Letter from the Chairman of the Executive Board 2 Executive Board of Hannover Rück SE 6 The Hannover Re share 8
Report by the Supervisory Board 258 Supervisory Board of Hannover Rück SE 261
Branch offices and subsidiaries of the Hannover Re Group abroad 262 Glossary 265 List of graphs, tables and charts 270 Imprint 274 Contact information 275 Financial calendar 276
While the past five years had seen insured losses from natural catastrophe events below the modelled expectations, the picture in 2017 was markedly different: most notably, the hurricanes “Harvey”, “Irma” and “Maria” – along with a number of other natural disasters – caused insured losses well in excess of USD 100 billion. This is on a similar scale to the expenditures incurred in 2005 from hurricanes “Katrina”, “Rita” and “Wilma” and in 2011 from the earthquakes in Japan and New Zealand. It is therefore evident that, as a reinsurer, we must anticipate insured losses in an order of magnitude comparable with 2017 at relatively frequent intervals.
In 2017, as had been the case in 2005 and 2011, your company – in common with other industry players – was impacted by the aforementioned natural catastrophe losses to a considerable extent. Reinsuring our clients against just such events is at the very heart of our business model in property and casualty reinsurance. It is therefore crucially important that we accurately capture these exposures in our risk management system in order to avoid having to carry unexpectedly heavy losses that could impair the company’s financial strength. With this in mind, I am pleased to report that the losses incurred by your company from these natural disasters were very much in line with the expected values from our risk management system relative to our defined risk appetite.
As a further factor, we generated exceptionally healthy investment income in 2017. Driven by good earnings from our real estate portfolio and from special investments, above all in private equity, we were able to boost ordinary investment income by almost 11 percent. Extraordinary investment income rose even more strongly following the sale of our listed equities in the third quarter, causing investment income from assets under own management to surge by 26 percent overall.
Driven by substantial growth in property and casualty reinsurance as well as a largely stable development in life and health reinsurance, premium income also fared well. Gross written premium climbed 9 percent to EUR 17.8 billion. Adjusted for exchange rate effects, growth would have been as strong as 11 percent. In view of your company’s unchanged very good equity position, we envisage a stable distribution on the level of the previous year and will propose to the Annual General Meeting that a dividend of EUR 5 per share should be paid. This is composed of an ordinary dividend of EUR 3.50 and an unchanged special dividend of EUR 1.50 per share.
As far as our investments are concerned, we anticipate largely stable ordinary income despite the low level of interest rates. The return on investment is expected to be in the order of 2.7 percent. If we also bear in mind the good outcome of the treaty renewals as at 1 January 2018 in property and casualty reinsurance, it is now our assumption that gross premium will grow by more than 5 percent at constant exchange rates. We expect to generate Group net income of more than EUR 1 billion. As always, our guidance is subject to the proviso that major loss expenditure remains within the budgeted EUR 825 million and assumes that there are no unforeseen distortions on the capital market.
Dr. Michael Pickel Group Legal Services Run-Off Solutions Target Markets in Property & Casualty Reinsurance
Roland Vogel Finance and Accounting Information Technology Investment and Collateral Management Facility Management
The Hannover Re share • Share performance of 6.8% including reinvested dividends • Proposed dividend of EUR 3.50 plus special dividend of EUR 1.50 per share on the level of the previous year
Stock markets in 2017 were again exposed to numerous potentially unsettling factors. In the wake of the surprising outcomes of the Brexit referendum and the US elections in 2016, many market players feared further uncertainty in the EU or the Eurozone in connection with national elections in France and the Netherlands. These concerns proved to be unfounded, however, and even real factors such as the overhaul of international trade agreements and the sluggish progress in forming a government in Germany had little impact on financial markets, which proved to be astonishingly robust and in the case of the Eurozone even surprisingly sprightly. An exception here was the comparatively muted performance of UK stock markets as negotiations dragged between the EU and the UK following the Brexit vote.
The German DAX index started the year at 11,481 points, which also proved to be its lowest level of the period under review. German blue chips enjoyed a broadly positive performance from the beginning of the year until the summer, albeit with certain modest setbacks. The continued expansionary monetary policy pursued by the European Central Bank (ECB), coupled with a good performance on the corporate side and a robust world economy, had positive implications for valuations on the capital markets. After taking a breather over the summer the DAX picked up significant momentum again, touching its high for the year of 13,479 on 3 November 2017. The German stock index closed out the year at 12,918 with a gain of 12.5%.
The MDAX fared even more favourably, kicking off the year at 22,189 points and climbing to an interim high of 26,696 on 2 June 2017. After moving sideways for a while over the summer months, the index surged higher again to reach its peak for the year of 27,027 shortly before year-end on 30 November. The MDAX ultimately closed out the year at 26,201 points with a gain of 18.1%. The performance of the Dow Jones in the United States was even more positive: spurred on by the “Trump effect” and the major tax reform package passed by the Senate at the end of the year, it soared to 24,719 and posted an annual gain of 25.1%.
In a three-year comparison the Hannover Re share delivered a performance (including reinvested dividends) of 61.0%. It therefore once again clearly outperformed the DAX (31.7%), MDAX (54.7%) and Global Reinsurance Index (30.5%) benchmarks.
The Executive Board and Supervisory Board intend to propose to the Annual General Meeting on 7 May 2018 that a dividend of EUR 3.50 plus a special dividend of EUR 1.50 per share should be distributed. In keeping with the previous year, the special dividend will be paid as a capital management measure because the company’s capitalisation continues to be in excess of the required capital. Based on the year-end closing price of EUR 104.90, this produces a dividend yield of 4.8%.
Annual General Meeting looked back on a fifth consecutive record profit
In his address to shareholders Chief Executive Officer Ulrich Wallin took the opportunity to look back once more on the 2016 financial year, which Hannover Re had closed out with Group net income of EUR 1.17 billion and hence a fifth record profit in a row. The Property & Casualty reinsurance business group had played the largest part in this successful development with a very healthy underwriting profit. While Life & Health reinsurance delivered a solid result in line with expectations, investment income surpassed expectations.
We continued to cultivate the dialogue with institutional investors in the financial year just ended in the context of roadshows and capital market conferences. Altogether, members of the Executive Board and representatives of the Investor Relations department attended 17 international capital market conferences (previous year: 14) and 19 roadshows (19). The focus of our efforts was on the financial centres of Europe and North America.
In the year just ended Hannover Re again provided information about its achievements as a responsible enterprise in the form of a stand-alone sustainability report drawn up in accordance with the current internationally recognised reporting standards of the Global Reporting Initiative (GRI). Based on its sixth Sustainability Report, the company’s sustainability performance was assessed by multiple rating agencies. In addition to RobecoSAM, MSCI, Sustainalytics and Vigeo, Hannover Re’s achievements in the field of sustainability were once again evaluated by the rating agency Oekom Research. The company ’s above-average fulfilment of industry-specific requirements was confirmed by Oekom Research with the award of “Prime” status. Furthermore, in the context of the Carbon Disclosure Project (CDP) Hannover Re was evaluated by the non-governmental organisation of the same name in the financial year just ended and received a “B” rating, corresponding to the second-best level. Not only that, the Hannover Re share continued to be listed in the worldwide, sustainability-focused FTSE4Good Index Series and was included for the first time in the Global Challenges Index (GCX) administered by the Hannover and Hamburg stock exchanges.
Our share register showed some 48,000 shareholders at the end of the year, another increase in the number of shareholders year-on-year (41,000). The largest shareholders as at year-end were Talanx AG with 50.2% and the asset manager BlackRock, Inc. with a reported 3.05% of the voting rights. Of the remaining shares outstanding, by far the bulk – at 35.5% – were held by other institutional investors such as banks, insurers and investment companies (previous year in total: 38.5%); private investors held 11.2% (8.2%). Our shareholders include investors who pay particularly close attention to sustainability criteria.
In total, around 320 analyst studies were published on Hannover Re and the insurance sector in the 2017 financial year. By the end of the year 32 analysts had handed down opinions on Hannover Re: nine analysts (ten) recommended the Hannover Re share as “buy” or “overweight”. Altogether 18 opinions (17) were a “hold”, making this the most common. “Underweight” or “sell” recommendations were issued a total of five (seven) times. The analysts’ average price target continued to move higher in the year under review, increasing from EUR 101.34 at the start of the financial year to EUR 110.49 at year-end. This development is particularly pleasing in view of what is still a relatively superior valuation measured against peer companies.
Shareholding structure as at 31 December 2017 I 11 11.2% Private investors 38.6% Institutional investors (including BlackRock, Inc. 3.1%)
Market capitalisation at year-end in EUR million 12,650.6 12,397.4 12,741.1 9,041.2 7,522.8
Equity attributable to shareholders of Hannover Rück SE in EUR million 8,528.5 8,997.2 8,068.3 7,550.8 5,888.4
Earnings per share (basic and diluted) 7.95 9.71 9.54 8.17 7.43
With a gross premium volume of more than EUR 17 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.
In the Property & Casualty reinsurance business group we consider ourselves to be a reliable, flexible and innovative market player that ranks among the best in any given market. Cost leadership, effective cycle management and superlative risk management are the key elements of our competitive positioning.
Growth in earnings per share (year-on-year comparison) ≥ 6.5% -18.2% 1.8% 16.7% -0.9%
EBIT margin 7 Financial Solutions / Longevity ≥ 2% 13.2% 9.4% 11.0% 11.1%
In 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.
IVC – the strategic management ratio In order to manage the portfolios and individual treaties we apply underwriting-year-oriented measurement principles based on expected cash flows that appropriately accommodate the specific characteristics of property & casualty and life & health reinsurance. The attainment of targets in a particular financial year is also of interest – especially from the standpoint of shareholders. Based on our internal capital model, the foundation of our enterprise management, we strive to generate a profit in excess of the cost of capital. This return – which is the decisive ratio for the management of our business activities – is referred to as Intrinsic Value Creation (IVC).
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. At 4.8%, our average cost of capital is comparatively low.
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Macroeconomic climate and industry-specific environment • Appreciable uptick in global economic growth • Low interest rate environment remains a drag on the insurance industry • Capital markets subject to volatility • Disproportionately heavy incidence of devastating natural disasters
Economic growth in emerging markets also gained added impetus in 2017, after softer increases in the previous years. A key reason here is the recovery in output in commodity-exporting countries, which had suffered heavily in 2015 and 2016 under the collapse in commodity prices and profited in 2017 from significantly higher price levels. Brazil, for example, emerged from its recession. Manufacturing output in Russia, too, trended sharply higher again despite the impacts of sanctions imposed by western industrial nations. In China the pace of economic expansion slowed only marginally, even though the government scaled back its monetary stimuli and despite waning credit growth.
United States In the US the geopolitical risks that many market players had linked to the new administration were relegated to the sidelines. By the second quarter the economy was already making the most of the generally good framework conditions and substantially boosted its growth rate. Over the year as a whole US manufacturing output rose by 0.8 percentage points to 2.3%
The state of the labour market continued to improve. The average jobless rate in the Eurozone retreated by 0.9 percentage points relative to the previous year to stand at 9.1%. Greece and Spain nevertheless continue to struggle with very high levels of unemployment. Consumer prices rose by 1.4 percentage points year-on-year to 1.6%, thus approaching the ECB’s 2% target.
Private consumption continued to play a large part in the favourable economic trend. It benefited from the favourable state of the labour market, rising real wages and low oil prices. The sustained low level of interest rates also stimulated spending by private households.
