on-year (48,000). The largest shareholders as at year-end were Talanx AG with 50.2% and the asset manager BlackRock, Inc., with a reported 3.05% and Deutsche Asset Management Investment GmbH with 3.02% of the voting rights. Of the remaining shares outstanding, by far the bulk – at 37.8% – were held by other institutional investors such as banks, insurers and investment companies (previous year in total: 35.5%); private investors held 8.9% (11.2%). Our shareholders include investors who pay particularly close attention to sustainability criteria.
Institutional investors (including BlackRock, Inc. 3.1% and Deutsche Asset Management Investment GmbH, 3.0%)
United Kingdom 6.4% France 5.2% Canada 1.7% Rest of Europe 0.7% Rest of world 34.4% United States 22.2% Germany
By the end of the year 30 analysts had handed down opinions on Hannover Re: three analysts (nine) recommended the Hannover Re share as “buy” or “overweight”. Altogether 17 opinions (18) were a “hold”, making this the most common. “Underweight” or “sell” recommendations were issued a total of ten (five) times. The analysts’ average price target continued to move higher in the year under review from EUR 110.49 at the start of the financial year to EUR 116.20 at yearend. This development is particularly pleasing in view of what is still a relatively superior valuation measured against peer companies.
Market capitalisation at year-end in EUR million 14,194.3 12,650.6 12,397.4 12,741.1 9,041.2
Equity attributable to shareholders of Hannover Rück SE in EUR million 8,776.8 8,528.5 8,997.2 8,068.3 7,550.8
With a gross premium volume of more than EUR 19 billion, the Hannover Re Group is the fourth-largest reinsurer in the world. Hannover Rück SE is a European Company, Societas Europaea (SE), based in Hannover, Germany. We transact reinsurance in our Property & Casualty and Life & Health business groups.
We also strive for the broadest possible diversification and hence an efficient risk balance. This is achieved by accepting reinsurance risks with mostly little or no correlation in our Property & Casualty and Life & Health business groups across all lines of business as well as by maintaining a global presence. In conjunction with our capital management, this is the key to our comparatively low cost of capital.
Our integrated system of enterprise management constitutes the basis for attainment of our strategic objectives. Located at its core are, first and foremost, our profit and growth targets, which are summarised for the Group and its business groups in the so-called target matrix. In addition to traditional performance indicators geared to the IFRS balance sheet, our system of strategic targets also includes economic targets derived from our internal capital model approved by the regulator and from the economic equity pursuant to Solvency II reporting. The targets are regularly analysed and adjusted in the context of the strategy review conducted at periodic intervals. Thus, for example, with effect from the strategy cycle commencing in 2018 we added a target for our solvency ratio to the target matrix. In general terms, our primary focus is on medium- and long-term attainment of the strategic targets.
Growth in earnings per share ≥ 5% 10.5% -18.2% 1.8% -2.7%
The adjusted economic profit is comprised of two factors: the IFRS Group net income recognised after tax and the change in the balancing items for differences between economic valuations and amounts stated in the IFRS balance sheet. By way of the latter we make allowance in the value determination for changes in the fair values of assets not recognised in income under IFRS as well as for the change in economic effects in the technical Solvency II balance sheet items that are not recognised in the IFRS balance sheet. In addition, interest on hybrid capital already recognised in the IFRS Group net income and the non-controlling interest in profit and loss are included back in the calculation.
Intrinsic Value Creation and excess return on capital allocated M 03 in EUR million
A number of IFRS-based financial performance indicators are also embedded in our strategic system of targets and coordinated with our parameters for value creation derived from the internal capital model. We use these indicators for operational management within the year, in part because they are available promptly and also because they already provide initial pointers as to whether we are likely to achieve our higher-order strategic objectives. These are for both business groups the growth in gross premium, for property and casualty reinsurance the combined ratio, for life and health reinsurance the EBIT growth and for the Group as a whole the return on investment. Non-financial performance indicators, on the other hand, are not used for operational management within the year.
Research and development Exploring market trends and developing innovative products are tasks assigned to the individual market units at Hannover Re. In addition, business opportunities and innovations that cut across markets and segments are coordinated by the “Regulatory Affairs and Innovation” team and pursued by means of interdisciplinary projects in which various market and service units participate. In this way, we develop products and solutions that deliver value added both for Hannover Re and for our clients. By way of example, our move to give capital market players direct access to insurance risks as far back as the mid-1990s through our “K” transactions puts us among the industry pioneers. The intervening years have seen the subsequent evolution of a market for so-called insurance -linked securities, which is one of the fastest growing markets in the insurance sector. Another example of Hannover Re’s development activities is our own internal model for risk management under Solvency II that caters to the requirements of various stakeholders (regulators, rating agencies, capital providers) and was one of the first in Europe to be approved by a national financial regulator (Federal Financial Supervisory Authority = BaFin). Not only that, through our active involvement and the provision of financial assistance we support scientific initiatives geared to developing products, solutions or markets that will be crucial success factors going forward in the viability of any reinsurance undertaking.
Expertise on demand hr | equarium, Hannover Re’s exclusive online platform, brings together digital innovators, insurtechs and insurance companies looking to shape the future of insurance. Digital disruption, shifting demographics and evolving buyer preferences have created a challenging operating environment for insurers. Today, more than ever, product and distribution innovation are crucial factors for insurers to stay ahead of their competition and to meet consumer needs.
Although insurtechs are offering a wide range of solutions and services along the insurance value chain, many of our clients find it challenging to cut through the noise in order to find the best-fit solution. Start-up insurtechs, on the other hand, require direct access to insurance decision makers to market their solutions at lowest possible cost.
Innovation is crucial for insurers to stay ahead of their competition
Report on economic position Macroeconomic climate and industry-specific environment • Global economic growth on a par with the previous year • Low interest rate environment an ongoing drag on the insurance industry • Capital markets subject to continued volatility • Considerable losses again incurred from natural catastrophes
The growth of the world economy lost momentum in 2018. The increase in global gross domestic product (GDP) was on a par with the previous year at 3.7% (previous year: 3.7%). Two major reasons here were rising trade tensions and the tightening of monetary policy in the United States. The latter prompted a reversal in the flow of international capital, hence putting the brakes on expansion first and foremost in emerging markets. After a moderate opening quarter global output put on another vigorous surge going into the summer, before suffering a sharp drop in impetus from the third quarter onwards. While business sentiment in advanced economies picked up again towards year-end, it remained depressed in emerging nations. This was exacerbated by a worsening economic outlook in China.
While economic developments across countries had moved in step with one another in the previous year, the picture in 2018 was more nuanced: the pace of expansion in the US gained added momentum from fiscal measures, whereas in the Eurozone and Japan the economy slowed. In emerging economies the story was a similar one: growth in manufacturing output eased only marginally in many Asian countries, in Russia and in parts of Latin America, while Argentina and Turkey slipped into recession.
United States The trade measures adopted by the US since the beginning of 2018 in pursuit of its economic policy goals significantly aggravated the potential for conflict not only with China but also with western industrialised nations. So far, however, this has not adversely impacted the upward trend in the country’s economy. Whereas in other advanced industrial nations the economy slowed appreciably in the third quarter, GDP growth in the US was only a little softer than in the previous quarter. Over the year as a whole US manufacturing output rose by 0.7 percentage points to 2.9% on the back of normal capacity utilisation. Unemployment continued to fall year-on-year to an extremely low level of 3.9%. The increase of 2.5% in consumer prices was again more marked than in the previous year.
Europe The Eurozone economy was unable to sustain the vigorous upward course that it had charted in the previous year: the pace of growth slowed by 0.6 percentage points year-on-year to 1.9%. The economy already suffered a sharp drop in momentum in the first six months, only to lose further impetus in the second half of the year. Domestic economic forces were even more crucial to driving expansion in 2018 than in the previous year. The role played by external factors diminished against a backdrop of falling imports and exports. While capital expenditure rose again slightly thanks to a favourable interest rate environment, private consumption expanded at a considerably reduced pace. Government consumption expenditures were also substantially more restrained than in the previous year.
Germany In 2018 the German economy was able to sustain the upswing seen in recent years. Growth is, however, progressively grinding to a halt. Indeed, economic output actually contracted for the first time in three years in the third quarter. The reasons – productions disruptions in Germany’s vitally important automobile manufacturing industry and transportation difficulties on inland waterways – are merely temporary in nature. Nevertheless, businesses are finding it increasingly difficult to keep expanding production at a vigorous pace in view of the high capacity utilisation rate. This is especially obvious in the construction sector. Viewed over the year as a whole and after working days adjustment, gross domestic product rose by 1.5%, a drop of 0.7 percentage points compared to the previous twelve months.
The jobless rate in 2018 fell to 5.2% (5.7%) and continues to trend lower. The number of persons employed domestically rose by more than 565,000. Consumer prices rose by an average of 1.9% (1.8%) over the year.
Gross domestic product in Japan increased by 0.8% year-onyear, a slower pace than in the previous year (1.9%). Both domestic consumption and exports contracted; capital spending was also sharply lower year-on-year. While business investment was still close to the growth rate recorded in the previous year, investment in housing and public-sector spending slumped heavily.
Factors such as the overhaul of international trade agreements and the troubled waters in which the German government was operating initially had little effect on financial markets, which opened the year in astonishingly robust shape. On US markets hope of real growth stimuli from the Trump administration materialised at the start of the year in the shape of large-scale tax reform. Some emerging economies found themselves in funding difficulties as a consequence of higher interest rates in the US and saw their currencies depreciate as investors withdrew their funds. Hannover Re has so far remained unaffected by the crises in Turkey and Argentina because it does not hold any direct investments in the currency of either country.
On equity markets the expectation of higher interest rates in response to an anticipated pick-up in inflation was reflected in the first quarter in corrections and sharply elevated volatility around the world. By the middle of the year things appeared to have settled back onto a calmer footing, only for the pent-up unease to flare up again on the markets – especially in the fourth quarter – with sometimes appreciable price corrections. Although the US market escaped relatively unscathed, it posted its poorest annual performance since 2008. European equities and the emerging markets sector came under even heavier pressure. European stock markets were still influenced primarily by the ECB’s ongoing expansionary monetary policy, although by year-end they were already reflecting the scaling back of bond purchases as well as comments by the President of the ECB to the effect that he anticipated a relatively vigorous surge in inflation. The stock market turmoil had scarcely any repercussions on other markets.
For more detailed remarks on the development of Hannover Re’s investments please see the “Investments” section on page 58 et seq.
The US tax reform passed by the administration at the end of 2017 came into effect in the United States on 1 January 2018. This put in place new tax regulations, include a general cut in corporate taxes from 35% to 21%, the implementation of a 30% interest expense deduction limitation as well as the elimination of the so-called “alternative minimum tax”. Likewise, special new regulations applicable to the insurance industry in the US were implemented with far-reaching implications. Furthermore, the legislative package included the roll-out of the base erosion and anti-abuse tax (BEAT) regime and hence disadvantageous tax arrangements for Group- internal retrocessions with entities considered foreign from the US perspective. In this context, the tax assessment base also includes premiums for ceded insurance risks within a corporate group. Thus, for example, premiums were initially taxed at a rate of 5% in 2018; from 2019 to 2026 they will be taxed at 10% and thereafter at 12.5%. The tax reform prompted market players to make adjustments to cession strategies and corporate structures.
The ongoing arduous negotiations between the EU and the UK following the outcome of the British population’s Brexit vote led to continuing uncertainty in the insurance industry. No agreement had been reached by year-end and markets were preoccupied with the risk of a “hard Brexit” on 31 March 2019. The lack of clarity surrounding the definitive shape of future economic and trade relations between the EU and UK as well as regarding freedom of movement for workers is, however, also generally detrimental to the national economies of the remaining EU member states since it impacts planning reliability and the readiness of companies to invest.
In the year under review, not long after the reform of European insurance supervisory law by the Solvency II Directive in 2016, the European Commission initiated the first review of the standard formula used to calculate the regulatory Solvency Capital Requirement. Among the key topics addressed were simplifications to the standard formula as well as the calibration of the interest rate risk, the premium and reserve risk in non-life insurance, the deferred taxes and the risk margin. In this regard the European Insurance and Occupational Pensions Authority (EIOPA) submitted technical advice on the delegated regulation to the European Commission in the year under review. These recommendations were based on the experience of national regulators and insurance companies themselves in the preparatory phase and early years of application of Solvency II. The Solvency II review conducted by the European Commission ran until 31 December 2018. The first comprehensive review of the Solvency II Directive by the European Commission is scheduled for 2020.
The planned adoption of the new international accounting standard IFRS 17 by the International Accounting Standards Board (IASB) continued to be an important concern in the year under review. IFRS 17 replaces the interim standard IFRS 4, which has been in force since 2005, and is intended to make it easier to compare insurers through a consistent worldwide basis for the recognition of insurance contracts. The new measurement model is expected to bring particularly far-reaching changes for the accounting of long-duration contracts. It is still too early to foresee what implications the implementation of IFRS 17 will ultimately have for the volatility of business results. At a meeting in November 2018 the IASB provisionally decided to postpone the effective date of IFRS 17 by one year. The new financial reporting standards will thus likely come into effect starting 1 January 2022, although they are only mandatory for the consolidated financial statements of capital-market-oriented insurance companies. In this context the IASB also decided to extend the temporary exemption for insurers from applying the new financial instruments standard, IFRS 9, by one year until 2022 so as to require all insurers to first apply IFRS 9 and IFRS 17 at the same time.
In Germany the government changed the formula used to determine the reference interest rate for the additional reserve for the interest rate risk (“Zinszusatzreserve’) in October, a reform that benefited both insureds and insurers. The requirement to establish this provision was adopted in 2011 to provide security for legacy contracts with high guaranteed returns in order to ensure that life insurers can still generate the interest guarantees promised to their customers even in times of sustained low interest rates. The calculation had come to be regarded as overly rigorous since it imposed an onerous burden on life insurers. The safeguarding role played by the additional reserve for the interest rate risk has been preserved even after recalibration of the calculation method; however, an interest rate corridor now prevents excessive swings in the reserve – in either direction. In this way, the expenses associated with building up the provision and the income generated from its release are better harmonised with current investment income and interest guarantee requirements. According to calculations made by the rating agency S & P, the change will bring considerable financial relief for the insurance sector.
well into double-digit percentages were again obtained for the motor liability line in the year under review, although they fell short of expectations. The basis for another adjustment to the Ogden rates was established with the passing of the Civil Liability Act 2018 on 20 December 2018. The adjustment will be made in the course of the year, which means that the reserves set aside by the various insurers and reinsurers can be corrected in 2019.
The market environment in worldwide property and casualty reinsurance remained challenging. The enormous natural catastrophe losses of the previous year prompted increases in reinsurance rates in the impacted regions and programmes, albeit on a smaller scale than anticipated. Rates for programmes that had been spared losses tended to stabilise in the year under review. This development can be attributed to unchanged intense competition, with the associated implications for pricing. At the same time, most primary insurers still enjoyed a healthy capital position, which was reflected in a correspondingly high retention and adversely impacted demand for reinsurance. As a further factor, there was no change in the considerable capacities made available by the insurance-linked securities (ILS) market in 2018, as a consequence of which supply outstripped demand and the pressure on conditions and prices remained undiminished. As the year progressed, however, a cooling could be felt in industry sentiment. As had been the case in 2017, the first half of 2018 saw a moderate large loss experience – followed by an elevated large loss incidence in the second six months. After hurricanes Harvey, Irma and Maria had left their mark on 2017, the picture in the second half of 2018 was dominated by typhoons in Japan, hurricanes and forest fires in California.
Digitalisation continued to be a topic of growing importance to the insurance industry in 2018. The focus was on developing new products, delivering more innovative customer support and optimising internal cost structures as well as business processes. Participations in and cooperative ventures with start-ups and insurtechs saw another sharp increase. This trend is expected to be sustained in the coming years.
The development of business in 2018 was impacted by, among other factors, major loss expenditure in excess of the expected level – albeit considerably lower than the heavy burden incurred in the previous year – and one-time charges resulting from steps taken to improve our US mortality business in life and health reinsurance.
In property and casualty reinsurance we continue to find ourselves facing an intensely competitive market. Even after the record losses of 2017, reinsurance capacity still clearly outstripped demand. Furthermore, additional capital originating from the ILS market left prices and conditions in the property lines under sustained pressure. We were nevertheless able to act on profitable growth opportunities as business came up for renewal. In the area of structured reinsurance we noted a sharp rise in demand on the customer side for reinsurance solutions offering solvency relief and we expanded our book of business accordingly.
We are satisfied with the result in property and casualty reinsurance. After the considerable large loss expenditure of the previous year, the underwriting result including interest and expenses on funds withheld and contract deposits improved to EUR 372.8 million (EUR 15.5 million). The operating profit (EBIT) as at 31 December 2018 increased to EUR 1,322.6 million (EUR 1,120.2 million). The EBIT margin held stable and at 12.2% it was higher than the 10% minimum target. Group net income in property and casualty reinsurance rose by 11.0% to EUR 929.1 million (EUR 837.3 million).
The result posted in life and health reinsurance was adversely affected in the year under review by one-time charges associated with treaty recaptures in our legacy US mortality portfolio. This contrasted with, among other things, the positive underlying development of our business in international life and health reinsurance.
Investment income decreased by 12.3% in the financial year to EUR 491.8 million (EUR 560.6 million) owing to lower realised gains. Of the total investment income, EUR 319.6 million (EUR 343.5 million) was attributable to assets under own management and the remaining EUR 172.2 million (EUR 217.1 million) to securities deposited with ceding companies.
The operating profit (EBIT) rose by 12.5% to EUR 275.9 million (EUR 245.2 million) on the back of the good underlying risk experience. The improved profitability is pleasing because the aforementioned recaptures in legacy US mortality business gave rise to a one-off charge to the result, but further strains going forward are thereby largely eliminated. Group net income for our Life&Health reinsurance business group increased by 7.7% to EUR 185.9 million (EUR 172.6 million).
