Equity attributable to shareholders of Hannover Rück SE 10,528.0 +20.0% 8,776.8 8,528.5 8,997.2 8,068.3
Earnings per share (basic and diluted) in EUR 10.65 +21.2% 8.79 7.95 9.71 9.54
Share price at year-end in EUR 172.30 +46.4% 117.70 104.90 102.80 105.65
Return on investment (excl. funds withheld by ceding companies) 3.5% 3.2% 3.8% 3.0% 3.4%
Hannover Rück SE 20 The Hannover Re share 24 Combined management report 25 Foundations of the Group 30 Report on economic position 70 Combined non-financial information statement 92 Opportunity and risk report 120 Enterprise management 147 Outlook 157 Consolidated financial statements 158 Consolidated balance sheet as at 31 December 2019 160 Consolidated statement of income 2019 161 Consolidated statement of comprehensive income 2019 162 Consolidated statement of changes in shareholders’ equity 2019 164 Consolidated cash flow statement 2019 167 Notes to the consolidated financial statements 2019 268 Independent Auditor’s Report 278 Responsibility statement 279 Supervisory Board 279 Report of the Supervisory Board 284 Supervisory Board of Hannover Rück SE
When it comes to leading an enterprise successfully into the future, the pursuit of profits is not a sufficient raison d’être. That was the consensus at the Global Management Forum 2019. In response, the Executive Board launched a project to define the self-image and values of Hannover Re. Some 560 employees from all areas and 13 locations of the Hannover Re Group contributed their views and experiences. Jean-Jacques Henchoz, Chief Executive Officer of Hannover Re, and Roland Vogel, Chief Financial Officer, backed the project in the role of sponsors. We asked them why it is important for a company to be aware of its own self-image – and what value-added its actions create for customers and society.
Henchoz: We can look back on a history of success: for ten years we have clearly outperformed the market average. We are proud to have grown our premium and our profits. Yet where does this strong performance commitment in our company come from? And how can we preserve it for the future? I came to Hannover Re as Chief Executive Officer with these questions on my mind – and I was met with open ears: a broad-based desire for a binding statement of our values and corporate purpose was palpable throughout the undertaking. It only made sense, therefore, to motivate all the members of staff to develop these foundations in a spirit of togetherness. After all, having a goal and a vision that extend beyond financial indicators is a fundamental need not only of our employees, but also of our investors and all our stakeholders in society.
Henchoz: By defining our company’s purpose we have accomplished something very significant: we have identified the factors in our past success and embraced them on our path into the future.
Vogel: There was one situation that left a really deep impression on me: our response to the September 11 attacks of 2001. At the time we were searching for innovative solutions to improve our capital position. We had drawn some of our inspiration from ideas outside our own industry. So we assembled a team, created the first securitisation of reinsurance recoverables and even went on to win an award for the transaction. In so doing, we improved our capital position, boosted our financial strength rating and – unlike some of our competitors – we did not withdraw from the market for aviation risks. That entrepreneurial spirit was our hallmark back then and remains so to this day.
Why is it important for Hannover Re’s future to be clear about the company’s purpose?
Henchoz: In today’s world we are approached by a wide range of stakeholders, no longer just shareholders and customers. We must respond to them with a consistent message. We can best reach them with clear and readily understandable statements about our values and our self-image, and at the same time we thereby establish the basis for our strategic orientation and our corporate culture.
Henchoz: Fundamentally, Hannover Re’s approach is characterised by credibility, reliability, honesty and an entrepreneurial mindset. We intend to and must retain these qualities. In concrete terms, they are reflected in our guiding values of “Responsibility”, “We-spirit” and “Drive” that we elaborated jointly with our staff around the world.
How do your employees embody these values in their daily work?
Vogel: We operate based on a self-image that has its roots in our history: when our company was established we entered an industry that was populated by long-established and very conservative players. Hannover Re set about doing many things differently and declined to follow conventions. Since then, we too have become an established market presence. And even though we have successfully retained our original approach to this day, it is by no means guaranteed for the future. By means of our values system we remind our employees of this on a daily basis. We act as a true partner for our customers, and we win them over with a sustainable longterm perspective and the conviction that our business model offers added value for society.
W e take m aster challen g es em pow ered to
em br ac e di ve rs it y in di vi du al a nd
We have integrity I am honest and humble with a strong sense of accountability. I deliver what I promise and openly address things which don´t turn out as expected. Everything I do could be reported in the news without embarrassing anyone.
We are empowered to master challenges I have trust in myself. I know my strengths and weaknesses.
We all contribute to common success I know the strategy and goals of Hannover Re and how I help in achieving them. I network and share knowledge without boundaries. I place joint success above personal success.
We foster a culture of respect I communicate clearly, transparently and objectively. I listen carefully in order to understand. I give and welcome constructive feedback.
We are open-minded and give things a try I see change as an opportunity for development and innovation. I strive for pragmatic and efficient solutions rather than perfect ones. I treat mistakes as an opportunity for learning. I help to cut the “somewhat different ” path of the company.
The second half of 2019 was devoted to exploring the question of why Hannover Re actually exists. What added value does our company create for society? And what is its relationship to the values for which Hannover Re stands? In interviews and workshops more than 560 employees around the world elaborated answers to these questions.
Orlando responsible project officers from 3 departments participants in the workshops drafts for purpose statements
formulation workshops and further rounds of consultations with representatives from all regional workshops in which the purpose statement was developed purpose state ment binding values
We were founded as an in-house reinsurer and started small, a new kid on the block, proving ourselves every day for over fifty years. We’ve grown into a company with the resources of a major player and the flexibility of a boutique one.
We are pragmatic, specialised and highly focused on costs. Modest yet self-assured. All our people count – and our clients sense this.
At Hannover Re we operate at the speed of trust. We work when our clients need us and always pick up the phone. We’re there to help, committed to excellence. We do not judge our clients, we assess their business opportunities. Fast in our decision-making, we are well prepared and offer execution certainty.
We acutely understand the pace and nature of market changes. We enable industries and people to recover from distress and move forward. By expanding the availability of insurance and reinsurance we improve the lives of many, opening up new avenues and creating fresh opportunities.
We team up to go the extra mile. Beyond risk sharing. Beyond mainstream.
We respond to the challenges of the future with our “somewhat different” approach. By defining our self-image and our values we build on our strengths and at the same time look ahead: in order to cement our market position among the top reinsurers, we combine tried and trusted strengths with our partnership-based approach to doing business. Together we create opportunities.
Hannover Re, with gross premium of more than EUR 22 billion, is the third-largest reinsurer in the world.
For our investors 14 Letter from the Chairman of the Executive Board 14
Hannover Re can look back on a very successful 2019 financial year. Personally, I am absolutely delighted that we are able to present to you a record result for the year just ended.
Hannover Re is well positioned for this transformation. We were one of the first players in our industry to enable investors to participate directly in insurance risks and to this day we still enjoy a leading role in the insurance-linked securities market. The same is true of bespoke covers offered in structured reinsurance: in both property & casualty and life & health reinsurance we played a pioneering role here in shaping the market and we have cemented our position over the years as one of the top providers.
We also make systematic efforts to foster the internal power of innovation within Hannover Re, including for example through an in-house ideas competition – the “Hannover Re Intrapreneurship Programme”. Our employees around the world submitted almost 150 business ideas to the programme, giving rise to a number of projects that we intend to implement. Launched at the start of 2019, our insurtech platform “hr | equarium” has already been well received on the market. It enables our customers to connect with insurtechs and other innovative solution providers on a worldwide basis.
The crucial success factors in the property & casualty reinsurance business group were the high quality and diversification of our portfolio, a leading position in specialty lines and a disciplined underwriting policy coupled with our risk management. Our life&health reinsurance business group contributed good results in traditional reinsurance and in the areas of longevity risks and financial solutions. The continuous improvements in our in-force US mortality portfolio were also beneficial. We similarly generated a very good performance with our investments. We benefited here from a number of positive one-time effects, while at the same time maintaining ordinary income on a stable level despite the challenging situation on capital markets.
This is now the eleventh year in succession that we are reporting a double-digit return on equity. In view of Hannover Re’s robust equity base, the Executive Board and Supervisory Board will propose to the Annual General Meeting that an increased dividend of EUR 5.50 per share should be paid to you, our valued shareholders. This proposed dividend consists of an increased ordinary dividend of EUR 4.00 per share and an unchanged special dividend of EUR 1.50 per share.
Based on the thoroughly successful results of the 2019 financial year, our guidance for 2020 is optimistic even though the competitive environment remains challenging. This optimism is reinforced by the fact that the renewals in property and casualty reinsurance as at 1 January 2020 once again passed off successfully for our company. For the current financial year we are expecting to grow our Group gross premium by around 5 percent and we anticipate Group net income of around EUR 1.2 billion.
Property & Casualty Reinsurance • Continental Europe and Africa • Catastrophe XL (Cat XL) • Structured Reinsurance and
Dr. Klaus Miller Life & Health Reinsurance • North America, United
Claude Chèvre Life & Health Reinsurance • Africa, Asia, Australia /
The Hannover Re share • Share price soars to new all-time high of EUR 175.20 • Share performance of +52.5% beats benchmark indices • Proposed dividend of EUR 4.00 plus special dividend of EUR 1.50
In a three-year comparison, the Hannover Re share delivered a performance (including reinvested dividends) of 90.6%. From a longer-term perspective, too, it thus continues to
F or o u r in ve st or s clearly outperform the benchmark DAX (+15.4%) and MDAX (+27.6%) indices as well as the Global Reinsurance Index (+29.1%).
With a book value per share of EUR 87.30, the Hannover Re share showed a price-to-book (P/B) ratio of 1.97 at the end of the year under review; it was thus just marginally below the average MDAX P/B ratio of 2.02 at year-end. Compared to the average P/B ratio for its peer group, the Hannover Re share continues to be significantly better valued.
In his address to shareholders, the retiring Chief Executive Officer Ulrich Wallin looked back on the exceptionally pleasing 2018 financial year. Despite significant major losses and a one-time charge in life and health reinsurance, Group net income increased by 10.5% to EUR 1,059.5 million. Herbert Haas, the Chairman of the Supervisory Board, responded to this speech by thanking Mr. Wallin not only for the good result in 2018 but also for his outstanding entrepreneurial achievement during the past ten years in which he had led the company as Chief Executive Officer. At the conclusion of the Annual General Meeting Jean-Jacques Henchoz took over as Chief Executive Officer. There were also changes in the ranks of the Supervisory Board. The Annual General Meeting 2019 held the regularly scheduled elections for the shareholder representatives. Dr. Michael Ollmann was chosen as a new member of the Supervisory Board; he succeeds Dr. Immo Querner, who as a member of the Board of Management of Talanx AG had previously represented the interests of the major shareholder on Hannover Re’s Supervisory Board together with Mr. Haas and Mr. Leue. As a consequence of his departure, the proportion of independent members on the Supervisory Board increased from two to three of the altogether six shareholder representatives. The other existing members of the Supervisory Board were confirmed in office by a large majority. Furthermore, the Annual General Meeting approved the proposed resolutions put to the vote by management under all other items on the agenda by a comfortable three-quarters majority.
The growth opportunities in the two business groups of Property & Casualty and Life & Health reinsurance, especially in Asia, were a key topic of discussion at Hannover Re’s 22nd Investors’ Day, which was held on 23 October 2019 in Frankfurt and also carried as a parallel webcast on the company’s website.
Shareholder structure as at 31 December 2019 I 11 11.2% Private investors
United Kingdom 5.8% France 5.6% Canada 2.4% Rest of Europe 1.1% Rest of world 36.2% United States 22.4% Germany
Business model • Worldwide reinsurance, transacting all lines of property & casualty and life & health reinsurance with the goal of achieving the broadest and most balanced possible regional and line-based diversification
With a gross premium volume of more than EUR 22 billion, the Hannover Re Group is the third-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.
In the Life&Health reinsurance business group we are recognised – as customer surveys confirm – as one of the top players and a leading provider of structured solutions. We achieve this standing by opening up new markets for our company and by identifying trends in order to anticipate the future needs of our customers.
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. In general terms, our primary focus is on medium- and long-term attainment of the strategic targets.
Growth in earnings per share ≥ 5% 21.2% 10.5% -18.2% 3.1%
Target: 600 basis points above the five-year average return on ten-year German government bonds 5 In accordance with our internal capital model and Solvency II requirements 6 Average over the reinsurance cycle; at constant exchange rates 7 Including large loss budget of EUR 875 million; target until 2018: 96% 8 EBIT / net premium earned 9 Value contribution relative to allocated economic capital 10 Organic growth only; target: annual average growth over a three-year period; at constant exchange rates 11 Based on Solvency II principles; pre-tax reporting 12 Annual average growth over a three-year period 13 Minor differences compared to the Annual Report 2018. The figures are based on the final Solvency II year-end reporting
With our internal management system Performance Excellence (PE) we have at our disposal a consistent method Group-wide that enables us to steer the development of the company as well as to measure and hence also evaluate the extent to which we have achieved our strategic objectives. The decentralised approach used by PE is of special importance in this context: every single organisational unit defines and continuously examines its contributions to execution of the Hannover Re Group strategy and develops improvement initiatives.
System of value-based management: Performance Excellence (PE) combines the strategic and operational levels 1 The Global Management Forum (GMF) and the Global Executive Forum (GEF) bring together senior managers of the Hannover Re Group from around the world for the purpose of defining strategic orientations. The parameters developed here serve as the basis for the subsequent planning process.
With the aid of the IVC ratio it is possible to compare the value contributions of the Group as a whole, its two business groups and the individual operational units. This enables us to reliably identify value creators and value destroyers.
The IVC (Intrinsic Value Creation) is calculated according to the following formula: Adjusted economic profit – (capital allocated × weighted cost of capital) = IVC
1 Minor differences compared to the Annual Report 2018. The figures are based on the final Solvency II year-end reporting. 2 Income above risk-free interest rate after deduction of risk-appropriate cost of capital
In calculating the cost of capital, our assumption – based on a Capital Asset Pricing Model (CAPM) approach – is that the investor’s opportunity costs are 450 basis points above the risk-free interest rate, meaning that value is created above this threshold. Our strategic return on equity target of 900 basis points above risk-free thus already contains a substantial target value creation. We allocate equity sparingly and use equity substitutes to optimise our average cost of capital, which amounted to 3.9% in 2019.
Overshadowed by the decline in industrial output, Germany’s economy experienced a downturn in 2019. Coming on the heels of two soft quarters in the middle of the year, growth rallied only insignificantly towards year-end – as a consequence of which expansion contracted by 1.0 percentage points year-on-year to 0.5%. Exports ultimately picked up despite the protracted sluggishness of industrial output around the world, but they failed to make up for the weak spring. Overall, exports increased by 1.3% in 2019 (previous year: 2.1%). Imports similarly grew at a slower pace (2.4%) than in the previous year (3.6%). The jobless rate fell by another 0.2 percentage points year-on-year to stand at 5.0%.
Consumer prices rose by an average of 1.4% over the year as a whole (1.7%).
Asia Gross domestic product in Asia fell short of the previous year with growth of 5.6% (6.4%); in comparative terms, however, the increase was still quite marked. In China the uncertainties associated with the trade dispute with the United States slowed growth by 0.4 percentage points to 6.2%. The Indian economy fared appreciably more poorly in 2019: the pace of growth here slumped sharply in the second and third quarters after problems emerged in the shadow banking system. This sector plays a very significant role in the financing of the Indian economy. Considered over the full twelve months, growth contracted by 1.8 percentage points compared to the previous year to stand at 5.0%.
In Japan gross domestic product again improved on the previous year’s growth (0.8%) with a modest gain of 1.2%. Key drivers of the increase were the rise in consumer spending, higher government investment and a recovery in residential construction. Exports, on the other hand, were sharply lower than in the previous year.
The punitive tariffs imposed by the United States clearly left their mark on global growth and on sentiment in the manufacturing sector over the course of the year. Problems affecting the German car industry were an additional strain. The US business climate proved to be highly robust, not least due to the tax incentives put in place by the Trump administration. Despite the thoroughly solid state of the US economy, the US Federal Reserve nevertheless surprisingly pulled an abrupt about-turn from its previously restrictive policy in favour of more expansionary action. By the end of the year, however, a renewed pause in the cycle of interest rate cuts had already been announced.
All in all, then, central bank policy in our main currency areas was inconsistent. The ECB kept the key interest rate for the Eurozone at a historically low 0.00%. The Bank of England similarly left its benchmark interest rate unchanged at 0.75% after a modest increase in 2018. The US Federal Reserve Fed trimmed the base rate for the US dollar in three increments over the course of the year to an average of 1.75%, although it stepped back from making a further cut at year-end.
Emerging economies were very heavily impacted by developments in the trade dispute between the United States and China, as also manifested in growing concern about China’s continued economic growth. Yet it is important here not to overlook the fact that trade between emerging countries has now reached a very robust scale and China is well on the way to dethroning the US as the largest trading partner for the emerging economies. The somewhat fragile limbo in which the global economy finds itself was, however, also reflected here. Central banks in emerging markets thus continued to ease their monetary policy, although the pace of interest rate cuts slowed. Weak commodity prices as a consequence of the widely held rather cautious assessment of the world economy put the brakes on growth in countries geared primarily to raw material exports.