The export sector showed further vigorous growth, increasing by 4.3% in 2017 (2.6%). While exports to the Eurozone and Asia expanded, they contracted to the rest of Europe and the United States. Imports increased at a rate of 4.8% (3.9%).
Asia Growth in Asia remained brisk in 2017 at 6.4% (6.8%). In China the pace of growth slowed only marginally to 6.8% – despite the fact that the Chinese government substantially scaled back its monetary stimuli in the year just ended. Gross domestic product in the third quarter of 2017 was 6.8 percent higher than a year before and still came in somewhat above the target set by the government. The fact that growth remained on track was also due in part to the country’s further expansion of its foreign trade. The problem of structural indebtedness affecting businesses and private households remained very widespread.
In India the rise in output slowed appreciably, falling by 1.4 percentage points year-on-year to 6.4%. Nevertheless, experts consider this to be a temporary effect of the cash reform implemented at the end of 2016 and the introduction of a national Goods & Services Tax. Over the longer term both measures are likely to promote economic growth. Expansion was similarly sustained in the other emerging economies of Southeast Asia. The four national economies of Indonesia, Thailand, Malaysia and the Philippines grew by an average of 5.2% (4.8%).
Another significant development in the year under review was the publication of the new international accounting standard IFRS 17 by the International Accounting Standard Board (IASB). IFRS 17 replaces the interim standard IFRS 4, which has been in force since 2005, and makes it easier to compare insurers through a consistent worldwide basis for the recognition of insurance contracts. The new measurement model is expected to bring particularly far-reaching changes for the accounting of long-duration contracts. It is still too early to foresee what implications the implementation of IFRS 17 will ultimately have for the comparability and volatility of business results. The new financial reporting standards come into effect starting 1 January 2021, although they are only mandatory for the consolidated financial statements of capital-market-oriented insurance companies.
In the United Kingdom the insurance industry was adversely impacted by the decision of the UK government to lower the “Ogden rate” used for discounting compensation payments in connection with personal injury claims from 2.5% to -0.75% effective March 2017. This means, for example, that severe personal injuries from a motor vehicle accident can lead to higher payments under liability covers. In view of the fact that this change affects not only future claims but also outstanding claims that have still to be run off, insurers and reinsurers were compelled to set aside substantial additional reserves.
In Argentina the opening up of the reinsurance market effective 1 July 2017 prompted some lively activity. The market liberalisation now enables local insurers to cede up to 50% of their business to foreign admitted reinsurers. The quota is to be raised progressively to 75% by 2019.
In Germany the statutory requirement for life insurance companies to build up an additional reserve for the interest rate risk (“Zinszusatzreserve”) as security for legacy contracts with guaranteed high returns remains a major challenge. The significance of this issue is further underlined by calls for policy makers to take supportive actions to slow down the accumulation of this additional interest provision.
In the context of advancing digitalisation, the market for insurance against cyber risks showed further strong growth in 2017. Against a backdrop of increasingly widespread cyber attacks, including for example those on the US financial services provider Equifax in May 2017, the surge in demand for covers offering protection against cyber risks was sustained. It remains the case that the vast bulk of the worldwide insurance premium is generated in the United States, but interest in such products continued to grow in Europe too.
The development of business in 2017 was shaped by exceptionally heavy losses in the third quarter. As a result, the large loss budget of EUR 825 million that we had earmarked for the full year had already been exceeded as at 30 September 2017. Further large losses in the fourth quarter pushed the total expenditure higher to altogether EUR 1,127.3 million.
Please find below a brief summary of the development of our two business groups – Property & Casualty and Life & Health reinsurance – and our investments. More detailed information is to be found on pages 31 to 58.
Against this backdrop gross premium rose by 16.4% to EUR 10.7 billion (previous year: EUR 9.2 billion). At constant exchange rates growth would have reached 18.7%. It thus clearly surpassed our expectations.
In the aftermath of a challenging year we are thoroughly satisfied with the result in property and casualty reinsurance, even though the underwriting result of EUR -2.3 million fell well short of the previous year (EUR 479.1 million) owing to the heavy burden of catastrophe losses. The operating profit (EBIT) as at 31 December 2017 reached a level of EUR 1,120.2 million (EUR 1,340.3 million) thanks to the positive investment income. The EBIT margin of 12.2% was higher than the minimum target of 10%. Group net income contracted by 11.8% to EUR 837.3 million (EUR 949.9 million).
Our financial solutions business, which further increased its profit contribution, was thoroughly gratifying. We were less satisfied with the development of our US mortality business – and in particular with the portfolio assumed in 2009, which continues to show a mortality in excess of expectations. In addition, we booked a non-recurring negative effect of around EUR 45 million. This one-time charge was attributable to the recapture of a reinsurance treaty in order to avoid higher losses over the long term.
Investment income declined by 12.3% in the year under review to EUR 560.6 million (EUR 638.9 million). The decrease was due to reduced interest on funds withheld and contract deposits. Of the total investment income, EUR 343.5 million (EUR 330.8 million ) was attributable to assets under own management and the remaining EUR 217.1 million (EUR 308.1 million) to securities deposited with ceding companies.
With the publication of the annual financial statement we are also releasing the capital adequacy ratio of the Hannover Re Group calculated in accordance with the requirements of Solvency II. It increased relative to the previous year to reach a level of 260% as at 31 December 2017 (31 December 2016: 230%).
Gross premium growth (Group) Growth in the low single-digit percentage range or > 5.0% 1, 2
Group net income > EUR 1 billion or around EUR 800 million 6, 7 EUR 958.6 million 1 At constant exchange rates 2 In the context of publication of the half-yearly financial report the guidance for gross premium growth (Group) was raised to more than 5.0%. 3 Organic growth only 4 Excluding ModCo derivatives 5 In the context of publication of the quarterly statement as at 30 September 2017 the guidance for the return on investment was raised to more than 3.0%. 6 Assuming stable capital markets and / or major loss expenditure in 2017 that does not exceed EUR 825 million 7 In the context of publication of the quarterly statement as at 30 September 2017 the guidance for Group net income was revised to around
Geographical breakdown of gross written premium M 07 in 2017 2.7% Australia 38.0% North America 2.4% Africa 19.8% Rest of Europe12.6% Asia 9.5% Germany 9.3% United Kingdom 5.7% Latin America
Breakdown of gross premium by distribution channel: M 09 through brokers / direct in % and in EUR million business written through brokers direct business
While the higher-than-average strains from natural catastrophe losses adversely impacted the result recorded by Hannover Re, they will have no lasting effect on our profitability or capitalisation. Quite the contrary: the losses have led to a renewed improvement in market conditions for reinsurers.
Property & Casualty reinsurance • Gross premium volume up by a pleasing 16.4% • Large loss expenditure of EUR 1,127 million significantly higher than the budgeted level of EUR 825 million • Combined ratio still satisfactory at 99.8% despite deterioration due to large losses • Group net income down by 11.8% due to large losses
Accounting for 60% of our premium volume, Property & Casualty reinsurance is Hannover Re’s largest business group. It is structured according to our Board areas of responsibility, namely “Target markets”, “Specialty lines worldwide” and “Global reinsurance”.
Against this backdrop, gross premium in the year under review rose by 16.4% to EUR 10.7 billion (previous year: EUR 9.2 billion ). Growth would have reached 18.7% at constant exchange rates. This figure puts us ahead of our expectations. The level of retained premium climbed slightly to 89.7% (88.5%).
In contrast to the previous years, the burden of major losses in 2017 was substantially higher than budgeted. After the first six months had passed off very quietly in terms of large losses, the second half of the year was dominated by severe natural catastrophe events – including three major hurricanes in the third quarter alone. Hurricane “Harvey”, which caused heavy damage in Texas and the neighbouring states, was followed by “Irma’s” trail of devastation in Florida and the Caribbean Islands. Hurricane “Maria” caused particularly widespread destruction in Puerto Rico. These three events alone resulted in net loss expenditure of EUR 749.4 million for our account. The two damaging earthquakes that struck Mexico in September cost our company a combined amount of EUR 49.2 million. The forest fires in California also caused considerable losses for our company totalling EUR 101.1 million. These and other events added up to total net major loss expenditure of EUR 1,127.3 million. Not only was the large loss budget of EUR 825 million thereby clearly exceeded, this was also the year with the heaviest burden of large losses in the history of Hannover Re. For a detailed list of these large losses please see page 90. The underwriting result including interest and expenses on funds withheld and contract deposits deteriorated from EUR 503.1 million to EUR 15.5 million owing to the high burden of losses. The combined ratio for the year under review declined from 93.7% to 99.8% and thus exceeded our targeted figure of 96%.
The investment income for the Property & Casualty reinsurance business group was, however, thoroughly gratifying. Driven by higher ordinary investment income and extra ordinary gains generated from the disposal of our portfolio of listed equities, the income from assets under own management surged by 35.9% to EUR 1,191.5 million (EUR 876.9 million). The operating profit (EBIT) retreated to EUR 1,120.2 million (EUR 1,340.3 million) in view of the heavy large loss expenditures. The EBIT margin consequently contracted from 16.8% to 12.2%. We nevertheless achieved our minimum target of 10%. Group net income fell by 11.8% to EUR 837.3 million (EUR 949.9 million). Earnings per share for the Property & Casualty reinsurance business group amounted to EUR 6.94 (EUR 7.88).
On the following pages we report in detail on developments in the individual markets and lines of our Property & Casualty reinsurance business group, split into the three areas of Board responsibility referred to at the beginning of this section.
Key figures for Property & Casualty reinsurance M 10 in EUR million year
Property & Casualty reinsurance: Key figures for individual markets and lines in 2017 M 12
Structured reinsurance and insurance-linked securities 2,606.8 +99.2% 1,308.7 94.8 97.7% 98.7%
Property & Casualty reinsurance: Major loss trend 1 M 11 in EUR million 1 Natural catastrophes and other major losses in excess of EUR 10 million gross (until 31 December 2011: in excess of EUR 5 million gross)
Target markets Hannover Re classifies North America and Continental Europe as target markets. The premium volume rose by 4.9% to EUR 3,155.6 million (EUR 3,007.0 million). Growth was in line with our expectations. The combined ratio deteriorated sharply from 92.5% to 102.8%. The operating profit (EBIT) consequently fell to EUR 441.8 million (EUR 598.2 million).
After pausing for breath in 2016, the strength of the US economy was on display again in the year under review. The positive momentum was driven above all by the generally stable financial situation as well as increased consumer spending. The move by the Federal Reserve to raise the key interest rate, thereby enabling our cedants to generate higher investment income, was also gratifying. The stronger growth overall in the United States of course also had positive implications for premium growth in the insurance industry. This came in at around 4%.
While modest rate reductions had still been observed on the primary insurance side going into the year, a positive trend towards stable rates set in as the year under review progressed. Towards year-end rates picked up appreciably in view of the catastrophe losses in the US.
On the reinsurance side we booked premium growth in all three areas of US liability business (standard, special and professional liability), with conditions for proportional treaties remaining broadly stable. Most notably, the professional indemnity lines showed modest rate increases, hence enabling us to further enlarge our medical malpractice business, in particular. We grew our premium volume in a number of other areas, too, including cyber covers. We make appropriate capacities available to selected clients in this segment. In US property business the rate level had softened somewhat at the beginning of the year, but prices rose in the course of the year under review on account of the elevated losses from natural catastrophes. Conditions remained largely unchanged.