Despite the low level of interest rates, ordinary investment income excluding interest on funds withheld and contract deposits came in slightly higher than the previous year at EUR 1,321.7 million (EUR 1,289.0 million).
Net realised gains on investments as at 31 December 2018 contracted sharply from EUR 377.1 million to EUR 127.7 million. They reverted to a normal level after the liquidation of our equity portfolio in the previous year. The impairments taken in the year under review were again only minimal.
The operating profit (EBIT) improved by 17.0% to EUR 1,596.6 million (EUR 1,364.4 million). Group net income was higher than in the previous year at EUR 1,059.5 million (EUR 958.6 million). We thus achieved our guidance of more than EUR 1 billion. Earnings per share for the Hannover Re Group stood at EUR 8.79 (EUR 7.95).
The equity position remains very robust: the equity attributable to shareholders of Hannover Re totalled EUR 8.8 billion (EUR 8.5 billion) as at 31 December 2018. The return on equity amounted to 12.2% (10.9%). The book value per share reached EUR 72.78 (EUR 70.72). Thanks to the fact that business developed largely in line with our expectations in the year under review, we were able to achieve and in some cases even substantially outperform the forecasts shown in the following table “Business development in the year under review ”.
The total policyholders’ surplus, consisting of shareholders’ equity, non-controlling interests and hybrid capital, amounted to EUR 11.0 billion (EUR 10.8 billion) as at 31 December 2018.
With the publication of the annual financial statement we are also releasing the capital adequacy ratio of the Hannover Re Group calculated in accordance with the requirements of Solvency II. It decreased relative to the previous year to a level of 245.7% as at 31 December 2018 (31 December 2017: 260.3%).
+11.6% at constant exchange rates +7.8% not adjusted for currency effects
Gross premium growth for Property & Casualty reinsurance 3 to 5% 1 +16.2% at constant exchange rates +11.8% not adjusted for currency effects
Group net income > EUR 1 billion 5 EUR 1,059.5 million 1 At constant exchange rates 2 In the context of publication of the quarterly statement as at 31 March 2018 the guidance for gross premium growth (Group) was raised to more than 10%.
The concentration of values, interdependencies between industries and stricter regulatory requirements are making the world a more complex place. As a result, demand is constantly growing for covers that provide comprehensive protection for a wide range of property and casualty risks.
In traditional reinsurance business we are well diversified. We accept risks in a variety of lines – including for example property and liability risks connected with infrastructure projects. Based on our long-standing experience we can design complex covers for portfolios comprised of diverse risks. Our financial strength also enables us to carry the associated risks.
Gross written premium in P & C reinsurance in EUR million
M 07 4.3% Latin America 4.8% Australia 8.1% Germany 13.2% Asia
Breakdown of gross premium by treaty types: M 08 proportional and non-proportional treaties by volume in % and in EUR million proportional non-proportional
In life and health reinsurance we continue to see promising business opportunities in international markets, for example in the area of individual longevity products. In US mortality business better-than-expected mortality rates and the release of an expense reserve counteracted the strains from treaty recaptures in the year under review. Future losses will be largely eliminated for the relevant treaties in subsequent years, and we therefore anticipate a substantial improvement in profitability.
Hannover Re’s shareholders’ equity continues to be robust. At the time of preparing the management report, both the business position of the Group and its financial strength remain good. With this in mind, the Executive Board and Supervisory Board will propose to the Annual General Meeting that a dividend of EUR 5.25 per share should be paid. The distribution consists of an ordinary dividend of EUR 3.75 per share and a special dividend of EUR 1.50 per share.
• Large loss expenditure of EUR 849.8 million somewhat higher than budgeted EUR 825 million • Combined ratio improves to 96.5% • Property and casualty reinsurance market challenging in the face of sustained high losses • Segment result increases by 11.0% to EUR 929.1 million
Property and casualty reinsurance markets around the world continue to be shaped by an oversupply of capital available for risk coverage. The heavy hurricane losses in the United States in 2017 and 2018 have done little to change this state of affairs. At the same time, prices and conditions are under sustained pressure from additional capacities originating from the insurance-linked securities (ILS) market. The environment in which Hannover Re is operating therefore remains challenging. Stronger demand for reinsurance covers could, however, be observed in some loss-affected regions and among certain clients.
In addition, we were thoroughly satisfied with the treaty renewals in North America as well as in Western and Eastern Europe. In the area of cyber covers, too, attractive opportunities opened up to expand our portfolio. We noted a sharp rise in demand among customers for reinsurance solutions designed to provide solvency relief, enabling us to book further appreciable gains in the structured reinsurance segment.
We were similarly satisfied with the various rounds of treaty renewals that took place during the year. In the area of natural catastrophe covers we adhered to our profit-oriented underwriting policy and the exposure consequently remained comfortably with our risk appetite, which was unchanged from the previous year. We were able to significantly improve our position on a number of sizeable customer accounts, especially in North America and Europe.
The investment income booked in the Property & Casualty reinsurance business group was very pleasing. Against a backdrop of stable ordinary investment income, the income from assets under own management contracted by 16.1% to EUR 999.3 million (EUR 1,191.5 million). The sharp decrease relative to the previous year can be attributed to the exceptionally high gains realised in that year from the liquidation of our portfolio of listed equities. With major loss expenditure coming in lower than in the previous year, the operating profit (EBIT) climbed to EUR 1,322.6 million (EUR 1,120.2 million). The EBIT margin was stable at 12.2% (12.2%). We thus achieved our minimum target of 10%. Group net income improved by 11.0% to EUR 929.1 million (EUR 837.3 million).
Earnings per share in EUR 7.70 +11.0% 6.94 7.88 7.58 6.88 1 Operating result (EBIT) / net premium earned 2 Including expenses on funds withheld and contract deposits
The price increases observed on the primary insurance side in 2017 were sustained throughout 2018. The most striking rate increases were recorded in industrial property business.
However, even lines whose performance had been particularly unsatisfactory in recent years – such as general liability and directors’ and officers’ insurance – showed positive tendencies in the year under review. Rates moved appreciably higher at the end of the year in light of further large loss events in the United States, including for example Hurricanes “Florence ” and “Michael” as well as the forest fires.
We are now authorised as a “Certified Reinsurer” in 37 US states, a status which enables us to post significantly lower collateral in favour of US-based ceding insurers. The reduction in the level of collateral from the previous 100% to just 10% for technical reserves had positive implications for our result. The situation should improve still further going forward because under the bilateral agreement signed between the United States and the European Union in September 2017 collateral requirements for business written in the US will be entirely eliminated after a transitional period of five years.
Notwithstanding the good growth already generated in 2017, the premium volume in North America increased by a further 10.8% in the year under review to EUR 1,893.2 million (EUR 1,708.3 million). The combined ratio improved to 102.5% (111.3%). Against this backdrop, the operating profit (EBIT) climbed to EUR 227.2 million (EUR 177.5 million) despite a drop in investment income.
Property & Casualty reinsurance: Breakdown of gross M 15 written premium in Continental Europe by line of business 7.5% Other 37.6% Motor 37.9% Property 17.0% Liability
In natural catastrophe business Storm “Friederike” resulted in a loss of EUR 24 million on the Group level. Localised flood events caused by heavy rainfall were also recorded. Given the increasing prevalence of natural disasters, covers for extended natural perils are likely to become ever more important.
Cyber insurance is another area of growing significance in Germany. In 2018 we continued to expand our service and pricing models in order to cater to the rising demand for these covers. In addition, we partnered with FinLeap, a fintech incubator, to create Perseus. Perseus offers SMEs a platform for insurance protection and IT solutions in connection with cyber risks.
Rest of Continental Europe Primary insurance markets in Continental Europe were once again intensely competitive in the year under review on account of surplus capacities; this was especially true of mature markets such as France and Northern Europe. The situation was particularly competitive in the fire / industrial lines and in motor business.
Growth rates in the countries of Central, Eastern and Southern Europe – for both the primary and reinsurance market – were still stronger overall than the European average. Prices largely held stable in the treaty renewals in the face of sustained intense competition. Exceptions here were loss-impacted programmes, especially in Russia, where sometimes substantial adjustments were necessary. Rates in motor business in Poland remained stubbornly on the previous year’s level in 2018 – after the sharp upward trend observed in prior years.
The premium volume for specialty lines in the year under review amounted to EUR 2,919.5 million (EUR 2,767.6 million). The combined ratio improved to 94.3% (98.8%). The operating profit (EBIT) for specialty lines increased to EUR 421.2 million (EUR 349.5 million).
The Lloyd’s of London insurance market was among those impacted by these difficult market conditions. Results in a number of marine lines were still in the red. Customers responded by scaling back or entirely discontinuing their acceptances in selected marine lines.
In view of our market position as one of the world’s leading marine reinsurers, the aforementioned losses also left their mark on our books.
The gross premium for our marine portfolio contracted by 11.3% to EUR 230.8 million (EUR 260.1 million). The underwriting result improved to EUR 125.4 million (EUR 6.6 million ) owing to the low loss expenditure. The operating profit (EBIT) increased to EUR 146.0 million (EUR 35.7 million).
The positive developments in the primary market only partially filtered through to the reinsurance side. This was to some extent due to the fact that improved results – as a reflection of the course of business – take time to show up in the reinsurers ’ books. As a further factor, the available capacity essentially remained constant aside from some minor changes. In sum, it may be stated that the market environment was more favourable than it had been one year earlier.
The premium volume for our total aviation portfolio contracted slightly in the year under review to EUR 227.2 million (EUR 247.9 million). The combined ratio stood at 84.4%. The operating profit (EBIT) of EUR 55.7 million (EUR 267.8 million ) fell well short of the previous year’s EBIT, although this had been massively influenced by the release of reserves set aside for prior underwriting years that were no longer required.
The loss experience was characterised by a stable claims frequency and loss amounts for individual claims that were on a similar level to prior years. Against this backdrop, prices and conditions were mostly unchanged on both the insurance and reinsurance side.
Gross premium consequently increased by a very pleasing 11.5% in the 2018 financial year to EUR 743.2 million (EUR 666.7 million). The combined ratio for the entire segment amounted to 85.8% (91.1%). The operating profit (EBIT) reached EUR 155.0 million (EUR 112.8 million).
With effect from 1 January 2019 we are participating in a joint venture with HDI Global SE that focuses on specialty lines in primary business. In this connection we sold the majority interest in our subsidiary International Insurance Company of Hannover SE (Inter Hannover) to the Talanx subsidiary HDI Global.
Following on from the costly 2017 financial year, natural catastrophe losses remained on a high level. In contrast to the previous year, the results posted in facultative business in 2018 also reflected a growing number of mid-sized manmade losses. This unusual accumulation of medium-sized market losses, coupled with continuing large losses, led to capacity shortages in the affected regions and market segments. We responded to the attractive business opportunities opened up by this turnaround in keeping with our prudent underwriting approach and risk appetite.
Despite a challenging year, we are satisfied with the development of our overall facultative portfolio in the financial year just ended. Along with the expenditures on catastrophe losses, substantial strains were also incurred in industrial fire insurance across all regions. The combined ratio improved only slightly on the previous year at 101.9% (103.7%). The operating profit (EBIT) came in at EUR 43.1 million (EUR 39.7 million).
Property & Casualty reinsurance: Breakdown of gross M 18 written premium in global reinsurance in EUR million
Worldwide treaty reinsurance We are thoroughly satisfied with the development of our worldwide treaty reinsurance. Gross premium income grew to EUR 2,298.3 million (EUR 1,826.7 million). The combined ratio of 93.0% was considerably better than in the previous year (96.3%). The operating profit (EBIT) increased to EUR 304.6 million (EUR 237.4 million).
Property & Casualty reinsurance: Breakdown of gross M 19 written premium in worldwide treaty reinsurance 9.2% Other 24.4% Motor 9.1% Liability 57.3% Property
Along with China, the region of Southeast and South Asia continues to drive growth in the Asia-Pacific. We achieved good results here across the board, although we note that profitable growth in the primary market does not necessarily carry over to the reinsurance markets. Margins here continue to be very squeezed in many areas – a state of affairs that will likely continue in the years to come, especially in those markets that are not affected by large losses. Thanks to our focused underwriting policy, we generated a very pleasing result in the region of Southeast and South Asia served by our branch in Kuala Lumpur, Malaysia.
Latin America Despite the competitive landscape, we are very well positioned in Latin America and a market leader in several countries on the continent. The most important markets for our company are Brazil, where we are also present with a representative office, as well as Mexico, Argentina, Chile, Columbia and Ecuador. The main lines in Latin America and the Caribbean are property and motor insurance; liability lines are growing more slowly. We consistently offer our customers tailored solutions and suggest various alternative options. Our business relations have been cultivated in some instances over many years both on a direct basis and through reinsurance brokers. Above all in countries exposed to natural catastrophes, very attractive growth opportunities have opened up of late. Local insurers here specifically seek out our expertise and capacity.
Agricultural risks We expanded our market position for the coverage of agricultural risks. Particularly in emerging and developing economies, the growing need for agricultural commodities and foodstuffs combined with the increased prevalence of extreme weather events are generating stronger demand for insurance and rein surance solutions. For example, the InsuResilience initiative of the G7 nations – in which we are participating – has set itself the goal of offering insurance protection against climate risks to millions of poor and at-risk individuals in developing countries by the year 2020. In Europe, too, the unusually dry summer prompted discussions around the subject of crop insurance.
The increasingly widespread implementation of public-private partnerships presents new opportunities for our company to write profitable business in markets that have still to mature. The growing availability of new technologies, such as remote sensing by satellites, will enable us to further enlarge our scope of business through innovative and efficient insurance products such as parametric covers.
Rates and conditions were stable in primary insurance business. On the reinsurance side, sustained pressure on prices and intense competition were evident in mature markets such as the United States and Canada.
We successfully moved forward with the geographical and line-based diversification of our portfolio. Our result was highly satisfactory thanks to the absence of large losses and our healthy diversification.
Our major markets nevertheless remain highly competitive. Even though the stubbornly low price of oil is a drag on economic momentum, the inflow of international underwriting capacities remains undiminished. A positive factor here is the action currently being taken to significantly improve the regulatory framework in the Middle East and North America (MENA) region. This is likely to increase the spread of insurance and open up opportunities for retakaful business and the broader reinsurance market.
Bearing in mind this market climate, we again put the focus on selective underwriting in the financial year just ended. Our premium income was consequently slightly lower.
While our expenditure on large losses in the first six months of the year came in below expectations, the second half of the year was significantly more eventful for the entire insurance sector. Along with losses from typhoons in Japan, hurricanes in the United States and forest fires in California, an increase in the cost of losses from the previous year – especially for Hurricane “Irma” – took a toll on results industry-wide. California was impacted by devastating forest fires for the second year in a row, and the coverage of such risks is therefore likely to draw even more attention.
Structured reinsurance With our Advanced Solutions segment we rank as one of the largest providers in the world for structured and tailor-made reinsurance solutions. In this context we assist our clients with their capital management and offer alternative reinsurance solutions that provide solvency relief or protection against the strain of frequency losses.
Growth in the financial year just ended was appreciable in many regions, especially in North and South America as well as in Europe, and played a significant part in the premium growth booked in our property and casualty reinsurance portfolio. Not only did the average premium per contract increase, but also the number of contracts in absolute terms. Looking to the future, we anticipate continued growth in demand for innovative and tailored reinsurance solutions. Over the past ten years we have tripled our premium volume in structured reinsurance to around EUR 2.6 billion. Altogether, almost half our business in structured reinsurance originates from the United States and roughly a third from Europe.
In 2018 the volume of new exposures that we transferred to the capital market in the form of catastrophe bonds was in the region of USD 1.5 billion. The largest transaction this year was a USD 500 million catastrophe bond for the Federal Emergency Management Agency (FEMA). The bond provides protection against floods in the United States that result di-
In collateralised reinsurance business we continued to step up our cooperation with selected fund managers and in so doing generated attractive margins. It was also pleasing to note that we were able to further expand the transfer of life reinsurance risks to the capital market.
The gross premium volume in structured reinsurance and from ILS activities grew by 12.2% to EUR 2,926.1 million (EUR 2,606.8 million). The combined ratio stood at 97.7% (97.7%). The operating profit (EBIT) increased to EUR 129.3 million (EUR 94.8 million).
People around the world are facing the challenge of securing a lifelong income at retirement age and finding a flexible retirement product to suit their individual needs. Drawing on our global experience and capacity, we are well placed to support insurance companies in developing tailor-made retirement solutions that meet a wide range of individual security needs in old age.
We can provide well-rounded support including new underwriting process design, implementation of our automated underwriting system at the point of sale as well as medical training by our experienced physicians. Our core competence is biometric risk assessment and we are flexible with regard to reinsurance solutions that mitigate these risks.
Target since 2016 1 Since 2016 based on Solvency II principles and pre-tax reporting; until 2015 MCEV principles (cost of capital already increased from 4.5% to 6% in 2015) and post-tax reporting
Breakdown of gross written premium by reporting categories in EUR million
Life and health reinsurance contributed a substantial 38% share of Group gross premium in the year under review. Thanks to our global network and our know-how, we are able to drive both traditional business and new developments on the markets. We nevertheless consider the profitability and quality of the generated business to be the absolute overriding priority and we act accordingly.
Numerus positive developments in our international life and health reinsurance portfolio helped us to achieve a solid result in the financial year just ended. Treaty recaptures prompted by our announcement of rate increases in legacy US mortality business gave rise to a charge to income of EUR 272.6 million. Allowing for the necessary release of an expense reserve in an amount of EUR 87 million, we achieved an operating result (EBIT) of EUR 275.9 million (previous year: EUR 245.2 million). This reflected the consistently good quality and solid profitability of the portfolio outside of the book of US mortality business acquired in 2009.