Sluggish progress towards reaching a deal between the European Union and the United Kingdom as a consequence of the British people’s vote in favour of Brexit led to further uncertainty. In the year under review this was reflected not only in the volatility of pound sterling against the euro and US dollar, but also in the choppy performance of UK equity markets. Over the year as whole, though, the British pound and UK stock markets both closed with gains.
The general election held in the United Kingdom towards the end of the year has at least put an end for the time being to the protracted search for a policy direction. The looming threat of a disorderly Brexit has caused uncertainty about the final shape of future economic and trade relations between the EU and the UK and about freedom of movement for workers. This continues to have a generally detrimental effect on the economies of the remaining EU Member States because it
Bond markets continued to be shaped by the generally low level of interest rates. The already very low level of the previous year was once again pushed significantly lower in all our main currency areas. While the US dollar area recorded particularly appreciable interest rate declines, pound sterling and euro interest rates also saw sharp decreases. Negative yields can be seen here well into the medium maturity segment. Risk premiums on European and US corporate bonds retreated sometimes markedly in virtually all rating categories. In this regard it is important to monitor the levels down to which companies will be able to comfortably service their interest obligations.
For more detailed remarks on the development of Hannover Re’s investments please see the “Investments” section on page 55 et seq.
Business development • Currency-adjusted growth in gross premium of 15.2% ahead of target • Growth particularly appreciable in North America, Asia and Germany • Major loss experience in property and casualty reinsurance above budget • Return on investment of 3.4% beats increased minimum target of 3.2% • Group net income of EUR 1.28 billion surpasses higher full-year target of more than
EUR 1.25 billion • Return on equity climbs to 13.3% and comfortably exceeds minimum target of 9.3%
Hannover Re, as the third-largest reinsurer in the world, has an extensive global network and considerable technical expertise. Taken together, they enable us to make advances in the area of traditional reinsurance covers and drive new business opportunities. In this context, we attach the highest priority to the profitability and quality of our business and we act accordingly. This is of special importance to our company because the markets for property and casualty reinsurance and for life and health reinsurance continue to be intensely competitive.
In 2019 major losses in excess of our expected level were once again incurred in the Property & Casualty reinsurance business group. The market is still dominated by surplus capacities for the coverage of insurance risks. Nevertheless, after years of declining prices in the various rounds of treaty renewals during each financial year, it was possible for the first time to discern a more broad-based improvement in prices and conditions for reinsurance protection. Prices remain on a low level, however, and further adjustments are therefore needed. The combined ratio deteriorated to 98.2% (previous year: 96.5%) and consequently fell short of the maximum full-year target of 97%. The main factors here were substantial losses in the third quarter, delayed claim notifications received from our clients for prior-year losses and our unchanged prudent approach to reserving.
Our Life & Health reinsurance group is similarly experiencing strong and ongoing competition. Our result benefited from steps taken in the previous year to improve the profitability of our in-force US mortality portfolio as well as from one-time income recognised from the restructuring of a participating interest in our investments.
All in all, in both our business groups we find ourselves operating in an intensely competitive environment in which we are able to successfully assert our position thanks to our comparatively low administrative expenses and cost of capital. As a further factor, we enjoy good access to business thanks to our standing as one of the industry’s largest and most financially robust reinsurers.
The operating profit (EBIT) improved by 16.1% to EUR 1,853.2 million (EUR 1,596.6 million). Group net income was higher than in the previous year at EUR 1,284.2 million (EUR 1,059.5 million). We thus achieved our guidance, which we had raised in the third quarter to more than EUR 1.25 billion. Earnings per share for the Hannover Re Group stood at EUR 10.65 (EUR 8.79).
Gross premium growth for Property & Casualty reinsurance significant growth 1 +20.4% at constant exchange rates +23.4% not adjusted for currency effects
Overall assessment of the business position Hannover Re is highly satisfied with the development of business in 2019. On the Group level we achieved or even surpassed our targets for the year under review, just as we had in the two previous years.
• Gross premium rises by 20.4% adjusted for exchange rate effects • Particularly strong growth in North America, Asia, Germany and structured reinsurance • Modest improvements in prices and conditions, in some cases also extending to loss-free lines of business • Major loss expenditure of EUR 956 million higher than budgeted level • Combined ratio deteriorates to 98.2% • Segment result declines by 6.2% to EUR 871.7 million
The environment for property and casualty reinsurance markets around the world remained challenging in the 2019 financial year. For years now, the capital available for risk coverage has exceeded the demand for reinsurance protection. The primary factors here are, in the first place, the considerable inflows of additional alternative capital from the insurance -linked securities (ILS) market in recent years. Prices for reinsurance protection have consequently been under pressure for quite some time. Furthermore, investment income has been hampered by low interest rates, which fell again in 2019, hence necessitating rigorous discipline in technical underwriting. At the same time, substantial expenditures have been incurred in the past three years from major losses.
Breakdown into business written through brokers and direct business in % and in EUR million
C om b in ed m an ag em en t re p or t rebound effects are still muted, and hence in our assessment further adjustments are needed.
Unlike in the previous year, alternative capital providers from the ILS sector took a more cautious approach during 2019 against the backdrop of the loss experience seen in prior years. By the end of the 2019 financial year, the volume of available alternative capital had contracted by around 5%. Alternative capital providers nevertheless still account for a significant share of the reinsurance market, principally for risks from natural catastrophes. We continued to adhere to our existing profit-oriented underwriting policy for these covers. Our risk appetite, which we specify relative to the available economic capital, remained virtually unchanged from the previous year.
In view of the aforementioned rate increases and significant growth, especially from the regions of North America, Asia and Germany as well as from structured reinsurance, we were able to further improve our market position in the Property & Casualty reinsurance business group.
The 2019 financial year, in common with the two previous years, was impacted by major losses that exceeded our expectations. While the large loss experience in the first six months was again thoroughly moderate, loss expenditure in the second half of the year was significantly higher than anticipated.
The investment income booked for the Property & Casualty reinsurance business group was pleasing. It improved by 3.3% to EUR 1,069.4 million (EUR 1,035.1 million). The operating profit (EBIT) contracted by 2.8% to EUR 1,285.8 million (EUR 1,322.6 million). The EBIT margin decreased to 10.0% (12.2%). We thus achieved our minimum target for the EBIT margin of 10%. The contribution made by property and casualty reinsurance to Group net income deteriorated by 6.2% to EUR 871.7 million (EUR 929.1 million).
Property & Casualty reinsurance: Key figures for individual markets and lines in 2019 M 13
Germany, Switzerland, Austria and Italy 1,195.2 19.2% 1,002.8 209.0 88.8% 95.3% 38.1 103.5%
Asia, Australia and the Middle East 1,664.0 27.2% 1,308.1 174.4 96.4% 98.8% 155.0 94.9%
Facultative Reinsurance and Direct Business 1,424.5 68.2% 846.8 140.1 97.1% 97.2% 34.1 103.2%
Expenditure on catastrophe losses in North America was lower in 2019 than in the previous year. A range of different events nevertheless caused losses that were modestly higher than we had anticipated. Thanks to our prudent underwriting policy and our retrocession strategy, however, the net impact of these expenditures on our company was less appreciable than the strain for gross account.
All in all, we were satisfied with our results in the North American market. Based on our expertise and our robust financial strength we continue to be seen as a valued partner. On this basis, we were able to acquire new clients while at the same time expanding long-standing customer relationships and further extending our market footprint.
Building on the good growth already recorded in 2018, the premium volume in North America increased sharply again in the year under review by 34.9% to EUR 2,553.3 million (EUR 1,893.2 million). The combined ratio deteriorated to 105.8% (102.5%). The operating profit (EBIT) contracted by 30.7% to EUR 157.4 million (EUR 227.2 million).
In the area of natural catastrophe risks, too, it is imperative to secure continuous improvements in conditions for the reinsurance market. As one of the leading providers in Latin America, we are aware of this challenge and we shall act in close cooperation with our local customers.
Demand for natural catastrophe covers remained strong owing to various losses in the region and continues to grow.
We are also seeing a sharp surge in demand for innovative coverage concepts based on parametric indices. These are particularly well suited to countries with a lower insurance density. In addition, governments or indeed aid organisations can use these solutions to improve disaster protection for their population. We are actively involved in projects in the Caribbean, Mexico, Peru and Colombia.
We include agricultural risks in the reporting category of Latin America and the Iberian Peninsula owing to their geographical concentration in this region. We successfully expanded our market position in this business. Particularly in emerging and developing countries, the growing need for agricultural commodities and foodstuffs combined with the increased prevalence of extreme weather events are generating stronger demand for insurance and reinsurance solutions.
Property & Casualty reinsurance: Gross premium in Latin America, Iberian Peninsula and Agricultural Risks by lines of business
In the German primary insurance market, the highest-volume property insurance lines – namely homeowners’ insurance and industrial lines – continued to deliver above-average premium growth, driven in particular by ongoing rehabilitation efforts in the market. Particularly in homeowners’ insurance, product enhancements and product innovations also boosted profitability. On the claims side, the forecast reduction in the combined ratio of 8.2 percentage points pointed to a positive underwriting result and hence significant improvement.
The year had barely begun when the market for the reinsurance of natural catastrophe risks incurred losses from winter storm Eberhard. Low pressure system Jörn, which impacted Germany on Whit Monday, resulted in a loss of EUR 13.7 million for E+S Rück. In Italy, too, numerous severe storms led to further sizeable losses in the year under review. These events repeatedly underscore the importance of coverage for extended natural perils.
The gross premium volume in the reporting category Germany, Switzerland, Austria and Italy climbed by 19.2% to EUR 1,195.2 million (EUR 1,002.8 million). The combined ratio stood at 88.8% (103.5%). The operating profit (EBIT) improved to EUR 209.0 million (EUR 38.1 million).
United Kingdom, Ireland and London Market In the reporting category United Kingdom, Ireland and London Market the results delivered by our property and casualty reinsurance business showed varying degrees of success in 2019. In contrast to the previous year, property reinsurance saw a smaller number of large losses from natural perils. In some cases, however, we noted adjustments to prior-year reserves on the customer side, with implications in particular for proportional acceptances in previous years. On the whole, though, the business development was satisfactory, in part also due to our below-average share in natural catastrophe events and industrial losses. Profitability in liability business proved more challenging: an increased number of losses from past years were recorded here, impacting our reinsurance covers.
The initiative launched by the Lloyd’s insurance market in 2018 to restore loss-making business to profitability had favourable effects on the state of the market in almost all lines. Appreciable double-digit rate increases were increasingly prevalent in primary insurance business. All in all, this resulted in a more pleasing profit outlook on the London Market than had been seen in previous years.
Property & Casualty reinsurance: Gross premium in United Kingdom, Ireland and London Market by lines of business
In Western Europe we further expanded our market share at stable rates that were commensurate with the risks. Growth was spread across various lines, including for example longtail liability and accident business. Thanks to its leading role in builder’s risk insurance Hannover Re continued to profit from the recovery of this sector.
In Northern Europe we further cemented our position through our local presence despite a difficult market climate. Here, too, we noted a slightly increased frequency of mid-sized losses.
Property & Casualty reinsurance: Gross premium in Continental Europe and Africa by lines of business
In general terms, it is our expectation that the focus of global insurance markets will shift towards Asia on account of the above-average growth rates.
In response to this development we are stepping up our involvement in Asia. To this end, we are supporting our clients and helping them to tackle the challenges of the coming years. Both tailor-made concepts for capital support and traditional reinsurance are potential options in this regard.
In China we were able to significantly expand our market position among the major local reinsurers thanks to our very good customer relationships and our innovative market presence – including but not restricted to tailored covers. This is all the more gratifying in view of the protracted intense competition.
Along with China, Southeast Asia and South Asia continue to be the engine of growth in the Asia-Pacific region. While we succeeded in generating consistently good results here, it was again evident that profitable growth in the primary market does not necessarily carry over to the reinsurance markets.
In Australia and New Zealand our standing as a reinsurer with a very good rating, coupled with our extensive expertise and excellent business relationships, again enabled us to obtain attractive prices. This was especially true of Australia. Despite the intense competition prevailing here, we generated strong profitable growth based on our positioning – especially in the area of multi-line covers.
Property & Casualty reinsurance: Gross premium in Asia, Australia and the Middle East by lines of business
Even though the premium volume has now reached a very high level, we posted further moderate growth in the financial year just ended. In total, more than half of our premium income derives from the United States and roughly a third from Europe.
After years of rising demand for insurance and reinsurance risks on the capital market, the insurance-linked securities (ILS) market showed some slight softening in 2019. The losses incurred in 2017 and 2018, combined with the fact that liquidity was curtailed by the need to post collateral for losses still in run-off, prompted a certain restraint among market players.
The importance of the capital market in our purchasing of retrocession protection remains unchanged. Thus, for example, we were able to renew the protection cover for Hannover Re known as the “K quota share” at an increased level of roughly USD 680 million (USD 640 million) for 2020. This is a modelled quota share cession consisting of non-proportional reinsurance treaties in the property, catastrophe, aviation and marine (including offshore) lines that has been placed inter alia on the ILS market since 1994. In addition to the K quota share we use the ILS market for other protection covers as well.
The gross premium volume in the Structured Reinsurance and ILS reporting category grew by 23.2% to EUR 3,603.7 million (EUR 2,926.1 million). The combined ratio was 98.3% (97.7%). The operating profit (EBIT) retreated to EUR 104.0 million (EUR 129.3 million).
Facultative Reinsurance and Direct Business In contrast to obligatory reinsurance, individual risks are primarily written in facultative reinsurance. The general environment for both types of reinsurance in the various markets is, however, for the most part comparable and hence there is a corresponding correlation between them.
The gross premium volume in our reporting category Facultative Reinsurance and Direct Business climbed sharply by 68.2% to EUR 1,424.5 million (EUR 846.8 million). The combined ratio stood at 97.1% (103.2%). The operating profit (EBIT) surged to EUR 140.1 million (EUR 34.1 million).
Credit, Surety and Political Risks In credit, surety and political risk business the need for protection grew against the backdrop of the continuing economic slowdown. As a result, modest growth was recorded in the primary insurance market. Reinsurance cessions remained generally stable, with a slight increase observed only in the area of political risks.
The loss experience was characterised by a marginally higher claims frequency and moderately increased loss amounts for individual claims. Against this backdrop, prices nudged higher on both the insurance and reinsurance side.
Aviation and Marine In the market for aviation covers the positive rate movements witnessed of late on the primary side were sustained. After more than a decade of continuously declining prices, however, the market has not yet reached an adequate level – something that is particularly true of the three segments airline, general aviation and product liability. Appreciable price increases were similarly observed in space insurance.
On the reinsurance side competition remained intense and there was no change in the abundant supply of capacity provided both by traditional reinsurance markets and alternative capital. This had the effect of preventing us from pushing through price increases to the full extent. On the whole, marine reinsurance recorded below-average loss expenditure in 2019, as had been the case in 2018. As far as the Japanese marine market is concerned, the considerable losses caused by typhoon Jebi in 2018 prompted significant price increases and in general brought greater stability to the Asian market climate in the April 2019 round of renewals.
After the historically high windstorm losses of 2017 as well as the devastating typhoons in Japan and the California wildfires in 2018, natural catastrophe reinsurance once again recorded numerous major losses in the year under review. The accumulation of large losses also left its mark on the balance sheets of reinsurers and providers of catastrophe bonds, prompting price increases overall in catastrophe XL business.
Loss-impacted programmes again saw the most marked adjustments. A trend towards price stabilisation could also be observed, above all in North America but also in other segments.
Even though some providers of reinsurance coverage from the ILS markets have shown more restraint of late in making their capacities available, the supply of catastrophe coverage still far outstripped demand. As a consequence of the continuing heavy losses caused by typhoons it was possible to secure appreciably higher prices for catastrophe covers, most notably in Japan.
Target since 2016 1 Since 2016 based on Solvency II principles and pre-tax reporting; 2015 based on MCEV principles with 6% cost of capital and post-tax reporting
Life and health reinsurance contributed a 35% share of our Group gross premium in the year under review and is thus Hannover Re’s second-largest business group.
Global life and health reinsurance markets remain intensely competitive and are shaped by a low interest rate environment, which in many regions became even more challenging in the year under review. Above all in Europe and North America, interest rates came under renewed pressure over the course of the reporting period. This had implications – albeit only to a moderate extent – for the investment results generated by insurers and reinsurers. As a further factor, the interest rate development adversely affected the profitability of underlying life insurance products in certain cases. At the same time, though, this sometimes opened up additional opportunities for financially robust reinsurers such as Hannover Re – for example in the area of financial solutions, where we offer our customers bespoke reinsurance solutions designed to improve their solvency, liquidity and capital position.
As part of our strategy, we cooperate with insurtechs and other start-ups to jointly develop new approaches and solutions with our primary insurance customers. With a view to facilitating their access to innovative solutions we launched the innovation platform “hr | equarium” in February. On the one hand, this enables our cedants to access a wide range of insurance -specific products and solutions. At the same time, insurtechs and other start-ups benefit from access to our global network of clients.
The operating result (EBIT) doubled to EUR 569.9 million (EUR 275.9 million). The contribution made by life and health reinsurance to Group net income improved substantially to EUR 471.6 million (EUR 185.9 million).