On the whole, though, we are satisfied with our results in North America. We are a valued partner based on our expertise and robust financial strength. Thanks to our long-standing good customer relationships, we were able to further extend our market footprint and boost our premium volume. In the year under review we entered into a partnership with a major client from which we expect to generate substantial additional premium.
Property & Casualty reinsurance: Breakdown of gross M 13 written premium in target markets in EUR million
Continental Europe We group together the markets of Northern, Eastern and Central Europe as Continental Europe. The largest single market here is Germany. The premium volume for our business in Continental Europe in the year under review came in at EUR 1,447.3 million (EUR 1,387.3 million). The combined ratio improved to 93.1% (94.3%). The operating profit (EBIT) climbed to EUR 264.3 million (EUR 204.9 million).
The German insurance market was stable in the year under review and recorded modest premium growth. The increases derived in particular from motor and homeowners’ insurance.
In view of the healthy capital position enjoyed by German insurers, we observed a trend towards increases in retentions that were substantial in some instances. So-called alternative capital, i. e. risk transfer to the capital markets, does not play a significant role in the German (re)insurance market.
Industrial fire business was still problematic: high losses were again incurred in this line. Although premium income showed an increase in the low single-digit percentage range, the premium level is only sufficient to cover attritional and mid-sized claims, not large losses. There is no prospect of a change in the situation because competition remains intense.
In natural catastrophe business a number of local flood events caused by heavy rainfall resulted in losses, although for the most part these remained within the retentions run by primary insurers. Given the increasing prevalence of natural disasters, covers for extended natural perils are likely to become ever more important.
Cyber insurance is another area of growing significance in Germany. We lost no time in responding to this rising demand and are cooperating with a service provider to offers small and mid-sized enterprises a service platform for cyber security solutions and risk management.
We have actively fostered the trend towards new digital insurance start-ups and enabled various players to enter the market by providing their reinsurance protection.
All in all, we are satisfied with the development of our property and casualty reinsurance portfolio in the German market. Premium income contracted marginally in the year under review; we had anticipated a virtually stable premium volume in our guidance.
Despite the competition, the lively demand for reinsurance solutions continued unabated. A key driver here was the more demanding requirements placed on the capital resources of insurance companies under Solvency II. On the whole, we were able to secure broadly risk-adequate rates and conditions for the region of Central and Eastern Europe in the year under review and hence generated satisfactory results on the back of an increased premium volume. On the claims side the territory of the Russian Federation was notable principally for two sizeable losses as well as a number of smaller events.
The gross premium for our marine portfolio contracted by 6.2% to EUR 260.1 million (EUR 277.5 million). The loss expenditure led to a deterioration in the combined ratio, which slipped to 96.0% (38.5%), and hence also in the under writing result. The operating profit (EBIT) fell to EUR 35.7 million (EUR 138.1 million).
Given the strained state of the market, especially in the aftermath of the hurricane events, initial signs of stabilisation in the aviation market could be detected both on the primary and reinsurance side.
The premium volume for our total aviation portfolio contracted in the year under review from EUR 278.7 million to EUR 247.9 million. Given the elevated level of large losses compared to the previous year, the combined ratio from regular business operations increased slightly. However, the operating profit (EBIT) for our aviation portfolio increased to EUR 267.8 million (EUR 108.9 million) on account of the release of reserves set aside for prior underwriting years that were no longer required.
Hannover Re writes the bulk of its business in the form of proportional treaties. It ranks among the market leaders in worldwide credit and surety reinsurance and in the reinsurance of political risks. New clients were added in the year under review, thereby further diversifying the portfolio.
Against this backdrop, coupled with the expansion of existing customer relationships, gross premium increased in the year under review by a very pleasing 8.7% to EUR 666.7 million (EUR 613.5 million).
Primary insurance rates in most lines stabilised in the financial year just ended and the fierce competition of the previous years abated somewhat. However, the reduction of the Ogden rate – the discount rate used in the UK to calculate lump-sum compensation payments for personal injuries – from 2.5% to -0.75% compelled all insurers writing personal injury lines to set aside additional reserves, in some cases in a significant amount.
The prices of reinsurance programmes with exposures to these lines hardened appreciably in the course of 2017. Most notably, the cost of motor reinsurance covers went up considerably. Compared to the previous two years, some easing in the pressure on rates in the other property and casualty lines could already be observed as the year progressed. Prices ultimately began to harden following the hurricane losses in the third quarter.
We write a large portion of this direct business in the London Market and through our Swedish branch, although it increasingly derives from Canada, Australia and Germany as well. The result from direct business was satisfactory despite the prevailing intense competition. In the first quarter of 2017 the change in the Ogden rate in the United Kingdom necessitated a not inconsiderable increase in the reserves for serious personal injuries under liability policies, with implications for our account too in the year under review. As a consequence of this change rates for motor business surged sharply higher. Other than this, rates declined overall by between 5% and 10% – until the hurricane events in the second half of the year. Since then, however, property insurance has recorded rate increases substantially in excess of 10% in the hurricane- impacted regions. We were able to act on promising business opportunities in the year under review and enlarged our premium volume.
In the first six months of the year under review it remained the case that extended coverage concepts and price reductions were observed in many areas. Faced with this market environment, we wrote our business selectively and premium income in the first half of the year was consequently slightly lower.
The exceptionally heavy incidence of natural disasters in the third quarter triggered stronger demand for natural catastrophe covers, accompanied by a correspondingly favourable pricing trend. This turnaround generated business opportunities to which we responded by moderately expanding our acceptances.
Despite the heavy losses incurred from natural disasters around the world, we are thoroughly satisfied with the development of our overall facultative portfolio in the 2017 financial year. In addition to the considerable expenditures on catastrophe losses, substantial losses were again recorded in industrial fire insurance across all regions. Despite these significant strains, our highly diversified portfolio – both geographically and in terms of lines of business – and our limited risk appetite for natural perils covers enabled us to post a merely modest underwriting deficit. The premium volume contracted owing to a portfolio transfer. The combined ratio of 103.7% was higher than in the previous year (95.6%). The operating profit (EBIT) retreated to EUR 39.7 million (EUR 95.0 million).
Property & Casualty reinsurance: Breakdown of M 17 gross written premium in facultative reinsurance 7.8% Other 48.0% Property 13.5% Motor 30.7% Liability
Property & Casualty reinsurance: Breakdown of gross M 19 written premium in worldwide treaty reinsurance 11.8% Other 61.4% Property 18.9% Motor 7.9% Liability
We have had a presence in the markets of Australia and New Zealand for more than three decades and are positioned as the number three among Australian property and casualty reinsurers. Cyclone “Debbie”, which hit the coastline of Queensland in the first quarter of 2017, brought stability to reinsurance prices in Australia. As a further factor, the after-effects of the earthquake on the South Island of New Zealand in November 2016 helped to keep prices on a good level in that market too in the year under review, with price increases even recorded in some instances.
Australia and New Zealand continue to be attractive natural catastrophe markets for global reinsurance capacities, and competition therefore remains fierce. We nevertheless succeeded in generating further premium growth at adequate conditions, in part also by expanding the primary insurance activities of our Inter Hannover branch.
In response to progressive digitalisation and the associated change in customer habits, we took various steps in the year under review with a view to supporting the development of insurtechs. We also participate as a reinsurer in further insurtech activities in the market. The purpose of our involvement in this area is to develop innovative products that are tailored to the mobile, networked world and offer consumers the option of a digital customer experience.
The natural disasters in Latin America and the Caribbean resulted in significant losses, including for our company; see also the list of large losses on page 90. It is entirely possible that the frequency and severity of Caribbean hurricanes will increase in the future. With this mind, Hannover Re will pay closer attention to ensuring that sufficient coverage is purchased in these regions for natural catastrophe events and also that potential gaps in coverage, such as the flood risk, are closed. The aim here is to protect policyholders against possible insolvencies among primary insurers, which could throw a region’s entire insurance system out of balance.
A large part of our premium volume nevertheless still derives from territories that are less affected by natural perils events, such as Argentina and Brazil. Both these markets are currently turning away from their previous restrictive approach to reinsurance regulation, and newly elected governments are also bringing an economic revival. We therefore expect to see an improved business environment in these countries.
Rates and conditions largely held stable on the primary insurance side. Conditions in reinsurance business came under pressure in the established markets due to new players entering the sector.
We were successful in our efforts to further diversify our portfolio mix both geographically and in terms of lines of business. A contributory factor here, for example, was an enlarged share of business with insurance products for small farmers, predominantly in emerging and developing countries.
Retakaful business We write retakaful business, i. e. reinsurance transacted in accordance with Islamic law, worldwide. Our focus is currently on the Middle East, North Africa and Southeast Asia. We are represented by a subsidiary in Bahrain that writes this business. We also maintain a branch there with responsibility for traditional reinsurance in the Middle East. Our retakaful business has grown vigorously since we entered the sector in 2006 and we now enjoy a strong position in the market. Overall, we are satisfied with the development of business in the year under review. The insurance markets of the Middle East and North Africa are still posting healthy growth rates. The largest markets continue to be Turkey, the United Arab Emirates and Saudi Arabia.
In light of the soft state of the market we again wrote our business selectively in the year under review. Attractive business opportunities nevertheless opened up to us; by way of example, we received a growing number of requests for coverage of cyber risks. Overall, we booked single-digit percentage growth in our premium volume.
On the claims side the most notable events in the first half of the year were Cyclone “Debbie” in Australia and a number of tornados in the United States. Yet these events merely prompted price adjustments on a local basis under the loss-impacted programmes. The second half of the year, by contrast, was dominated by a high incidence of natural disasters and massive losses. After a below-average hurricane season by multi-year standards in the United States and Caribbean, three events in quick succession – hurricanes “Harvey”, “Irma” and “Maria” – inflicted an exceptionally heavy burden of losses on the insurance industry. The hurricanes caused an insured market loss of some EUR 100 billion. The total net strain for Hannover Re from these events was EUR 749.4 million. What is more, the two severe earthquakes in Mexico and forest fires in California also resulted in considerable loss expenditure. Against this backdrop we obtained appreciable rate increases for the treaty renewals as at 1 January 2018 that were not limited exclusively to the loss-impacted programmes.
Structured reinsurance and insurance-linked securities Structured reinsurance In this business transacted under the name Advanced Solutions, Hannover Re is one of the largest providers in the world for structured and tailor-made reinsurance solutions, the purpose of which – among other things – is to optimise the cost of capital for our ceding companies. In this area we also offer alternative reinsurance solutions that provide solvency relief or protect our clients against frequency losses. The modified purchasing habits of our customers led to rising demand in many countries for individually tailored reinsurance solutions. Both the number of contracts and the premium volume in structured reinsurance consequently rose sharply.
Insurance-linked securities (ILS) The strong demand on the capital market for (re)insurance risks remains undiminished, particularly given the diversifying nature of such investments. The worldwide volume of newly issued catastrophe bonds reached a new record level of around USD 12 billion in 2017. The same is true of the entire ILS market, the volume of which is roughly USD 90 billion.
The ILS market shouldered a substantial portion of the catastrophe losses incurred in 2017, thereby underscoring the importance of ILS investors for disaster scenarios.
In 2017 the volume of new exposures that we transferred to the capital market in the form of catastrophe bonds was in the order of USD 1 billion.