Key figures for Life & Health reinsurance M 24 in EUR million 2018 + / – previous year
From a global perspective, we saw strong demand for reinsurance solutions to cover longevity risks – driven in part by the exacting capital requirements for such business on the primary insurance side. New business avenues also opened up to us through digitalisation initiatives and insurtechs. In most cases these are small start-up enterprises that are normally reliant on cooperations with experienced, cash-rich partners. By partnering with insurtechs we also generate benefits for primary insurers and policyholders. Through this type of partnership we are able to help our customers respond to the changing needs of policyholders and bring innovations to market.
In view of the unchanged low level of interest rates, investment income in life and health reinsurance contracted as expected and totalled EUR 491.8 million (EUR 560.6 million). The share of the income attributable to our assets under own management amounted to EUR 319.6 million (EUR 343.5 million ), while the contribution made by income from securities deposited with ceding companies came in at EUR 172.2 million (EUR 217.1 million).
The operating result (EBIT) reached EUR 275.9 million (EUR 245.2 million). Bearing in mind the charge to income associated with the aforementioned recaptures in legacy US mortality business, this is a pleasing performance. Group net income for life and health reinsurance improved by 7.7% to EUR 185.9 million (EUR 172.6 million).
The US has long been an extremely important insurance market for us in this segment. Our financial solutions business performed superbly here and once again delivered a clearly positive contribution to the total result for the reporting category.
Primary insurers in Germany showed considerable interest in Solvency II issues, as they had in the previous year. While the minimal capital adequacy ratios required by the regulator (BaFin) were met by the companies across the board, the ratios varied sometimes markedly. Applying our expertise to the elaboration of possible solutions, we stand ready to support our customers as a reliable partner and we were able to successfully place corresponding business.
In general terms, considerable activity could be observed in the area of financial solutions on various European markets. In addition to Germany, we were successful in generating new business in Western and Central Europe and implemented financing solutions for a range of customers. Interest in reinsurance solutions with a bearing on Solvency II was also evident in the Scandinavian markets. This significance attached to this subject has increased in these markets, too, and we are engaging individual customers in an active dialogue.
during the reporting period. On the one hand, this had positive implications for our existing book of longevity business. On the other hand, it also led to considerably more capacity in the longevity market and the associated pressure on prices. We have made a conscious choice not to follow this price trend at the present time, but instead only write selected risks.
In total, the gross premium for longevity business increased in the year under review by 1.5% to EUR 1,276.1 million (EUR 1,256.9 million). The operating result (EBIT) reached a level of EUR 5.6 million (EUR 20.0 million).
Mortality Solutions Mortality-exposed business forms the core of traditional life and health reinsurance and, in terms of premium volume, still accounts for the bulk of our total premium income in this business group. The business discussed in this reporting category consists of covers that protect our customers against the risk that people do not live as long as anticipated and hence the actual mortality negatively diverges from the originally expected mortality.
The most significant impact on the result for this reporting category in the financial year just ended derived from part of our legacy US mortality portfolio that we had acquired in 2009. In view of past experience we initiated rate increases for the relevant treaties in the second quarter of 2018. This prompted treaty recaptures on the part of the ceding companies. The total loss recognised in the balance sheet in this connection added up to EUR 273 million or USD 322 million. We are consciously willing to accept these losses because further strains on the corresponding treaties in subsequent years can be largely avoided. For 2019 we already expect to see an appreciable improvement in the result – in part also because new US mortality business written in the reporting period delivered a pleasing profit contribution.
profit contribution. Market competition was noticeably more intense in northern parts of Europe, especially in Sweden. Despite this, our business here lived up to our expectations.
In Asia, on the other hand, our morbidity business fared exceptionally well. The Chinese market showed the most dynamic growth in the year under review. Most notably, we were able to substantially grow our critical illness business because, among other things, the Chinese regulator is encouraging more active marketing of these solutions. Along with the traditional critical illness product, modifications in the form of additional risk inclusions were also widely used. In China, alone, we consequently acquired numerous new customers and treaties, with appreciable positive effects on the premium volume. Our business in the other Asian markets developed largely in line with our expectations.
Gross premium for our total mortality and morbidity solutions business increased by 1.4% to EUR 4,996.0 million (EUR 4,927.6 million). The operating result (EBIT) for the two reporting categories came in at EUR -49.1 million (EUR 1.4 million ).
We are currently in talks regarding our underwriting system hr|Quirc not only with customers in Africa and the Middle East but also with an increasing number of Asian insurance providers, who have signalled their interest in implementation.
Similarly, we were thoroughly satisfied with the progressive global roll-out of our state-of-the-art and flexibly customisable system hr|ReFlex in the reporting period. Along with the implementations already completed in prior years, we were again successful in launching hr|ReFlex with a large number of existing and new customers in the year under review.
All in all, the focus of all our activities – taking into consideration our corporate objectives – is on the needs of our customers. We aspire to be a reliable expert partner over the long term in every situation and for the widest possible range of concerns. Along with traditional reinsurance solutions, this means keeping a close eye on new products and developing concepts designed to satisfy supervisory requirements. Not only that, we must move with the times and keep pace with the trend towards increasing innovation and more technology, and we must also be willing to take on capital market risks. With minority interests in two companies specialising in the transfer of capital market risks, we have expanded our range of solutions and ensured that we can also meet this need on the part of primary insurers.
We are highly satisfied with the development of our investments. While the year under review was once again a challenging one in view of the continued low level of interest rates and global economic movements driven by a range of uncertainties and risks, we were nevertheless compelled to recognise only a minimal volume of impairments. We were able to outperform our targets despite quite appreciable portfolio regrouping in support of financing measures in life and health reinsurance, the tax reform in the United States, issuance of a senior bond and our amended strategy. Nor were we held back by a decrease in reserves due to USD interest rate hikes and widening credit spreads. Our exposures to emerging markets were also rewarded by the good performance of these markets and delivered stable earnings. This was again true of the real estate sector as well, the income from which – driven by the higher weighting in the portfolio – helped to push our ordinary investment income (excluding interest on funds withheld and contract deposits) to a very pleasing EUR 1,321.7 million, a level roughly on a par with the previous year (EUR 1,289.0 million). The partial reduction of our credit risk exposures in the course of the year proved advantageous as spreads widened towards year-end. Despite the difficult interest rate environment, our returns on fixed-income securities came in on a gratifying level that even surpassed the previous year. We were thus able to very comfortably make up for the dividend income lost after the liquidation of our equity portfolio in the previous year.
Net realised gains on disposals totalled EUR 127.7 million (previous year: EUR 377.1 million). The sharp decline can be attributed to the exceptionally high income realised in the previous year from the liquidation of our portfolio of listed equities. It also reflects the fact that we recognised not inconsiderable hidden charges in connection with our portfolio regrouping moves due to the steeper US yield curve. We were nevertheless able to more than offset this through attractive gains realised on the disposal of high-yield bonds. As a further factor, we benefit from rising interest rates in our reinvestment activities. We report further on this in the following section “Financial position and net assets” under the subsection “Investments” on page 61 et seq.
We recognise a derivative for the credit risk associated with special life reinsurance treaties (ModCo) under which securities deposits are held by cedants for our account; the performance of this derivative in the year under review gave rise to negative fair value changes recognised in income of EUR 11.9 million (positive changes of EUR 3.7 million). Altogether, the positive changes in the fair values of our financial assets recognised at fair value through profit or loss amounted to EUR 31.2 million (EUR 38.6 million). The principal items recognised here are various derivative financial instruments relating to the technical account or taken out as currency or interest rate hedges as well as fixed-income assets for which the fair value option provided by IAS 39 was applied.
Despite reduced income from funds withheld and contract deposits as well as lower realised gains, we were thus able to generate very healthy investment income of EUR 1,530.0 million (EUR 1,773.9 million). Key drivers here were the pleasing rise in ordinary income booked on fixed-income securities as well as very good earnings from real estate and private equity. Income from assets under own management accounted for EUR 1,322.0 million (EUR 1,539.0 million), producing an average return (excluding effects from ModCo derivatives) of 3.2%. We thus clearly beat our originally anticipated 2.7% target.
With these goals in mind we engage in active risk management based on balanced risk / return analyses. To this end we adhere to centrally implemented investment guidelines and incorporate insights gained from dynamic financial analysis. Both form the basis for investment ranges which are specified in light of the prevailing state of the market and the requirements on the liabilities side and within which operational management of the portfolio takes place. These measures are intended to safeguard the generation of an appropriate level of return. In so doing, we pay strict attention to compliance with our clearly defined risk appetite, which is reflected in the risk capital allocated to the investments and constitutes the foundation for the asset allocation of the entire Hannover Re Group and the individual portfolios. Our ability to meet our payment obligations at all times is also ensured in this way. Within the scope of our asset / liability management (ALM) the allocation of investments by currencies and maturities is determined by the technical liabilities. The modified duration of our bond portfolio is geared largely to the technical liabilities.
Our portfolio of assets under own management amounted to EUR 42.2 billion, a level significantly higher than at the end of the previous year (31 December 2017: EUR 40.1 billion). Along with the positive operating cash flow, this reflects the fact that the issuance of a senior bond in the second quarter and exchange rate effects more than offset valuation declines on fixed-income securities. We adjusted the allocation of our investments to the individual classes of securities in the reporting period in that we somewhat modified the nature of our government bond holdings and expanded our portfolio of instruments with inflation-linked coupons and redemption amounts. By taking this step we are counteracting inflation risks in our property and casualty reinsurance business. Through the reduction of certain positions in the area of highyield bonds we also smoothed the risk profile of our investments and generated liquidity for future opportunities in the capital market as well as for financing transactions in life reinsurance.
In addition, we improved the quality of our portfolio of covered bonds.
As at the end of the year under review we held a total amount of EUR 1.5 billion (EUR 1.8 billion) in short-term investments and cash. Funds withheld amounted to EUR 10.9 billion (EUR 10.9 billion).
In terms of amount, the technical provisions and liabilities are of course by far the most significant item in our balance sheet. Further elements are equity and equity substitutes, which help to substantially strengthen our financial base and optimise our cost of capital. The following chart shows our capital structure as at 31 December 2018, broken down into percentages of the balance sheet total.
The policyholders’ surplus totalled EUR 11,035.1 million (EUR 10,778.5 million) as at the balance sheet date. Retained earnings increased by EUR 455.9 million to EUR 7,440.3 million (EUR 6,984.4 million) on the back of the good Group net income booked in the year under review. On the other hand, the foreign currency gains and losses and the net gains on investments recognised in equity were lower in total. Overall, the policyholders’ surplus consequently increased by 2.4%.
In its capital management Hannover Re is guided by the requirements and expectations of the rating agencies with an eye to its targeted rating. Furthermore, while making appropriate allowance for business policy considerations and factors that influence market presence, the allocation of capital to the Group’s operational companies is based upon the economic risk content of the business group in question. The Group companies are also subject to national capital and solvency requirements. All Group companies met the applicable local minimum capital requirements in the year under review. Adherence to these capital requirements is continuously monitored by the responsible organisational units on the basis of the latest actual figures as well as the corresponding planned and forecast figures. If, despite the capital allocation mechanisms described above, a scenario occurs in which there is a danger of minimum capital requirements being undershot, suitable options are immediately discussed and measures set in motion to counteract such an eventuality. From the Group perspective we manage Hannover Re’s solvency using our internal capital model (cf. “Opportunity and risk report”, page 94 et seq.).
Compared to the position as at 31 December 2017, Group shareholders’ equity increased in the year under review by EUR 255.5 million, equivalent to 2.8%, to EUR 9,542.0 million. After adjustment for non-controlling interests, it rose by EUR 248.3 million to EUR 8,776.8 million. The book value per share increased accordingly by 2.9% to EUR 72.78. The changes in shareholders’ equity were shaped chiefly by the following developments: The foreign currency gains and losses grew by EUR 263.9 million from EUR -62.5 million to EUR 201.4 million as a consequence of exchange rate movements of foreign currencies against the euro in the financial year. The rise in the reserve for currency translation adjustments resulted principally from the appreciation of the US dollar and translation of the shareholders ’ equity of those subsidiaries whose equity is denominated in USD.
The Group net income for 2018 attributable to the shareholders of the Hannover Re Group amounted to EUR 1,059.5 million (EUR 958.6 million). The non-controlling interest in the profit generated in the year under review totalled EUR 86.0 million (EUR 86.0 million).
Hannover Finance (Luxembourg) S. A. subordinated debt, EUR 500 million; Hannover Finance (Luxembourg) S. A. subordinated debt, EUR 500 million; Hannover Rück SE, subordinated debt, EUR 500 million; 2014 / undated 15.9.2014 3.375 495.6 495.0
Consolidated cash flow statement M 34 in EUR million 2018 2017
Cash and cash equivalents at the beginning of the period 835.7 848.7
Cash and cash equivalents at the end of the period 1,151.5 835.7
Cash flow from investing activities The balance of cash inflows and outflows from operating activities and investing activities in an amount of EUR 2,075.2 million (EUR 942.3 million) was invested in accordance with the company’s investment policy, giving particular consideration to the matching of currencies and maturities on the liabilities side of the technical account. Regarding the development of the investment portfolio please see also our remarks at the beginning of this section.
Overall, the cash and cash equivalents therefore increased year-on-year by EUR 315.8 million to EUR 1,151.5 million.
2 International Insurance Company of Hannover SE was renamed HDI Global Specialty effective 1 January 2019.
Issue ratings of issued debt As part of the process of rating Hannover Re the rating agencies also assess the debt issued by the Hannover Re Group.
Information pursuant to § 315a Para. 1 German Commercial Code (HGB)
We conduct our business with a sophisticated risk-based capital model. This enables us to optimally allocate our capital to business groups, regions and lines and to leverage potential scope for diversification. Our rigorous, selective underwriting policy establishes the basis for a stable operating performance.
Our robust capital resources – with an eye to both solvency requirements and our risk profile – are flexibly supported by a prudent reserving policy, hybrid capital and retrocession programmes.
Thanks to a superlative rating we can act on business opportunities at any time. Safeguarding our strong rating through outstanding and consistently practised risk management is therefore especially important.
All in all, the net investment result climbed to EUR 1,231.7 million (EUR 1,197.5 million). The balance of other income and charges changed from EUR -196.3 million to EUR -182.6 million.
The profit on ordinary activities decreased to EUR 869.7 million (EUR 968.0 million). The year under review closed with a profit for the year of EUR 665.4 million (EUR 843.4 million).
The following section describes the development of the various lines of business. With effect from the beginning of the 2014 financial year the cooperation and exchange of business between Hannover Rück SE and E+S Rückversicherung AG was reorganised. In this context a quota share retrocession from Hannover Rück SE to E+S Rückversicherung AG has since been maintained in property and casualty reinsurance.
Fire Total gross premium income for the fire line climbed by 12.7% in the 2018 financial year to EUR 2,213.3 million (EUR 1,963.4 million). The net loss ratio was virtually unchanged at 75.2% (75.7%). The underwriting result improved to EUR -56.5 million (EUR -122.5 million). An amount of EUR 54.1 million (EUR 337.2 million) was withdrawn from the equalisation reserve and similar provisions.
Life Gross premium income in the life line totalled EUR 4,236.5 million (EUR 4,104.9 million) for the period under review. Life and health reinsurance business has a clear international focus. We write our business on all continents and in many instances we are directly available as a local point of contact thanks to our extensive network. In addition to traditional mortality-oriented life reinsurance we write financial solutions business as well as health and longevity risks on a worldwide basis.
Other lines The lines of health, credit and surety, other indemnity insurance and other property insurance are reported together under other lines. Other property insurance consists of the extended coverage, comprehensive householder’s (contents), comprehensive householder’s (buildings), burglary and robbery, water damage, plate glass, engineering, loss of profits,
Balance sheet structure of Hannover Rück SE M 41 in EUR thousand 2018 2017
Deposits with ceding companies, which are shown under the investments, remained stable in the year under review at EUR 8.1 billion (EUR 8.0 billion).
Our capital and reserves – excluding the disposable profit – stood at EUR 1,631.7 million (EUR 1,631.7 million). The total capital, reserves and technical provisions – comprised of the capital and reserves excluding disposable profit, the subordinated liabilities, the equalisation reserve and similar provisions as well as the net technical provisions – increased during the year under review to EUR 34,674.8 million (EUR 33,358.4 million). The balance sheet total of Hannover Rück SE grew to EUR 40.8 billion (EUR 37.9 billion).
Hannover Rück SE maintains branches in Australia, Bahrain, Canada, China, France, India, Hong Kong, Korea, Malaysia, Sweden and the United Kingdom.
Hannover Re expects to generate a good profit on ordinary activities for the current financial year, although it will probably not quite reach the level of 2018. In terms of the ordinary dividend, Hannover Re envisages a payout ratio in the range of 35% to 45% of its IFRS Group net income. The ordinary dividend will be supplemented by payment of a special dividend if the present comfortable level of capitalisation remains unchanged in light of capital management considerations.
The combined non-financial information statement is a section of the report that the legislator has expressly exempted from the audit of the financial statements (§ 317 (2) Sentence 6 and Sentence 4 German Commercial Code (HGB); unaudited information). The combined non-financial information statement presented here has, however, been audited with limited assurance by the auditing firm of PricewaterhouseCoopers in accordance with the audit standard ISAE 3000 (Revised) (see here the Independent Auditor’s Report on page 270 et seq.).
The present combined Group non-financial information statement was drawn up in accordance with §§ 315b and 315c in conjunction with 289b to 289e German Commercial Code (HGB). It combines the disclosures for the Group and the parent company Hannover Rück SE. Unless indicated separately, the disclosures are equally applicable to the Group and the parent company. The combined non-financial information statement contains the legally required information relating to significant environmental matters, employee matters, social matters, respect for human rights and combatting corruption and bribery. Within these individual aspects the underlying concepts and due diligence processes are discussed and available findings are reported. In addition, the combined non-financial information statement is to be used to report on material risks pursuant to § 289c (3) No. 3 and 4 German Commercial Code (HGB) to the extent necessary for an understanding of the business development, business result, position of Hannover Rück SE and the Group and implications for non-financial matters. In view of the fact that we purposefully enter into numerous risks in the context of our business operations, we have put in place an extensive and effective risk management system. For a description of the risk management system please see the “Risk report” section under “Opportunity and risk report” in the combined management report.