In Germany as indeed across Europe in general – against a backdrop of further significant cuts in interest rates – we noted growing interest among primary insurers in support for issues such as the funding of the additional interest rate reserve (“Zinszusatzreserve”) or the fulfilment of solvency requirements. Going forward, we expect to see a further surge in demand in these areas.
As in the previous years, lively demand for our financial solutions offerings could be observed in Asia – above all China and Japan – and this was reflected in part in new business written. In India we similarly noted growing interest in such covers.
In the area of longevity solutions we have benefited from a sustained positive development in the United Kingdom, but we also succeeded in acquiring new business in other markets such as Canada and the Netherlands. Furthermore, we were able to write our first significant longevity cover in Germany.
More exacting requirements set by prudential regimes around the world for the solvency capital of primary insurers also had a favourable effect on demand for appropriate covers. Where longevity risks are involved, insurers need to hold considerable reserves as collateral for their pension and annuity commitments which are often still in the distant future. This meant that in some instances it was also possible to offer financial solutions arrangements in such scenarios.
In total, the gross premium for Longevity Solutions remained virtually unchanged at EUR 1,274.2 million (EUR 1,276.1 million ). The operating result (EBIT) improved to EUR 29.0 million (EUR 5.6 million).
Our mortality solutions business in the United States performed better than expected and delivered a strong contribution to the improved result. The management actions taken in the previous year to enhance the profitability of our in-force US mortality portfolio played an important part in this development. In 2018 a one-time charge of EUR 185.4 million, allowing for the release of an expense reserve, had been incurred as a consequence of treaty recaptures. Markets in Europe experienced dynamic growth, as reflected both in the renewal of existing treaties and in the successful acquisition of new business.
The gross premium in the Mortality Solutions reporting category rose by 7.3% to EUR 3,260.3 million (EUR 3,039.5 million ). Altogether, it therefore contributed 41.7% of the total gross premium income booked in life and health reinsurance.
In Australia, on the other hand, a temporary market-wide deterioration in disability income insurance adversely affected profits across the entire industry. Our company, too, incurred higher-than-expected losses here.
The gross premium for Morbidity Solutions business grew by 17.6% in the financial year to EUR 2,301.0 million (EUR 1,956.5 million).
We take the view that the provision of state-of-the-art and scalable systems for process automation gives us a key competitive edge that supports our customers in their own automation projects and helps us to build lasting business relationships.
Our expectations for the development and take-up rate of our underwriting systems were once again clearly surpassed in the year under review.
We are thoroughly satisfied with the development of our investments. While 2019 once again proved to be a challenging year in view of continued low interest rates and global economic movements driven by a range of uncertainties and risks, we were able to outperform our targets despite choppy capital markets. Nor were we held back by the turbulent Brexit process and the very low interest rate level overall.
Our exposures to emerging markets were rewarded with a broadly favourable performance and healthy profit contributions. Reflecting a slightly heavier weighting in the portfolio, the asset classes of private equity and real estate also helped to push our ordinary investment income (excluding interest on funds withheld and contract deposits) to a very pleasing EUR 1,380.8 million, a level slightly above that of the previous year (previous year: EUR 1,321.7 million).
Net realised gains on disposals totalled EUR 273.7 million (EUR 127.7 million) and derived in large measure from the release to income of hidden reserves triggered by restructuring of a participation. An additional factor was the sale of two individual properties, the valuation of which had risen sharply. We report further on this in the following section “Financial position and net assets” under the subsection “Investments ” on page 58 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 positive fair value changes recognised in income of EUR 8.1 million (negative changes of EUR 11.9 million). Altogether, the positive changes in the fair values of our financial assets recognised at fair value through profit or loss amounted to EUR 72.9 million (EUR 31.2 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.
Net investment income from funds withheld and contract deposits 206.4 -0.7% 208.0 234.9 332.1 395.0 1 Excluding income and expenses on funds withheld and contract deposits 2 Including depreciation / impairments on real estate 3 Portfolio at fair value through profit or loss and trading
Despite somewhat higher write-downs, we were thus able to generate investment income of EUR 1,757.1 million (EUR 1,530.0 million). The key drivers here were slightly higher ordinary income from fixed-income securities as well as the earnings from real estate and private equity, but above all the very significant increase in net realised gains. Income from assets under own management accounted for EUR 1,550.6 million (EUR 1,322.0 million), producing an average return of 3.4%. We thus comfortably outperformed our originally anticipated full-year target of at least 2.8%, which we had raised in November to at least 3.2%.
By adjusting the maturity pattern of our fixed-income securities to the expected payment patterns of our liabilities we reduce the economic exposure to the interest rate risk. In the current reporting period this gave rise to a broadly neutral modified duration of our bond portfolio, which stood at 5.7 (previous year: 4.8) as at 31 December 2019. Through active and regular management of the currency spread in our fixed-income portfolio we also bring about extensive matching of currencies on the assets and liabilities sides of the balance sheet, as a consequence of which fluctuations in exchange rates have only a limited effect on our result. As at year-end 2019 we held 29.7% (30.1%) of our investments in euros, 44.0% (45.8%) in US dollars, 8.2% (7.7%) in pound sterling and 5.6% (5.9%) in Australian dollars.
Holdings of alternative investment funds increased slightly overall. As at 31 December 2019 an amount of EUR 1,177.7 million (EUR 896.8 million) was invested in private equity funds; a further EUR 746.0 million (EUR 675.3 million) was attributable predominantly to investments in high-yield bonds and in the credit sector. In addition, altogether EUR 534.7 million (EUR 433.9 million) was invested in structured real estate investments. The uncalled capital with respect to the aforementioned alternative investments totalled EUR 1,429.9 million (EUR 1,326.4 million).
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 2019, broken down into percentages of the balance sheet total.
The technical provisions and liabilities shown above, which include funds withheld / contract deposits and reinsurance payable, make up 74.7% (73.5%) of the balance sheet total and are more than covered by our investments, (assets-side) funds withheld / contract deposits, accounts receivable and reinsurance recoverables.
The equity including non-controlling interests at 15.9% (14.8%) of the balance sheet total as well as the long-term debt and – especially – notes payable at altogether 4.9% (4.0%) of the balance sheet total represent our most important sources of funds.
We ensure that our business is sufficiently capitalised at all times through continuous monitoring and by taking appropriate steering actions as necessary.
• hybrid capital used as an equity substitute, which takes the form of subordinated bonds.
The policyholders’ surplus totalled EUR 13,588.9 million (EUR 11,035.1 million) as at the balance sheet date, an increase of 23.1%. Retained earnings rose by EUR 636.8 million to EUR 8,077.1 million (EUR 7,440.3 million) on the back of the good Group net income booked in the year under review. In addition, the foreign currency gains and losses and the net gains on investments recognised in equity were higher by altogether EUR 1,125.2 million. Lastly, the issuance of a subordinated bond in a nominal amount of EUR 750.0 million contributed to the increase in the policyholders’ surplus.
Hannover Re uses “Intrinsic Value Creation” (IVC) as its central value-based management tool. As part of this methodology, we apply the principles of economic allocation of equity and efficient use of debt as an equity substitute in order to achieve an attractive weighted cost of capital. This concept as well as the objectives and principles in accordance with which we conduct our enterprise management and capital management are described in greater detail in our remarks on value-based management on page 26 et seq. of this report.
Compared to the position as at 31 December 2018, Group shareholders’ equity increased in the year under review by EUR 1,812.5 million, equivalent to 19.0%, to EUR 11,354.5 million. After adjustment for non-controlling interests, it rose by EUR 1,751.2 million to EUR 10,528.0 million. The book value per share increased accordingly by 20.0% to EUR 87.30. The changes in shareholders’ equity were shaped chiefly by the following developments: The foreign currency gains and losses grew by EUR 183.8 million from EUR 201.4 million to EUR 385.2 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.
Non-controlling interests in shareholders’ equity increased by EUR 61.3 million to EUR 826.5 million as at 31 December 2019. The bulk of this – in an amount of EUR 745.4 million – is attributable to the non-controlling interests in E+S Rückversicherung AG.
The Group net income for 2019 attributable to the shareholders ’ equity of the Hannover Re Group amounted to EUR 1,284.2 million (EUR 1,059.5 million). The non-controlling interest in the profit generated in the year under review totalled EUR 89.2 million (EUR 86.0 million).
Hannover Finance (Luxembourg) S. A. subordinated debt, EUR 500 million; 2012 / 2043 20.11.2012 5.00 498.5 498.2
Hannover Rück SE, subordinated debt, EUR 500 million; 2014 / undated 15.9.2014 3.375 496.2 495.6
Hannover Rück SE, senior bond, EUR 750 million; 2018 / 2028 18.4.2018 1.125 743.3 742.5
Hannover Rück SE, senior bond, EUR 750 million; 2019 / 2039 9.10.2019 1.125 740.0 –
For further explanatory information please see our remarks in the notes to this report, section 6.12 “Long-term debt and notes payable”, page 238 et seq., and section 6.13 “Shareholders ’ equity and treasury shares”, page 240 et seq.
Hannover Re does not conduct any automated internal cash pooling within the Group. Liquidity surpluses are managed and created by the Group companies. Various loan relationships exist within the Hannover Re Group for the optimal structuring and flexible management of the short- or longterm allocation of liquidity and capital.
Consolidated cash flow statement M 36 in EUR million 2019 2018
Cash and cash equivalents at the beginning of the period 1,151.5 835.7
For further information on our liquidity management please see page 92 et seq. of the risk report.
Glencar Insurance Company – A+ 1 Hannover Reinsurance Africa Ltd. (HR SA) and Hannover Life Reassurance Africa Ltd. (HLR SA) benefit from parental guarantees issued by Hannover Rück SE (the “Guarantor”). The guarantees cover all of the payment obligations of HR SA and HLR SA in respect of insurance and reinsurance contracts issued by them. The guarantees are unconditional and continuing and shall be binding upon the Guarantor. The owners of the insurance and reinsurance contracts issued by these subsidiaries are express third party beneficiaries of these guarantees. The obligations of the Guarantor under these guarantees rank pari passu with all other unsecured indebtedness of such Guarantor.
Issue ratings of notes payable As part of the process of rating Hannover Re the rating agencies also assess the debt issued by the Hannover Re Group.
The following companies hold direct or indirect capital participations that exceed 10% of the voting rights: Talanx AG, Hannover, directly holds 50.2% (rounded) of the company’s voting rights. HDI-Haftpflichtverband der Deutschen Industrie Versicherungsverein auf Gegenseitigkeit, Hannover, which holds a stake of 79.0% in Talanx AG, therefore indirectly holds 39.7% (rounded) of the voting rights in the company.
The powers of the Executive Board with respect to the issue and repurchase of shares are defined in the Articles of Association of Hannover Rück SE (§ 6 “Contingent capital” and § 7 “Authorised capital”) as well as in §§ 71 et seq. Stock Corporation Act. In this connection the Annual General Meeting authorised the Executive Board on 6 May 2015 pursuant to § 71 Para. 1 Number 8 Stock Corporation Act to acquire treasury shares on certain conditions for a period of five years, ending on 5 May 2020.
The following paragraphs explain major agreements concluded by the company that are subject to reservation in the event of a change of control, inter alia following a takeover bid, and describe the resulting effects. Some letter of credit lines extended to Hannover Rück SE contain standard market changeof -control clauses that entitle the banks to early termination of a credit facility if Talanx AG loses its majority interest or drops below the threshold of a 25% participation or if a third party acquires the majority interest in Hannover Rück SE.
In addition, retrocession covers in property & casualty and life & health business contain standard market change-of- control clauses which in each case grant the other contracting party a right of termination if a significant change occurs in the ownership structure and participation ratios of the affected contracting party.
Hannover Rück SE transacts reinsurance business in the business groups of Property & Casualty and Life & Health reinsurance. Through its global presence and activities in all lines of reinsurance, the company achieves extensive risk diversification.
Condensed profit and loss account of Hannover Rück SE M 41 in EUR thousand 2019 2018
The underwriting result (before changes in the equalisation reserve) decreased in the year under review from EUR -0.2 million to EUR -23.1 million. Following a withdrawal of EUR 25.3 million in the previous year, an amount of EUR 210.6 million was allocated to the equalisation reserve and similar provisions in the year under review.
Ordinary investment income including deposit interest fell short of the previous year’s level at EUR 1,110.0 million (EUR 1,234.0 million), primarily due to reduced distributions from our investment holding companies. To some extent this was offset by stronger ordinary income from fixed-income securities. Driven by the substantial asset volume, the latter rose to a pleasing EUR 508.2 million (EUR 458.6 million) despite the continued low level of interest rates. Net gains of EUR 220.9 million (EUR 140.9 million) were realised on disposals. The sharp increase here derived in large measure from the release to income of hidden reserves that resulted from restructuring of a participating interest. The gains realised on investment fund certificates were, however, lower than the comparatively strong earnings booked in the previous year. Write-downs of EUR 11.4 million (EUR 88.4 million) were taken on investments, for the most part on bearer debt securities held as current assets. The write-downs contrasted with write-ups of EUR 50.3 million (EUR 1.2 million) that were made on assets written down in previous periods in order to reflect increased fair values.
All in all, the net investment result increased to EUR 1,325.8 million (EUR 1,231.7 million). The balance of other income and charges changed from EUR -182.6 million to EUR -148.9 million.
The following section describes the development of the various lines of business. The cooperation and exchange of business between Hannover Rück SE and E+S Rückversicherung AG was reorganised with effect from the beginning of the 2014 financial year and slightly adjusted in the 2019 financial year. 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.
Hannover Rück SE: Breakdown of gross premium by individual lines of business in EUR million
Fire Gross premium income for the fire line climbed by 32.7% in the 2019 financial year to EUR 2,937.3 million (EUR 2,213.3 million). The net loss ratio was slightly higher at 76.8% (75.2%). The underwriting result closed at EUR -141.6 million (EUR -56.5 million). An amount of EUR 120.1 million (EUR 54.1 million) was withdrawn from the equalisation reserve and similar provisions.
Casualty Gross premium in casualty business rose by 45.7% to EUR 2,316.8 million (EUR 1,590.1 million). The loss ratio decreased to 70.6% (91.9%). The underwriting result improved in the year under review to EUR -6.6 million (EUR -195.1 million ). After a withdrawal of EUR 64.4 million in the previous year, an amount of EUR 191.2 million was allocated to the equalisation reserve and similar provisions.
Marine Gross premium income for the marine line increased in the year under review by 37.7% to EUR 453.5 million (EUR 329.3 million). The net loss ratio fell from 37.9% to 31.0%. The underwriting result improved to EUR 103.7 million (EUR 75.8 million). An amount of EUR 36.4 million was withdrawn from the equalisation reserve and similar provisions, following an allocation of EUR 9.8 million in the previous year.
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 37,880.9 million (EUR 34,674.8 million). The balance sheet total of Hannover Rück SE grew to EUR 45.5 billion (EUR 40.8 billion).
A dividend of EUR 3.75 plus a special dividend of EUR 1.50 per share, equivalent to EUR 633.1 million (EUR 603.0 million ), was paid out in the year under review for the 2018 financial year.
Hannover Rück SE maintains branches in Australia, Bahrain, Canada, China, France, Hong Kong, India, Korea, Malaysia, Sweden and the United Kingdom.
The present combined non-financial information statement was drawn up in accordance with §§ 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 presented separately, the disclosures are equally applicable to the Group and the parent company.
Within the Hannover Re Group risks are evaluated after consideration of risk-mitigating measures. Neither the organisation established for sustainability management nor the risk management organisation were able to identify any material non-financial risks that are linked to our own business activities or the company’s business relations, products or services, are very likely to materialise and have or will have serious adverse implications for non-financial matters. Emerging risks, the content of which cannot yet be evaluated with any certainty, are monitored in the context of Group-wide risk management.
Hannover Re has defined exclusively financial management ratios and key 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.
References to information outside the combined management report and the consolidated and individual financial statement do not form part of the combined non-financial information statement.
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 in accordance with the GRI Standards.
• Maintain excellent ratings from the rating agencies most relevant to our industry 3. We aim for successful employees
• Harmonise the size and skills of our workforce with the current and future requirements of our global market presence as well as with the requirements of increasing digitalisation
• Increase the proportion of women on all levels of management 4. We strive for an optimal balance between stability and yield of our investments
We considered issues rated 5.0 and higher to be material for our company within the meaning of this legislation. The survey findings were discussed and approved at an internal workshop attended by representatives of various specialist units and management.
Im pa ct o f op er at io n s material according to GRI and German Commercial Code (HGB)material according to GRI
In addition to our continuous engagement with the changing general legal framework, since 2003 we have provided an annual Declaration of Conformity with the currently valid version of the German Corporate Governance Code (DCGK) as amended, which is published on our company’s website and reproduced in the present combined management report from page 120 et seq. onwards. 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. The Corporate Governance principles of Hannover Rück SE applicable to the 2019 reporting year were approved by the Executive Board and Supervisory Board on 7 November 2017.