The gross premium volume in structured reinsurance and from ILS activities grew by 99.2% to EUR 2,606.8 million (EUR 1,308.7 million). The combined ratio stood at 97.7% (97.3%). The operating profit (EBIT) increased to EUR 94.8 million (EUR 73.9 million).
• Charge to income from parts of the US mortality portfolio acquired in 2009 • Financial solutions business delivers another record result (EBIT margin of 25.4%)
Total business The numerous positive developments in our international life and health reinsurance portfolio were accompanied in the financial year just ended by individual parts of the business that fell short of our expectations. Essentially, this involved parts of the US mortality portfolio acquired in 2009. With a view to counteracting this development going forward, we are engaged in a dialogue with our customers in order to arrive at a viable solution for both parties. This is also connected with the recapture of a reinsurance treaty, which reduced the result by some EUR 45 million. The commutation was a targeted move since by taking this one-off charge to the balance sheet we will be able to avoid considerably higher economic losses in the future.
Breakdown of gross premium by markets M 20 in EUR million
Breakdown of gross written premium M 22 by reporting categories in EUR million
One of the positive developments in the year under review was the commencement of business operations in February by our newly established composite branch in India. The book of life and health reinsurance business performed favourably despite exacting regulatory requirements and compliance standards. Numerous new customers have already been acquired and our expectations were more than fulfilled.
Insurers in our domestic German market are increasingly preoccupied with the capital adequacy and solvency ratios prescribed by Solvency II. Reinsurance covers offer one possible solution for meeting the required ratios. On the one hand, they are extremely flexible in their structuring, while at the same time being more cost-effective than a – potentially necessary – capital measure. Serving as a reliable partner, we have supported our customers in an advisory role with our expertise. More pressing than Solvency II issues, however, was the continuing need for financing solutions to fund the additional reserves required for life products promising guaranteed returns in excess of an official reference rate (“Zinszusatzreserve ”). Potential covers for solvency relief were therefore dealt with only as a secondary priority. Along with these developments, demand for long-term care insurance and longevity reinsurance solutions remained strong in the international arena. Particularly in capital-intensive longevity business, a growing need for relief was evident among primary insurers.
In addition to risk-oriented (re)insurance topics, we devoted greater attention to the subject of digitalisation. The insurtech sector, in particular, received an enormous development boost in the financial year just ended. In many cases these are small start-up enterprises that are reliant on cooperations with experienced, cash-rich partners. For our company as a reinsurer, the benefits deriving from cooperations of this nature are based on the fact that the focus is normally on direct and uncomplicated contact with the customer / end consumer. Through this type of partnership we are able to optimally assist our customers, especially when it comes to addressing a generation that is not only tech-savvy but also attaches considerable importance to a healthy lifestyle. These groups are now virtually beyond the reach of traditional distribution channels in the life insurance industry and we therefore take an active part in developments in this field. We report on these activities at greater length under the heading “Underwriting services”.
In view of the unchanged low level of interest rates, investment income in life and health reinsurance contracted as expected and totalled EUR 560.6 million (EUR 638.9 million). The share of the income attributable to assets under own management amounted to EUR 343.5 million (EUR 330.8 million), while the contribution made by income from securities deposited with ceding companies came in at EUR 217.1 million (EUR 308.1 million).
Key figures for Life & Health reinsurance M 24 in EUR million year
In addition, we observed pleasing business potential in connection with Solvency II in the Scandinavian markets. In the United Kingdom, too, it was evident that the topic of financial solutions has become more important to our primary insurance customers and should generate corresponding demand for reinsurance.
Longevity In the longevity reporting category we group together all reinsurance business where the primary risk covered is the longevity risk. This consists principally of traditional annuity policies, pensions blocks taken out for new business and so-called enhanced annuities, which guarantee annuitants with a pre-existing condition a higher annuity payment for their remaining shortened life expectancy. By far the bulk of our portfolio is made up of business that is already in the pay-out phase.
In terms of volume, the United Kingdom continues to be our most important and by far the most mature market for longevity products. Despite intense competition, we successfully completed reinsurance transactions that provide customers with solvency relief in addition to coverage of the longevity risk and we have also received positive feedback from the market in response to our simply structured, traditional longevity solutions. The uncertainty surrounding the consequences of the United Kingdom leaving the European Union was palpable in the year under review and further complicated the business environment – on top of the already existing pricing and competitive pressures. Most notably, the pressure of competition on the primary insurance and reinsurance side had been growing steadily as a consequence of the change in the legal situation that came into effect in April 2015 (relaxation of the rules on compulsory retirement). On the primary side this has now led to consolidation efforts, which are expected to open up further new business opportunities for our company as a reinsurer.
Mortality and Morbidity In the global (re)insurance industry it is standard practice for the mortality and morbidity risk to form a common element of one and the same business relationship, and in some cases both risks are even covered under one reinsurance treaty. In our reporting we therefore consolidate the profit contributions of these two reporting categories and provide below merely an overview of specific significant developments of the past year affecting our mortality and morbidity business.
The life (re)insurance market in Germany was characterised in the financial year just ended by the protracted low interest rate level and especially the associated discussion around the future viability of traditional life insurance products. In the context of these developments even larger insurers have contemplated the possible disposal of their life insurance portfolios. With a view to enabling them to offer policyholders innovative new insurance solutions compared to traditional life insurance products, we are engaged in a dialogue with our customers and are willing to provide crucial support with this development.
Gross premium for mortality business rose by 3.9% to EUR 3,200.1 million (EUR 3,080.9 million). Altogether, it contributed 45.2% of the total gross premium income booked in life and health reinsurance (EUR 7.1 billion).
Morbidity Within the morbidity reporting category we cover business centred around the risk of deterioration in a person’s state of health due to disease, injury or infirmity. A hallmark of this business is the wide range of possible combinations of different covered risks, including for example strict (any occupation) disability, occupational disability and various forms of longterm care insurance. A dedicated team of staff equipped with both specialist expertise and access to our network of business centres stands ready to assist with transactions of this type. In this way, our customers are able to optimally benefit from our global know-how on a local basis.
In Germany, the adoption at the beginning of 2017 of a revised benefit trigger in long-term care (LTC) insurance as part of the statutory social security scheme failed to bring about any appreciable market upturn. On the contrary, the market for LTC covers – which was already very small – contracted. It is therefore all the more pleasing that one of our largest customers – which uses our own LTC tables – was one of the few market players to express considerable satisfaction with the development of its new business. We see this as confirmation that we took the right decision when we moved to refine our LTC tables.
Morbidity business grew by 6.3% in the financial year just ended to EUR 1,727.5 million (EUR 1,624.6 million).
Gross premium for our total mortality and morbidity portfolio increased by 4.7% to EUR 4,927.6 million (EUR 4,705.5 million ). The operating result (EBIT) for the two reporting categories was sharply lower at EUR 1.4 million (EUR 149.5 million).
Along with these activities, we intensified the dialogue and interaction with (online) platforms specialised in insurance solutions as part of our drive towards digitalisation. Those policyholders who value their health and quality of life and would like to always keep track of their medical and biological data with the aid of wearables (smart electronic devices such as a watch that can be worn on the user’s arm) constitute the ideal target group for insurance products combined with lifestyle and wellness elements. Cooperative ventures in the so-called insurtech sector establish a solid starting point for addressing the needs of these (mostly) younger generations and raising their awareness of insurance offerings. With a view to adding impetus to this trend, we have – among other things – participated in a South African company specialising in the storage and analysis of vital signs (such as pulse, blood pressure, etc.) that are captured and transmitted by a wearable. Our partner also has the medical know-how needed to analyse these data. Sound assessments and analyses of this type can be superbly combined with insurance products and are therefore of particular interest to health-conscious policyholders.
With minority interests in two companies specialising in the assumption of capital market risks, we have closed this gap and thereby ensured that we are also able to meet this need on the part of primary insurers. In the year under review we were already able to realise some initial solutions in this area.
Primary insurers utilise lifestyle apps to increase customer retention and encourage users to consider preventive healthcare resulting in reduced insurance costs.
Together with our partners, we develop innovative insurance models that provide personalised advice and insurance services based on data from lifestyle apps.
Investments • Another very good investment performance despite the challenging environment • Alternative investments and real estate more than offset the low interest rate level • Disposal of listed equities • Return on investment clearly beats target at 3.8%
We are thoroughly satisfied with the development of our investments. While the year under review was again a challenging one in view of the sustained low interest rate level and global economic movements driven by a range of uncertainties and risks, we had virtually no impairments to recognise in our equity portfolio or fixed-income securities. Our exposures to the credit risk and emerging markets were also rewarded with a good performance in these sectors and delivered stable results. This is similarly true of our private equity and real estate holdings, the income from which – thanks to their higher weighting in our portfolio – helped to push our ordinary investment income (excluding interest on funds withheld and contract deposits) to a very gratifying EUR 1,289.0 million, a level that once again improved on the previous year (EUR 1,162.0 million ). Despite the difficult interest rate environment, our returns on fixed-income securities even came in slightly higher than in the previous year.
Net realised gains on disposals totalled EUR 377.1 million (previous year: EUR 206.3 million) and can be attributed in part to regrouping moves in the context of regular portfolio maintenance but primarily to the liquidation of our portfolio of non-strategic listed equities at the end of the third quarter. We report further on this in the following section “Financial position and net assets” under the subsection “Investments” on page 52 et seq.
Hannover Re | Annual Report 2017 of the further increase in our involvement in this sector. These write-downs contrasted with write-ups of just EUR 0.9 million (EUR 0.3 million).
Financial position and net assets • Risk-commensurate investment policy • Highly diversified investment portfolio • Asset allocation adjusted to safeguard the return • Equity base remains robust
• limitation of currency exposure and maturity risks through matching currencies and maturities
With these goals in mind we engage in active risk management based on balanced risk / return analyses. To this end we adhere to centrally implemented investment guidelines and incorporate insights gained from dynamic financial analysis. They form the basis for investment ranges which are specified in light of the prevailing state of the market and the requirements on the liabilities side and within which operational management of the portfolio takes place. These measures are intended to safeguard the generation of an appropriate level of return. In so doing, we pay strict attention to compliance with our clearly defined risk appetite, which is reflected in the risk capital allocated to the investments and constitutes the foundation for the asset allocation of the entire Hannover Re Group and the individual portfolios. Our ability to meet our payment obligations at all times is also ensured in this way. Within the scope of our asset / liability management (ALM) the allocation of investments by currencies and maturities is determined by the technical liabilities. The modified duration of our bond portfolio is geared largely to the technical liabilities.
management of the currency spread in our fixed-income portfolio we 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.
Our portfolio of assets under own management amounted to EUR 40.1 billion, a level lower than at the end of the previous year (31 December 2016: EUR 41.8 billion). This decline primarily reflects exchange rate effects – especially the strength of the euro against the US dollar. These were offset to some extent by the pleasing operating cash flow.
In response to the challenging interest rate environment we had already taken steps in the previous year to adjust the allocation of our investments to individual classes of securities such that we further enlarged our holding of fixed-income securities rated BBB or lower while at the same time increasing the proportion of government bonds in our portfolio. In this way we can achieve increased liquidity of the portfolio and generate continued stable returns, while maintaining the overall risk level of our fixed-income portfolio virtually unchanged. We continued with this regrouping in the year under review. In addition, we reduced the proportion of covered bonds.