Hannover Re has defined exclusively financial management ratios and key financial performance indicators. For this reason, no non-financial performance indicators pursuant to § 289c (3) No. 5 German Commercial Code (HGB) are available that are relevant to the management of the Hannover Re Group’s business.
A detailed description of Hannover Re’s sustainability efforts, which go above and beyond the legal requirements of the combined non-financial information statement, is provided in a separate sustainability report compiled annually by the Group on a voluntary basis.
• Generate a profit in excess of the cost of capital
• Facilitate the greatest possible delegation of tasks, responsibilities and authority
• Achieve the target return – risk-free interest rate plus cost of capital 5. We manage risks actively
• Ensure a lower expense ratio than our competitors through an effective and efficient organisation 8. We support our business through efficient information technology and take advantage of digitalisation and automation
In response to the progressive digital transformation in the world of business over the coming years, we have developed an additional digitalisation strategy for the strategy cycle 2018-2020. This considers in detail the opportunities and risks associated with digitalisation – with an eye to both our business processes and our work as a reinsurer.
The sustainability strategy, goals and measures are reviewed and approved by the Executive Board. Sustainability measures are implemented on a decentralised basis in the various market and service departments. The coordination of strategic goals and measures as well as the collection of data for reporting purposes are handled by an interdisciplinary team composed of representatives of all relevant business units.
In total, we identified 13 material sustainability issues in accordance with the German Commercial Code (HGB) and the GRI, which we discuss below in our non-financial information statement and will report on going forward on a voluntary basis in our annual sustainability report compiled in accordance with GRI standards.
Im pa ct s on b us in es s op er at io n s material according to GRI and German Commercial Code (HGB)material according to GRI
Allocation of material issues to the reportable non-financial aspects pursuant to the German Commercial Code (HGB)
As a listed European company (Societas Europaea – SE) based in Germany, the formal framework that shapes Hannover Re’s corporate governance is determined by national law. The fundamental hallmarks of this corporate governance structure are a two-tier system with its transparent and effective split into management (Executive Board) and its oversight (Supervisory Board), the appointment of shareholder and employee representatives to the Supervisory Board and the rights of co-administration and supervision exercised by shareholders at the General Meeting. The interplay between these bodies is regulated by German stock corporation law and by the company’s Articles of Association. Furthermore, our Group Strategy, the Corporate Governance principles and our Code of Conduct form the basis of our enterprise management.
The Corporate Governance principles of Hannover Rück SE are also subject to regular review and fulfil the recommendations of the currently valid version of the German Corporate Governance Code as amended.
By aligning the remuneration structure with regulatory requirements and having the system of compensation reviewed
C om b in ed m an ag em en t re p or t by independent experts, we ensure that our remuneration policy is in keeping with our business and strategy and appropriately risk-adjusted. A detailed description of the remuneration scheme for both the Executive Board and Supervisory Board is provided in the “Remuneration report” on page 127 et seq. of the combined management report. Given that the trust of our various stakeholder groups and an immaculate reputation advance the success of our company, we make every effort to continuously maintain an active dialogue with our stakeholders. For more information on the dialogue with stakeholders we would refer to the section “Stakeholder dialogue ”.
Enhance our appeal in the eyes of value- and sustainability-minded investors by participating in major sustainability ratings
As part of the annual rating processes we engage in an ongoing dialogue on rating-specific sustainability issues and participate in various ratings. In 2018 we were again listed in the FTSE4Good Index and retained the "Prime" rating from oekom research. In March 2017 we were accepted for the first time into the Global Challenges Index (GCX) administered by the Hannover Stock Exchange and oekom. Based on our favourable evaluation from the CDP, we are included in the major STOXX family indices.
The Sustainability Report 2017 was drawn up in conformity with the GRI standards (2016) that have been mandatory since July 2018 and responds more closely to the information requirements of rating agencies. For further details please see the Sustainability Report 2017.
We consider efficiently functioning compliance management to be essential, since legally correct, responsible and ethical actions constitute the fundamental precondition for trust in our company and for its competitiveness as well as for ensuring that licences to pursue our business activities are maintained and not denied. In our view, conformity with applicable legal requirements is a self-evident prerequisite for enduring successful business operations. This includes laws and regulations relating to the environment just as it does those with a bearing on, among other things, fighting corruption, the prevention of money laundering, data privacy and tax compliance. In addition, the compliance function is one of the four key functions of the system of governance pursuant to the Solvency II Directive and an important element of the internal control system under these rules governing European insurers and reinsurers.
The Corporate Compliance Organisational Manual summarises the major activities and defines the responsibilities within our company, the interfaces and the elements of the compliance organisation. Our compliance structure was reviewed most recently in 2015 against the backdrop of the compliance requirements associated with Solvency II. The Compliance department and the Chief Compliance Officer keep employees informed of changes in legislation, insofar as they affect their work. A worldwide network of compliance officers reports to and supports the Chief Compliance Officer in his duties.
With a view to improving cooperation within the compliance network on the European level, we organise an annual gathering of European compliance officers. Conference calls are also held on a regular basis. The Chief Compliance Officer works to ensure compliance with internal corporate policies by cooperating with other departments, including Group Auditing, and updates the Executive Board on material compliance issues and developments in an annual compliance report.
A Web-based whistleblower system is also in place for the companies within the Group. This enables employees, customers and third parties to report compliance violations anonymously in their local language or in English. Relevant tips and any countermeasures initiated are included in the annual compliance report. In the year under review no tips were received through the Group-wide whistleblower system regarding potential wrongdoing. Furthermore, no lawsuits were filed against our company in the reporting period on grounds of anti-competitive or anti-trust practices. Similarly, we were not required to pay any significant fines in the period under review due to violations of legal provisions; nor were any non-monetary sanctions imposed on our company.
C om b in ed m an ag em en t re p or t panies. The existing structures of the established compliance organisation are used to implement the minimum standards required by data privacy law. Irrespective of the scope of application of the EU General Data Protection Regulation, the designated Compliance Officers and contact persons are responsible for local data protection requirements. As necessary, they draw up additional local data privacy guidelines and serve as the interface to the Data Protection Officer at Hannover Re in Germany. The Data Protection Officer coordinates overarching aspects of the installed data privacy management system within the Hannover Re Group. He gives advice on how to resolve specific data privacy issues and monitors compliance with the EU General Data Protection Regulation and other data protection standards. In this context, the monitoring of data privacy requirements takes place in close coordination with Group Auditing. The findings of the separate reporting on data protection are integrated into the annual compliance report. No complaints were received about privacy breaches affecting personal data or the loss of such data during the period under review. There was therefore no requirement to fulfil the duty to notify data breaches pursuant to Articles 33 and 34 of the GDPR.
An information security management system geared to ISO 27001 has been set up Group-wide for operational assurance of the protection requirements under data privacy law as well as for ensuring the security of all other sensitive information within the company. In organisational terms, information security management is coordinated centrally by the Group Information Security function and incorporates all other relevant functions, including for example Group IT for matters of IT security or Facility Management with respect to building security. In addition, awareness among our employees of such security risks is raised through practically oriented assistance measures, training activities and a staff information campaign.
In addition to an annual self-assessment, we participate in various cooperative projects undertaken by our industry and engage in a regular dialogue with advocacy groups such as the Bundesverband der IT-Anwender e.V. in the context of the Cyber Security Competence Center.
Observance of sanctions regulations Observance of applicable sanctions regulations plays a central role for us on account of our international orientation. We have enshrined compliance with relevant sanctions provisions in our Code of Conduct and Underwriting Guidelines. In addition, a Sanctions Screening Guideline is in place, stipulating when members of staff must perform sanctions screening with respect to the initiation of contracts and / or the payment of claims. A software-supported check continuously verifies whether the company’s data inventories include the names of persons who are subject to sanctions and hence with whom no business may be transacted. Each working day staff in Group Legal Services check the Official Journal of the European Union for changes in sanctions law on the EU level and publicise relevant changes Group-wide without delay. The compliance training given to new members of staff also includes basic instruction in sanctions law. New underwriters and claims managers receive additional training in the use of the screening software as well as in the scenarios in which a sanctions check must be made. In addition, all underwriting and accounting departments received training in the topic of trade embargos in the year under review.
Optimisation of compliance management Appropriate measures to improve compliance standards are regularly coordinated in the context of the meetings of European Compliance Officers and routine conference calls.
Furthermore, new legislative developments such as the statutory requirements of the European Insurance Distribution Directive were examined and appropriate processes were put in place at the Hannover location. The processes for implementation of this directive, which applies Europe-wide, are progressively being established at our European locations in accordance with local legal and timing requirements.
Our Group-wide risk management minimises the business risk on all levels and is vital to the long-term success of our company. It therefore constitutes a material issue that we also consider as part of our sustainability activities. A detailed description of our risk management is provided in the “Risk report ” on page 94 et seq. of the combined management report.
Through conferences, roadshows and one-to-one meetings, for example, we stay in contact with representatives of the capital market, rating agencies and private investors. In addition, analysts and institutional investors use our annual Investors ’ Day and the analysts’ conference to participate in an intensive exchange with management. We continue to expand the dialogue with ESG rating agencies. Our employees engage with our worldwide customers through direct, face-toface discussions. For further information we would refer to the section “Customer orientation and satisfaction”.
We similarly engage in an ongoing dialogue with political decision -makers, supervisory authorities and insurance industry associations – mostly in relation to topical issues in insurance supervision and financial market regulation in Germany, the EU and on the wider international level. In this context we contribute our specialist expertise from business practice to the public debate; in return, we are able to integrate helpful insights gained from such exchanges into our business activities and reporting.
C om b in ed m an ag em en t re p or t tive coverage concept designed to protect communities in Colombia against natural disasters. In addition, we participate in the Munich Climate Insurance Initiative (MCII) and we are a member of the Insurance Development Forum, the CRO Forum and the “Extreme Events and Climate Risks” working group of the Geneva Association.
Intensification of the stakeholder dialogue We maintain an ongoing dialogue with our stakeholders in a variety of ways. Through conferences, roadshows and one-to-one meetings, for example, we stay in contact with representatives of the capital market, rating agencies and private investors.
In the context of our business operations we knowingly enter into a broad range of risks. As a leading player in the reinsurance industry, our commercial success is crucially dependent on the correct assessment of present and emerging risks. This process of evaluating risks is growing in complexity owing to the constant monitoring and analysis of new and emerging risks, trends and future-related factors; sustainability aspects are also playing a greater role here. In some instances these have direct strategic and operational relevance to our reinsurance products and the management of our investments. We can gain insights from the risks and opportunities for our own risk management and also use them as a basis for product and service innovations. In this way, we constantly adjust to societal changes and the needs of our clients. Not only does this enhance our competitiveness, it also boosts trust among our customers and business partners.
A detailed description of our risk expertise and risk assessment is provided in the “Opportunity and risk report” starting on page 94 et seq. of the combined management report.
In property reinsurance we support the expansion of renewable energy sources, ranging from wind power generated on- and offshore to photovoltaic and geothermal energy. Insurance protection begins with the construction phase and accompanies the customer through many years of operation.
Furthermore, we encourage the expansion of products in response to climate change, such as weather insurance and coverage for energy-saving warranties, and by delivering insurance solutions in areas such as microinsurance and agricultural risks we also play a part in the societal development of more structurally deprived regions. These enable people with scant financial means to protect themselves against fundamental risks such as illness, disability, impacts of natural disasters or crop failures. We are also taking an active part in the development of index-based disaster finance concepts that guarantee rapid financial assistance for countries in South America and Asia in the event of natural catastrophes.
In life and health reinsurance demographic changes around the world are leading to stronger demand for the reinsurance of longevity risks. We are also seeing rising demand for socalled lifestyle products, which principally involve insurance solutions under which the premium is linked to an insured’s healthy lifestyle (e. g. fitness and nutritional habits).
We continue to support weather-related products as well as insurance solutions for renewable energy sources such as solar, hydro and wind power.
In 2018 we wrote a premium volume in the mid-triple-digit millions of euros in the area of agricultural risks, roughly three quarters of which stemmed from developing and emerging markets of South America, Asia and Africa.
In addition to developing agricultural insurance products, we are involved in various initiatives and projects. For example, we assume risks through African Risk Capacity, which offers insurance covers against extreme weather events for African countries.
Our investments are subject to negative screening every six months by an external service provider to verify compliance with these ESG criteria. Securities of issuers defined as “non-adequate” are actively reduced while minimising the market impact. In addition, potential new investments are checked in advance to see whether the issuers violate the defined ESG criteria. Such exposure is avoided if this is found to
Given that the proportion of listed equities in our asset portfolio accounts for less than 1% of our investments under own management, we have not adopted any voting guidelines to date on environmental and social issues in connection with the sustainable orientation of our investments, nor have we defined any corresponding processes or measures. Should the proportion of listed equities in our portfolio increase significantly, we shall revisit the topic of active ownership.
Customer relationships at our company are normally managed on the level of individual divisions. In property and casualty reinsurance we cultivate our customer relationships both through reinsurance brokers and directly by making regular business trips or holding videoconferences. Furthermore, our employees attend trade fairs and expert conferences worldwide. In life and health reinsurance we have a direct local presence in most markets due to our decentralised approach and are thus able to engage in a quick and flexible exchange with our customers. In addition to business trips to visit individual clients, we also organise seminars – usually on specific topics – and training workshops in the markets where we operate so as to keep our customers informed about the latest issues and developments relating to life and health reinsurance as well as underwriting.
We conduct regular surveys to measure the satisfaction of our customers – not only independently but also with the support of external market research institutes when it comes to certain markets. In view of the importance that we attach to accommodating the specific features of individual markets, we consciously do not carry out any general uniform survey of customer satisfaction on a global basis across all our divisions. We process the results of our customer surveys and studies in-house so as to identify potential action fields. The steps taken not only served to improve the perception of our brand, they also made our services and products stronger. In recent years, for example, we have enhanced our automated underwriting systems according to the wishes of our customers and we have brought new product ideas to market.
ment Task and Individual Responsibility” and “Gender- specific Communication”; the latter event also supports our mentoring programme for women on the management level. At the same time our managers were offered special expert seminars, including for example updated and redesigned workshops on matters of employment law.
The Employee Assistance Programme is another component of our health management. This provides external and anonymous immediate counselling on personal, professional and health concerns for our employees, managers and their family members, including access to a service for families. This support tool once again proved helpful and popular in the financial year just ended.
Goal to be achieved by 2020: Executive development / Employee advancement
Optimisation of further training measures for employees and executives (training days per employee and year > 4 days (Group-wide))
In 2017 the average number of training days per employee was 4.0 at the Hannover location. The number of training days Group-wide was 2.7. As at the reporting date a complete record of the number of training days per employee for the 2018 financial year was not yet available.
We also operate our own company daycare centre at the Hannover location that provides all-day care for infants up to the age of three.
An employee survey was not carried out in the year under review. Instead, a new round of management feedback was launched in order to enable employees working under a defined group of managers to give their direct supervisors feedback on how their leadership style is experienced.
Diversity and the advancement of women are topics that have come under increasing public scrutiny in recent years. Within the Hannover Re Group, too, it is evident that women are under -represented in the company’s higher hierarchical levels. With a view to changing this, the Executive Board initiated a number of measures geared specifically to furthering women in their professional development. In 2017 we therefore launched another implementation round of our in-house mentoring programme for women at the Hannover location, which ended in March 2018. A further round is already planned for 2019 / 2020.
Promoting diversity and equal opportunities (proportion of women on the second and third levels of management 18% at the Hannover location)
Proportion of women on the second and third levels of management at the Hannover location on the reference date of 31 December 2018: 15.6%
In the year under review we pressed ahead with our measures relating to the conditions needed for a healthy work / life balance. Along with our part-time and teleworking models, these include our flexitime arrangements and an in-house infant daycare centre.
Back in 2012 we put in place standard processes at the Hannover location to address environmental protection and we specified concrete measures in our environmental programme. Our environmental management system has since been recertified annually, from 2016 onwards according to the revised standard DIN EN ISO 14001:2015. Since 2016 we have also published annually a validated EMAS III Environmental Statement in fulfilment of the Europe-wide legal requirement to perform energy audits. The environmental management system records the consumption and emissions data for the Hannover sites of Hannover Rück SE, E+S Rückversicherung AG and (until the end of 2018) International Insurance Company of Hannover SE (Inter Hannover SE) as well as the associated infant daycare centre and hence covers roughly 43% of the global workforce.
The focus of our efforts to conserve the environment is on reducing CO2 emissions caused by the supply of electricity and heat to our premises as well as those resulting from our business travel. We have operated with a net zero carbon footprint at the Hannover location since 2016. The changeover to renewable energy and the offsetting of greenhouse gas emissions caused by air travel through payments to the climate protection organisation atmosfair were key factors in this achievement.
Having already converted our power supply at the Hannover location to renewables, we now want to extend this progressively to our international offices as well.
We actively support the work of local and international initiatives for climate protection. For example, we are engaged in a number of environmental conservation projects, including the local initiative “Climate Alliance Hannover 2020”.
Since mid-2012 our Code of Conduct for Suppliers has been applied throughout large parts of the company at the Hannover location. Reviewed on a regular basis and adjusted as necessary, it obliges all main suppliers and subcontractors to fulfil sustainability criteria, inter alia respect for human rights and observance of the core labour standards of the International Labour Organisation (ILO). We rate new suppliers based on self-reporting and using an application-supported process; those that are assessed critically in an ESG risk category are assigned to a blacklist, as a consequence of which no further orders are placed with them. The process is used as warranted by Facility Management and IT at the Hannover location.