Raising employee awareness of the topic of sustainability by expanding internal communication and developing a training concept
Development of a training concept 2019: Elaboration of the training concept currently dormant
Enhancing our appeal in the eyes of ethical and sustainability-minded investors by participating in major sustainability ratings
Inclusion in at least one sustainability index 2019: Continued listing in the FTSE4Good index 2019: Continued listing in the STOXX Index family
Perform GAP analysis to identify and close gaps in content 2019: Revision of the management approaches, the presentation of material issues and the table of goals in the context of the Sustainability Report 2018
Any form of corrupt or unlawful behaviour causes considerable harm to society. Responsible corporate governance therefore also includes compliance with laws and ethical standards, promoting integrity, implementing risk and prevention systems as well as making ongoing efforts to raise awareness among employees and keep them informed.
Our compliance management plays a pivotal role in this regard. 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 the various rules and regulations governing European insurers and reinsurers. These include, for example, laws and regulations relating to environmental issues, fighting corruption, data privacy, information security and tax compliance as well as the Market Abuse Directive, the Solvency II Directive, the Insurance Supervision Act (VAG), the Securities Acquisition and Takeover Act (WpÜG), the Stock Corporation Act (AktG) and the Securities Trading Act (WpHG).
In addition, our company has its own Code of Conduct. Along with the Group Strategy and Corporate Governance Principles, this sets out rules for how our employees are to conduct themselves with integrity. It is reviewed both at regular intervals and if a concrete need arises and is approved by the Executive Board. The Code of Conduct is accepted by our employees as an integral component of their employment contract and hence has binding effect. It encompasses, among other things, specific rules of conduct in the form of instructions for the avoidance and disclosure of conflicts of interest, for the granting and acceptance of benefits, gifts and invitations, for the arrangement of donations and sponsorships as well as with respect to sideline activities and involvement in other companies and business transactions; furthermore, it makes specific reference to the prohibition of money laundering and the prohibition of other criminal acts.
The Chief Compliance Officer works to ensure compliance with internal corporate policies by cooperating with other departments, including Group Auditing. 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, an annual gathering of European compliance officers is held. Conference calls also take place on a regular basis with the compliance officers at the international locations.
No lawsuits were filed against our company in the reporting period on grounds of anti-competitive behaviour, anti-trust or monopoly 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 team makes staff aware of these rules and points out blocking periods during which shares may not be traded.
Data privacy and security As part of our business activities we process and store personal data. The data are required primarily in the context of underwriting, for providing customer and contract-related services as well as in claims and benefit management. Furthermore, personal data are collected, processed and stored in connection with, among other things, human resources management and shareholder administration. We also process personal data in order to assert our own legitimate interests or those of third parties. In particular, this may be necessary in order to safeguard IT security and IT operations and to meet official requirements.
We make use of external service providers to some extent in order to perform our contractual and statutory duties. These external data recipients are to be viewed as part of the data processing operations, as is the case with brokers, outside experts, business partners etc. All external recipients are contractually bound to comply with statutory data protection requirements and are checked in this regard.
Our employees regularly undergo training sessions in matters of data protection and information security, including in the form of Web-based training and face-to-face instruction. The latest information on these topics is also made available to staff through internal company media on a regular basis.
In addition, 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 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.
The Sustainability Strategy 2018-2020 defines the following goals and measures with regard to this issue: Goal to be achieved by 2020: Compliance
The adequacy and effectiveness of the mitigating measures geared to each risk is subject to continuous analysis. The optimisations identified in the context of these monitoring procedures were implemented
Deployment of a Group-wide compliance plan 2019: Roll-out of the Group-wide compliance plan, which is to be deployed for the first time in 2020
Our business model has a long-term orientation. Many of the risks that we enter into in the course of our business activities exist over years or even decades. Our customers in the primary insurance sectors rely on us to conduct our business sustainably and with a focus on risk in order to ensure that we are able to meet the payment commitments that we have given over the long term with a high degree of assurance.
The trust of our stakeholders and an immaculate reputation support the success of our company. At the same time, we strive for full and transparent communication in the interest of good corporate governance. With this in mind, we consistently make every effort to cultivate an active dialogue with our stakeholders. By sharing information and opinions with the company’s various stakeholder groups, we are able to integrate, as far as possible, their expectations and aspirations into our business operations. Furthermore, this dialogue helps us to identify risks and opportunities at an early stage and serves to build trust.
The material issue of “Stakeholder dialogue” has a special connection with all aspects because we communicate about all issues with various stakeholders.
We maintain an open and ongoing dialogue with our stakeholders. Key stakeholders are determined by our business operations and our geographical presence. The following stakeholder groups are particularly relevant to us: our clients, our employees, the capital market, the public sector and non-governmental organisations (NGOs).
Ongoing process 2019: Further continuous exchange of views with our stakeholders
Holding of an Investors’ Day and an analysts’ conference, participation in capital market conferences, organisation of roadshows as well as numerous one-to-one conference calls with investors
As a reinsurance undertaking, we knowingly enter into a broad range of risks in the context of our business operations. Our commercial success is crucially dependent on the correct assessment, management and monitoring of these risks. The risk assessment process entails the constant monitoring and analysis of new and emerging risks, trends and future-related factors. Sustainability aspects traditionally play a role here. Both in our investing activities and in our insurance business we rely upon our ability to evaluate and assure the lasting intrinsic value of the business relationship. Essentially, then, sustainability and our risk management share a similar goal.
The Sustainability Strategy 2018-2020 defines the following goals and measures with regard to this issue: Goal to be achieved by 2020: Risk expertise and risk assessment
Ongoing process, raising of awareness about ESG risks in regular internal risk reporting
Provision of comprehensive information on emerging risks that is accessible to all employees. Regular updating of the contents 2019: Release of the position paper on emerging risks entitled “Advances in Medicine”
Intensification of knowledge sharing about emerging risks with our customers, partners, universities and research institutes
Active member of the Risk Management Steering Group of the Insurance Development Forum (IDF)
Sponsorship of the Global Earthquake Model Foundation 2019: Publication of 15 earthquake models completed, finalisation and publication of all GEM EQ models planned for 2020
The consideration given to sustainability in our business operations relates principally to our reinsurance products and services as well as the management of our investments; it is taking on added importance given the growing awareness among the general public of sustainability issues. At its very heart, the business of insurance involves cushioning the burden caused by loss events and providing financial protection for companies and private individuals alike through the transfer and spreading of risks. In this way, we are able to prevent risks adversely impacting society and our company.
In property and casualty reinsurance we support the increased use of renewable energy sources, ranging from wind power generated both onshore and offshore to photovoltaic and geothermal energy. Insurance protection begins with plant construction 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. In this way, we 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 disasters.
At the same time, we play our part in minimising adverse impacts. Our underwriting guidelines are revised regularly to reflect the latest developments. In April 2019 we took a conscious decision with respect to stand-alone risks that – as a general principle – we will no longer provide reinsurance coverage for any planned new coal-fired power plants or thermal coal mines. Furthermore, we are aiming for a phased exit such that by the year 2038 we no longer cover any coal-based risks in connection with mining or power generation in our entire property and casualty reinsurance portfolio.
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).
Support for various sustainable initiatives, including in developing and emerging countries
Expansion of sustainable insurance solutions in the Life & Health sector
Since as long ago as 2011 we have been applying sustainability criteria in the investment sector; they are continuously refined and set out in writing in our “Responsible Investment Policy”. An ESG officer on the investment team ensures the development and application of ESG criteria and implementation of the policy. The investment team reports major con-
Implementation of the best-in-class investment approach was completed in the year under review. Through regular measurement of the asset’s portfolio’s sustainability quality, we will be able going forward to structure the portfolio more sustainably with a focus on corporate bonds and minimise ESG risks.
We are increasingly supplementing the aforementioned measures in the existing asset portfolio with active participations in sustainable investments. With this in mind, a budget was created in 2019 for investment in impact investment funds. The explicit objective here is to achieve appreciable improvements through the broadest possible coverage of the United Nations Social Development Goals (SDGs), inter alia in the fields of food security and nutrition, education, health and well-being, ending poverty, climate action etc. In the course of 2019 we already subscribed to six impact funds.
Ongoing: Exclusion of issuers that generate 25% or more of their turnover from coal mining, coal-fired power generation or oil sands extraction
Ongoing: Exclusion of issuers involved in the development and proliferation of controversial weapons
Negative screening Ongoing: Half-yearly negative screening of our fixed-income securities (government and semi-government bonds, corporate bonds and covered bonds) as well as listed equities
It is crucial to our company’s success that we are perceived by our customers as a preferred business partner. If we are to achieve this, we must offer prices commensurate with the risks, adequate capacities and a reliable value proposition. In addition, we foster an active dialogue with our clients. In the context of customer events we initiate an exchange of knowledge on current insurance topics and developments and we enable our customers to give feedback on our products and services in face-to-face discussions.
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 employed 3,083 staff (previous year: 3,317) Group-wide as at the end of the year under review. Hannover Re continued to expand its workforce in the reporting period. The reported decrease in the number of employees was due to a change in the consolidated group resulting from the transfer of International Insurance Company of Hannover Ltd. (IICH SE) with altogether 206 staff as well as of Svedea AB with 147 staff to HDI Global Specialty.
As a global entity, we are able to offer our employees an attractive workplace that fosters motivation, dedication and teamwork. Our attractiveness as an employer is further reinforced by systematic career development programmes.
The basis of our common corporate culture is the greatest possible delegation of tasks, responsibilities and authority. In this way we ensure that our employees are able to act in a quick and flexible manner. We support this with leadership according to management principles and through management by objectives, and we expect our managers to instil a sense of individual accountability in their staff. Our managers therefore play a particularly important role.
When it comes to expanding and establishing our personnel development measures, we set particularly great store by a range of activities tailored to specific needs and target groups. Our programme of further training, which is open to all employees, encompasses above all offerings in the fields of reinsurance, information technology, social and methodological skills as well as language courses. The programme is continuously reviewed and extended.
The Sustainability Strategy 2018-2020 defines the following goals with regard to this issue: Goal to be achieved by 2020: Executive development / Employee advancement
Review and refinement of the range of training opportunities for all employees
We set great store by enabling our employees to strike a healthy balance between their professional and private life. With this in mind, we offer part-time and teleworking models that can be individually structured and flexible working-time arrangements without core hours. Through this flexibility we want to make it easier for our employees to organise everyday life in phases such as starting a family or preparing for the end of their professional career, e. g. through partial retirement arrangements. These benefits are reflected in a low staff turnover rate and the long periods of time that our employees stay with the Group.
Starting in 2019, we began to offer employees another option for improving the flexibility of their working world – both in terms of time and location – in the form of “mobile working”. Mobile working refers to the possibility of performing work – outside of formal teleworking models – at a location other than the company workplace as warranted and on a time-limited basis. All that is required is mutual agreement between the supervisor and the employee. 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. In this regard we conducted another supply and demand analysis in 2019 and decided to explore how this offer can be expanded – a project that is to be continued in 2020. We attach great importance to the satisfaction of our employees in order to remain a consistently attractive employer. With this in mind, we carried out another international employee survey in 2019, the so-called “Organizational Health Check”. Both the good rate of participation – at altogether 64% of all managers and staff – and the positive survey results virtually across the board gave grounds for satisfaction. Nevertheless, this employee survey will once again prompt us to devise measures to bring about further improvement in the identified action fields.
The Sustainability Strategy 2018-2020 defines the following goals with regard to this issue: Goal to be achieved by 2020: Employee retention
Our employees are paid according to their specific tasks, their skills and qualifications and their performance.
Three members of our company’s Executive Board were among the mentors participating in this round of the programme.
Ongoing: Zero tolerance policy for discrimination based on race, colour, gender, age, ethnic origin, religion, sexual orientation, gender identity or expression, relationship/family status, citizenship, disability, medical condition or any other legally protected factor
Implementation of mentoring programmes for the advancement of women 2019: Launch of a new implementation round with nine tandems
Ongoing, various support offers again available in 2019 including part-time and teleworking models, flexi-time arrangements and an in-house infant daycare centre 2019: Launch of mobile working option
The environmental impacts of our operations are comparatively slight, deriving principally from business trips taken by our employees and their commuting to and from work as well as the operation of our office premises. Nevertheless, we take our responsibility for the environment very seriously. In our Sustainability Strategy we regularly define concrete targets and measures for protecting the environment and conserving resources.
The issue of “Operational environmental protection” has a particular connection with the aspect “Environmental matters ”.
The Sustainability Strategy 2018-2020 defines the following goals with regard to this issue: Goal to be achieved by 2020: Operational environmental protection
As a provider of insurance services, we do not have a traditional upstream or downstream supply chain of raw and auxiliary materials or produced goods as is the case with manufacturing companies. Nevertheless, we too source a broad range of goods and services. They include, among other things, IT hardware and software, Cloud services, consulting and development services, building and office equipment, electricity, heat and water, services relating to logistics, building management and technology as well as food for our staff catering. Altogether, we procure goods for IT, the operation of our premises and the conduct of our business from some 360 suppliers. Roughly two-thirds of these suppliers are based in Germany or indeed the Greater Hannover region. Above and beyond this, we source IT products primarily from the European Union and the United States. Our activities relating to the material issue of “Supplier management” have implications for all aspects.
Due to our supplier structure, our activities do not entail any special risks. We nevertheless consider it important to report accordingly on the issue.
Ongoing evaluation of ~90% of suppliers (measured by purchasing volume) according to environmental and social standards
Evaluation of suppliers Ongoing, 2019: Evaluation of 85% of the purchasing volume in Facility Management and 100% of the purchasing volume in the IT sector according to ESG criteria
Opportunity and risk report Risk report • Hannover Re has very good capital resources in excess of the defined strategic thresholds.
We manage our total enterprise risk such that we can expect to generate positive IFRS Group net income with a probability of 90% p. a. and the likelihood of the complete loss of our economic capital and shareholders’ equity under IFRS does not exceed 0.03% p. a. Our solvency ratio must amount to at least 180%, although 200% is already considered to be a threshold; countermeasures would be triggered if the solvency ratio were to fall below this threshold. These indicators are monitored using our internal capital model and the Executive Board is informed quarterly about adherence to these key parameters as part of regular risk reporting. The necessary equity resources are determined according to the requirements of our economic capital model, regulatory parameters, the expectations of rating agencies with respect to our target rating and the expectations of our clients. Above and beyond that, we maintain a capital cushion in order to be able to act on new business opportunities at any time.
Strategic targets for the risk position M 60 in EUR million Limit Indicator as at
This section describes external factors that were particularly relevant in 2019 and could continue to influence risk management in subsequent years.
Regulatory developments: A review of selected aspects of Solvency II commenced in the reporting period at the instigation of the European Commission. In this regard the European Insurance and Occupational Pensions Authority (EIOPA) opened up its recommendations to the insurance industry for comment. Implementation of the new rules is still pending.
Capital market environment: The protracted low level of interest rates is a major external factor influencing the return that can be generated on our investments. Interest rate declines – which in some instances were very marked – affected both euro-denominated bonds as well as the US dollar and sterling markets over the course of the year. Negative yields are now being seen on euro area government bonds extending beyond the 10-year maturity point. The uncertain signals coming from policy makers and indications of softening fundamentals led to greater volatility overall on the mar-
kets. The tense geopolitical situation and global trade disputes were also reflected in fluctuations in gold and oil price movements. At the same time, muted expectations for global growth are making themselves felt here. The continued surprising confusion in the process surrounding the United Kingdom’s withdrawal from the European Union – despite the already lengthy period of acclimatisation – offered little support; the same was true of the cautious moves made by central banks, which documented the persistent lack of market stability despite the buoyant state of equity markets. Even while the US economy showed itself to be in a thoroughly robust condition, the US Federal Reserve surprisingly pulled an abrupt about-turn from its previously restrictive policy in favour of more expansionary action. As indications of declining growth began to emerge at the end of the period under review, the Fed announced a pause in the cycle of interest rate adjustments that it had initiated. At the European Central Bank, on the other hand, there is no end in sight to the expansionary monetary policy. Given the depletion of monetary policy tools and in view of the gloomy growth and inflation outlook, calls for fiscal measures are growing louder. As far as the risk premiums on corporate bonds were concerned, sharp decreases reflected a levelling off in the nervousness observed at the end of the previous year, as a result of which they were considerably lower year-on-year at the close of 2019. We continue to have exposure to the private equity market. Fair value changes here tend to be less influenced by general market conditions and more by company-specific evaluations. The risks are therefore primarily associated with the business model and profitability and to a lesser extent with the interest rate component in a consideration of cash flow forecasts. In the period under review, for example, we see the need to take somewhat higher write-downs not as a reflection of an elevated risk in the market, but rather in the context of the risk profile specific to this asset class. The significance of real estate risks has continued to grow owing to our consistent participation in this sector. We spread these risks through broadly diversified investments in high-quality markets around the world, with each investment decision being preceded by extensive analyses of the relevant property, manager and market.
Brexit: Despite the United Kingdom’s withdrawal from the European Union on 31 January 2020, the long-term relations between the UK and the EU have still to be determined. The Hannover Re Group has prepared for all other scenarios. A Group-wide working group has analysed the impacts on each affected entity as well as the status of their planning and preparations.
Argenta Holdings Limited is a wholly owned subsidiary of Hannover Re that operates on a stand-alone basis in the United Kingdom and as a member of Lloyd’s it focuses on the solutions offered by the Lloyd’s market. The operating model envisaged for the Life & Health branch in the UK after Brexit is transformation into a so-called third-country branch. We also write reinsurance business in the United Kingdom through Group companies in Hannover and Ireland. Changes in the operating models are not anticipated at this point in time.