At the end of the third quarter we responded to the hurricane events in the United States and the Caribbean as well as the earthquakes in Mexico by liquidating our holdings of non-strategic listed equities and equity funds. In so doing, we took advantage of the favourable state of the market, reduced our general risk position and freed up capital for possible risk allocations. We also further increased slightly the share attributable to real estate as part of the strategic expansion of this asset category. In all other asset classes we made only minimal changes in the context of regular portfolio maintenance.
In terms of amount, the technical provisions and liabilities are of course by far the most significant item in our balance sheet. Further elements are equity and equity substitutes, which help to substantially strengthen our financial base and optimise our cost of capital. The following chart shows our capital structure as at 31 December 2017, 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 77.1% (77.0%) 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 policyholders’ surplus totalled EUR 10,778.5 million (EUR 11,231.4 million) as at the balance sheet date. The decrease was due principally to the reduction in foreign currency gains and losses recognised in equity. Retained earnings, on the other hand, increased by EUR 356.1 million to EUR 6,984.4 million (EUR 6,628.3 million) on the back of the good Group net income booked in the year under review. Overall, the policyholders’ surplus consequently declined by 4.0%.
Hannover Re uses “Intrinsic Value Creation” (IVC) as its central value-based management tool. As part of this methodology, we apply the principles of economic allocation of equity and efficient use of debt as an equity substitute in order to achieve the lowest possible weighted cost of capital. This concept as well as the objectives and principles in accordance with which we conduct our enterprise management and capital management are described in greater detail in our remarks on value-based management on page 16 et seq. of this report.
Compared to the position as at 31 December 2016, Group shareholders’ equity fell in the year under review by EUR 454.0 million, equivalent to 4.7%, to EUR 9,286.6 million. After adjustment for non-controlling interests, it declined by EUR 468.8 million to EUR 8,528.5 million. The book value per share decreased accordingly by 5.2% to EUR 70.72. The changes in shareholders’ equity were shaped chiefly by the following developments: The foreign currency gains and losses contracted by EUR 742.6 million from EUR 680.1 million to EUR -62.5 million as a consequence of exchange rate movements of foreign currencies against the euro in the financial year. The decrease in the reserve for currency translation adjustments resulted principally from the depreciation of the US dollar and translation of the shareholders’ equity of those subsidiaries whose equity is denominated in USD.
Net unrealised gains on investments stood at EUR 818.3 million, a drop of EUR 85.8 million compared to the beginning of the year under review. This reflected the yield increases observed in the reporting period, especially in the area of EUR- and GBP-denominated sovereign bonds and debt securities issued by semi-governmental entities, which were offset to some extent by lower risk premiums on corporate bonds.
The Group net income for 2017 attributable to the shareholders of the Hannover Re Group amounted to EUR 958.6 million (EUR 1,171.2 million). The non-controlling interest in the profit generated in the year under review totalled EUR 86.0 million (EUR 55.2 million).
In addition to the financing effect of the changes in shareholders ’ equity described above, debt financing on the capital market is a significant component of Hannover Re’s financing. It was essentially composed of subordinated bonds issued to ensure lasting protection of our capital base – in part also in observance of rating requirements. The total volume of debt and subordinated capital stood at EUR 1,742.1 million (EUR 1,804.2 million) as at the balance sheet date.
Amortised cost of our subordinated bonds M 33 in EUR million Issue date Coupon in % 2017 2016
Hannover Finance (Luxembourg) S.A., subordinated debt, EUR 500 million; 2010 / 2040 14.9.2010 5.75 499.1 498.9
For further explanatory information please see our remarks in the notes to this report, section 6.12 “Debt and subordinated capital”, page 222 et seq., and section 6.13 “Shareholders’ equity and treasury shares”, page 224.
Various financial institutions have provided us with letters of credit for the collateralisation of technical liabilities. We report in detail on existing contingent liabilities in the notes, section 8.7 “Contingent liabilities and commitments”, page 245 et seq.
Liquidity We generate liquidity primarily from our operational reinsurance business, investments and financing measures. Regular liquidity planning and a liquid investment structure ensure that Hannover Re is able to make the necessary payments at all times. Hannover Re’s cash flow is shown in the consolidated cash flow statement on page 152 et seq.
Cash and cash equivalents at the beginning of the period 848.7 821.0
Cash flow from operating activities The cash flow from operating activities, which also includes inflows from interest received and dividend receipts, amounted to EUR 1,693.9 million in the year under review as opposed to EUR 2,331.3 million in the previous year. The reduction of altogether EUR 637.4 million was essentially due to increased claims paid as a consequence of sharply higher large losses in the reporting period compared to the previous year.
Cash flow from investing activities The balance of cash inflows and outflows from operating activities and financing activities in an amount of EUR 942.3 million (EUR 1,711.6 million) was invested in accordance with the company’s investment policy, giving particular consideration to matching of currencies and maturities on the liabilities side of the technical account. Regarding the development of the investment portfolio please see also our remarks at the beginning of this section.
Cash flow from financing activities The cash outflow from financing activities amounted to EUR 690.0 million (EUR 626.9 million) in the year under review. This item includes primarily the dividends paid out by Group companies in the financial year totalling EUR 647.1 million (EUR 613.0 million).
International Insurance Company of Hannover SE AA- A+ 1 Hannover Reinsurance Africa Ltd. and Hannover Life Reassurance Africa Ltd. 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.
Hannover Rück SE, subordinated debt, EUR 500 million; 2014 / undated A a+
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 change-of-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. For details of the letter of credit lines please see our explanatory remarks on the letter of credit (LoC) facilities in the notes, section 8.7 “Contingent liabilities and commitments”, page 245.
The 2017 financial year passed off satisfactorily for Hannover Rück SE. The gross premium of Hannover Rück SE in total business grew by 11.5% to EUR 13.3 billion (previous year: EUR 11.9 billion). The level of retained premium rose from 72.4% to 78.4%. Net premium earned also increased, climbing by 19.6% to EUR 10.2 billion (EUR 8.5 billion).
The underwriting result (before changes in the equalisation reserve) contracted in the reporting period from EUR 336.8 million to EUR -12.7 million. Following a withdrawal of EUR 8.7 million in the previous year, an amount of EUR 165.9 million was withdrawn from the equalisation reserve and similar provisions in the year under review.
Unlike in the previous years, the level of large losses in 2017 was significantly higher than anticipated. After a moderate loss experience in the first six months of the year, the second half was impacted by severe natural catastrophe events. The (re) insurance industry had to cope with its most costly hurricane season to date, as three storms followed in quick succession. Several other natural disasters also occurred, including the destructive earthquakes in Mexico and devastating forest fires in California. The total net expenditure from large losses for Hannover Rück SE was EUR 689.8 million (EUR 340.1 million).
Ordinary investment income including deposit interest fell clearly short of the previous year’s level at EUR 1,002.9 million (EUR 1,197.9 million), principally due to lower distributions from our investment holding companies and reduced income from funds withheld and contract deposits. The ordinary income from fixed-income securities nevertheless remained relatively stable despite the persistently very low interest rate level, declining only slightly to EUR 419.0 million (EUR 430.0 million ). Net gains of EUR 247.9 million (EUR 132.9 million) were realised on disposals. The sharp increase can be attributed in part to regrouping measures in connection with regular portfolio maintenance, but primarily to the liquidation of our portfolio of non-strategic listed equities at the end of the third quarter. Write-downs of just EUR 20.7 million (EUR 34.9 million) were taken on investments. They were attributable mainly to bearer debt securities held as current assets. The write-downs contrasted with write-ups of EUR 13.7 million (EUR 25.9 million) that were made on assets written down in previous periods in order to reflect increased fair values.
The following section describes the development of the various lines of business. With effect from the beginning of the 2014 financial year the cooperation and exchange of business between Hannover Rück SE and E+S Rückversicherung AG was reorganised. In this context a quota share retrocession from Hannover Rück SE to E+S Rückversicherung AG in property and casualty reinsurance was maintained.
Accident Gross premium income for the accident line increased by 0.7% in the year under review to EUR 336.1 million (EUR 333.8 million ). The net loss ratio retreated slightly to 64.6% (64.8%). The underwriting result came in at EUR 18.0 million (EUR 22.0 million ). An amount of EUR 24.9 million (EUR 20.6 million) was withdrawn from the equalisation reserve and similar provisions.
Marine Gross written premium for the marine line contracted by 9.3% in the 2017 financial year to EUR 343.2 million (EUR 378.7 million ). The net loss ratio increased markedly from 30.8% to 96.2%. Against this backdrop the underwriting result declined from EUR 105.7 million to EUR -35.8 million. An amount of EUR 28.6 million (EUR 86.7 million) was withdrawn from the equalisation reserve and similar provisions in the year under review.
Parts of the mortality portfolio in the United States performed more poorly than anticipated. This caused the underwriting result in life business for the year under review to decline overall to EUR 29.3 million (EUR 97.0 million).
Our portfolio of assets under own management contracted in the year under review to EUR 26.5 billion (EUR 27.3 billion). This corresponds to a decline of 3.2% and can be attributed in part to reductions in the fair values of fixed-income securities held in current assets as a consequence of upsloping EUR and GBP yield curves as well as upward pressure for shorter- and medium-term maturities of the USD interest rate spectrum; the primary factor, however, was exchange rate effects associated with our USD-denominated holdings. The balance of unrealised gains on fixed-income securities and bond funds decreased to EUR 662.9 million (EUR 685.1 million). This reflects the aforementioned yield increases for EUR- and GBP-denominated government bonds, which were only partially offset by a further modest reduction in risk premiums for corporate bonds. Opposing effects derived solely from long-dated US Treasuries, which recorded slight yield decreases over the year as a whole.
A dividend of EUR 3.50 plus a special dividend of EUR 1.50 per share, equivalent to EUR 603.0 million (EUR 572.8 million), was paid out in the year under review for the 2016 financial year.
It will be proposed to the Annual General Meeting on 7 May 2018 that a dividend of EUR 3.50 plus a special dividend of EUR 1.50 per share should be paid for the 2017 financial year. This corresponds to a total distribution of EUR 603.0 million. The dividend proposal does not form part of this consolidated financial statement.
Hannover Rück SE maintains branches in Australia, Bahrain, Canada, China, France, India, Korea, Malaysia, Sweden and the United Kingdom.
In view of the interrelations between the parent company and the Group companies and the former’s large share of business within the Group, we would refer here to our remarks contained in the section entitled “Outlook for 2018” on page 142, which also reflect the expectations for Hannover Rück SE.
The present Group non-financial information statement was drawn up pursuant to the CSR Directive Implementation Act in accordance with the disclosures required by § 289b and c German Commercial Code (HGB) and § 315c German Commercial Code (HGB). It contains the legally required information relating to significant environmental matters, employee matters, social matters, respect for human rights and combating corruption and bribery. Within these individual aspects the underlying concepts and due diligence processes are discussed and available findings are reported. In addition, the Group non-financial statement is to be used to report on material risks pursuant to § 289c (3) No. 3 and 4 German Commercial Code (HGB), to the extent necessary for an understanding of the business development, business result, position of the Group and implications for non-financial matters. In view of the fact that we purposefully enter into numerous risks in the context of our business operations, we have put in place an extensive and effective risk management system. For a description of the risk management system please see the section “Risk report” of the “Opportunity and risk report” from page 78 onwards of the Group management report. Our non-financial risks are summarised there under the operational and other risks.