Storm surge damage is normally covered in the US under private and industrial windstorm insurance. Flood damage resulting from heavy rainfall, on the other hand, often needs to be covered separately. Torrential rain from Hurricane Harvey caused extensive damage throughout South Texas in 2017, while precipitation from Hurricane Katrina in 2005 flooded parts of New Orleans.
Loss scenarios for windstorm risks can be reliably simulated using existing models. We are continuously developing and refining our risk models in order to calculate affordable, risk-appropriate prices for flood damage covers as well.
Opportunity and risk report Risk report • Hannover Re has a very strong capital position, which is constantly reviewed against the backdrop of possible changes in the risk profile. • Our risk management system continuously monitors newly added and changing risks and is able to respond flexibly to changes in internal and external factors.
Our risk strategy is derived from the corporate strategy. The following principles of the corporate strategy constitute the key strategic points of departure for our Group-wide risk management: • We manage risks actively.
4. We fulfil regulatory requirements. 5. We fulfil the requirements of rating agencies. 6. We act in light of materiality and proportionality considerations.
Regulatory developments: A review of selected aspects of Solvency II was conducted in the year under review at the instigation of the European Commission. In this regard the European Insurance and Occupational Pensions Authority (EIOPA) made technical recommendations to the European Commission. Implementation of the new rules is still pending, but will most likely do not have any material implications for the Hannover Re Group.
In the year under review the reinsurance entities belonging to the Hannover Re Group in the European Union received approval from the Federal Financial Supervisory Authority (BaFin ) to calculate their operational risks using the internal model with retroactive effect from the year-end reporting 2017. The Hannover Re Group has already had such approval since 2017. This means that both the Hannover Re Group and the specified individual companies are now calculating their capital requirements under Solvency II on the basis of a full internal model. In addition, Hannover Re was granted approval by the BaFin in 2018 to use volatility adjustments pursuant to § 82 VAG. This is intended to mitigate the effect of value fluctuations on the bond market.
The specification of the probability distributions for the risk factors draws upon historical and publically available data exclusive industry data and the internal data resources of the Hannover Re Group. This process is further supplemented by the know-how of internal and external experts. The fit of the probability distributions is regularly checked by our specialist departments, although more importantly it is also verified in the context of the regular, company-wide use of the capital model when assessing risks and allocating the cost of capital. Hannover Re calculates the required risk capital as the Value at Risk (VaR) of the economic change in value over a period of one year with a confidence level of 99.97%. This reflects the goal of not exceeding a one-year ruin probability of 0.03%. The internal target capitalisation of the Hannover Re Group is therefore significantly higher than the confidence level of 99.5% required under Solvency II. For its capitalisation under Solvency II Hannover Re has set a limit of 180% and a threshold of 200% for the capital adequacy ratio.
Hannover Re is thus well capitalised and our available capital comfortably exceeds the required capital, both from the economic and the regulatory perspective: Available capital and required risk capital 1 M 59 in EUR million
Required risk capital / Solvency capital requirement 10,990.5 5,135.4 5,135.4 9,877.3 4,729.0 4,729.0 1 This table contains information that has not been audited by the independent auditor. 2 The figures were based on the Solvency II reporting as at 31 December 2018. 3 Minor differences for 31 December 2017 compared to the Annual Report 2017. Figures based on final Solvency II year-end reporting as presented in the Solvency and Financial Condition Report.
The figures shown above refer to the Hannover Re Group. In addition, Hannover Rück SE is also subject to regulatory capital requirements, which in accordance with Solvency II reporting were clearly fulfilled as at 31 December 2018 with a solvency ratio of 250.5%. The solvency ratio of Hannover Rück SE is normally higher than the solvency ratio of the Hannover Re Group because there are no restrictions with regard to the use of own funds attributable to non-controlling interests. The details provided here regarding the solvency ratio of the solo entity Hannover Rück SE constitute information that has not been audited by the independent auditor.
Treaty / regional and service divisions within the business groups of Property & Casualty reinsurance, Life & Health reinsurance and investments Risk steering and original risk responsibility for risk identification and assessment on the divisional and company level
Monitoring and coordi- nating body in relation to the Actuarial Function
Risk monitoring across the Group as a whole and the business groups of all material risks from the company perspective
Ensures adequacy of the methods used and under- lying models in relation to calculation of the technical provisions
Process-independent and Group-wide monitoring 2nd line of defence 1st line of defence 2nd line of defence 3rd line of defence supported by local risk management functions supported by local actuarial functions supported by local compliance functions
Group-wide risk communication and an open risk culture are important to our risk management. Regular global meetings attended by the actuarial units and risk management functions serve as a major anchor point for strategic considerations in relation to risk communication. In addition, risk management requirements are formulated in guidelines that are communicated throughout the organisation.
Risk reporting Our risk reporting provides systematic and timely information about all material risks and their potential implications. The central risk reporting system consists primarily of regular risk reports, e. g. on the overall risk situation, adherence to the parameters defined in the risk strategy or on the capacity utilisation of natural catastrophe scenarios. Complementary to the regular risk reporting, immediate internal reporting on material risks that emerge at short notice takes place as necessary.
We use a central IT solution with standardised accounting and consolidation processes, posting rules and interfaces for data delivery in order to draw up the consolidated financial statement. Access rights for the reporting systems are assigned through an approval process. All components of the accounting-related internal control system, the processes for the organisation and implementation of consolidation tasks and for the preparation of the consolidated financial statement as well as the accompanying controls are consistently documented. In order to safeguard and continuously improve the adequacy of the control system it is subject to regular review and evaluation. In this regard, the internal audit function ensures that the quality of the control system is constantly monitored. All relevant accounting principles are collated in a Group Accounting Manual that sets out uniform Group-wide rules for the recognition, measurement and reporting of items in the consolidated financial statement. The process for updating and, if necessary, adjusting these rules is clearly regulated with respect to information channels, responsibilities and period of validity. Not only that, we provide prompt Group-wide notification of significant developments and modified requirements in Group financial reporting.
• counterparty default risks resulting from our diverse business relationships and payment obligations inter alia with clients, retrocessionaires and banks,
Property and casualty reinsurance Life and health reinsurance Price / premium risk
2 The figures were based on the Solvency II reporting as at 31 December 2018.
The required risk capital with a confidence level of 99.5% reflects the loss from the respective risk that with a probability of 0.5% will not be exceeded. The risk capital required for specific risks is shown in each case before tax.
Risk management in property and casualty reinsurance has defined various overall guidelines for efficient risk steering. These include, among other things, the use of retrocessions to reduce volatility and conserve capital. It is also crucially important to consistently maximise the available risk capacities on the basis of the risk management parameters of the Hannover Re Group and to steer the acceptance of risks systematically through the existing central and local underwriting guidelines. Our conservative reserving level is a key factor in our risk management. We make a fundamental distinction between risks that result from business operations of past years (reserve risk) and those stemming from activities in the current or future years (price / premium risk). In the latter case, special importance attaches to the catastrophe risk.
The largest share of the required risk capital for the premium risk (including catastrophe risk) is attributable to risks from natural disasters. They constitute the main concentration risk in property and casualty reinsurance. The following table shows the required risk capital for four of our largest natural hazards scenarios: Required risk capital 1 for four natural hazards scenarios in EUR million 2018 2017
Winter storm Europe 609.77 665.15 1 Required risk capital with a confidence level of 99.5% on an aggregate annual loss basis
Survival ratio in years and reserves for asbestos-related claims and pollution damage M 66 in EUR million
Asbestos-related claims / pollution damage 19.5 157.9 30.0 20.1 155.3 27.2
Hurricane "Michael", United States 10 – 16 October 2018 144.0 46.3
Typhoon "Prapiroon", Japan 29 June – 6 July 2018 25.2 11.0
Typhoon "Mangkhut", Guam, Philippines, China 10 – 19 September 2018 24.4 12.3
Combined ratio (property and casualty reinsurance) 96.5 99.8 93.7 94.4 94.7 94.9 95.8 104.3 98.2 96.6 1 Net share of the Hannover Re Group for natural catastrophes and other major claims in excess of EUR 10 million gross as a percentage of net premium earned (until 31 December 2011: in excess of EUR 5 million gross)
For further information on the run-off of the loss reserves please see our explanatory remarks in the section “Run-off of the net loss reserve in the property and casualty reinsurance segment” on page 230 et seq.
Underwriting risk life and health 2,212.5 2,354.7 1 Required risk capital with a confidence level of 99.5% 2 Mortality risk incl. catastrophe risk
As part of our inforce management measures we initiated rate adjustments for the portfolio concerned. It is to be anticipated that individual cedants will seek arbitration proceedings with respect to the implemented rate increases. Based on the information currently available to us, we take a favourable view of our legal position.
Market risk 3,833.5 3,462.2 1 Required risk capital with a confidence level of 99.5% 2 Including private equity
The predefined discussion and analysis mechanisms in connection with a triggering of the early-warning system’s escalation levels reached the assessment in each case that the general market movements would not have any intolerable or strategy-altering implications for our portfolio or our economic capitalisation. For this reason, our trigger system did not cause us to make any changes to the asset allocation in the reporting period.v
M 75 1 VaR upper limit according to Hannover Re’s investment guidelines: 2.5%
Stress tests are conducted in order to be able to map extreme scenarios as well as normal market scenarios for the purpose of calculating the Value at Risk. In this context, the loss potentials for fair values and shareholders’ equity (before tax) are simulated on the basis of already occurred or notional extreme events.
It should be borne in mind that the issued subordinated bonds and resulting induced interest rate exposure are actively factored into our ALM. Further information on the risk concentrations of our investments can be obtained from the tables on the rating structure of fixed-income securities as well as on the currencies in which investments are held. Please see our comments in section 6.1 of the notes entitled “Investments under own management” on page 204 et seq.
Equity risks derive from the possibility of unfavourable changes in the value of equities, equity derivatives or equity index derivatives in our portfolio. Their relevance to our investments decreased sharply in the year under review, however, because we liquidated our holdings of non-strategic listed equities and equity funds at the end of the previous year. This leaves only a minimal portfolio in the context of strategic holdings. Our exposure to the private equity market remains unchanged. Changes in fair value here tend to be prompted less by general market conditions and more by entity -specific assessments. The risks are associated principally with the business model and profitability and less so with the interest rate component in the consideration of cash flow forecasts. Please see our comments in section 6.1 of the notes entitled “Investments under own management” on page 204 et seq.
Real estate risks result from the possibility of unfavourable changes in the value of real estate held either directly or through fund units. They may be caused by a deterioration in particular qualities of a property or by a general downslide in market values. Real estate risks continued to grow in importance for our portfolio owing to our ongoing involvement in this sector. We spread these risks through broadly diversified investments in high-quality markets worldwide; each investment is preceded by detailed analyses of the property, manager and market concerned.
In general terms, Hannover Re gears its investment portfolio to the principles of a balanced risk / return ratio coupled with broad diversification. Accordingly, we counter the risk concentrations that nevertheless arise in individual asset classes with the broadest possible spread of different issuers per asset class. This is just as much a key component of our investment policy as credit rating assessment and management based on the quality criteria defined in the investment guidelines.
On a fair value basis EUR 4,126.2 million of the corporate bonds held by our company were issued by entities in the financial sector. Of this amount, EUR 3,285.4 million was attributable to banks. The vast majority of these bank bonds (65.7%) are rated “A” or better. Our investment portfolio under own management does not contain any written or issued credit default swaps.
Since the business that we accept is not always fully retained, but instead portions are retroceded as necessary, the counterparty default risk is also material for our company in reinsurance transactions. Our retrocession partners are carefully selected and monitored in light of credit considerations in order to keep the risk as small as possible. This is also true of our broker relationships, which entail a risk inter alia through the potential loss of the premium paid by the cedant to the broker. We minimise these risks, among other things, by reviewing all broker relationships with an eye to criteria such as the existence of professional indemnity insurance, payment performance and proper contract implementation. The credit status of retrocessionaires is continuously monitored. On the basis of this ongoing monitoring a Security Committee decides on measures where necessary to secure receivables that appear to be at risk of default. This process is supported by a Web-based risk management application, which specifies cession limits for the individual retrocessionaires participating in protection cover programmes and determines the capacities still available for short-, medium- and long-term business. Depending on the type and expected run-off duration of the reinsured business, the selection of reinsurers takes into account not only the minimum ratings of the rating agencies Standard & Poor’s and A.M. Best but also internal and external expert assessments (e. g. market information from brokers). Overall, retrocessions conserve our capital, stabilise and optimise our results and enable us to act on opportunities across a broader front, e. g. following a major loss event. Regular visits to our retrocessionaires give us a reliable overview of the market and put us in a position to respond quickly to capacity changes. The following table shows how the proportion of assumed risks that we do not retrocede (i. e. that we run in our retention) has changed in recent years:
Lastly, short-term deposits at banks are also at risk of counterparty default.
The average default rate from retrocessions over the past four years was 0.09%.
Retrocession gives rise to claims that we hold against our retrocessionaires. These reinsurance recoverables – i. e. the reinsurance recoverables on unpaid claims – amounted to EUR 2,084.6 million (EUR 1,651.3 million) as at the balance sheet date.
Further remarks on technical and other assets which were unadjusted but considered overdue as at the balance sheet date as well as on significant impairments in the year under review are provided in section 6.4 “Technical assets” on page 222 et seq., section 6.6 “Other assets” on page 225 et seq. and section 7.2 “Investment result” on page 246 et seq.
Subcategories of operational risks • Business process and data quality risk • Compliance risk • Outsourcing risk • Fraud risk • Personnel risk • Information security risk • Business interruption risk
We use sanctions screening software on the main parts of the Hannover Re Group’s portfolio as well as on loss advices to filter out individuals who are subject to sanctions on account of a criminal or terrorist background. Suitable steps are taken if such individuals are identified. Business partners are also screened in this way. Responsibilities within the compliance organisation are regulated and documented Group-wide and interfaces with risk management have been put in place. The set of tools is rounded off with regular compliance training programmes. For further information on compliance-related topics, including for example lawsuits, contingent liabilities and commitments, please see section 8.6 “Lawsuits” and section 8.7 “Contingent liabilities and commitments” on page 266 et seq.
C om b in ed m an ag em en t re p or t sourcing can even occur in the first place. Our external partners are additionally subject to regular due diligence checks.
The proper functioning and competitiveness of the Hannover Re Group can be attributed in large measure to the expertise and dedication of our staff. In order to minimise personnel risks, we pay special attention to the skills, experience and motivation of our employees and foster these qualities through outstanding personnel development and leadership activities. Regular employee surveys and the monitoring of turnover rates ensure that such risks are identified at an early stage and scope to take the necessary actions is created.
Fraud risks refer to the risk of intentional violations of laws or regulations by members of staff (internal fraud) and / or by externals (external fraud) in order to obtain a personal gain. This risk is reduced by the internal control system as well as by the audits conducted by Group Auditing on a Group-wide and line-independent basis.
The hallmark of emerging risks is that the content of such risks cannot as yet be reliably assessed – especially on the underwriting side with respect to our treaty portfolio. Such risks evolve gradually from weak signals to unmistakable tendencies. It is therefore vital to detect these risks at an early stage and then determine their relevance. For the purpose of early detection we have developed an efficient process that spans divisions and lines of business and we have ensured its linkage to risk management. Operational implementation is handled by an expert working group assembled specially for this task. The analyses performed by this working group are used Group-wide in order to pinpoint any necessary measures (e. g. the implementation of contractual exclusions or the development of new reinsurance products). By way of example, risks associated with possible climate change are analysed by this working group. Global warming would affect not only natural perils, but also human health, the world economy, the agricultural sector and much more besides. These problematic issues may also have implications for our treaty portfolio – in the form of not just risks but also opportunities, such as increased demand for reinsurance products. Further examples of emerging risks include pandemics (spread of disease across multiple countries or continents), supply chain risks and autonomous machines.
Key elements in Hannover Re’s opportunity management include its various market-specific innovations in the Life & Health and Property & Casualty reinsurance business groups (see the Forecast on page 150 et seq.).
The Executive Board and Supervisory Board of Hannover Rück SE expressly support the suggestions and recommendations of the German Corporate Governance Code that are practicable for the reinsurance industry and recognise their central importance in guiding our activities. The principles of responsible and good enterprise management therefore constitute the core of our internal Corporate Governance principles (www.hannover-re.com/50889/corporate-governance- principles.pdf). These remained unchanged in the year under review. We cultivate integrity at all times in our dealings with business partners, staff, shareholders and other stakeholder groups and support the principles of value-based and transparent enterprise management and supervision defined in the German Corporate Governance Code. The Supervisory Board, Executive Board and employees of Hannover Re identify with these principles, which thus form part of our corporate self-image. The Executive Board ensures that the principles are observed Group-wide.
Hannover Rück SE hereby provides insight into its enterprise management practices as part of the Declaration on Corporate Governance pursuant to § 289f German Commercial Code (HGB) and pursuant to § 315d German Commercial
Code (HGB) in conjunction with § 289f German Commercial Code (HGB) for the Hannover Re Group: Corporate Governance
Code Government Commission” published by the Federal Ministry of Justice or to explain which recommendations of the Code were / are not applied.
The Executive Board and Supervisory Board declare pursuant to § 161 Stock Corporation Act (AktG) that in its implementation of the German Corporate Governance Code Hannover Rück SE diverges in three respects from the recommendations contained in the version of the Code dated 7 February 2017: Code Section 4.2.3 Para. 2; Caps on the amount of variable compensation elements in Management Board contracts The variable compensation of the members of the Executive Board is granted in part in the form of Hannover Re share awards. The maximum number of share awards granted at the time of allocation depends upon the total amount of variable compensation, which is subject to an upper limit (cap), i. e. the allocation of share awards is limited by the cap. The share awards have a vesting period of four years. During this period the members of the Executive Board therefore participate in positive and negative developments at the company, as reflected in the share price. The equivalent value of the share awards is paid out to the members of the Executive Board after the end of the vesting period. The amount paid out is determined according to the share price of the Hannover Re share applicable at the payment date plus an amount equivalent to the total dividends per share distributed during the vesting period. The share awards consequently follow the economic fortunes of the Hannover Re share.