Natural catastrophe risks and climate change: It is likely that the increased storm activity of recent years is due in part to progressive global warming. Hannover Re works together with partners to closely monitor the implications of global warming for extreme weather events so as to be able to factor the insights gained into the models and the management of risks.
Ogden rate: In 2017 a change (i. e. reduction) was made in the so-called Ogden rate – primarily affecting UK motor insurance – which is used to calculate personal injury compensation payments. A massive cut in the rate led to a rise in the expected loss costs. These increased amounts have since been reflected in the technical reserves for the relevant lines.
Joint investment in specialty business with HDI Global SE: Back in 2018 Hannover Rück SE had already begun making preparations with HDI Global SE, under the umbrella of Talanx AG, for the launch of a joint initiative in worldwide specialty business. Since January 2019 the specialty insurer HDI Global Specialty SE has offered, as a joint venture of HDI Global and Hannover Re, tailored insurance solutions for agency and specialty business in lines including professional indemnity, directors’ & officers’ liability, legal expenses, sports and entertainment, aviation, offshore energy and pet and farm pack.
In the interests of our shareholders and clients we strive to ensure that our risks remain commensurate with our capital resources. Our quantitative risk management provides a uniform framework for the evaluation and steering of all risks affecting the company as well as of our capital position. The internal capital model – a stochastic enterprise model – is a central tool in this context. It covers all subsidiaries and business groups of the Hannover Re Group. The core variable in risk and enterprise management is the economic equity, which is calculated according to market-consistent measurement principles and also constitutes the basis for calculating the own funds under Solvency II. Hannover Re’s internal capital model reflects all risks that influence the development of the economic equity. These are split into underwriting risks, market risks, counterparty default risks and operational risks. For each of these risk classes we have identified a number of risk factors for which we define probability distributions. These risk factors include, for example, economic indicators such as interest rates, exchange rates and inflation indices, but also insurance-specific indicators such as the mortality of a particular age group within our portfolio of insureds in a particular country or the number of natural catastrophes in a certain region and the insured loss amount per catastrophe. 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.
The mandatory capitalisation indicated in accordance with regulatory requirements diverges from the capitalisation in accordance with the Hannover Re Group’s internal capital model. Since approval was given to use the model for operational risks, the difference now rests solely in the Solvency II requirements that non-controlling interests are to be treated as partially ineligible. The capital adequacy ratio calculated according to the internal capital model stood at 262.9% as at 31 December 2019 (the indicator includes information that has not been audited by the independent auditor). The key risk indicators shown for the Hannover Re Group and Hannover Rück SE as at 31 December 2019 allow for the dynamic volatility adjustment of the yield curves. In contrast, the figures for the previous year as at 31 December 2018 include the static volatility adjustment of the yield curves.
The capital adequacy ratio at the confidence level of 99.97% amounted to 125.0% as at 31 December 2019 (the indicator includes information that has not been audited by the independent auditor). In the context of the internal measurement of capital adequacy, the entire available economic capital is recognised irrespective of restrictions on eligibility under Solvency II.
In awarding these ratings the agencies highlighted the company’s very good risk management, the consistent and systematic implementation of corporate strategy by management and its excellent capital resources. Hannover Re’s internal capital model was also subjected to expert appraisal. As a result of this review, Standard & Poor’s factors the results of the Hannover Re Group’s internal capital model into the determination of capital strength.
Monitoring of areas where misconduct can result in civil actions or criminal / administrative proceedings
Risk analysis and assessment In principle, every risk that is identified and considered material is quantitatively assessed. Only risk types for which quantitative risk measurement is currently impossible or difficult are qualitatively assessed (e .g. strategic risks, reputational risks or emerging risks). Qualitative assessment can take the form of, for example, expert evaluations. Quantitative assessment of material risks and the overall risk position is performed using Hannover Re’s internal capital model. The model makes allowance for risk concentration and risk diversification.
C om b in ed m an ag em en t re p or t
The financial reporting of the parent company and the Group must satisfy international and national financial reporting standards as well as regulatory requirements. This is safeguarded in the area of accounting and financial reporting by processes with integrated controls which ensure the completeness and accuracy of the annual and consolidated financial statements. A structure made up of differentiated criteria, control points and materiality thresholds assures our ability to identify and minimise the risk of material errors in the annual and consolidated financial statements at an early stage.
In the context of its business operations the Hannover Re Group enters into a broad variety of risks. These risks are deliberately accepted, steered and monitored in order to be able to act on the associated opportunities. The parameters and decisions of the Executive Board with respect to the risk appetite of the Hannover Re Group, which are based on the calculations of risk-bearing capacity, are fundamental to the acceptance of risks. Through our business operations on all continents and the diversification between our Property & Casualty and Life & Health reinsurance business groups we are able to effectively allocate our capital in light of opportunity and risk considerations and generate a higher-than- average return on equity. Along with our principal business operations as a reinsurer of property & casualty and life & health business, we also transact primary insurance in selected niche markets as a complement to our core reinsurance business. With this approach we are well positioned for further profitable growth. In this context crucial importance attaches to our risk management in order to ensure that, among other things, risks to the reinsurance portfolio remain calculable and even exceptional major losses do not have an unduly adverse impact on the result.
At the present time our most significant individual risks are the default and spread risks within the market risks, the reserving and catastrophe risks within the underwriting risks of property and casualty reinsurance and the risk of changes in mortality within the underwriting risks of life and health reinsurance. With regard to mortality risks, as a general principle annuity portfolios are impacted by improvements in mortality while death benefit portfolios are adversely affected by deteriorations in mortality.
The specific risk characteristics and the principal monitoring and steering mechanisms are described in the following sections.
In this section we compare the available economic capital with the required risk capital in greater detail. Hannover Re calculates the economic equity as the difference between the market-consistent value of the assets and the market-consistent value of the liabilities. While fair values are available for most investments, the market-consistent valuation of reinsurance treaties necessitates a specific valuation model. We establish the market-consistent value of technical items as the present value of projected payments using actuarial methods. This is adjusted by a risk loading that factors in the potential fluctuation in future payments. Such fluctuations result from risks that cannot be hedged by means of capital market products, such as underwriting risks. For the discounting of future cash flows we use the risk-free basic yield curves calculated in accordance with Solvency II requirements including volatility adjustment. Market prices for options and guarantees embedded in insurance contracts are determined or approximated using option valuation models from the field of financial mathematics. The volume of these options and guarantees in our portfolio is, however, comparatively slight. The adjustments for assets under own management shown in the following table indicate the difference between fair value and book value of those investments recognised under IFRS at book values. Other adjustments encompass above all the deferred taxes. The available economic capital, which is available as liable capital for policyholders, is composed of the economic equity and the hybrid capital and includes the deduction of foreseeable dividends as required by Solvency II. Hybrid capital is recognised at market-consistent value as required by Solvency II, with changes in the own credit risk not being included in the valuation.
2 The figures were based on the Solvency II reporting as at 31 December 2019.
The required risk capital of the Hannover Re Group at the confidence level of 99.5% increased to EUR 5,719.1 million as at 31 December 2019, compared to EUR 5,135.4 million as at 31 December 2018. This was driven principally by the larger business volumes, which have led to an increase in market risks and underwriting risks. In addition, the weaker euro against our main currencies contributes to a rise in volumes denominated in foreign currencies and an increase in all risk categories, as does the lower level of interest rates.
The loss-mitigating effect from taxes remains stable. The slight increase in the diversification effect is a consequence of the diversified business growth and the associated risk structure.
Required risk capital at the confidence level of 99.5% M 65 in EUR million 31.12.2019 31.12.2018
The required risk capital at the 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.
Diversification within the Property & Casualty reinsurance business group is actively managed through allocation of the cost of capital according to the contribution made to diversification. A high diversification effect arises out of the underwriting of business in different lines and different regions with different business partners. In addition, the active limitation of individual risks – such as natural catastrophes – enhances the diversification effect. The risk capital with a confidence level of 99.5% for underwriting risks in property and casualty reinsurance breaks down as follows: Required risk capital 1 for underwriting risks in property and casualty reinsurance
Underwriting risk property and casualty 4,432.2 3,819.3 1 Required risk capital with a confidence level of 99.5%
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
Our own actuarial calculations regarding the adequacy of the reserves are also subject to annual quality assurance reviews conducted by external firms of actuaries and auditors. For further remarks on the reserve risk please see our comments in section 6.7 “Technical provisions” on page 227 et seq.
For the purpose of assessing our material catastrophe risks from natural hazards (especially earthquake, windstorm and flood) we use licensed scientific simulation models, supplemented by the expertise of our own specialist departments, that deliver probability distributions for losses from natural catastrophes. The monitoring of the risks resulting from natural hazards is rounded out by scenario analyses. Major scenarios and stress tests are shown in the following table: Stress tests for natural catastrophes after retrocessions
Net expenditure on major losses in the year under review amounted to EUR 956.1 million (EUR 849.8 million). Our company incurred the following catastrophe losses and major claims in the 2019 financial year: Catastrophe losses and major claims 1 in 2019 M 71 in EUR million Date gross net
Tornadoes, Midwest, United States 25 – 29 May 2019 40.8 38.7
Floods, Queensland, Australia 26 January – 7 February 2019 37.1 27.5
The reserves are determined on the basis of secure biometric actuarial bases in light of the information provided by our clients. The biometric actuarial bases used and the lapse assumptions are continuously reviewed with an eye to their adequacy and if necessary adjusted. This is done using the company’s own empirical data as well as market-specific insights. Our current risk profile in life and health reinsurance is dominated by mortality and longevity risks. This is due to the fact that under some of our contracts we pay death benefits, while under others we pay survival benefits. The volume of our annuity portfolio contributes to diversification within life and health reinsurance. We calculate the diversification effect between mortality and longevity risks prudently in view of the fact that the contracts are normally taken out for different regions, age groups and individuals. The required risk capital with a confidence level of 99.5% for underwriting risks in life and health reinsurance breaks down as follows: Required risk capital 1 for underwriting risks in life and health reinsurance
Underwriting risk life and health 2,735.6 2,212.5 1 Required risk capital with a confidence level of 99.5% 2 Mortality risk incl. catastrophe risk
Through our quality assurance measures we ensure that the reserves established by ceding companies in accordance with local accounting principles satisfy all requirements with respect to the calculation methods used and assumptions made (e. g. use of mortality and morbidity tables, assumptions regarding the lapse rate). In addition, the assumptions are continuously reviewed on the basis of empirical data and modified if necessary. New business is written in all regions in compliance with underwriting guidelines applicable worldwide, which set out detailed rules governing the type, quality, level and origin of risks and how these considerations are factored into the pricing. These global guidelines are revised annually and approved by the Executive Board. Special underwriting guidelines give due consideration to the particular features of individual markets. By monitoring compliance with these underwriting guidelines we minimise the risk of an inability to pay or of deterioration in the financial status of cedants. Regular reviews and holistic analyses (e. g. with an eye to lapse risks) are carried out with respect to new business activities and the assumption of international portfolios. Large transactions are also examined by our risk management department. Individual actuarial reports and documentation ensure that regular scrutiny also takes place on the level of the subsidiaries. The interest rate risk, which in the primary sector is important in life business owing to the guarantees that are given, is of only minimal relevance to our company thanks to the design of our reinsurance treaties. We have confidence in the entrepreneurial abilities of our underwriters and grant them the most extensive possible powers. In our decentralised organisation we manage risks where they arise using a consistent Group-wide approach in order to obtain an overall view of the risks in life and health reinsurance. Our global underwriting guidelines provide underwriters with an appropriate framework for this purpose.
Market risk 4,163.0 3,833.5 1 Required risk capital with a confidence level of 99.5% 2 Including private equity
Value at Risk 1 for the investment portfolio of the Hannover Re Group in %
Further significant risk management tools – along with the various stress tests used to estimate the loss potential under extreme market conditions – include sensitivity and duration analyses and our asset / liability management (ALM). The internal capital model provides us with quantitative support for the investment strategy as well as a broad diversity of VaR calculations. In addition, tactical duration ranges are in place, within which the portfolio can be positioned opportunistically according to market expectations. The parameters for these ranges are directly linked to our calculated risk-bearing capacity. 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 202 et seq.
C om b in ed m an ag em en t re p or t strategic participations. 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 202 et seq.
Through extensive matching of currency distributions on the assets and liabilities side, we reduce this risk on the basis of the individual balance sheets within the Group. The shortterm Value at Risk therefore does not include quantification of the foreign exchange risks. We regularly compare the liabilities per currency with the covering assets and optimise the currency coverage by regrouping assets. In so doing, we make allowance for collateral conditions such as different accounting requirements. Remaining currency surpluses are systematically quantified and monitored within the scope of economic modelling. A detailed presentation of the currency spread of our investments is provided in section 6.1 of the notes entitled “Investments under own management” on page 210.
We use derivative financial instruments only to the extent needed to hedge risks. The primary purpose of such financial instruments is to hedge against potentially adverse developments on capital markets. A portion of our cash flows from the insurance business as well as foreign exchange risks arising because currency matching cannot be efficiently achieved are hedged to some extent using forward exchange transactions. Hannover Re holds further derivative financial instruments to hedge interest rate risks from loans taken out to finance real estate. In addition, Hannover Re holds hedges in the form of equity swaps to hedge price risks in connection with the stock appreciation rights granted under the Share Award Plan. These are intended to neutralise changes in the fair values of the awarded stock appreciation rights. Contracts are concluded with reliable counterparties and for the most part collateralised on a daily basis so as to avoid credit risks associated with the use of such transactions. The remaining exposures are controlled according to the restrictive parameters set out in our investment guidelines.
With effect from this reporting period we are entering into term repurchase agreements as a supplementary liquidity management tool. The holdings exchanged in this context are fully collateralised.
We measure credit risks in the first place using the standard market credit risk components, especially the probability of default and the potential amount of loss – making allowance for any collateral and the ranking of the individual instruments depending on their effect in each case.
Counterparty default risk 423.3 312.6 1 Required risk capital with a confidence level of 99.5%
Counterparty default risks are also relevant to our investments and in life and health reinsurance, among other things because we prefinance acquisition costs for our ceding companies. Our cedants, retrocessionaires and broker relationships as well as our investments are therefore carefully evaluated and limited in light of credit considerations and are constantly monitored and controlled within the scope of our system of limits and thresholds.
The average default rate from retrocessions over the past four years was 0.1%.
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 2,050.1 million (EUR 2,084.6 million) as at the balance sheet date.
Reinsurance recoverables as at the balance sheet date M 82 in EUR million
Regular quarterly risk reporting to the Risk Committee and the Executive Board takes place with regard to all operational risks. Risks are also evaluated as part of the reporting.
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 cyber risks, risks from the use of autonomous machines and the supply of raw materials. Altogether, we are constantly monitoring 40 emerging risks.
The liquidity risk refers to the risk of being unable to meet our financial obligations when they become due. The liquidity risk consists of the refinancing risk (necessary cash could not be obtained or could only be obtained at increased costs) and the market liquidity risk (financial market transactions could only be completed at a poorer price than expected due to a lack of market liquidity). Core elements of the liquidity management of our investments are, in the first place, management of the maturity structure of our investments on the basis of the planned payment profiles arising out of our technical liabilities and, secondly, regular liquidity planning as well as the asset structure of the investments. Above and beyond the foreseeable payments, unexpected and exceptionally large payments may pose a threat to liquidity. In reinsurance business, however, significant events (major losses) are normally paid out after a lead time that can be reliably planned. As part of our liquidity management we have nevertheless defined asset holdings that have proven to be highly liquid – even in times of financial stress such as the 2008 financial crisis. Our holdings of unrestricted German, UK and US government bonds as well as cash during the year under review were larger than possible disbursements for assumed extreme events, which means that our liquidity is assured even in the unlikely case of financial crises coinciding with an extreme event that needs to be paid out quickly. The liquid asset reserve stood at EUR 5.3 billion as at the balance sheet date. In addition, we manage the liquidity of the portfolio by checking on each trading day the liquidity of the instruments contained therein. These measures serve to effectively reduce the liquidity risk.
Regular quarterly risk reporting to the Risk Committee and the Executive Board takes place with regard to the other risks. Risks are also evaluated as part of the reporting.
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 147 et seq.).
The dynamic networking of the members of staff active in the field of innovation at Hannover Re gives rise to close links with other projects, working groups and bodies, such as with the working group on “Emerging Risks und Scientific Affairs” in regard to emerging risks and opportunities (see page 115 et seq. “Other risks”). This working group carries out qualitative assessments of emerging risks. As a result, however, not only are the potential risks explored but also any available business opportunities. In the year under review, for example, issues such as “Microplastics” and “Medical advances” were analysed by the working group.
This process is supported by Risk Management at Hannover Re. The process is always worked through if a contractual commitment is to be entered into in a form not previously used by Hannover Re or if a new type of risk is to be insured. If this is the case, all material internal and external influencing factors are examined beforehand by Risk Management (e. g. implications for the overall risk profile or the risk strategy) and evaluated. Risk Management ensures that before it can be used or sold a new reinsurance product must be approved by the Executive Board.