Hannover Re has only defined financial management ratios and key financially 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 business operations of the Hannover Re Group.
• Achieve profitability targets and generate a profit clearly in excess of the cost of capital
• Offer an attractive value proposition that makes us the preferred business partner for our clients
• Optimise the overall cost of capital 7. We ensure low costs through an efficient organisational set-up
• Support considered and pragmatic principles of corporate governance and recognise their central role in guiding our activities 10. We strive for Performance Excellence and continuous improvement
Responsibility for the topic of sustainability rests with the full Executive Board of Hannover Rück SE. The sustainability strategy, goals and measures are reviewed and approved by the Executive Board. In view of the Group’s decentralised organisational structure, sustainability measures are implemented directly on the level of the various specialist units. The coordination of goals and measures as well as the collection of data for reporting purposes are handled by an interdisciplinary team composed of representatives of all relevant business units.
With a view to identifying significant non-financial topics, we conducted a materiality analysis as required for reporting purposes in accordance with the Global Reporting Initiative (GRI). To this end, an internal workshop was held at which representatives of all relevant specialist units were called upon to specify important issues in relation to Hannover Re’s business operations. A stakeholder survey was also carried out in cooperation with an external partner. The issues identified as material by stakeholders and from the company’s perspective were subsequently sorted and weighted with the aid of a scoring system in order to determine materiality. In total, we identified 15 material sustainability issues, on which we have reported since 2011 on a voluntary basis in our annual Sustainability Report.
The material topics as defined by the CSR Directive Implementation Act are discussed below.
Goal to be achieved by 2017: M 43 Value creation for our shareholders
A regular, active dialogue is conducted with rating agencies. In 2017 we were again listed in the FTSE4Good Index and achieved the “Prime” rating from Oekom Research.
The Corporate Compliance Organisational Manual summarises the major activities and defines the responsibilities within our company, the interfaces and the elements of the compliance organisation. Our compliance structure was reviewed most recently in 2015 against the backdrop of the compliance requirements associated with Solvency II. A worldwide network of compliance officers reports to and supports the Chief Compliance Officer in his duties. The Chief Compliance Officer works to ensure compliance with internal corporate policies by cooperating with other departments, including Group Auditing, and updates the Executive Board on material compliance issues and developments in an annual compliance report. A Webbased whistleblower system is also in place for the companies within the Group. This enables employees, customers and third parties to report compliance violations in their local language or in English – anonymously if they so desire. Relevant tips and any countermeasures initiated are included in the annual compliance report.
All new members of staff go through compliance training when they join the Group. In 2017 altogether 70 employees received training in compliance requirements. In order to keep the workforce updated on compliance issues, we also use traditional communication channels such as the intranet and online newsletters.
Since June 2012 our DIN EN ISO 14001-certified environmental management system has been in place at our Hannover headquarters to protect the environment; in 2016 this was enhanced with the addition of a validated EMAS (Eco-Management and Audit Scheme) environmental statement. We have since published an environmental statement in accordance with the EMAS III Regulation on an annual basis. The environmental management system encompasses the Hannover sites of Hannover Rück SE, E+S Rückversicherung AG and International Insurance Company of Hannover SE (Inter Hannover SE) as well as the associated children’s daycare centre and hence covers roughly 43% of the global workforce.
Goal to be achieved by 2017: M 45 Expansion of compliance concepts and guidelines in relation to specific topics
Extension of compliance requirements in IT A Cloud competence team was set up to ensure IT compliance with an eye to the growing number of Cloud-based projects. In 2017 altogether 15 Cloud projects were supported. An existing guideline was specially modified for the international offices to reflect new standards and IT requirements. In 2017 a system- supported process to assist with IT compliance control processes was implemented.
We maintain an open and ongoing dialogue with our stakeholders. By sharing information and opinions with them, we are able to integrate, as far as possible, the expectations and aspirations of the various stakeholder groups into our business operations. Furthermore, this dialogue helps to identify risks and opportunities at an early stage and serves to build trust. Key stakeholders are determined by our business operations and our geographical presence. The following are particularly relevant to us: our clients, our employees, the capital market, the public sector and non-governmental organisations (NGOs).
In November 2016 we attended an SRI conference for the first time. A regular dialogue with SRI investors and ESG rating agencies is ongoing.
The consideration given to sustainability in our business operations relates principally to our reinsurance products and services as well as the management of our investments and is taking on added importance given the growing awareness among the general public of sustainability issues. It is therefore increasingly important to evaluate insurance products with an eye to their environmental and social implications as well as their relevance to sustainable development.
Our reinsurance services do not give rise to any direct relevant environmental impacts. Rather, our services help to ensure that environmental risks are adequately insured and that the effects in the event of loss or damage can be rectified or mitigated. Beneficial social consequences are at the very core of insurance business. They include the transfer and spreading of risks, by means of which the impacts of loss events can be absorbed and both companies and private individuals alike can be financially protected. Often, it is only the backing of internationally operating reinsurers that enables primary insurers to cover large individual risks and the risks associated with natural perils.
In the engineering insurance lines, for example, multifaceted insurance solutions are realised in support of renewables, ranging from wind power generated on- and offshore to photovoltaic and geothermal energy. Insurance protection begins with the construction phase and accompanies the customer through many years of operation. By providing our support as a reinsurer 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 development of more structurally deprived regions. These enable people with scant financial means to protect themselves against fundamental risks such as illness, disability, the consequences of natural disasters or crop failures. We are also taking an active part in the development of index-based disaster finance concepts that guarantee rapid financial assistance for countries in South America and Asia in the event of natural catastrophes. We support primary insurance start-ups with the cost-intensive acquisition of new business and help them to increase insurance density.
In life and health reinsurance demographic changes around the world are leading to stronger demand for reinsurance in the area of longevity solutions. We are also seeing rising demand for so-called 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).
Closer cooperation with primary insurers to develop and expand sustainable products
Cooperation with primary insurers in Pakistan, the Philippines, Indonesia and India is being steadily expanded in the growing market for microinsurance products.
Further expansion of microinsurance products In India we play an active part in the expansion of microinsurance business and reinsure a growing volume there. We also partner with primary insurers in countries such as Pakistan, the Philippines and Indonesia to provide suitable microinsurance solutions for the market. In Malaysia we support an initiative to expand state-subsidised accident and disability insurance covers.
Investors, analysts and clients are increasingly taking an interest in how we incorporate social and environmental aspects into the management of our investments. In general terms, when it comes to the management of our investment portfolio we aim to generate a stable and commensurate market return in the interests of our clients and shareholders. We also take into account environmental, social and governance (ESG) criteria. Our sustainability strategy on the investment side is defined in writing in our “Responsible Investment Policy”, which we developed in 2011 and subsequently updated in 2016. Specifically, we are guided here by, inter alia, the ten principles of the United Nations Global Compact, i. e. we also take into account considerations relating to human rights, working conditions, the environment and anti-corruption. Furthermore, we avoid exposures to issuers who are involved in the development and proliferation of controversial weapons. Since 2012 our investments have undergone half-yearly negative screening by an external service provider to verify compliance with these
Signing of the UN Principles for Responsible Investment (PRI) to be reviewed
The existing ESG Investment Policy has already been refined and enhanced with a best-in-class investment approach including positive screening. Practical implementation of this measure is being pursued jointly with Asset Management. Integration of positive screening into the investment process is to be completed in 2018.
Appointment of an ESG officer on the investment team In April 2015 we designated an ESG officer on the investment team.
It is crucial to our company’s success that we are perceived by our customers as a preferred business partner. If we are to be considered the best option, we must offer prices commensurate with the risks, adequate capacities and a reliable value proposition. As a business-to-business service provider, the fair design of our products – i. e. of contracts with primary insurers – is an essential prerequisite for our business. Our Customer Relationship Management (CRM) promotes an interactive exchange with our customers. Through a regular dialogue and in the context of events we initiate an exchange of knowledge on insurance topics and enable our customers to give feedback on our products and services in face-to-face discussions. We usually meet with our customers multiple times a year, not only on the occasion of the treaty renewals but also in connection with current developments and topical issues.
Customer relationships at our company are normally cultivated on the level of individual divisions. In property and casualty reinsurance we cultivate our customer relationships both through insurance brokers and directly by making regular business trips or holding videoconferences. Furthermore, our employees attend trade fairs and expert conferences worldwide. In life and health reinsurance – in contrast to property and casualty reinsurance – we have a direct local presence in most markets due to our decentralised approach and are thus able to engage in a quick and flexible exchange with our customers. In addition to business trips to visit individual clients, we also organise seminars – usually on specific topics – and training workshops in the markets where we operate so as to keep our customers informed about the latest issues and developments relating to life and health reinsurance as well as underwriting.
We regularly conduct customer surveys in order to measure the satisfaction of our customers regionally and Group-wide; these are carried out both independently and, when it comes to certain markets, by drawing on the services of external market research institutes. We process the results of our customer surveys and studies in-house so as to identify potential action fields. The steps that were taken not only served to improve the perception of our brand, they also made our
services and products stronger. In recent years, for example, we have increasingly expanded our automated underwriting systems according to the wishes of our customers and we have brought new product ideas to market.
Expand avenues for international dialogue Our “Building Bridges” seminar series in the property and casualty reinsurance business group serves to build closer customer relationships and is regularly expanded to include topical issues.
The success of our company depends directly on the successful work of our employees. We therefore pay particularly close attention to the qualifications, experience and commitment of our staff and foster these attributes through our excellent personnel development and leadership practices. Our strategic human resources planning enables us to 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.
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 information technology, reinsurance, social and methodological skills as well as language courses. The range of measures is continuously reviewed and extended.
We offer our managers training and support measures tailored specifically to their needs as well as opportunities for individual coaching. This was already the case in the period under review and will continue in the 2018-2020 strategy cycle.
In 2015 the Hannover Re Academy was launched at the Hannover location as a learning management system. Our training programme has since been continuously reviewed with an eye to its focus and quality.
Since August 2016 our staff and managers have been able to access an external telephone counselling service, anonymously if they so desire.
We attach great importance to the satisfaction of our employees in order to remain a consistently attractive employer. Regular feedback given by our staff is taken very seriously, and we use the evaluations and concrete suggestions that came out of our international employee survey as a basis for continuous improvement.
Goal to be achieved by 2017: M 53 Expansion of further training measures for specialist and executive staff
One of the cornerstones of our successful business activities, along with our employees’ skills and commitment, is the considerable degree of diversity in the workforce. At Hannover head office alone, for example, the members of staff come from altogether 39 different nations, a reflection of the international dimension of our operations. Diversity and the advancement of women are topics that have come under increasing public scrutiny in recent years. Within the Hannover Re Group, too, it is evident that women are under-represented in the company ’s higher hierarchical levels. With a view to changing this, the Executive Board initiated a number of measures geared specifically to furthering women in their professional development. In 2017 we therefore launched another implementation round of our in-house mentoring programme for women at the Hannover location, which will end in March 2018.
The specific focus of the internal mentoring programme on a purely female group of participants is part of our initiative to give targeted support to promising junior female managers by raising their profile in the organisation and giving them individual support. The number of participants was expanded to seven mentoring tandems. Mentoring refers to a protected, non-hierarchical partnership of fixed duration. Female employees (mentees) are paired with senior managers (mentors) for a period of twelve months to engage in a targeted, regular dialogue. In the course of the mentoring programme the mentees are encouraged to reflect on their professional development to date and to take steps to actively shape their future career. They also gain insights into new fields of work and are able to learn from their mentor’s experience. We are particularly pleased that as many as three members of our company’s Executive Board are participating as mentors in the 2017 / 2018 round of the programme.