For formal purposes and as a highly precautionary measure, Hannover Rück SE is therefore declaring a divergence from Code Section 4.2.3 Para. 2.
Code Section 4.2.3 Para. 4; Caps on severance payments in Management Board contracts Premature termination of a service contract without serious cause may only take the form of cancellation by mutual consent. Even if the Supervisory Board insists upon setting a severance cap when concluding or renewing an Executive Board contract, this does not preclude the possibility of negotiations also extending to the severance cap in the event of a member leaving the Executive Board. In addition, the scope for negotiation over a member leaving the Executive Board would be restricted if a severance cap were agreed, which could be particularly disadvantageous in cases where there is ambiguity surrounding the existence of serious cause for termination.
In the period from 1994 to 2002 he served as the company’s Chief Financial Officer. During this time he acquired superb knowledge of the company and he is equipped with extensive professional expertise in the topics that fall within the scope of responsibility of the Finance and Audit Committee. With this in mind, the serving Chair of the Supervisory Board is optimally suited to chairing the Audit Committee.
The strategic orientation of Hannover Re towards sustainability constitutes an important element of the enterprise strategy.
Employee retention is encouraged, while diversity and equal opportunities are promoted.
Following a by-election four of the members of the Supervisory Board of Hannover Rück SE in the year under review were women. In addition, one woman sits on the Supervisory Board’s Finance and Audit Committee and one is a member of the Nomination Committee. Detailed information on the topic of sustainability is provided on our website (www.hannover- re.com/ 60729/sustainability).
Targets pursuant to § 289f Para. 4 Sentence 1 in conjunction with Para. 2 No. 4 German Commercial Code (HGB)
The three seats held by employee representatives, which are currently allocated to Germany pursuant to Part III. § 13 (3) of the Agreement regarding the Participation of Employees in Hannover Rück SE of 23 January 2013, are elected in accordance with the provisions of the SE Participation Act (SEBG) by the responsible representative body (currently the joint Employee Council of Hannover Rück SE and E+S Rückversicherung AG). The Supervisory Board appoints the members of the Executive Board. Since members of the Supervisory Board cannot at the same time belong to the Executive Board, a high degree of independence in the oversight of the Executive Board is thus already ensured by structural means. In addition, the Supervisory Board is kept informed on a regular and timely basis of the business development, the execution of strategic decisions, material risks and planning as well as relevant compliance issues. The Chairman of the Supervisory Board stays in regular contact with the Chairman of the Executive Board in order to discuss with him significant business occurrences. The composition of the Executive Board (including areas of responsibility) as well as of the Supervisory Board and its committees is set out on pages 6 et seq. and 286 respectively of the present Annual Report.
Furthermore, it shall be ensured that the proposed person can allocate the expected amount of time. For their part, each sitting member of the Supervisory Board shall also ensure that they have sufficient time to discharge their mandate. The Supervisory Board meets at least twice each calendar half-year. If a member of the Supervisory Board has only participated in half of the meetings of the Supervisory Board and the committees or less in a financial year, this shall be noted in the Supervisory Board’s report. No more than two former members of the company’s Executive Board may belong to the Supervisory Board.
For further details of the activities of the Supervisory Board committees please see the explanations provided in the Supervisory Board Report on page 281 et seq..
Hannover Re considers a properly functioning compliance structure to be an essential tool for ensuring compliance with external rules and regulations as well as requirements imposed internally by the company. Our compliance structure, which consists of compliance modules precisely tailored to the specific features of our Property & Casualty and Life & Health reinsurance business groups, facilitates optimal application. The compliance committees, which examine questions of risk transfer as well as other compliance aspects associated with the Group’s reinsurance treaties, are comprised of members from the respective business groups as well as from the areas of Legal, Finance, Accounting and Investments. The chairs report directly to the Executive Board. This structure safeguards adherence to the standards that have been set.
The compliance report for the 2018 calendar year will be submitted to the Finance and Audit Committee in March 2019. The reporting sets out the structure and diverse range of activities of Hannover Re in this regard. The findings of the separate data privacy reporting for the 2018 calendar year are also included in the compliance report. After in-depth examination of topics such as directors’ dealings, ad hoc and other disclosure requirements, the insider register, consulting agreements, data protection, international sanctions and the Group-wide whistleblower system, the report concludes that only a few circumstances have been identified which point to breaches of relevant compliance standards. After detailed exploration of these incidents, the necessary safeguards were put in place to ensure that in the future Hannover Re is in conformity with the internal and external requirements governing its business activities.
The risk management system applicable throughout the entire Hannover Re Group is based on the risk strategy, which in turn is derived from the corporate strategy. A core component is the systematic and comprehensive recording of all risks that from the current standpoint could conceivably jeopardise the company’s profitability and continued existence. Further details in this regard may be obtained from the risk report contained in this Annual Report on pages 94 et seq.
In order to ensure that the relevant selection criteria are met, the Supervisory Board followed the recommendation of the Nomination Committee and defined a requirements profile for Supervisory Board members; this is intended, among oth-
In addition to the present Declaration on Corporate Governance, the Corporate Governance Report and the reports of recent years are published on our website pursuant to Item 3.10 of the German Corporate Governance Code (www.hannover-re.com/ 200801/declaration-of-conformity).
Remuneration report The remuneration report summarises the principles used to determine the remuneration of the Executive Board of Hannover Rück SE and explains the structure, composition and amount of the components of the remuneration received by the Executive Board in the 2018 financial year on the basis of the work performed by the Board members for Hannover Rück SE and companies belonging to the Group.
Responsibility In order to efficiently perform its tasks the Supervisory Board has formed various committees. The Standing Committee prepares remuneration-related matters of content relating to the Executive Board for discussion and adoption of a resolution by a full meeting of the Supervisory Board.
Insurance Sector (VersVergV). An independent expert’s report from September 2018 confirms that the system of remuneration meets the requirements of Art. 275 Commission Delegated Regulation (EU) 2015 / 35 for a remuneration policy and remuneration practices that are in line with the undertaking ’s business, strategy and risk profile.
An individually determined and contractually defined basic amount is paid for each 0.1 percentage point by which the RoE of the past three financial years exceeds the risk-free interest rate. Goal attainment of 100% corresponds to an RoE of 8.8% plus the risk-free interest rate (2018: 0.42%). Goal attainment can amount to a maximum of 200% and a minimum of -100%.
An individually determined amount specified in the service contract is calculated for each 0.1 percentage point by which the average 3-year RoCA exceeds the level of 0%.
Goal attainment of 100% is achieved in property and casualty reinsurance with a RoCA of 9.1% and in life and health reinsurance with a RoCA of 10.1%. These RoCA values are above the cost of capital and thus generate positive intrinsic value creation (IVC). 1
The method used to calculate the IVC as a basis for determining the divisional performance is checked by independent experts.
Individual bonus Proportion of variable remuneration: Chief Executive Officer / Chief Financial Officer: 30%; Board member with divisional responsibility: 25%
Automatic granting of virtual Hannover Re share awards (HR-SAs) with a value equivalent to 20% of the variable remuneration; payment of the value calculated at the payment date after a vesting period of four years; value of the share on awarding / payment: unweighted arithmetic mean of the Xetra closing prices five trading days before to five trading days after the meeting of the Supervisory Board that approves the consolidated financial statement; additional payment of the sum total of all dividends per share paid out during the vesting period; changes in a cumulative amount of 10% or more in the value of the HR-SAs caused by structural measures trigger an adjustment; the Board member has no entitlement to the delivery of shares.
Of the stock appreciation rights granted in previous years, active and former members of the Executive Board exercised amounts totalling EUR 63.6 thousand (previous year: EUR 0.6 million) in 2018.
Other information The contracts of the Board members do not include a commitment to benefits in the event of a premature termination of employment on the Executive Board owing to a change of control.
With regard to Item 4.2.3. Para. 2 “Caps on the amount of variable compensation elements in management board contracts ” and Item 4.2.3 Para. 4 “Caps on severance payments in management board contracts” of the German Corporate Governance Code, we would refer the reader to our remarks in the 2018 Declaration of Conformity contained in the section “Statement of enterprise management practices” on page 123 et seq. of this Group Annual Report.
The remuneration (excluding pension payments) received by former members of the Executive Board totalled EUR 54.1 million (EUR 0.2 million).
Total remuneration of the active members of the Executive Board pursuant to DRS 17 (modified in 2010) M 87
6 In order to calculate the number of share awards for 2018 reference was made to the Xetra closing price of the Hannover Re share on 28 December 2018 (EUR 117.70). The number to be actually awarded is established from the arithmetic mean of the Xetra closing prices of the Hannover Re share in a period from five trading days before to five trading days after the meeting of the Supervisory Board that approves the consolidated financial statement in March 2019. The applicable market price of the Hannover Re share had increased from EUR 104.90 (29 December 2017) to EUR 111.65 by the allocation date (16 March 2018) of the share awards for 2017; the share awards actually allocated for 2017 are shown here, not those estimated in the 2017 Annual Report.
Short-term Medium-term Long-term 2017 = Actual 2018 = EstimateVariable remuneration payable Bonus bank Share awards in EUR thousand from seats with Group bodies in EUR thousand
4 The nominal amount is stated; full or partial repayment in 2022, depending on the development until such time of the balance in the bonus bank. In 2018 altogether EUR 11,200 more than had been originally reserved was allocated to the bonus bank for 2017. 5 The nominal amount is stated; virtual Hannover Re share awards are automatically granted in an amount equivalent to 20% of the variable remuneration. The equivalent amount will be paid in 2023 at the prevailing share price of Hannover Re. In 2018 nominal amounts of EUR 11,200 more than had been originally reserved were used as a basis for allocation of the 2017 share awards.
7 The variable remuneration to be approved at the Supervisory Board meeting held to consider the consolidated financial statements in March 2019 will be paid out to the heirs.
Total in EUR thousand 1 The change in the reserve for share awards from previous years derives from the higher market price of the Hannover Re share, the dividend approved for 2017, the spreading of the expense for share awards across the remaining period of the individual service contracts and the payout of the share awards allocated for 2013.
Dividend on share awards for 2017 3 0.0 24.7 24.7 24.7 0.0 26.1 26.1 26.1 0.0 28.2 28.2 28.2 1 Year of payment 2 Maximum value when awarded, amount paid out dependent upon the share price in the year of payment and the dividends paid until such time. 3 In the case of Mr. Althoff the dividend also refers to share awards from his work as a senior executive at Hannover Re. 4 For details of the service cost see the table “Pension commitments” on page 143.
German Corporate Governance Code, Item 4.2.5 Para. 3 – Table 2 (cash allocations in 2017 and 2018) M 90
2 In the case of Mr. Althoff the payment of share awards relates to his work as a senior executive before his appointment as a member of the Executive Board.
4 Stock appreciation rights were awarded to Mr. Althoff in 2011 as a senior executive, exercise option discretionary until 31 December 2021 in the following tranches: 60% from 2016, 80% from 2017, 100% from 2018 onwards 5 For details of the service cost see the table “Pension commitments” on page 143.
Defined contribution pension commitment (appointment from 2009 onwards) The commitments given to members of the Executive Board from 2009 onwards are based on a defined contribution scheme.
An orphan’s pension shall be granted in the amount of 15% – in the case of full orphans 25% (final-salary pension commitment) or 30% (contribution-based pension commitment ) – of the retirement pay that the Board member received or would have received on the day of his death if the pensionable event had occurred owing to a permanent incapacity for work.
DBO 31.12. Personnel expense in EUR thousand 1 Mr. Althoff and Mr. Vogel were first granted a pension commitment prior to 2001 on the basis of their service to the company prior to their appointment to the Executive Board; the earned portion of the defined benefit obligation is therefore established as a proportion (in the ratio [currently attained service years since entry] / [attainable service years from entry to exit age]) of the final benefit. The values shown include the entitlements prior to appointment to the Executive Board, which in accordance with a resolution of the company’s Supervisory Board shall remain unaffected by the pension commitment as a member of the Executive Board.
2 The personnel expense for 2018 includes a past service cost of EUR 82.8 thousand.
Furthermore, each member of the Supervisory Board receives variable remuneration measured according to the average earnings per share (EPS) of the company over the past three financial years preceding the Annual General Meeting at which the actions of the Supervisory Board for the last of these three years are ratified. The variable remuneration amounts to EUR 330 for each EUR 0.10 average earnings per share (EPS) of the company. The measurement of this performance-based remuneration component according to the average earnings per share of the last three financial years ensures that the variable remuneration is geared to sustainable corporate development. The variable remuneration is limited to an annual maximum of EUR 30,000. The Chairman of the Supervisory Board receives twice the aforementioned remuneration amounts and the Deputy Chairman of the Supervisory Board receives one-and-a-half times the said amounts.
Deputy Chairman of the • Supervisory Board Member of the • Standing Committee • Finance and Audit Committee • Nomination Committee
Attendance allowances 6.0 4.0 1 Amounts excluding reimbursed VAT 2 Including supervisory board remuneration and remuneration for committee work as well as advisory board remuneration received from entities affiliated with the company 3 Employee representatives
Dealings in shares, options and derivatives of Hannover Rück SE effected by members of the Executive Board or Supervisory Board of Hannover Re or by other persons with managerial functions who regularly have access to insider information concerning the company and who are authorised to take major business decisions – as well as such dealings conducted by certain persons closely related to the aforementioned individuals – in excess of EUR 5,000 are to be reported pursuant to § 15a Securities Trading Act (WpHG). No reportable transactions took place in the 2018 financial year.
Members of the Supervisory Board and Executive Board of Hannover Rück SE as well as their spouses or registered partners and first-degree relatives hold less than 1.0% of the issued shares. The total holding as at 31 December 2018 amounted to 0.004% (0.004%) of the issued shares, i. e. 4,741 (4,681) shares.
The group of participants and the total number of eligible participants in the variable remuneration system of Hannover Re are set out in the following table.
The cash bonus for the 2017 financial year was paid out in June 2018. The share awards for the 2017 financial year were also allocated in June 2018; they will be paid out in the spring of 2022 including dividends paid for the 2017, 2018, 2019 and 2020 financial years.
Outlook Forecast • Successful treaty renewals in property and casualty reinsurance as at 1 January 2019 • Significant premium growth anticipated in property and casualty reinsurance as well as moderate growth in life and health reinsurance • Return on investment target of at least 2.8% for assets under own management • Group net income in the order of EUR 1.1 billion expected
United States After an upward trend that has been sustained for close to ten years, the US economy has in all likelihood passed its peak. Investment activity was already significantly more muted in the second half of 2018; employment growth similarly slowed appreciably. This trend is set to continue in 2019. A further factor is the absence of additional stimuli from monetary and fiscal policy, as a consequence of which the pace of expansion will decline by 0.4 percentage points in 2019 to 2.5%. Growth continues to be supported by rising incomes and sustained positive consumer sentiment. Exports will soften sharply in 2019, not least due to trade wars. Despite all the trade policy actions taken, the US current account deficit will likely grow by a further 0.4 percentage points to 3.2%.
In the United Kingdom the uncertainties surrounding what form Brexit will ultimately take remain in place for the time being and – according to calculations by the Kiel-based experts – have likely so far led to lost production in the order of 2% for the economy as whole. Irrespective of the new political and economic framework arrived at by the European Union and the United Kingdom, growth in the UK will decline again in 2019 to 1.0% owing to depressed consumer sentiment and a reluctance to invest. In this context it is to be anticipated that little will change in the trading relationship in the short term, given that the future arrangements still have to be elaborated in detail.
Germany As far as Germany is concerned, the Kiel-based economists expect the positive trend to continue in 2019. Even though the federal government trimmed its expectation for 2019 GDP growth in January, the ending of temporary production curbs – especially in car manufacturing – will likely have positive implications for the pace of economic growth. Moreover, wide-ranging tax cuts and benefit extensions will increase the disposable income of households and give private consumer spending an added boost. Capacity bottlenecks in the construction sector will hamper more vigorous expansion and drive building costs even higher. Business investments will be on the level of the previous year against the backdrop of recurring uncertainties on international markets.
China, India, Japan Growth in China will continue to slow in 2019 and is forecast to contract by 0.5 percentage points to 6.1%. The tax cuts and public spending programmes recently approved by the government are aimed less at stimulating the economy – which was the case in past years – and more at containing the effects of possible punitive tariffs that may be imposed by the United States.
Supported by a successfully implemented programme of reforms, India’s economy will be able to very nearly sustain its high rate of expansion and is likely to grow by 7.5%. The country is thus on the verge of overtaking the United Kingdom and France to claim fifth spot among the world’s largest economies.
Having tended to move sideways (albeit on a high level) over large parts of 2018, equity markets came under pressure that was significant in some areas towards the end of the year as they became caught up in global uncertainties and a pervasive sense of unease. It is our expectation that this will continue in 2019 to varying degrees, although the upside potential is rather limited. Sharply higher risk premiums of late on industrials and financials also suggest that a great deal of uncertainty has already been priced in, although the speculative scope for price jumps would seem to be on the modest side. However, we only expect to see appreciable price declines if national economies drift into recession. On US markets it remains to be seen how lasting the effects of tax reform and higher government spending will be, because many economic actors are likely aware that lower tax receipts combined with higher expenditures create funding gaps that ultimately have to be filled with higher tax inflows in the future. Nor will Europe or the emerging markets escape the resulting uncertainties unscathed.