We would also refer to the explanatory remarks on the financial strength ratings of our subsidiaries in the “Financial position” section of the management report on page 63. In addition, the risk trigger mechanism and internal monitoring system are reviewed annually by the independent auditor in relation to the financial reporting. The Group-wide risk management system is also a regular part of the audits conducted by the internal audit function.
This subsection is a part of the report that the legislator has expressly exempted from the audit of the financial statement / audit of the management report (§ 317 Para. 2 Sentence 6 and Sentence 4 German Commercial Code (HGB); unaudited information).
Hannover Re’s objective continues to be to consolidate and further expand its position as one of the leading, globally operating reinsurance groups of above-average profitability. In aspiring towards this goal, it is particularly important to observe and fulfil the principles of good and sustainable corporate governance. In so doing, we not only comply with the German Corporate Governance Code (DCGK, hereinafter also referred to as the Code), but have also developed our own model for responsible enterprise management which we consistently pursue and adjust to the latest requirements in accordance with our best practice standards.
Hannover Rück SE hereby provides insight into its enterprise management practices as part of the Declaration on Corporate Governance pursuant to § 289f German Commercial
The German Corporate Governance Code sets out major statutory requirements governing the management and supervision of German listed companies. It contains both nationally and internationally recognised standards of good and responsible enterprise management. The purpose of the Code is to foster the trust of investors, clients, employees and the gener-
In the opinion of Hannover Rück SE, it is therefore in the interest of the company to diverge from the recommendation contained in Code Section 4.2.3 Para. 4.
Code Section 5.3.2 Para. 3 Sentence 2; Independence of the Chair of the Audit Committee The current Chair of the Finance and Audit Committee of Hannover Rück SE at the same time also served as the Chair of the Board of Management of the controlling shareholder until the end of the Annual General Meeting of Talanx AG on 8 May 2018 and hence cannot, in the company’s legal assessment, be considered independent.
This assessment is also not cast into question by the fact that the Committee Chair cannot be considered independent within the meaning of the German Corporate Governance Code for the period from 1 January 2018 to 8 May 2018. Furthermore, since his service as Chief Financial Officer of Hannover Rück SE dates back to a period that is already over fifteen years ago, it is also the case that the reviews and checks performed by the Finance and Audit Committee no longer relate to any timeframe within which he himself was still a member of the Executive Board or decisions initiated by him as a member of the Executive Board were still being realised.
The aim is to achieve commercial success on the basis of a results-driven business model in accordance with the needs of our staff and society as well as with an eye to protecting the environment and conserving natural resources. The current Sustainability Strategy for the period from 2018 to 2020 defines four action fields and specifies concrete goals and measures that are to be implemented in the strategy cycle. In accordance with the CSR Directive Implementation Act of 11 April 2017, Hannover Rück SE has also published a combined non-financial information statement which can be found on page 70 et seq. of this year’s Group Annual Report.
We thus strive to reduce as far as possible the greenhouse gas emissions produced by our day-to-day business activities in order to come closer to reaching our goal of a net zero carbon footprint. Furthermore, we have defined strategic principles for our human resources management, since we consider our employees to be a crucial factor in the success of our company. Along with skills, qualifications and commitment, a high degree of diversity is one of the cornerstones of our successful business operations. Performance indicators have therefore been defined for executive development and employee advancement. Staff retention is encouraged, while diversity and equal opportunities are promoted.
Detailed information on the topic of sustainability is provided on our website (www.hannover-re.com/60729/sustainability).
Following the election of new employee representatives by the Employee Council as well as new shareholder representatives by the Annual General Meeting, five members of the Supervisory Board of Hannover Rück SE in the year under review were women. In addition, it remains the case that one woman sits on the Supervisory Board’s Finance and Audit Committee and one is a member of the Nomination Committee. The proportion of women serving on the Supervisory Board was therefore 44% in 2018 and at the beginning of 2019 and has stood at 56% in the new composition of the Supervisory Board since 8 May 2019. The proportion is thus in excess of the 30% target currently defined pursuant to §§ 76 Para. 4, 111 Para. 5 Stock Corporation Act (AktG) for the period from 1 July 2017 to 30 June 2022. The target for the Executive Board was similarly adjusted in response to the appointment of Ms. Silke Sehm to the Executive Board, which is discussed at greater length in the diversity concept.
The target for the two levels of senior management below the Executive Board is 18%.
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 Chair-
Currently, at least three of the six shareholder representatives are independent as defined by the German Corporate Governance Code. Persons suggested to the Annual General Meeting as candidates for election to the Supervisory Board may not be older than 72 at the time of their election and shall normally not belong to the Supervisory Board as a member for longer than three full consecutive terms of office; the term of office commencing from the end of the 2014 Annual General Meeting is the first term of office to be counted for this purpose. Nominations shall take account of the company’s international activities as well as diversity. 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 halfyear. The Supervisory Board’s report provides information about the attendance of individual Supervisory Board members at the meetings. No more than two former members of the company’s Executive Board may belong to the Supervisory Board.
The Finance and Audit Committee monitors the accounting process and the effectiveness of the internal control system, the risk management system and the internal auditing system. It also handles issues relating to compliance and the information system for the Supervisory Board and discusses the Quarterly Statements as well as the Half-yearly Financial Report prior to their publication. It prepares the Supervisory Board’s examination of the annual financial statement, management report and proposal for the appropriation of profit as well as of the consolidated financial statement and Group management report. In this context, the Finance and Audit Committee receives detailed information on the auditor’s view of the net assets, financial position and results of operations as well as explanations of the effects of any modified recognition and measurement principles on the net assets, financial position and results of operations together with available alternatives. In addition, the committee prepares the Supervisory Board’s decision on the commissioning of the independent auditor for the financial statements. It considers matters associated with the necessary independence of the auditor, the awarding of the audit mandate to the independent auditor, the determination of the audit concentrations and the fee agreement. The agendas and minutes of the meetings of the Finance and Audit Committee are also made available to the members of the Supervisory Board who do not sit on the committee.
For further details of the activities of the Supervisory Board committees, please see the explanations provided in the report of the Supervisory Board on page 297 et seq.
The results of our compliance activities are documented in the compliance report. The compliance report for the 2019 calendar year will be submitted to the Finance and Audit Committee of the Supervisory Board and the full Supervisory Board in March 2020. The report sets out the structure of the compliance function as well as of compliance risk identification and assessment and it describes the diverse range of activities conducted by Hannover Re in this regard. Along with the implementation of training measures and monitoring procedures, these activities include tracking the realisation of proposed potential improvements by the responsible units and responding to tips. In addition to topics frequently identified as being of particular relevance to compliance, such as regulatory compliance, international sanctions and data protection, the report also covers matters such as directors’ dealings, ad hoc and other disclosure requirements, the insider register and the handling of consulting agreements. The separate data privacy report for the 2019 calendar year is included in the compliance report as an annex.
After in-depth examination of all subject areas, work results and notifications within the period under review, 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.
Diversity concept – Goals for the composition of the Executive Board and Supervisory Board as well as status of implementation (§ 289f Para. 2 Number 6 German Commercial Code (HGB))
In the 2019 financial year the diversity of the Supervisory Board and Executive Board was further increased. While four women belonged to the Supervisory Board at the time when the resolution regarding the expanded diversity concept was adopted, this number increased to five in the Supervisory Board’s new composition following the election of new employee representatives by the Employee Council and the election of new shareholder representatives by the Annual General Meeting on 8 May 2019. Female members of the Supervisory Board continue to sit on two of the three Supervisory Board committees. One woman belongs to the Finance and Audit Committee and one is a member of the Nomination Committee.
The age diversity on the Executive Board ranged from 50 to 60 in the 2019 financial year. On the Supervisory Board the age range was from 46 to 70.
When appointments are made to the Executive Board and Supervisory Board, Hannover Rück SE is guided by a number of considerations including the principle of diversity. Wide-ranging qualifications, expertise and relevant experience on the part of the members of the Executive Board and Supervisory Board facilitate a nuanced evaluation of the commercial opportunities and risks associated with business operations and enable balanced and professional actions and decisions to be taken on this basis. Due consideration is given to the aspect of diversity when members of the Executive Board and Supervisory Board are appointed. In addition to specialist and personal qualifications (competencies), this aspect encompasses in particular age, gender, education and professional career. With a view to ensuring that the concept of diversity is applied on an ongoing basis, an assessment is made in the context of every new appointment to the Executive Board or Supervisory Board as to whether the envisaged appointment is also in keeping with the diversity concept.
The composition of the Supervisory Board shall be such that overall its members are equipped with the knowledge, abilities and specialist experience necessary for proper performance of the tasks. The make-up of the Supervisory Board shall ensure that the Executive Board in an internationally operating, broadly positioned reinsurance group receives qualified supervision and advice from the Supervisory Board. Above and beyond the legally required specialist expertise in investing, insurance practice and accounting, the topics of internationality, taxation, M & A, human resources, risk management, IT and compliance have been taken into account on a voluntary basis. The goal is that the Supervisory Board as a whole has all the know-how and experience considered to be material in light of the activities of the Hannover Re Group. Moreover, special attention is to be paid to the integrity, character, commitment, professionalism and independence of individuals put forward for election. In accordance with the Rules of Procedure for the Supervisory Board, for example, members of the Supervisory Board shall ensure that they have sufficient time at their disposal for their activities and that potential conflicts of interest are avoided. Furthermore, candidates shall be put forward to the Annual General Meeting for election to the Supervisory Board only if they will not have passed the age of 72 by the time of their election and – with effect from the election of the new Supervisory Board in 2014 – provided they have not sat on the Supervisory Board for more than three full consecutive terms of office. With regard to the appropriate number of independent Supervisory Board members from the perspective of the Supervisory Board, the Supervisory Board has decided that it shall have three independent members as defined by the German Corporate Governance Code (DCGK). Employee representatives on the Supervisory Board are disregarded in this context.
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 and competence profile for Supervisory Board members; this is intended, among other things, to assure the availability on the Supervisory Board of the expertise needed to cover all the Group’s areas of business. In addition, Supervisory Board members may not hold mandates on governing bodies at major competitors of the company or of a Group undertaking, nor may they perform individual advisory tasks for such competitors.
specialist experience. The principle of diversity is also reflected in the selection process.
In addition to the present Declaration on Corporate Governance, the Declaration of Conformity pursuant to § 161 Stock Corporation Act (AktG) regarding compliance with the German Corporate Governance Code and the associated 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).
Objective, structure and system of Executive Board remuneration The total remuneration of the Executive Board and its split into fixed and variable components conform to regulatory requirements – especially the provisions of the Act on the Adequacy of Management Board Remuneration (VorstAG) and of Art. 275 Commission Delegated Regulation (EU) 2015 / 35 and supplemented by those of the Regulation on the Supervisory Law Requirements for Remuneration Schemes in the
Variable remuneration (approx. 60% of total remuneration upon 100% goal attainment) The profit- and performance-based remuneration (variable remuneration) is contingent on certain defined results and the attainment of certain set targets. The set targets vary according to the function of the Board member in question. The variable remuneration consists of a profit bonus and a performance bonus.
2 An instrument of value-based management used to measure the attainment of long-term goals on the level of the Group, business groups and operational units 3 Split defined by legal minimum requirements
Goal attainment can amount to a maximum of 200% and a minimum of -100%.
Payment procedures for the total variable remuneration Of the total amount of defined variable remuneration, a partial amount of 60% is paid out in the month following the Supervisory Board meeting that approves the consolidated financial statement. The remaining amount of 40% is initially withheld as explained below with a view to encouraging longterm value creation: Payment procedures for the total variable remuneration M 88
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 2019 Declaration of Conformity contained in the section “Statement of enterprise management practices” on page 120 et seq. of this Group Annual Report.
Name Financial year Non-performance-based remuneration Performance-based remuneration 1 Performance-based remuneration 1 Total Number of share awards 6
7 Mr. Wallin’s appointment ended on age grounds after mutually agreed shortening of the term of office at the end of the company’s Annual General Meeting on 8 May 2019.
(allocation) 5 1 As at the balance sheet date no Board resolution was available regarding the performance-based remuneration for 2019. The variable remuneration is recognised on the basis of estimates and the provisions constituted accordingly.
8 Mr. Henchoz was appointed to the Executive Board on 1 April 2019 and named Chief Executive Officer with effect from the end of the company’s Annual General Meeting on 8 May 2019. In April 2019 Mr. Henchoz additionally received a one-time payment of EUR 1 million, which was included in the fringe benefits.
9 Ms. Sehm was appointed to the Executive Board on 6 March 2019. The stated amounts include her remuneration as a senior executive of Hannover Re for the period from 1 January to 5 March 2019.
The following table shows the expense for share-based remuneration of the Executive Board in the financial year.
Total expense for share-based remuneration of the active members of the Executive Board M 90
Jean-Jacques Henchoz 2019 – – – – 70.4 70.4 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 2018, 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 2014.
3 The expenses for stock appreciation rights relate entirely and those for share awards pro rata to Mr. Althoff’s work as a senior executive until 2014. 4 Ms. Sehm was appointed to the Executive Board on 6 March 2019. The share awards from prior years and a portion of the expense for share awards in the current financial year relate to her previous work as a senior executive at Hannover Re.
The following two tables show the remuneration of the Executive Board in the 2019 financial year in accordance with the recommendations of the German Corporate Governance Code: German Corporate Governance Code, Item 4.2.5 Para. 3 – Table 1 (target / minimum / maximum remuneration as nominal amounts)
German Corporate Governance Code, Item 4.2.5 Para. 3 – Table 1 (target / minimum / maximum remuneration as nominal amounts)
German Corporate Governance Code, Item 4.2.5 Para. 3 – Table 2 (cash allocations in 2018 and 2019) M 92
2 Mr. Henchoz was granted a contractually agreed one-time payment of EUR 1 million. 3 This refers in each case to payment of the variable remuneration for the previous year. Remuneration for seats with Group bodies that is counted towards the variable remuneration accrues in the year of occurrence. The company’s Supervisory Board only decides on the final amount paid out for the 2019 financial year after the remuneration report has been drawn up.
Retirement provision Defined benefit pension commitment (appointment before 2009) The contracts of members of the Executive Board first appointed prior to 2009 contain commitments to an annual retirement pension calculated as a percentage of the pensionable fixed annual remuneration (defined benefit). The target pension is at most 50% of the monthly fixed salary payable when leaving the company as contractually agreed on reaching the age of 65. A non-pensionable fixed remuneration component was introduced in conjunction with the remuneration structure applicable from 2011 onwards.
2 Mr. Althoff and Mr. Vogel as well as Ms. Sehm 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.
The remuneration of the Supervisory Board is determined by the Annual General Meeting of Hannover Rück SE and regulated by the company’s Statute.
In accordance with § 14 of the Statute as amended on 30 May 2016 and the resolution of the Annual General Meeting on 7 May 2013, the members of the Supervisory Board receive fixed annual remuneration of EUR 30,000 per member in addition to reimbursement of their expenses. 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 oneand -a-half times the said amounts.
Individual remuneration received by the members of the Supervisory Board M 94
Herbert K. Haas 2 Member of the • Supervisory Board 6
Name Function Type of remuneration 2019 2018 in EUR thousand 1
(until 8 May 2019) Member of the Supervisory Board Fixed remuneration 10.7 26.6
Attendance allowances – 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 Group 3 Employee representative 4 Deputy Chairman until 8 May 2019 and Chairman since 8 May 2019 5 Chairman since 8 May 2019 6 Chairman until 8 May 2019 and Deputy Chairman since 8 May 2019 7 Chairman until 8 May 2019 8 Chairman
The individualised presentation of the remuneration shows the expense charged to the financial year in question. Since the remuneration for a financial year becomes due at the end of the Annual General Meeting that ratifies the acts of the Supervisory Board for the financial year, the relevant reserve allocations for the variable remuneration are recognised allowing for any fractional amounts. Value-added tax payable upon the remuneration is reimbursed by the company.
In 2019 no loan relationships existed with members of the Executive Board or Supervisory Board of Hannover Rück SE, nor did the company enter into any contingent liabilities for members of the management boards.
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 2019 amounted to 0.0009% (0.004%) of the issued shares, i. e. 1,125 (4,741) shares.
Structure and system The remuneration scheme for senior executives below the Executive Board (management levels 2 and 3) and for key function holders in Germany belonging as a matter of principle to the ranks of senior executives consists of a fixed annual salary and a system of variable remuneration. This is comprised of a short-term variable remuneration component, the annual cash bonus and a long-term share-based remuneration component, the Share Award Plan. This variable remuneration has been uniformly applied worldwide since 1 January 2012 to all Group senior executives (i. e. Managing Directors, Directors and General Managers). As part of the reorientation of the remuneration system for senior executives the Share Award Plan of the Executive Board was consciously extended to include management levels 2 and 3. Given that at the same time the stock appreciation rights plan for senior executives was cancelled with effect from the 2012 allocation year, this means that a uniform share-based remuneration component has been maintained for the Executive Board and senior executives alike.