Our worldwide Code of Conduct stipulates that nobody may be disadvantaged on grounds of his or her gender, ethnic origin, religion or ideology, disability, age or sexual persuasion. Salary increases and promotions follow a clearly defined process.
Goal to be achieved by 2017: M 54 Promoting diversity and a work / life balance
By 2050, the world’s population will have grown to about nine billion. How to feed people in a sustainable way will continue to be a major challenge of our time.
Risk report • Hannover Re has a very strong capital position, which is constantly reviewed against the backdrop of possible changes in the risk profile.
Capital market environment: A major external influencing factor is the protracted low level of interest rates, especially with an eye to the return that can be generated on our investments. The announcement by the ECB of its decision to reduce its monthly corporate sector purchases but at the same time extend the programme until September 2018, the sluggish progress of negotiations over the United Kingdom’s exit from the European Union and numerous geopolitical flashpoints impacted the capital market climate in the period under review. With this in mind, the risk management team has deployed a working group on Brexit. Despite all these influencing factors the capital market proved to be relatively stable, although it was still shaped by a low level of interest rates overall and a continuing decline in risk premiums on corporate bonds. For further information please see the “Investments” section of the management report on page 50 et seq.
US tax reform: The changes in tax legislation adopted by the US administration at the end of 2017 entered into force on 1 January 2018. They provide for new tax regulations that have far-reaching implications for subsidiaries operating in the United States. On the one hand, the reform cuts the corporate tax rate from 35% to 21%. On the other hand, the legislative package includes the introduction of the so-called “Base Erosion and Anti-Abuse Tax” (BEAT). In this connection, premiums for ceded insurance risks within the corporate group are also included in the taxable base and will in future be taxed at a rate of 5% - 12.5% (rising over the next nine years). We have already undertaken some restructuring activities within the Group and initiated further steps in order to avert this increased burden of taxation.
Risks from electronic data retention: Recent years have seen the increasing emergence of risks relating to electronic systems and their data. Hannover Re, in common with other companies, is at risk of attacks on its IT systems and has put in place extensive safeguards. Furthermore, Hannover Re offers reinsurance coverage for risks connected with electronic systems and the associated data. The dynamic pace of developments in the context of digitalisation presents a particular challenge to the assessment of such risks.
Increase in risks from US mortality business: In view of a renewed deterioration in the performance, most notably, of the large block of business acquired by Hannover Re at the beginning of 2009, the technical provisions calculated in accordance with IFRS and in the economic balance sheet according to Solvency II were reassessed by a project set up specifically for this purpose. This resulted in a substantial increase in the technical provisions under Solvency II. Under IFRS the provisions continued to be calculated according to the lock-in principle because the value in force (VIF) of the book of US mortality business remained positive overall.
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. In this context, the internal capital model is the central tool and constitutes a stochastic enterprise model. 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 as well as on 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 oneyear 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 as a limit a capital adequacy ratio of 180% and as a threshold a capital adequacy ratio of 200%.
The capitalisation prescribed by regulatory requirements diverges from the capitalisation shown in accordance with the Hannover Re Group’s internal capital model. Since approval was given last year to use the model for operational risks, the difference rests solely in the Solvency II stipulations that non-controlling interests cannot be fully recognised. The solvency ratio calculated in accordance with Solvency II stood at 260.3% as at 31 December 2017.
Required risk capital / Solvency capital requirement 9,877.3 4,729.0 4,729.0 10,381.7 5,149.5 5,585.9 1 The figures are based on the Solvency II reporting as at 31 December 2017. The calculation of the Group risk margin, which according to Solvency II requirements is the sum of the risk margins of the solo entities, already uses the new internal operational risk model for the solo entities which is currently undergoing the regulatory approval process. The audit procedures of the independent auditors relating to the Solvency II reporting have still to be completed.
2 Minor differences for 31 December 2016 compared to the Annual Report 2016. Figures based on final Solvency II year-end reporting as presented in the Solvency and Financial Condition Report.
following chart provides an overview of the central functions and bodies within the overall system as well as of their major tasks and powers.
Our risk strategy and our Risk and Capital Management Guideline including the system of limits and thresholds for material risks of the Hannover Re Group describe the central elements of our risk management system. This is subject to a constant cycle of planning, action, control and improvement. Systematic risk identification, analysis, measurement, steering and monitoring as well as risk reporting are especially crucial to the effectiveness of the system as a whole.
This guideline describes, among other things, the major tasks, rights and responsibilities, the organisational framework conditions and the risk control process. The rules, which are derived from the corporate strategy and the risk strategy, additionally take account of the regulatory minimum requirements for risk management as well as international standards and developments relating to appropriate enterprise management.
Risk-bearing capacity concept The establishment of the risk-bearing capacity involves determining the total available risk coverage potential and calculating the funds required to cover all risks. This is done in conformity with the parameters of the risk strategy and the risk appetite defined by the Executive Board. The quantitatively measurable individual risks and the risk position as a whole are evaluated using our risk model. A central system of limits and thresholds is in place to monitor material risks. This system incorporates – along with other risk-related key figures – in particular the indicators derived and calculated from the risk-bearing capacity. Adherence to the overall risk appetite is verified on an ongoing basis.
Risk communication and risk culture Risk management is firmly integrated into our operational processes. It is assisted by transparent risk communication and the open handling of risks as part of our risk culture. Risk communication takes the form, for example, of internal and external risk reports, information on current risk complexes in the intranet and training opportunities for staff. The regular sharing of information between risk-steering and risk-monitoring units is also fundamental to the proper functioning of risk management.
Process-integrated / -independent monitoring and quality assurance Irrespective of internally assigned competencies, the Executive Board is responsible for the orderly organisation of the company’s business. This also encompasses monitoring of the internal risk steering and control system. Process-independent monitoring and quality assurance of risk management is carried out by the internal audit function and external instances (regulators, independent auditors and rating agencies). Most notably, the independent auditors review the trigger mechanism and the internal monitoring system. The risk management system is rounded off with process-integrated procedures and rules, such as those of the internal control system.
We organise our business activities in such a way that they are always in conformity with all legal requirements. The internal control system (ICS) is an important subsystem that serves, among other things, to secure and protect existing assets, prevent and reveal errors and irregularities and comply with laws and regulations. The core elements of Hannover Re’s ICS are documented in a guideline that establishes a common understanding of the differentiated execution of the necessary controls. In the final analysis, it is designed to systematically steer and monitor the implementation of our corporate strategy. The guideline defines concepts, stipulates responsibilities and provides a guide for the description of controls. In addition, it forms the basis for the accomplishment of internal objectives and the fulfilment of external requirements imposed on Hannover Re. The ICS consists of systematically structured organisational and technical measures and controls within the enterprise. This includes, among other things: • the principle of dual control,
Depending upon the results of our checks, these figures can be corrected if necessary. Given that our Group financial reporting is heavily dependent on IT systems, these systems also need to be subject to controls. Authorisation concepts regulate system access and for each step content-based as well as system-side checks have been implemented, by means of which errors are analysed and promptly eliminated.
At the present time our most significant 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.
Available economic capital 13,041.8 13,461.0 1 The figures are based on the Solvency II reporting as at 31 December 2017. The calculation of the Group risk margin, which according to Solvency II requirements is the sum of the risk margins of the solo entities, already uses the new internal operational risk model for the solo entities which is currently undergoing the regulatory approval process. The audit procedures of the independent auditors relating to the Solvency II reporting have still to be completed.
As far as the market risks are concerned, last year’s reduction of the equity quota in the investment portfolio and lower spreads – along with volume effects driven by exchange rate movements – resulted in diminished volatility overall and hence less risk.
The increase in operational risks can be attributed to a refined expert valuation.
The loss-absorbing effect of taxes and the diversification effect remained stable.
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 M 62 property and casualty reinsurance in EUR million 31.12.2017 31.12.2016
Earthquake Japan 613.9 750.4 1 Required risk capital with a confidence level of 99.5% on an aggregate annual loss basis
Hannover Re | Annual Report 2017 occurred but have not yet been reported to us. Liability claims have a major influence on the segment reserve. The segment reserve is calculated on a differentiated basis according to risk categories and regions. The segment reserve established by the Hannover Re Group amounted to EUR 6,927.9 million in the year under review.
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 211 et seq.
Survival ratio in years and reserves for asbestos-related claims and pollution damage M 64 in EUR million
Net expenditure on major losses in the year under review amounted to EUR 1,127.3 million (EUR 626.6 million). Our company incurred the following catastrophe losses and major claims in the 2017 financial year: Catastrophe losses and major claims 1 in 2017 M 67 in EUR million Date gross net
Hurricane “Maria”, United States 18 – 21 September 2017 413.8 284.7
Forest fires, California, United States 7 – 30 October 2017 212.6 81.9
Forest fires, Chile 21 January – 3 February 2017 19.2 17.3
Severe weather / tornado, United States 18 – 21 January 2017 12.4 9.9
Severe weather / hail, United States 10 – 13 June 2017 11.0 4.5 1 Natural catastrophes and other major claims in excess of EUR 10 million gross
For further information on the run-off of the loss reserves please see our explanatory remarks in the section “Run-off of the net loss reserve in the property and casualty reinsurance segment” on page 212 et seq.
All risks directly connected with the life of an insured person are referred to as biometric risks. They include in particular the miscalculation of mortality, life expectancy, morbidity and occupational disability. Biometric risks are the material risks for our company in the area of life and health reinsurance. Our goal is to strike a balance between biometric risks. Furthermore, we are exposed to lapse risks because the cash flows resulting from our reinsurance treaties are in part dependent on lapse rates among policyholders. Counterparty default risks are also material since we partly prefinance our cedants’ new business acquisition costs. Furthermore, we are exposed to catastrophe risks, especially events involving a high number of fatalities in our insurance portfolio.
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 M 70 life and health reinsurance in EUR million 31.12.2017 31.12.2016
Underwriting risk life and health 2,354.7 2,117.9 1 Required risk capital at a confidence level of 99.5% 2 Mortality risk incl. catastrophe risk
Hannover Re | Annual Report 2017 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.
In view of the unsatisfactory performance of the aforementioned portfolio, we initiated a project at the end of 2016 with the aims of, firstly, reviewing actuarial assumptions relative to emerging experience and, secondly, deploying available means to improve results through inforce management measures on a targeted basis. This primarily involves rate management pursuant to contractual rights, as well as other measures. Based on the information available to us today, we continue to assume a positive VIF for our US mortality business as a whole. This assumption is based in large measure on the value of the cash flows that will be generated through future management actions. Should additional information lead to the determination that this is no longer the case, this would result in a oneoff charge to the IFRS result.
Utilisation by Hannover Re Warning level 1 Warning level 2 Warning level 3
Scenarios for changes in the fair value of material asset classes M 74 in EUR million Scenario Portfolio change on a fair value basis Change in equity before tax
Foreign exchange risks are especially relevant if there is a currency imbalance between the technical liabilities and the assets. 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 short-term 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 197 et seq.