The insurance industry continues to be preoccupied with the sustained, generally low level of interest rates and increasingly exacting regulatory requirements: the decision taken by the ECB in January of 2019 to keep the key reference rate at zero percent indicates that the Eurozone will not see any quick turning away from the ultra-low rate environment. Life insurers are particularly hard hit, having no choice but to adjust their business models. The US Federal Reserve, on the other hand, will likely press ahead along the path towards higher interest rates in 2019. Going forward, there is at least the prospect that this will also lead to a normalisation of interest rates in Europe. On the regulatory side it is evident that insurance supervisory authorities around the world are now expanding the focus of their attention to include not only solvency issues but also the supervision of market conduct. The topic of market conduct has, for example, already been included as a content item in the five-year strategic plan drawn up by the International Association of Insurance Supervisors (IAIS).
The pressure to act on cutting costs remains considerable, prompting market players to accelerate the drive towards digitalisation of their business processes. They are expanding automation of their back office processes and enhancing the flexibility of their IT structures, at the same time opening up further scope to improve customer care. The consolidation process that has already been ongoing in the reinsurance sector for a number of years will continue in 2019. Surplus capacities are thereby eliminated and efficiency is increased.
Reinsurers are continuing to shift their focus towards the quality of their products and services. This move is also prompted by the demand side, since their insurance partners are increasingly calling for bespoke solutions. Against this backdrop insurance products are created that actively support their partners’ strategic objectives and growth targets. Thus, for example, the increasing need to protect against climate change, elevated political risks and the ever more important segment of cyber risks continue to present the industry with numerous entry points for the launch of new products. The digital transformation of the industry, in particular, is opening up new avenues for loss prevention and for closer cooperation with partners from the technology sector.
+ = above the cost of capital + / – = on a par with the cost of capital – = below the cost of capital 3 All lines with the exception of those reported separately
A stable to slightly positive price trend was evident in the treaty renewals as at 1 January 2019. Rates moved notably higher under loss-impacted programmes, while modest price erosion was observed for programmes that had remained loss-free. In US property business we were able to enlarge the portfolio written with existing clients at improved conditions overall. Prices and conditions in US liability business were for the most part on a satisfactory level, enabling us to further expand our premium volume in some lines of this segment. We expect to see a continued positive pricing tendency for the rounds of treaty renewals in June and July 2019 – when the bulk of the loss-impacted programmes come up for renewal. Through our cooperation with insurtechs we are also acting on business opportunities associated with progressive digitalisation. Within our defined risk appetite we are able to comprehensively support our clients who continue to seek out our financial strength.
Continental Europe In Germany, the largest single market within our Continental Europe segment, we were able to consolidate our prominent position in the treaty renewals as at 1 January 2019 and indeed extended it on the basis of specific treaties. Against a backdrop of broadly stable rates and conditions, we expect to book premium growth in the double-digit percentage range overall. After the challenging market conditions seen in industrial fire and property insurance in Germany for quite a number of years, some moves by primary insurers to remediate the business can now be discerned in the market. With this in mind we partially expanded the portfolio in keeping with our selective underwriting policy. In motor insurance, our most important individual line of business, we expect to see a stable premium development. Demand for reinsurance protection has been stimulated by rising awareness of the dangers posed by cyber risks as well as by regulatory requirements.
In the other markets of Continental Europe the picture was a mixed one. Generally speaking, it may be stated that the treaty renewals as at 1 January 2019 saw a demand for more reinsurance protection at stable prices. We achieved particularly pleasing growth in Italy. In Western Europe we maintained the premium level from the previous year. In Eastern Europe price stabilisation was evident; some of the price increases under loss-affected programmes were very significant.
Specialty lines worldwide Marine In marine reinsurance the renewals as at 1 January 2019 passed off largely satisfactorily. Rate increases for loss-impacted programmes were in some instances appreciable. Other than that, the Asian market was still shaped by surplus capacity and Continental European programmes also came under modest pressure. The treaty renewals on the London Market for the most part remained on a constant level. Customers were nevertheless differentiated here according to their specific changes in exposures and losses. Owing to our
C om b in ed m an ag em en t re p or t discontinuation of marine acceptances in the London Market as well as some corporate mergers, we anticipate a reduced premium volume in marine reinsurance.
United Kingdom, Ireland and London Market Rates were stable across all lines in the round of 1 January treaty renewals, with modest erosion observed in motor third party liability. Market players now expect the Ogden rate to be increased in 2019, which may lead to an improved claims run-off. To some extent this effect was pre-empted by other market players and prices were adjusted downwards. For our part, however, we maintained our conservative stance on pricing. Prices were also stable for property reinsurance programmes on the London Market. Given the keen focus put on profit, which is pursued especially vigorously by Lloyd’s of London, we expect to see hardening on the primary insurance market. We similarly anticipate positive implications for our portfolio from improvements in the business written by our clients, both in qualitative terms and on the pricing side. For the current year we are expecting a stable premium volume overall.
Direct business As already announced in the year under review, Hannover Re and HDI Global have concentrated their primary insurance activities in specialty lines in a new joint venture named HDI Global Specialty SE. The majority interest (50.2%) in Inter Hannover was acquired by HDI Global for this purpose. HDI Global Specialty commenced operational activities on 1 January 2019 and writes agency business and speciality insurance in a range of lines including errors & omissions liability insurance, directors’ and officers’ (D & O) liability insurance, legal expenses, sports and entertainment, aviation and offshore energy. As early as 2019 annual gross premium income is expected to exceed EUR 1 billion. Hannover Re will continue to reinsure a large portion of the business written by HDI Global Specialty. A premium decline will nevertheless be recorded due to deconsolidation in the amount of the former Inter Hannover’s retention.
Based on our progressive accumulation of know-how and enhanced customer support, we similarly anticipate a rising premium volume and continued good results for our specialty lines.
China continues to be the focus of our activities in Asia. Particularly against the backdrop of rapid digitalisation, we are seeking new business opportunities with existing and new
partners. In traditional reinsurance business we consider ourselves optimally positioned but anticipate a continued oversupply of capacity, which means that a greater emphasis on innovation will play an important strategic role in the cultivation of new business.
In Australia and New Zealand the market players expect to see clear improvements in conditions in the run-up to the 1 January and 1 July renewals. Demand for natural catastrophe capacity is still rising, which should have implications for pricing in Australia and New Zealand too.
The market for reinsurance is just as competitive in Latin America as it is in other insurance markets, although the picture shows sometimes sharp variations from country to country.
In view of a number of large losses in the year under review as well as a shortage of capacity for proportional earthquake covers, conditions for these programmes improved significantly in the renewals as at 1 January 2019 compared to the beginning of 2018. Based on our good market position and superb financial strength, we benefited from offers of new business and improved treaty conditions in the renewals. In addition, we shall continue to pay closer attention to an adequate level of primary insurance rates in Latin America and the Caribbean and we shall make our capacity available accordingly. Thanks to our selective underwriting policy and needs-oriented reinsurance solutions, and reflecting the improvement in primary insurance conditions, it is our assumption that we shall be able to profitably expand our portfolio in Latin American markets and the Caribbean in the current 2019 financial year.
Hannover Re expects demand for insurance against agricultural risks to continue rising: the increasing need for agricultural commodities and foodstuffs as well as the growing prevalence of extreme weather events are generating stronger demand for corresponding reinsurance covers, particularly in emerging and developing markets. At Hannover Re we engage both in traditional reinsurance and in intensified cooperation with our customers and partners on the development of new tools for primary insurance. In this regard, we see further growth potential for index-linked products as part of direct and indirect insurance concepts in emerging and developing economies. The more widespread implementation of public-private partnerships offers us new opportunities to write profitable business in markets that have still to establish themselves.
In natural catastrophe (Cat XL) business we expect the additional inflow of capacity from the capital markets to be on the moderate side. This is due to the loss experience of 2017 and 2018 as well as a pricing response that many capacity providers found disappointing. Given that reinsurance rates remain low, it is our expectation that the retentions carried by primary insurers will continue to be on a low level.
When it comes to the 1 April renewals in Japan, the previously mentioned typhoon losses could appreciably affect demand for reinsurance capacity. It is our expectation that the rise in prices will be in the order of 30%. For the 1 June and 1 July renewals we anticipate stronger rate increases than those seen as at 1 January, because by that stage a clearer picture will emerge of the results achieved by reinsurers and hence
C om b in ed m an ag em en t re p or t the pressure on capital market investors will likely grow in light of market and interest rate factors.
In the international life and health reinsurance market we expect new business opportunities to open up in 2019. It is our assumption that emerging markets, in particular, will continue to make up economic ground. Based on the associated rise in incomes and improvement in living standards, demand for insurance protection – including for example disability, accident and pure mortality covers – as well as for products geared to retirement provision can be expected to rise.
In the German market it appears that market consolidation will remain a defining issue. The regulatory requirements imposed by the Federal Financial Supervisory Authority (BaFin) in combination with a complex set of market circumstances – such as low interest rates, a decline in business with traditional life insurance policies and higher capital adequacy ratios – are presenting the insurance industry with considerable challenges. It remains to be seen whether the market is already equipped to tackle them. Notwithstanding the above, we believe that insurance products aimed at senior citizens offer potential opportunities, given how growth in this area is driven by an ageing German population.
As it looks towards Brexit, the United Kingdom is on the cusp of an event with far-reaching implications for the local economy and for the entire European Union. It is still too soon to make any detailed observations, given that only the vaguest key points about the country’s withdrawal are known. We are, however, keeping a close eye on developments and are positioned to respond flexibly to the changes that lie ahead.
We consider Asia to be the continent that offers the greatest growth potential. The Chinese market, in particular, is recording very dynamic growth, and we therefore anticipate continued promising new business in the coming year.
In our assessment, microinsurance is another area that offers further business opportunities. Drawing on innovative networks of a wide range of sales partners, the goal is to enable groups of individuals to access insurance who cannot be reached through normal distribution channels. This is particularly important for less developed economies. Thanks to our global network, we are able support providers as they expand their product range in these countries, thereby open opening up access to insurance for more people.
Turning to our automated underwriting systems, we are similarly optimistic that we can build on the success story written so far. Numerous new deployments of hr|ReFlex are already envisaged for the coming year. What is more, the growing demand for lifestyle insurance products that combine health-related aspects (e. g. fitness and nutritional habits) with insurance protection will remain a trend in 2019 and have major implications for the life insurance industry around the world.
We anticipate that the forecast developments in the markets will affect our key earnings figures as follows: gross premium income is expected to show organic growth averaging between 3% and 5% (assuming constant exchange rates; over a three-year period). The operating result (EBIT) should grow by more than 5% on average over a three-year period. The value of new business should exceed the minimum target of EUR 220 million.
Geopolitical and populist developments harbour growing uncertainties. As a consequence of the unusual capital market constellations experienced in recent years, the behaviour of capital market players can no longer be wholly explained by fundamentals. With this in mind, we shall remain risk-aware in investing substantial parts of our investment portfolio. Nevertheless, the brighter economic outlook in certain markets and countries will also be reflected in appropriate risk-taking. Our emphasis on broad diversification will remain in place. By maintaining the most neutral possible modified duration we shall ensure that the interest rate risk is tightly managed.
If the valuation levels of listed equities experience further corrections or stabilise, we are ready to enter the market on a moderate scale.
In our assessment, the Brexit issue remains, if anything, an indirect source of uncertainty affecting capital markets, but not a direct factor influencing our asset management activities. It is our assumption that markets have already priced in the uncertainty surrounding the withdrawal process.
For the 2019 financial year we anticipate a good overall result for Hannover Re. Bearing in mind the developments in property and casualty as well as life and health reinsurance, we are looking to book single-digit percentage growth in gross premium – based on constant exchange rates.
Thanks to our good ratings, long-standing stable customer relationships and low expense ratio, a solid outcome should once again be attainable. We therefore anticipate a good underwriting result, provided the burden of large losses remains within our expectations. For 2019 we have raised our net large loss budget for the first time in three years; it now stands at EUR 875 million as against EUR 825 million in the previous years. This adjustment reflects the growth in the underlying business.
The EBIT margin for property and casualty reinsurance should amount to at least 10%. We are aiming for a combined ratio here of less than 97%.
For the current financial year we anticipate Group net income of EUR 1.1 billion. This is subject to the proviso that large loss expenditure does not significantly exceed the budgeted level of EUR 875 million – which has been adjusted to reflect the growth in the underlying business – and assumes that there are no unforeseen distortions on capital markets.
Fixed-income securities – at fair value through profit or loss 6.1 559,750 212,042
Profit / loss from investments in associated companies 7.2 4,977 16,006
Income / expense on funds withheld and contract deposits 7.2 207,987 234,915
Commission and brokerage, change in deferred acquisition costs 7.3 4,271,736 3,499,270
Changes in ownership interest with no change of control status – – – – – – 618 618 160 778
Acquisition / disposal of treasury shares – – – – – – 7 7 – 7
Capital increases / additions – – – – – – – – 559 559
Capital increases / additions – – – – – – – – 44 44
Capital repayments – – – – – – – – (53) (53)
Cash and cash equivalents at the beginning of the period 835,706 848,667
Change in cash and cash equivalents (I. + II. + III. + IV.) 315,803 (12,961)
Cash and cash equivalents at the end of the period 1,151,509 835,706
Cash and cash equivalents at the end of the period excluding the disposal group 1,072,915 835,706
A n n u al f in an ci al s ta te m en ts 1. Company information 172 2. Accounting principles 172 3. Accounting policies 175 3.1 Summary of major accounting policies 175 3.2 Major discretionary decisions and estimates 183 4.1 Consolidation principles 184 4.2 Consolidated companies and complete list of shareholdings 185 4.3 Major acquisitions and new formations 197 4.4 Major disposals and retirements 198 5. Segment reporting 199 6. Notes on the individual items of the balance sheet 204 6.1 Investments under own management 204 6.2 Funds withheld (assets) 222 6.3 Contract deposits (assets) 222 6.4 Technical assets 222 6.6 Other assets 225 6.7 Technical provisions 229 6.8 Funds withheld (liabilities) 234 6.9 Contract deposits (liabilities) 234 6.10 Provisions for pensions and other post-employment benefit obligations 234 6.11 Other liabilities 238 6.12 Long-term debt and notes payable 240 6.13 Shareholders’ equity and treasury shares 242 6.14 Non-controlling interests 243 7. Notes on the individual items of the statement of income 245 7.1 Gross written premium 245 7.2 Investment income 246 7.3 Reinsurance result 248 7.4 Other income / expenses 249 7.5 Taxes on income 251 8. Other notes 254 8.1 Derivative financial instruments and financial guarantees 254 8.2 Related party disclosures 257 8.3 Share-based payment 260 8.4 Staff and expenditures on personnel 264 8.5 Earnings per share and dividend proposal 265 8.7 Contingent liabilities and commitments 266 8.8 Rent and leases 267 8.9 Fee paid to the auditor 268 8.10 Events after the balance sheet date 269
Changes in assumptions that do not relate to interest rates or financial risks are not recognised directly in the statement of income but are booked against the contractual service margin and hence spread across the remaining coverage period. Changes in estimates are only recognised immediately in
profit or loss in the case of those groups of insurance contracts that are expected to be loss-making.
Subject to endorsement in EU law and based on a tentative decision of the IASB, application of IFRS 17 is mandatory for annual reporting periods beginning on or after 1 January 2022.
Given that the standard affects Hannover Re’s core business activity, significant implications are expected for the consolidated financial statement. In view of the special significance of the new accounting rules, a multi-year implementation project was launched back in 2017 to explore the implications of the standard for the consolidated financial statement – including the interdependency with IFRS 9 – and the necessary implementation steps were defined and initiated. The accounting principles are currently being elaborated in order to subsequently begin implementing the extensive adjustments to the processes and systems. At this moment, therefore, it is not yet possible to quantify the implications for the consolidated financial statement.
In July 2014 the IASB published the final version of IFRS 9 “Financial Instruments”, which supersedes all previous versions of this standard and replaces the existing IAS 39 “Financial Instruments: Recognition and Measurement”. The standard contains requirements governing classification and measurement, impairment based on the new expected credit loss impairment approach and general hedge accounting. The new classification requirements result in more financial instruments being measured at fair value through profit or loss. Initial mandatory application of the standard, which was endorsed by the EU in November 2016, is set for annual periods beginning on or after 1 January 2018. In September 2016, however, the IASB published “Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (Amendments to IFRS 4)”. Under the deferral approach provided for in the amendments, entities whose predominant activity is issuing insurance and reinsurance contracts within the scope of IFRS 4 are granted an optional temporary exemption from recognising their financial instruments in accordance with IFRS 9 until probable entry into force of IFRS 17 on 1 January 2022. Hannover Re reviewed the application requirements based on the consolidated financial statement as at 31 December 2015 with a positive outcome (the proportion of insurance activities conducted by the Group stood at 98.0%, a change in activity has not occurred in the meantime) and decided to make use of the deferral approach. Hannover Re primarily anticipates implications for the classification of financial instruments. The IFRS 9 implementation project is running parallel to and in close coordination with the IFRS 17 implementation project. Disclosures regarding the fair values of financial instruments currently in the portfolio split according to the cash flow criterion as well as disclosures about the credit risks of securities that solely generate payments of principal and interest are provided in section 6.1 of the notes to the consolidated financial statement “Investments under own management”.
In addition to the accounting principles described above, the IASB has issued the following standards, interpretations and amendments to existing standards with possible implications for the consolidated financial statement of Hannover Re, application of which was not yet mandatory for the year under review and which are not being applied early by Hannover Re. Initial application of these new standards is not expected to have any significant implications for Hannover Re’s net assets, financial position or result of operations:
Initial application to annual periods beginning on or after the following date: October 2018 Amendments to IAS 1 and IAS 8: Definition of Material 1 January 2020 (still to be endorsed by the EU)
October 2017 Amendments to IAS 28: Long-term Interests in Associates and Joint Ventures 1 January 2019 (endorsed by the EU)
Reinsurance contracts: IFRS 4 “Insurance Contracts” represents the outcome of Phase I of the IASB project “Insurance Contracts” and constitutes a transitional arrangement. IFRS 17, which was issued by the IASB in May 2017, establishes binding principles for the measurement of insurance contracts effective for annual reporting periods beginning on or after 1 January 2021. At a meeting of the IASB in November 2018 it was tentatively decided to defer mandatory application of IFRS 17 by one year to 1 January 2022.