Measurement of variable remuneration for senior executives The measurement of the variable remuneration is based on three elements: Group net income, targets in the Property & Casualty and Life & Health business groups and individual targets. The weighting of the elements is dependent upon whether responsibility is carried in a treaty / regional department or in a service department. In the treaty / regional departments the measurement of the variable remuneration is based on weightings of 20% for Group net income, 40% for goal attainment in the respective Property & Casualty or Life & Health business group and 40% for individual goal attainment. In service departments the variable remuneration is based on Group net income and individual targets with a corresponding weighting of 40% and 60%. The degree of goal attainment is defined for both the Group net income and the business groups. Individual targets and the degree of goal
The Group net income is measured by the three-year average return on equity (RoE) of the Hannover Re Group above the risk-free interest rate. Goal attainment is calculated as follows: for each individual financial year of the last three financial years it is calculated by how many percentage points the RoE of the Hannover Re Group exceeds the risk-free interest rate. The average of these three differences determines the three-year average RoE above the risk-free interest rate. The risk-free interest rate is the average market interest rate over the past five years for 10-year German government bonds.
Group of participants and total number of eligible participants in variable remuneration systems Valid: 31 December 2019 M 95
Participants Variable remuneration system Number of eligible participants in the variable remuneration system
The measurement of the business group targets – which in the case of the treaty / regional departments accounts for 40% of overall goal attainment – is geared to the economic value created. The Excess Return on Capital Allocated (xRoCA ) of the business group encompassing the respective area of responsibility, namely Property & Casualty reinsurance or Life & Health reinsurance, is therefore taken as a one-year measurement basis. The xRoCA describes the IVC in relation to the allocated capital and shows the relative excess return generated above and beyond the weighted cost of capital. Goal attainment of 100% exists if the xRoCA in Property & Casualty reinsurance reaches 2% and the xRoCA in Life & Health reinsurance reaches 2%. Negative performance contributions are excluded; the minimum goal attainment is 0%. The maximum possible goal attainment is 150%.
The cash bonus for the 2018 financial year was paid out in June 2019. The share awards for the 2018 financial year were also allocated in June 2019; they will be paid out in the spring of 2023 including dividends paid for the 2018, 2019, 2020 and 2021 financial years.
Global economy Following further slowing in the pace of global economic growth towards the end of the financial year just ended, there are signs of stabilisation for the current year: in its year-end forecast, the Kiel Institute for the World Economy expects growth in 2020 to improve by 0.1 percentage points to 3.1%. The highly expansionary monetary policy once again adopted in the advanced economies has a supportive effect here. Lower US interest rates have enabled central banks in emerging economies to cut interest rates across a broad front.
Manufacturing output in the emerging economies is forecast to rise slightly from 4.1% to 4.5%. Along with the issues already mentioned above, additional challenges in some emerging countries are hampering a more vigorous rally: in Latin America structural weaknesses are a drag on economic development. Argentina is experiencing another severe debt and currency crisis, which will probably once again result in debt relief. While Turkey has apparently come out of recession, investment has continued to contract sharply.
Selected countries 1 price-, calendar- and seasonally adjusted Source: Kiel Institute for the World Economy; figures for Germany are calendar-adjusted.
United States The US economy is expected to continue slowing after the vigorous surge seen in recent years. Growth will probably only reach 1.5% in 2020, after 2.3% in the previous year. Two reasons that can be cited for the slowdown in economic expansion are the petering out of fiscal stimuli and the increased uncertainties surrounding trade policy, the effects of which are also being felt in the United States. Looking beyond the coming year, it is anticipated that the underlying cyclical trend will initially soften, but output will remain on an upward trajectory. There is nothing to suggest that a recession is around the corner. Private consumption will continue to be a major growth driver in 2020, boosted by a robust job market. Moreover, consumer spending will go hand-in-hand with government spending, although the figures for both areas will likely fall well short of the levels seen in the previous year. Despite all the trade policy measures that have been taken, the US current account deficit will likely deteriorate slightly by a further 0.2 percentage points to 2.6%.
Europe Supported by favourable financing conditions and a modestly expansionary fiscal policy, cyclical activity in the Eurozone will pick up again slightly, boosting renewed expansion from 2021 onwards. The growth rate for 2020 is, however, expected to still be on a par with the previous year’s level, in other words 1.2%. The state of the employment market has improved to such a degree that wages are rising more strongly again and consumer spending is benefiting from appreciable real wage growth against a backdrop of low inflation. The jobless rate is set to fall by another 0.4 percentage points to 7.2%.
The pace of growth in Japan is set to decline slightly in 2020 to 0.6% – to some extent because the previous year’s growth can be attributed in part to anticipatory effects associated with the hike in consumption tax on 1 October 2019. While the Japanese central bank has pledged to prevent any rise in interest rates from their prevailing ultra-low level for the foreseeable future, it nevertheless refrained from a widely anticipated stepping up of its policy of negative rates on reserve deposits out of concerns for adverse impacts on the profitability and stability of the country’s banks.
International bond markets should once again see largely below -average and divergent interest rate levels in 2020, although some convergence with European levels is likely. In the relevant currency areas for our company we expect slightly falling to stable yield curves. Sovereign bonds with higher risk premiums issued by countries of the European Monetary Union should for the most part continue to stabilise, particularly in light of recent indications of a more harmonious interaction between the EU and Italy. The continuing credit cycle in the United States – albeit with diminished momentum –
The renewed price surges on equity markets in 2019 can likely be attributed to, among other things, the unusually abundant supply of liquidity. This scenario can be expected to continue on a moderate scale. Ultimately, it will probably be the central banks that determine the turning point. The robust state of stock markets has less to do with corporate fundamentals than it does with the interest rate environment and a reduction in the relative return requirements for alternative asset classes. To this extent, it is hard to discern any negative omens for equity markets in the near future.
On US markets it remains to be seen how the slowly fading positive effects of tax reform and a further increase in government spending will play out. Higher taxes may be needed down the road to fill the funding gaps. Nor will Europe or the emerging markets escape the resulting uncertainties unscathed. With one or two exceptions, however, we still see a positive scenario for the latter going forward as they have largely been successful in responding to external pressure with economic and fiscal reforms. Based on more flexible labour markets and with inflation in check – a few exceptions notwithstanding –, our expectation here is for a healthy domestic economy and stabilisation in foreign trade.
Insurance industry In the current 2020 financial year the global insurance industry again finds itself confronted by numerous, in some instances substantial challenges. Nevertheless, the mood in the sector has lifted, among other things due to generally upbeat business sentiment overall. The insurance industry is thus making every effort to profitably grow its core business while at the same time developing flexible, tailored products and business models. What is more, many companies are now actively partnering with insurtechs – increasing numbers of which are entering the market – in their business models and finding numerous nexus points for innovative products.
The insurance industry’s preoccupation with the generally low level of interest rates remains unchanged. A rapid aboutturn from the low interest rate environment is still not anticipated for the Eurozone. Life insurers have been particularly hard hit. They must tackle the challenge of adjusting their business models and developing new products that are adapted to market circumstances. When it comes to industry supervision, it is evident that the regulatory environment is now undergoing a fundamental shift.
The pressure on the (re)insurance industry to act to cut costs remains considerable, prompting an accelerated drive to digitalise business processes. By automating back office processes and enhancing the flexibility of their IT structures, companies are at the same time able to open up further scope to improve customer care.
Overview Supply continues to outstrip demand in the market for reinsurance coverage, both in traditional reinsurance business and in the area of alternative capital (ILS).
1 In EUR, development in original currencies can be different 2 ++ = significantly above the cost of capital
+ = above the cost of capital + / – = cost of capital earned – = below the cost of capital 3 All lines of business except those stated separately
Regional markets North America The primary insurance market in North America should continue to develop favourably, partly in view of the general economic climate. The considerable losses incurred in recent years from windstorm events, wildfires and floods led to stronger demand. While total insured losses from natural disasters such as the fresh outbreak of wildfires in California and hurricane Dorian were lower than in the previous two years, it was nevertheless possible to secure price increases in property business across large parts of the portfolio in the 1 January treaty renewals. The rate improvements were particularly appreciable under loss-affected programmes in non-proportional reinsurance. Prices in US liability business improved against a backdrop of reduced capacities in the market. We expect the favourable pricing tendency to be sustained in the further rounds of treaty renewals to be held in June and July 2020, when the bulk of the loss-impacted programmes come up for renewal.
Latin America, Iberian Peninsula and Agricultural Risks In Latin America and the Caribbean we are seeing heightened awareness of natural catastrophe and political risk exposures. Substantial price increases were already observed here in the 1 January renewals, especially for loss-affected programmes. Large parts of Hannover Re’s portfolio in Latin America are, however, not renewed until later in the year. We therefore anticipate further improvement in conditions on the reinsurance market in order to ensure that such risks can continue to be reinsured going forward.
In the area of agricultural risks we expect further growth in demand for insurance covers. The increasing need for agricultural commodities and foodstuffs as well as the more widespread prevalence of extreme weather events are generating stronger demand for corresponding reinsurance covers, particularly in emerging and developing markets. We engage both in traditional reinsurance and in intensified cooperation with our customers and partners on the development of new tools for primary insurance. We see further growth potential for index-linked products and parametric covers that – in contrast to traditional insurance products – are geared not to loss amounts which may potentially be difficult to ascertain, but rather to previously defined and objectively quantifiable indices and are measured using weather stations or remote sensing satellites. The more widespread implementation of public-private partnerships offers us new opportunities to write profitable business in markets that have still to establish themselves.
Germany, Switzerland, Austria and Italy We grew our premium volume in the reporting category Germany, Switzerland, Austria and Italy by 5.9% as at 1 January. E+S Rückversicherung AG, the Hannover Re
Opportunities in emerging segments such as telematics or cyber are supporting the favourable development of business. Activities undertaken by market leaders are increasingly putting the industry spotlight back on the use of telematics, in particular. In the cyber line, on the other hand, the market -wide premium volume in Germany is expected to double within the next five years.
United Kingdom, Ireland and London Market In the United Kingdom, Ireland and London Market, we made every effort to push through price increases in all major reinsurance lines in the 1 January treaty renewals. Particularly in motor business, which we carry in our books exclusively on a non-proportional basis, we achieved premium increases running into double-digit percentages. In almost all property and liability lines we secured improved rates, although the increases were not as marked as in motor business.
In the 1 January renewals we succeeded in significantly expanding our position with a number of clients at broadly stable prices and conditions, especially in China. In Japan, we anticipate appreciably higher reinsurance prices for the renewals as at 1 April – first and foremost for catastrophe covers but also in other market segments. We continued to grow our business in China with new and existing customers alike. In traditional reinsurance we consider ourselves optimally positioned; however, given that we anticipate an ongoing oversupply of capacity, we continue to attach strategic importance to pursuing an innovation-driven approach in the development of customised solutions.
In Australia and New Zealand, market players are looking for clear improvements in conditions in the run-up to the treaty renewals during the year. The devastating bushfires in Australia have caused significant losses. This should further stimulate demand for catastrophe covers and is expected to be reflected on the pricing side.
Going forward, we see especially strong growth potential in Asia. We intend to step up our participation in the associated business opportunities and will expand our activities in the region accordingly.
Credit, Surety and Political Risks Covers for credit, surety and political risks will be affected by the anticipated slowdown in global economic growth. This may cause the number of insolvencies around the world to rise slightly from the existing low level. Against this backdrop, we expect loss ratios in credit and surety business as well as in the area of political risks to increase moderately. This development will likely generate stronger demand, especially in credit and political risks business. Demand in the area of surety risks, on the other hand, will tend to remain stable. With this in mind, it is our expectation that premium growth will be sustained going forward, although the pace of growth will be held back by general economic conditions. All things considered, we expect to book modestly increased premium income and a good result.
In US catastrophe business we negotiated stable or slightly improved prices. Here, too, however, we were only able to secure appreciable price increases under loss-impacted programmes.
For the 2020 financial year we anticipate further good business prospects in life and health reinsurance. Driven by the continuing development of their economies, it is our assumption that emerging markets, in particular, will continue to generate above-average economic growth. 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 continue rising.
1 In EUR, development in original currencies can be different 2 + + = significantly above the cost of capital
For some years now, regulatory issues relating to capital and solvency ratios have dominated the more mature markets. We expect this trend to continue.
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 2020 financial year.
The tendency among our customers to see us as more than just a pure risk carrier will be sustained in the years ahead. In our role as an expert partner, we draw on our worldwide know-how spanning a wide range of topics to give our customers comprehensive support.
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 maintain a conservative posture in investing substantial parts of our asset 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.
The enlargement of the asset portfolio should have a positive effect on investment income. Despite the persistently low euro interest rate level, we expect to keep the average return on our investments in the region of our defined 2.7% target for the year. In view of the low returns on more secure investments, we shall continue to invest in products offering attractive credit spreads such as corporate bonds, although in this regard we shall increasingly move towards higher-quality segments. The widening of spreads towards the end of the year under review is putting a healthier risk/return ratio within reach again. We also intend to selectively expand our holdings in the areas of alternative investments, real estate and emerging markets.
For the 2020 financial year we anticipate another good business performance for Hannover Re. In view of the developments in property and casualty as well as in life and health reinsurance, we are looking to book growth of around 5% in gross premium for our total business – based on constant exchange rates.
In view of the expected positive cash flow that we generate from the technical account and the investments themselves, and assuming roughly stable exchange rates and interest rate levels, our asset portfolios should continue to grow. We are looking to deliver a return on investment of around 2.7% for 2020.
Group net income is expected to be in the order of EUR 1.2 billion. This is subject to the proviso that large loss expenditure does not significantly exceed the budgeted level of EUR 975 million and assumes that there are no unforeseen distortions on capital markets.
Income / expense on funds withheld and contract deposits 7.2 206,433 207,987
Commission and brokerage, change in deferred acquisition costs 7.3 4,805,447 4,271,736
Diluted earnings per share 10.65 8.79 1 Restated pursuant to IAS 8
Changes in the consolidated group – – – – – 466 (466) – (3,192) (3,192)
Changes in ownership interest with no change of control status – – (1,171) – – – (643) (1,814) (306) (2,120)
Total income and expense recognised directly in equity – – (470,670) 263,917 3,132 (2,766) – (206,387) (23,660) (230,047)
Change in fair value of financial instruments (through profit or loss) (72,855) (31,160)
Cash and cash equivalents at the beginning of the period 1,151,509 835,706
Thereof cash and cash equivalents of the disposal group – 78,594
The annual financial statements included in the consolidated financial statement were for the most part drawn up as at 31 December. Pursuant to IFRS 10 “Consolidated Financial Statements” there is no requirement to compile interim accounts for Group companies with diverging reporting dates because their closing dates are no earlier than three months prior to the closing date for the consolidated financial statement. Insofar as no interim accounts were drawn up, allowance has been made for the effects of significant transactions between the diverging reporting dates and the closing date for the consolidated financial statement.
The annual financial statements of all companies were drawn up in accordance with standard Group accounting and measurement rules pursuant to IFRS.
Hannover Re is applying IFRS 16 “Leases” for the first time with effect from 1 January 2019. The significant new requirements relate principally to accounting by lessees. The lessee recognises a lease liability for virtually all leases and at the same time recognises a right to use the underlying asset. Hannover Re has applied the standard using a modified retrospective approach and recognises the cumulative effect of adoption of the standard in retained earnings as at 1 January 2019. Comparable figures for prior-year periods were therefore not restated. Hannover Re has decided not to re-examine lease contracts concluded before the transition date with a view to establishing whether the contract is or contains a lease upon initial application, but rather to retain the assessment previously made under IAS 17 and IFRIC 4. The following transition reliefs were applied: • recognition of leases with a remaining lease term of twelve months or less as at 1 January 2019 as shortterm leases
• application of a single discount rate to a portfolio of similar lease contracts
Disclosures regarding the new treatment of lease arrangements are provided in sections 3.1 “Change in accounting policies” and 8.8 “Leases”.
The measurement model of IFRS 17 requires entities to measure groups of insurance contracts based on estimates of discounted future cash flows with an explicit risk adjustment for non-financial risks (“fulfilment cash flows”) as well as a contractual service margin, representing the expected (i. e. unearned) profit for the provision of insurance coverage in the future.
Initial application of the standard was originally mandatory on a retrospective basis for annual reporting periods beginning on or after 1 January 2021; it has still to be endorsed by the EU.
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. Based on the elaboration of the accounting foundations, work on the implementation of extensive adjustments to processes and systems began in the year under review and will have to continue in 2020. The implications for the consolidated financial statement cannot yet be quantified.
In July 2014 the IASB published the first 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 and decided to make use of the deferral approach. Since the review of the application requirements there has been no change in business activity that would have necessitated a re-evaluation of the predominant activity.
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 ”. This information is intended to facilitate some comparability with entities that are already applying IFRS 9.
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: Further IFRS Amendments and Interpretations N 06
October 2018 Definition of Material (Amendments to IAS 1 and IAS 8)
A n n u al f in an ci al s ta te m en ts 3. Accounting policies 3.1 Change in accounting policies
Changes pursuant to IAS 8 – Offsetting of foreign currency translation N 09 in EUR thousand 1.1. – 31.12.2018
Financial assets held to maturity are comprised of non-derivative assets that entail fixed or determinable payments on a defined due date and are acquired with the intent and ability to be held until maturity. They are measured at amortised cost. The corresponding premiums or discounts are recognised in profit or loss across the duration of the instruments using the effective interest rate method. An impairment loss is taken in the event of permanent impairment. Please refer to our comments on impairments in this section.