Loans and receivables are non-derivative financial instruments that include fixed or determinable payments on a defined due date, are not listed on an active market and are not sold at short notice. They are carried at amortised cost.
Financial assets classified as available for sale are carried at fair value; accrued interest is recognised in this context. We allocate to this category those financial instruments that do not satisfy the criteria for classification as held to maturity, loans and receivables, at fair value through profit or loss, or trading. Unrealised gains and losses arising out of changes in the fair value of securities held as available for sale are recognised directly in shareholder’s equity after deduction of deferred taxes.
Hannover Re considers equity securities to be impaired under IAS 39 if their fair value falls significantly, i. e. by at least 20%, or for a prolonged period, i. e. at least nine months, below acquisition cost. In accordance with IAS 39 the reversal of impairment losses on equities to the statement of income once impairment has been taken is prohibited, as is adjustment of the cost basis. Impairment is tested in each reporting period using the criteria defined by Hannover Re. If an equity security is considered to be impaired on the basis of these criteria, IAS 39 requires that a value adjustment be recognised in the amount of the fair value less historical cost and less prior value adjustments, meaning that depreciation is taken on the fair value as at the closing date – if available, on the publicly quoted stock exchange price. We also apply this method to participations in funds that invest in private equity. In order to reflect the specific character of these funds (in this case initially negative yield and liquidity flows from the socalled “J curve” effect during the investment period of the funds), we take an impairment to net asset value as an approximation of the fair value for the first time after a two-year waiting period if there is a significant or prolonged decrease in value. If, however, significant changes in value occur within the funds during this period that are not attributable to the J curve effect in addition to the increased investment expenses, the resulting impairment is recognised directly as a writedown.
Reinsurance recoverables on technical reserves: shares of our retrocessionaires in the technical reserves are calculated according to the contractual conditions on the basis of the gross technical reserves. An appropriate impairment is taken to allow for objective substantial indications of credit risks that are based on an event after initial recognition and suggest impairment, insofar as this can be reliably measured.
Intangible assets: in accordance with IFRS 3 “Business Combinations” goodwill is not amortised; instead, impairments may be taken after an annual impairment test or as indicated. For the purposes of the impairment test, goodwill is to be allocated pursuant to IAS 36 “Impairment of Assets” to so-called “cash generating units” (CGUs). Each CGU to which goodwill is allocated should represent the lowest level on which goodwill is monitored for internal management purposes and may not be larger than a segment. Following allocation of the goodwill it is necessary to determine for each CGU the recoverable amount, defined as the higher of the value in use and the fair value less costs to sell. For impaired goodwill the recoverable amount is to be stated. The recoverable amount is to be compared with the book value of the CGU including goodwill. When the latter exceeds the recoverable amount, an impairment expense is to be recognised. For detailed information on the impairment method used and the goodwill recognised as at the balance sheet date, please see section 6.5 “Goodwill”.
Own-use real estate: The portfolio of own-use real estate is measured at cost less straight-line depreciation over a useful life of no more than 50 years. The fair values are determined for comparative purposes using the discounted cash flow method.
Loss and loss adjustment expense reserves are constituted for payment obligations from reinsurance losses that have occurred but have not yet been settled. They are subdivided into reserves for reinsurance losses reported by the balance sheet date and reserves for reinsurance losses that have already been incurred but not yet reported (IBNR) by the balance sheet date. The loss and loss adjustment expense reserves are based on estimates that may diverge from the actual amounts payable. In reinsurance business a considerable period of time may elapse between the occurrence of an insured loss, notification by the insurer and pro-rata payment of the loss by the reinsurer. For this reason the realistically estimated future settlement amount based on long-standing established practice is carried. Recognised actuarial methods are used for estimation purposes. In this regard we make allowance for past experience, currently known facts and circumstances, the expertise of the market units as well as other assumptions relating to the future development, in particular economic, social and technical influencing factors. Subsequently, based on Group-wide analyses, we give separate consideration in this context to the inherent volatility of the reserves constituted for the reinsurance business, e. g. due to large losses. The interest rate-induced portion of the change in the reserve is shown in the statement of income on a consistent Group basis.
This grouping into classes is not, however, solely determinative for the type and structure of each disclosure in the notes. Rather, guided by the underlying business model of reinsurance, the disclosures are made on the basis of the facts and circumstances existing in the financial year and in light of the principle of materiality.
Currency translation differences resulting from long-term loans or lendings without specified maturity between Group companies are similarly recognised outside the statement of income in a separate item of shareholders’ equity.
Key exchange rates N 08 1 EUR corresponds to: Mean rate of exchange on the balance sheet date Average rate of exchange
Earned premium and unearned premium: assumed reinsurance premiums, commissions and claim settlements as well as assumed portions of the technical reserves are recognised according to the terms and conditions of the reinsurance treaties, giving due consideration to the underlying contracts for which reinsurance was taken out.
Ceded reinsurance premiums are deducted from the gross written premium for the purpose of reconciliation to net premium earned. Assets and liabilities in connection with reinsurance ceded are recognised on a gross basis. The reinsured portions of the reserves are estimated on a basis consistent with the reserves attributable to the reinsured risk. Income and expenses in connection with reinsurance treaties are recognised on a basis consistent with the underlying risk of the reinsured business.
By analysing a broad range of observable information it is possible to classify losses as major individual loss events. Measurement of the obligations existing in this connection is carried out using a separate process, which is based largely on contract-specific estimates.
For further particulars, including information required by IFRS 4, the reader is referred to our remarks on the underwriting risks in property and casualty reinsurance on page 105 et seq. of the management report – including, for example, with regard to the modelling of natural catastrophe scenarios and the assumptions relating to asbestos and pollution risks. We would further refer to our explanatory remarks on the technical reserves in section 3.1 “Summary of major accounting policies” and section 6.7 “Technical provisions”.
Only subsidiaries which are of minor importance – both individually and in their entirety – for the net assets, financial position and results of operations of the Hannover Re Group are exempted from consolidation. Hannover Re assesses whether a subsidiary is of minor importance on the basis of the company’s total assets and net income relative to the corresponding values for the Group as a whole on average over the last three years. For this reason 12 (14) companies at home and abroad were not consolidated in the year under review. A further 5 (4) individual companies as well as 1 (2) subgroup account(s) with altogether 14 (17) individual companies were not included at equity in the consolidated financial statement for the same reason. The business object of these altogether 31 (35) companies is for the most part the rendering of services for reinsurance companies within the Group.
Hannover Life Re AG 1, 2, Hannover / Germany 100.00 EUR 1,563,377 –
HR Verwaltungs-GmbH 1, 4, 5, Hannover / Germany 100.00 EUR 3 (5)
Hannover Re Euro RE Holdings GmbH 1, Hannover / Germany 87.68 EUR 908,380 19,339
E+S Rückversicherung AG 1, Hannover / Germany 64.79 EUR 940,847 170,000
HANNOVER Finanz GmbH 7, Hannover / Germany 27.78 EUR 84,553 21,044
Hannover Finance (UK) Limited 1, London / United Kingdom 100.00 GBP 2,694 (13)
Hannover Life Reassurance Company of America 1, Orlando / USA 100.00 USD 551,466 36,288
Hannover Re (Bermuda) Ltd. 1, Hamilton / Bermuda 100.00 USD 1,234,010 163,495
Integra Insurance Solutions Limited 7, Bradford / United Kingdom 100.00 GBP 4,859 (978)
Argenta Holdings Limited 1, 9, London / United Kingdom 100.00 GBP 46,436 3,720
Argenta Private Capital Limited 1, 9, London / United Kingdom 100.00 GBP 4,852 1,802
Names Taxation Service Limited 1, 9, London / United Kingdom 100.00 GBP 10 –
Argenta General Partner Limited 1, 9, Edinburgh / United Kingdom 100.00 GBP – –
Argenta LLP Services Limited 1, 9, London / United Kingdom 100.00 GBP – –
Argenta SLP Continuity Limited 1, 9, Edinburgh / United Kingdom 100.00 GBP – –
Argenta Syndicate Management Limited 1, 9, London / United Kingdom 100.00 GBP 7,474 1,580
Argenta Tax & Corporate Services Limited 1, 9, London / United Kingdom 100.00 GBP 712 462
Argenta Underwriting No.1 Limited 1, 9, London / United Kingdom 100.00 GBP 22 –
Argenta Underwriting No.3 Limited 1, 9, London / United Kingdom 100.00 GBP 466 (1,845)
Argenta Underwriting No.7 Limited 1, 9, London / United Kingdom 100.00 GBP – –
Argenta Underwriting No.9 Limited 1, 9, London / United Kingdom 100.00 GBP 791 (580)
Argenta Underwriting No.10 Limited 1, 9, London / United Kingdom 100.00 GBP (53) (16)
Argenta Underwriting No.11 Limited 1, 9, London / United Kingdom 100.00 GBP (30) 3
Argenta No.13 Limited 1, 9, London / United Kingdom 100.00 GBP – –
Argenta No.15 Limited 1, 9, London / United Kingdom 100.00 GBP – –
Residual Services Limited 1, 9, 11, London / United Kingdom 100.00 GBP – –
Residual Services Corporate Director Limited 1, 9, London / United Kingdom 100.00 GBP – –
Argenta Underwriting Labuan Ltd 1, 9, Labuan / Malaysia 100.00 USD 71 –
Glencar Underwriting Managers, Inc. 7, Chicago / USA 100.00 USD 5,148 325
Glencar Insurance Company 1, Orlando / USA 100.00 USD 76,206 (16,897)
Sand Lake Re, Inc. 1, Burlington / USA 100.00 USD 96,097 (1,224,375)
Hannover Re Real Estate Holdings, Inc. 9, Orlando / USA 95.25 USD 828,831 25,011
GLL HRE CORE Properties, L. P. 1, 9, Wilmington / USA 95.15 USD 656,081 (275)
7550IAD LLC 1, 9, Wilmington / USA 95.15 USD 68,438 428
Broadway 101, LLC 1, 9, Wilmington / USA 95.15 USD 13,174 (2)
River Terrace Parking, LLC 1, 9, Wilmington / USA 95.15 USD 18,553 254 3290ATL LLC 1, 9, Wilmington / USA 95.15 USD 70,595 3,821 1600FLL LLC 1, 9, Wilmington / USA 95.15 USD 30,795 439
HR US Infra Debt LP 1, 9, George Town / Cayman Islands 94.71 USD 118,517 3,721
Orion No.1 Professional Investors Private Real Estate Investment LLC 1, Seoul / South Korea 94.39 KRW 28,889,876 1,671,894
Peace G. K. 1, Tokyo / Japan 93.77 JPY 5,081,293 175,556
Kaith Re Ltd. 1, Hamilton / Bermuda 88.00 USD 373 (181)
Mustela s. r.o. 1, Prague / Czech Republic 87.67 CZK 1,094,807 18,515
HR GLL Roosevelt Kft 1, Budapest / Hungary 87.67 HUF 20,102,378 1,120,922
HR GLL Griffin House SPÓLKA Z OGRANICZONA ODPOWIEDZIALNÓSCIA 1, Warsaw / Poland 87.67 PLN 36,064 (1,413)
HR GLL CDG Plaza S. r.l. 1, Bucharest / Romania 87.67 RON 143,433 7,762
SUM Holdings (Pty) Ltd. 1, Johannesburg / South Africa 70.00 ZAR 44,599 7,624
Firedart Engineering Underwriting Managers (Pty) Ltd., Johannesburg / South Africa 49.00 ZAR 1,225 (620)
Construction Guarantee (Pty) Ltd. 4, 13, Johannesburg / South Africa 42.00 ZAR – –
HR Hannover Re, Correduría de Reaseguros, S. A., Madrid / Spain 100.00 EUR 585 88
Hannover Re Consulting Services India Private Limited 14, Mumbai / India 100.00 INR 110,806 (1,965)
Hannover Re Services USA, Inc., Itasca / USA 100.00 USD 3,889 111
Hannover Mining Engineering Services LLC, Itasca / USA 100.00 USD 340 40
Hannover Rück SE Escritório de Representação no Brasil Ltda. 7, Rio de Janeiro / Brasil 100.00 BRL 3,016 457
Hannover Re Services Italy S. r.l., Milan / Italy 99.65 EUR 471 93
ITAS Vita S.p.A. 7, Trento / Italy 27.10 EUR 104,540 3,660
Clarendon Transport Underwriting Managers (Pty) Ltd. 1, Johannesburg / South Africa 22.87 ZAR 15,311 13,306
Meribel Topco Limited 1, St. Helier / Jersey 20.11 EUR (4,775) (162)
Trinity Underwriting Managers Ltd. 18, Toronto / Canada 20.00 CAD (1,711) 29
Inlife Holding (Liechtenstein) AG 7, Triesen / Liechtenstein 15.00 CHF 3,803 1,996
Life Invest Holding AG 7, Zürich / Schweiz 15.00 CHF 43,631 15,583
Somerset Reinsurance Ltd. 19, Hamilton / Bermuda 12.31 USD 411,713 9,247
Centaur Animal Health, Inc. 21, Olathe / USA 6.90 USD 1,968 150
Kopano Ventures (Pty) Ltd 1, Johannesburg / South Africa 4.61 ZAR 772 (3,881)
Group company / Branch Gross written premium 1 Net income 1
Hannover Rück SE, Hong Kong Branch, Wanchai / Hong Kong 291,101 288,928 11,803 15,456
Hannover Rueck SE Malaysian Branch, Kuala Lumpur / Malaysia 397,170 376,970 44,681 10,363
Hannover Rück SE Succursale Francaise, Paris / France 783,872 777,357 42,425 26,197
Hannover Rueck SE Bahrain Branch, Manama / Bahrain 101,820 125,675 (12,523) (414)
Hannover Rück SE Shanghai Branch, Shanghai / China 1,193,529 775,684 25,515 8,325
Hannover Re UK Life Branch, London / United Kingdom 307,867 298,933 (5,150) (31,338)
1 IFRS figures before consolidation. 2 Branch is in liquidation. 3 Effective 1 January 2019 renamed HDI Global Specialty SE
In addition, other companies belonging to the Hannover Re Group maintain further branches in New Zealand, Canada, Malaysia and Australia that both individually and collectively are to be classified as immaterial to the Group.
Pursuant to IFRS 10 we consider the general account and the segregated accounts to be separate units to which the principles of so-called “silo accounting” are applied. In accordance with this concept, Hannover Re is required to consolidate the general account of Kaith Re Ltd. and Kubera Insurance (SAC) Ltd and is contractually responsible for the fees due to external service providers that are to be covered from the general account’s own funds. Each individual segregated account is to be examined separately with an eye to a consolidation requirement and consolidated according to the particular contractual arrangements in each case.
LI RE is a segregated account of Kaith Re Ltd., the purpose of which – as with all segregated accounts under Kaith Re Ltd. – is the securitisation of underwriting risks. In contrast to the other segregated accounts, the sole investor and hence the risk carrier of LI RE is the Hannover Re Group through its subsidiary Leine Investment SICAV-SIF, Luxembourg.
Investing activities and investments in catastrophe bonds (ILS) Within the scope of its investment activities Hannover Re participates inter alia in numerous structured entities. These are predominantly special purpose entities in the form of funds, which for their part transact certain types of equity and debt capital investments. These investments encompass private equity funds, fixed income funds, collateralised debt obligations, real estate funds, index funds and other public funds. The volume of these transactions is derived from the book values of the respective investments and amounted to EUR 2,916.5 million (EUR 3,016.9 million) as at the balance sheet date. The maximum risk of loss corresponds to the book values.
By way of its “K” transactions Hannover Re has raised underwriting capacity for catastrophe risks on the capital market. The “K Cession”, which was placed with investors in North and South America, Europe and Asia, involves a quota share cession on worldwide natural catastrophe business as well as aviation and marine risks. Of the total volume of the “K Cession ”, a large part equivalent to EUR 389.0 million (EUR 349.3 million) was securitised via structured entities as at the balance sheet date. The transaction has an indefinite term and can be cancelled annually by the investors. Segregated accounts of Kaith Re Ltd. are used for transformer purposes for part of this transaction. Hannover Re also uses further segregated accounts of Kaith Re Ltd. and other structured entities outside the Group for various retrocessions of both its traditional and ILS covers, which in each case are passed on to institutional investors in securitised form. The volume of these transactions is measured by the ceded exposure limit of the underlying retrocession agreements and amounted to altogether EUR 2,992.4 million (EUR 2,635.3 million) as at the balance sheet date. The structured entities are in all cases fully funded by contractually defined investments in the form of cash and equivalent liquid assets. Given that the entire exposure limit of the structured entities is therefore wholly collateralised in each case, there is no risk of loss for Hannover Re.
The book values of the assets and liabilities from the specified transactions with unconsolidated structured entities were as follows as at the balance sheet date: Book values from business relations with unconsolidated structured entities N 12 in EUR thousand
Fixed-income securities – at fair value through profit or loss – 86,281 –
Book values from business relations with unconsolidated structured entities N 13 in EUR thousand
In December 2018 Kubera Insurance (SAC) Ltd established its first segregated account, the owner of which is not Hannover Re. Effective 31 December 2018 the segregated account concluded a contract with a non-Group life insurance company for the assumption of a reinsurance portfolio, which is partially retroceded. In the context of this retrocession Hannover Re also concluded a reinsurance treaty with the segregated account to protect against the peak exposure through its wholly owned subsidiary Hannover Life Reassurance Company of America (Bermuda) Ltd.
With regard to commitments and obligations that we do not consider to be support, particularly outstanding capital commitments from special investments, please see our remarks in section 8.7 “Contingent liabilities and commitments”.