Premiums or discounts are deducted or added within the statement of income using the effective interest rate method until the amount repayable becomes due. An impairment loss is taken only to the extent that repayment of a loan is unlikely or no longer expected in the full amount. Please refer to our comments on impairments in this section.
Unlisted bond, equity and real estate funds Audited net asset values (NAV) Net asset value method
Financial assets at fair value through profit or loss consist of securities held for trading and those classified as measured at fair value through profit or loss since acquisition. This refers principally to unsecured debt instruments issued by corporate issuers and derivative financial instruments. Within the scope of the fair value option provided under IAS 39 “ Financial Instruments: Recognition and Measurement”, according to which financial assets may be carried at fair value on first-time recognition subject to certain conditions, all structured securities that would have needed to have been broken down had they been recognised as available for sale or under loans and receivables are also recognised here. Hannover Re makes use of the fair value option solely for selected subportfolios of its financial assets. Securities held for trading and securities classified as measured at fair value through profit or loss since acquisition are carried at their fair value on the balance sheet date. If stock market prices are not available for use as fair values, the carrying amounts are determined using generally acknowledged measurement methods. All changes in fair values from this measurement are recognised in investment income. The classification of financial assets at fair value through profit or loss is compatible with Hannover Re’s risk management strategy and investment strategy, which are oriented extensively towards economic fair value variables.
Establishment of the fair value of financial instruments carried as assets or liabilities: we establish the fair value of financial instruments carried as assets or liabilities using the methods and models described below. The fair value of a financial instrument corresponds to the amount that Hannover Re would receive or pay if it were to sell or settle the said financial instrument on the balance sheet date. Insofar as market prices are listed on markets for financial assets, their bid price is used; financial liabilities are valued at ask price. In other cases the fair values are established on the basis of the market conditions prevailing on the balance sheet date for financial assets with similar credit rating, duration and return characteristics or using recognised models of mathematical finance. Hannover Re uses a number of different valuation models for this purpose. The details are set out in the table above. Financial assets for which no publicly available prices or observable market data can be used as inputs (financial instruments belonging to fair value hierarchy level 3) are for the most part measured on the basis of proven valuations drawn up by knowledgeable, independent experts, e. g. audited net asset value, the plausibility of which has previously been subjected to systematic review. For further information
Other invested assets are for the most part recognised at nominal value. Insofar as such financial assets are not listed on public markets (e g. participating interests in private equity firms), they are carried at the latest available net asset value as an approximation of the fair value. Loans included in this item are recognised at amortised cost.
A n n u al f in an ci al s ta te m en ts the effective interest rate method and shown in investment income.
Contract deposits: under this item we report receivables and liabilities under insurance contracts that satisfy the test of a significant risk transfer to the reinsurer as required by IFRS 4 “Insurance Contracts” but fail to meet the risk transfer required by US GAAP. IFRS 4 in conjunction with SFAS 113 requires insurance contracts that transfer a significant technical risk from the ceding company to the reinsurer to be differentiated from those under which the risk transfer is of merely subordinate importance. Since the risk transfer under the affected transactions is of subordinate importance, these contracts are recognised using the “deposit accounting” method and hence eliminated from the technical account. The compensation for risk assumption booked to income under these contracts is netted under other income / expenses. The payment flows resulting from these contracts are shown in the cash flow statement under operating activities.
items carried directly in equity, the resulting deferred taxes are also recognised directly in equity. Value adjustments are taken on deferred tax assets as soon as realisation of the receivable no longer appears likely. Deferred taxes are measured according to the tax regulations specific to the country concerned that are applicable or have been adopted as at the closing date.
Deferred tax assets may only be netted with deferred tax liabilities if an enforceable right exists to net actual tax refund claims with actual taxes owing. A precondition here is that the deferred tax assets and deferred tax liabilities refer to income taxes that are levied by the same revenue authority either for (i) the same taxable entity or for (ii) different taxable entities. In this regard, there must be an intention – in every future period in which the discharge or realisation of substantial amounts of deferred tax liabilities / deferred tax assets is to be expected – either to bring about the settlement of the actual taxes owing and refund claims on a net basis or to discharge the liabilities at the same time as the claims are realised.
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.
Provisions for pensions are established in accordance with IAS 19 “Employee Benefits” using the projected unit credit method. They are calculated according to actuarial principles and are based upon the commitments made by the Hannover Re Group for retirement, disability and widows’ benefits. The amount of the commitments is determined according to length of service and salary level. The pension plans are defined benefit plans. The basis of the valuation is the estimated future increase in the rate of compensation of the pension beneficiaries. The benefit entitlements are discounted by applying the capital market rate for highest-rated securities. All
Under the balance sheet item Other liabilities we recognise not only the sundry non-technical provisions but also minority interests in partnerships. Direct minority interests in partnerships, i. e. liabilities to holders of minority shares in partnerships arising out of long-term capital commitments, which are puttable at fair value by the holder of the interest, are recognised as debt pursuant to IAS 32 and measured at the fair value of the redemption amount as at the balance sheet date.
Shareholders’ equity: the items “common shares” and “additional paid-in capital” are comprised of the amounts paid in by the shareholders of Hannover Rück SE on its shares. In addition to the statutory reserves of Hannover Rück SE and the allocations from net income, the retained earnings consist of reinvested profits generated by the Hannover Re Group companies in previous periods. What is more, in the event of a retrospective change of accounting policies, the adjustment for previous periods is recognised in the opening balance sheet value of the retained earnings and comparable items of the earliest reported period. Unrealised gains and losses from the fair value measurement of financial instruments held as available for sale are carried in cumulative other comprehensive income under unrealised gains and losses on investments.
Non-controlling interests are shares in the equity of affiliated companies not held by companies belonging to the Group. IAS 1 “Presentation of Financial Statements” requires that non-controlling interests be recognised separately within Group shareholders’ equity. The non-controlling interest in profit or loss is shown separately following the net income. Further information is provided in section 6.14 “Non-controlling interests”.
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 3.2 “Summary of major accounting policies” and section 6.7 “Technical provisions”.
In determining the carrying amounts for certain financial assets it is sometimes necessary to make assumptions in order to calculate fair values. In this regard we would refer the reader to our remarks in section 3.2 “Summary of major accounting policies” concerning financial assets at fair value through profit or loss and securities held as available for sale as well as in section 6.7 “Technical provisions” concerning investment property. Assumptions concerning the appropriate applicability criteria are necessary when determining the need for impairments on non-monetary financial assets held as available for sale. In this regard we would again refer the reader to our explanatory remarks in section 3.2 “Summary of major accounting policies”.
The capital consolidation is based on the acquisition method. Goodwill derives from the acquisition of subsidiaries and corresponds to the sum of the consideration rendered, the amount of all non-controlling interests in the acquired company and the fair value of the equity interests previously held in the acquired company less the fair value of the acquired net assets. Under IFRS 3 goodwill is not amortised, but instead impairment is taken where necessary on the basis of annual impairment tests. Immaterial and negative goodwill are recognised in the statement of income in the year of their occurrence. Costs associated with acquisition are expensed.
The figures for the capital and reserves as well as the result for the last financial year are taken from the local financial statements drawn up by the companies.
Hannover Rück Beteiligung Verwaltungs-GmbH 1, 2, Hannover / Germany 100.00 EUR 4,027,406 –
FUNIS GmbH & Co. KG, Hannover / Germany 100.00 EUR 95,810 37,702
HAPEP II Holding GmbH 1, Hannover / Germany 95.42 EUR 13,432 90
Hannover Re Global Alternatives GmbH & Co. KG 1, Hannover / Germany 94.72 EUR 438,158 14,870
Hannover Re Euro RE Holdings GmbH 1, Hannover / Germany 87.68 EUR 1,018,585 110,205
HR GLL Central Europe Holding GmbH 1, Munich / Germany 87.67 EUR 61,753 (47)
HR Verwaltungs-GmbH 5, 6, 7, Hannover / Germany 100.00 EUR 3 (5)
HDI Global Specialty SE 1, Hannover / Germany 49.78 EUR 251,149 (12,114)
Perseus Technologies GmbH 7, Berlin / Germany 18.22 EUR – (3,742)
Internationale Schule Hannover Region GmbH 8, Hannover / Germany 9.17 EUR 4,214 (188)
ELEMENT Insurance AG 7, Berlin / Germany 6.01 EUR 22,942 (7,948)
Hannover Re (Ireland) Designated Activity Company 1, Dublin / Ireland 100.00 USD 697,296 106,124
Hannover Life Re of Australasia Ltd 1, Sydney / Australia 100.00 AUD 487,581 (10,838)
Hannover Re (Bermuda) Ltd. 1, Hamilton / Bermuda 100.00 USD 1,533,574 164,790
Inter Hannover (No. 1) Limited 1, London / United Kingdom 100.00 GBP – –
Integra Insurance Solutions Limited 1, Bradford / United Kingdom 100.00 GBP 6,621 1,105
Argenta Holdings Limited 1, 3, London / United Kingdom 100.00 GBP 52,901 6,465
Argenta Private Capital Limited 1, 3, London / United Kingdom 100.00 GBP 4,102 2,139
Fountain Continuity Limited 1, 3, Edinburgh / United Kingdom 100.00 GBP – –
Argenta Continuity Limited 1, 3, London / United Kingdom 100.00 GBP – –
Argenta General Partner Limited 1, 3, Edinburgh / United Kingdom 100.00 GBP – –
Argenta SLP Continuity Limited 1, 3, Edinburgh / United Kingdom 100.00 GBP – –
Argenta Underwriting No.1 Limited 1, 3, London / United Kingdom 100.00 GBP 22 –
Argenta Underwriting No.7 Limited 1, 3, London / United Kingdom 100.00 GBP – –
Argenta No.15 Limited 1, 3, London / United Kingdom 100.00 GBP – –
Argenta Underwriting Asia Pte. Ltd. 1, 3, Singapore / Singapore 100.00 SGD 1,403 754
Argenta Underwriting Labuan Ltd 1, 3, 10, Labuan / Malaysia 100.00 USD 78 –
Glencar Underwriting Managers, Inc., Chicago / USA 100.00 USD 4,702 (133)
Glencar Insurance Company 1, Orlando / USA 100.00 USD 57,437 (1,580)
Kubera Insurance (SAC) Ltd 1, Hamilton / Bermuda 100.00 USD 702 (187)
Sand Lake Re, Inc. 1, Burlington / USA 100.00 USD 89,789 112,853
Hannover Reinsurance Africa Limited 1, Johannesburg / South Africa 100.00 ZAR 950,873 191,237
Hannover Re Real Estate Holdings, Inc. 3, Orlando / USA 95.25 USD 969,278 4,615
320AUS LLC 1, 3, Wilmington / USA 95.15 USD 90,289 3,392
River Terrace Parking, LLC 1, 3, Wilmington / USA 95.15 USD 17,944 (10)
3290ATL LLC 1, 3, Wilmington / USA 95.15 USD 69,419 3,074 1600FLL LLC 1, 3, Wilmington / USA 95.15 USD 30,248 1,053 2530AUS LLC 1, 3, Wilmington / USA 95.15 USD 24,805 360 7550BWI LLC 1, 3, Wilmington / USA 95.15 USD 23,758 84 7659BWI LLC 1, 3, Wilmington / USA 95.15 USD – –
Markham Real Estate Partners (KSW) Pty Limited 1, Sydney / Australia 94.72 AUD – –
PAG Real Estate Asia Select Fund Limited 1, George Town / Cayman Islands 94.72 USD 213,484 3,174
Morea Limited Liabilty Company 1, Tokyo / Japan 93.77 JPY 4,447,713 (33,287)
Kaith Re Ltd. 1, Hamilton / Bermuda 88.00 USD 101 (272)
HR GLL Roosevelt Kft 1, Budapest / Hungary 87.67 HUF 34,475,317 19,422,451
HR GLL Liberty Corner SPÓŁKA Z OGRANICZONĄ ODPOWIEDZIALNOŚCIĄ 1, Warsaw / Poland 87.67 PLN 49,850 1,837
Akvamarín Beta s.r.o. 1, Prague / Czech Republic 87.67 CZK 83,662 17,722
HR GLL Europe Holding S.à r.l. 1, Luxembourg / Luxembourg 87.67 EUR 128,356 22,688
HR GLL CDG Plaza S.r.l. 1, Bucharest / Romania 87.67 RON 103,947 8,486
Pipera Business Park S.r.l. 1, Bucharest / Romania 87.67 RON 357,192 8,429
Commercial & Industrial Acceptances (Pty) Ltd. 1, Johannesburg / South Africa 79.20 ZAR 12,817 36,821
Lireas Holdings (Pty) Ltd. 1, Johannesburg / South Africa 70.00 ZAR 299,437 85,508
SUM Holdings (Pty) Ltd. 1, Johannesburg / South Africa 70.00 ZAR (594) (125)
Thatch Risk Acceptances (Pty) Ltd. 1, Johannesburg / South Africa 49.00 ZAR 3,365 3,806
Landmark Underwriting Agency (Pty) Ltd. 1, Bloemfontein / South Africa 45.85 ZAR 6,201 10,675
Hannover Re Consulting Services India Private Limited 12, Mumbai / India 100.00 INR 114,966 3,267
Hannover Re Services USA, Inc., Itasca / USA 100.00 USD 4,047 158
Hannover Mining Engineering Services LLC, Itasca / USA 100.00 USD 385 45
Hannover Re Risk Management Services India Private Limited 12, New Delhi / India 100.00 INR 51,838 1,240
Hannover Re Services Italy S.r.l., Milan / Italy 99.65 EUR 371 99
Vela Taxi Finance (Pty) Ltd 1, Johannesburg / South Africa 12.58 ZAR (6,825) (1,554)
Marmic Taxi Parts (Pty) Ltd 1, Durban / South Africa 6.86 ZAR 20,206 4,661
Reaseguradora del Ecuador S.A. 1, Guayaquil / Equador 30.00 USD 18,560 3,798
Sureify Labs, Inc. 1, 14, Wilmington / USA 20.69 USD (489) (2,134)
Investsure Technologies Proprietary Limited 1, Johannesburg / South Africa 18.95 ZAR 1,324 (3,154)
SWISS INSUREVOLUTION PARTNERS Holding (FL) AG 7, Triesen / Liechtenstein 15.00 CHF 3,773 (31)
SWISS INSUREVOLUTION PARTNERS Holding (CH) AG 7, Zurich / Switzerland 15.00 CHF 43,631 15,583
Somerset Reinsurance Ltd. 7, Hamilton / Bermuda 12.31 USD 415,008 5,263
Acte Vie S.A. 7, Schiltigheim / France 9.38 EUR 9,870 394
1 Provisional (unaudited) figures 2 Year-end result after profit transfer 3 IFRS figures 4 Financial year as at 30 September 2019 5 Company is in liquidation 6 Company was wound up with effect from the end of 31 December 2018 7 Figures as at 31 December 2018 8 Financial year as at 31 July 2019 9 The company holds 35 subsidiaries with capital and reserves of altogether EUR 0.5 million. 10 Company is inactive 11 Financial year as at 31 October 2018 12 Financial year as at 31 March 2019 13 Consolidated figures 14 Financial year as at 31 July 2018 15 Figures as at 31 December 2017 16 Company was newly established in 2018; an annual financial statement is not yet available. 17 Financial year as at 30 June 2018
Hannover Rück SE, Hong Kong Branch, Wanchai / Hong Kong 365,967 291,101 2,973 11,803
Hannover Rück SE Succursale Francaise, Paris / France 876,850 783,872 36,032 42,425
Hannover Rueck SE Bahrain Branch, Manama / Bahrain 127,629 101,820 11,763 (12,523)
Hannover Re UK Life Branch, London / United Kingdom 280,647 307,867 5,183 (5,150)
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. HDI Global Specialty SE, which is included at equity in the consolidated financial statement, has branches in Australia, Canada, Italy, Sweden and the United Kingdom.
In accordance with the consistent consolidation model, a structured entity – just like a subsidiary – must be consolidated if Hannover Re gains control over the said entity. With regard to the criteria for control please see also section 4.1 “Consolidation principles”. Within the Hannover Re Group the requirement to consolidate structured entities is examined as part of an analysis that encompasses both transactions in which a structured entity is initiated by us with or without the involvement of third parties and those in which we enter into contractual relations with an already existing structured entity with or without the involvement of third parties. Consolidation decisions are reviewed as necessary and at least once a year. The list of all consolidated structured entities forms part of the list of shareholdings.
Consolidated structured entities The following structured entities were consolidated as at the balance sheet date: • Kaith Re Ltd., Hamilton, Bermuda
Kaith Re Ltd. is a so-called segregated accounts company (SAC), the sole object of which is the securitisation of reinsurance risks in the form of investment products. Under this transformation a complete underwriting risk transfer always takes place to the investor in question. In a SAC further segregated accounts exist under a general account; it is in these segregated accounts, which for liability purposes are entirely separate from one another and from the general account, that the aforementioned securitisations take place for the investors.
Retrocession and securitisation of reinsurance risks The securitisation of reinsurance risks takes place largely through the use of structured entities.
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 409.8 million (EUR 389.0 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 3,716.0 million (EUR 2,992.4 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.