Corporate bonds Covered bonds / asset -backed securities in % in EUR million in % in EUR million in % in EUR million in % in EUR million 1 Securities held through investment funds are recognised pro rata with their corresponding individual ratings. 2 Including government-guaranteed corporate bonds
Required risk capital 1 counterparty default risk M 76 in EUR million 31.12.2017 31.12.2016
Since the business that we accept is not always fully retained, but instead portions are retroceded as necessary, the counterparty default risk is also material for our company in reinsurance transactions. Our retrocession partners are carefully selected and monitored in light of credit considerations in order to keep the risk as small as possible. This is also true of our broker relationships, which entail a risk inter alia through the potential loss of the premium paid by the cedant to the broker. We minimise these risks, among other things, by reviewing all broker relationships once a year with an eye to criteria such as the existence of professional indemnity insurance, payment performance and proper contract implementation. The credit status of retrocessionaires is continuously monitored. On the basis of this ongoing monitoring a Security Committee decides on measures where necessary to secure receivables that appear to be at risk of default. This process is supported by a Webbased risk management application, which specifies cession limits for the individual retrocessionaires participating in protection cover programmes and determines the capacities still available for short-, medium- and long-term business. Depending on the type and expected run-off duration of the reinsured business, the selection of reinsurers takes into account not only the minimum ratings of the rating agencies Standard & Poor’s and A.M. Best but also internal and external expert assessments (e. g. market information from brokers). Overall, retrocessions conserve our capital, stabilise and optimise our results and enable us to act on opportunities across a broader front, e. g. following a major loss event. Regular visits to our retrocessionaires give us a reliable overview of the market and put us in a position to respond quickly to capacity changes. The following table shows how the proportion of assumed risks that we do not retrocede (i. e. that we run in our retention) has changed in recent years: Gross written premium retained M 77
Alongside traditional retrocessions in property and casualty reinsurance we also transfer risks to the capital market.
57.0% of our recoverables from reinsurance business are secured by deposits or letters of credit. For the majority of our retrocessionaires we also function as reinsurer, meaning that in most cases recoverables can potentially be set off against our own liabilities. In terms of the Hannover Re Group’s major companies, EUR 304.7 million (8.0%) of our accounts receivable from reinsurance business totalling EUR 3,821,1 million were older than 90 days as at the balance sheet date.
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 1,651.3 million (previous year: EUR 1,506.3 million) as at the balance sheet date.
Further remarks on technical and other assets which were unadjusted but considered overdue as at the balance sheet date as well as on significant impairments in the year under review are provided in section 6.4 “Technical assets” on page 205 et seq., section 6.6 “Other assets” on page 208 et seq. and section 7.2 “Investment result” on page 227 et seq.
With the aid of the Self-Assessment for Operational Risks we determine the maturity level of our operational risk management system and define action fields for improvements. The assessment is carried out, for example, by assessing the maturity level of the respective risk management function or of the risk monitoring and reporting. The system enables us, among other things, to prioritise operational risks. In order to calculate the capital commitment in our internal capital model we perform extensive scenario analyses and use the findings as a basis for specifying the parameters for the stochastic model.
Operational risk 637.0 503.9 1 Required risk capital at a confidence level of 99.5%
Subcategories of operational risks • Business process risk (including data quality) • Compliance risk • Function outsourcing risk • Fraud risk • Personnel risk • Information and IT security risk • Business interruption risk
Business process risks are associated with the risk of deficient or flawed internal processes, which can arise as a consequence of an inadequate process organisation. We have defined criteria to evaluate the maturity level of the material processes, e. g. for the reserving process. This enables us to ensure that process risks are monitored. In cooperation with the process participants, the process owner evaluates the risks of the metaprocess and develops measures for known, existing risks. Data quality is a highly critical success factor in this regard. It is monitored inter alia by way of regular automated analyses.
We use sanctions screening software on parts of the Hannover Re Group’s portfolio to filter out individuals who are subject to sanctions on account of a criminal or terrorist background. Suitable steps are taken if such individuals are identified. Business partners are also screened in this way. Responsibilities within the compliance organisation are regulated and documented Group-wide and interfaces with risk management have been put in place. The set of tools is rounded off with regular compliance training programmes. For further information on compliance-related topics, including for example lawsuits, contingent liabilities and commitments, please see section 8.6 “Lawsuits” and section 8.7 “Contingent liabilities and commitments ” on page 244 et seq.
Fraud risks refer to the risk of intentional violations of laws or regulations by members of staff (internal fraud) and / or by externals (external fraud). This risk is reduced by the internal control system as well as by the audits conducted by Group Auditing on a Group-wide and line-independent basis.
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 technology risks, shortage of resources and supply chain risks.
Strategic risks derive from a possible imbalance between the corporate strategy of the Hannover Re Group and the constantly changing general business environment. Such an imbalance might be caused, for example, by incorrect strategic policy decisions, a failure to consistently implement the defined strategies and business plans or an incorrect allocation of resources. We therefore regularly review our corporate strategy in a multi-step procedure and adjust our processes and the resulting guidelines as and when required. We have defined performance criteria and indicators for operational implementation of the strategic principles and objectives; these are authoritative when it comes to determining fulfilment of the various targets. With the “Strategy Cockpit” the Executive Board and responsible managers have at their disposal a strategy tool that assists them with the planning, elaboration and management of strategic objectives and measures and safeguards their overall perspective on the company and its strategic risks. The process for the management of strategic risks continues to be assessed annually as part of the monitoring of business process risks. For more information on the topic of strategy please see the section “Non-financial information statement” on page 64 et seq.
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
Speed is one of the qualities used to measure a successful knowledge transfer. Quick solutions and staying one step ahead of the competition is the name of the game. Hannover Re searches systematically for new business opportunities in order to generate sustainable growth and strengthen the company’s profitable development. With a view to identifying opportunities and successfully translating ideas into business, Hannover Re adopts a number of closely related approaches in order to achieve holistic opportunity and risk management. Of significance here is the interplay without overlaps of the various functions within opportunity and risk management, which is ensured by defined interfaces.
A key project initiated back in 2016 went by the name “Journey Re”. It forged a connection to students, university graduates and young professionals with a view to developing new business models for primary insurance and reinsurance and translating the creativity that exists outside the industry into new business opportunities. The project activities were focused on locations in Berlin, Dublin, Boston and Johannesburg. Work on refining the results of the project continued in 2017.
The average total cost of a data breach for a business is USD 3.8 million.
In 2017 the Innovation Management unit identified and prioritised topics of relevance to Hannover Re going forward. More than 100 insurtech startups around the world were analysed on the basis of these various subject areas. We work together with selected insurtechs on the concrete implementation of innovative concepts.
Cyber risks Cyber attacks on critical systems are becoming increasingly common. They can cause considerable financial losses and also damage corporate reputations. Not only that, they can severely hamper private and public life, especially if critical infrastructures are impacted – such as the health, transportation / traffic and energy sectors. In such instances supply bottlenecks with lasting effects as well as major disruptions to public safety may ensue. In a networked world the repercussions of cyber attacks are intensifying because the volume of data stored around the world is constantly growing – and in this context it is not only one’s own technical infrastructure that needs to be secured. On the contrary, the trend towards cloud computing is increasingly shifting the focus to third-party infrastructures and the associated network connection. As part of our holistic risk and opportunity management activities, we are also tackling the question of what new insurance products can be developed in order to protect against the relevant threats. Our presence in this market thus goes as far back as 2007 and we have already developed corresponding products.
If a business idea is translated into reality and a new reinsurance product results, the normal procedure – provided the criteria defined for this purpose by Risk Management are applicable – is to work through the so-called new product process. 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.
• our opportunity management plays an important part in Hannover Re’s profitable growth.
Our steering and monitoring tools as well as our organisational and operational structure ensure that we identify risks at an early stage and are able to act on our opportunities. Our central monitoring tool is the system of risk management that we have installed Group-wide, which efficiently brings together both qualitative and quantitative information. Most notably, the interplay between domestic and foreign risk management functions affords us a holistic and Group-wide overview.
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 57 et seq. In addition, the risk trigger mechanism and internal monitoring system are reviewed annually by the independent auditor. The Group-wide risk management system is also a regular part of the audits conducted by the internal audit function. For additional information on the opportunities and risks associated with our business please see the Forecast on page 134 et seq.
Declaration on Corporate Governance pursuant to §§ 289a, 315 Para. 5 Commercial Code (HGB)
Hannover Rück SE hereby provides insight into its enterprise management practices as part of the Declaration on Corporate Governance pursuant to § 289a Commercial Code (HGB) and pursuant to § 315 Para. 5 Commercial Code (HGB) in conjunction with § 289a Commercial Code (HGB) for the Hannover Re Group: Corporate Governance
The positive attitude of Hannover Rück SE towards the Code is not contradicted by the fact that in the year under review we did not comply with certain Code recommendations, since a well justified deviation from the recommendations of the Code may – as in the present cases – be very much in the interests of good corporate governance tailored to a particular company, i. e. by reflecting enterprise- and industry-specific features (cf. Foreword to the German Corporate Governance Code). Based on what is still a high degree of fulfilment of the recommendations and suggestions of the Code, Hannover Re continues to rank very highly among the companies listed on the DAX and MDAX.
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 general public in German enterprise management. Under § 161 Stock Corporation Act (AktG) it is incumbent on the Management Board and Supervisory Board of German listed companies to provide an annual declaration of conformity with the recommendations of the “German Corporate Governance Code Government Commission” published by the Federal Ministry of Justice or to explain which recommendations of the Code were / are not applied.
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 5.3.2 Para. 3 Sentence 2.
In addition to the Corporate Governance principles, Hannover Rück SE has adopted its own more extensive Code of Conduct (www.hannover-re.com/50943/code-of-conduct.pdf) that is applied Group-wide as a set of minimum standards. Complementing our corporate strategy and the Corporate Governance principles, it establishes rules governing integrity in the behaviour of all employees of Hannover Re and is intended to help members of staff cope with the ethical and legal challenges that they face as part of day-to-day work. The rules defined in the Code of Conduct reflect the high ethical and legal standards that guide our actions worldwide. It is our belief that integrity in dealings with our stakeholders constitutes the foundation of a successful enterprise. In both our strategic planning and our day-to-day business activities, we therefore aspire to consistently apply the highest ethical and legal standards; for our actions and the way in which every single one of us presents and conducts himself or herself are crucial in shaping the image of Hannover Re.
The strategic orientation of Hannover Re towards sustainability constitutes an important element of the enterprise strategy. 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 the company as well as with an eye to protecting the environment and conserving natural resources. As part of the regular review of our Group Strategy and Sustainability Strategy and based upon a materiality analysis, we adjusted our previous Sustainability Strategy for the years 2015 to 2017 to the changing economic framework conditions and systematically followed through on it with the Sustainability Strategy 2018 to 2020. The current Sustainability Strategy 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 published a non-financial statement for the 2017 financial year.
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 carbon neutrality. 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 personnel development and advancement. Employee retention is encouraged, while diversity and equal opportunities are promoted. Three of the members of the Supervisory Board of Hannover Rück SE in the year under review were women. In addition, one of the members of the Supervisory Board’s
Targets pursuant to §§ 76 Para. 4, 111 Para. 5 Stock Corporation Act (AktG)
Hannover Re | Annual Report 2017 independence in the oversight of the Executive Board is thus already ensured by structural means. In addition, the Supervisory Board is kept informed on a regular and timely basis of the business development, the execution of strategic decisions, material risks and planning as well as relevant compliance issues. The Chairman of the Supervisory Board stays in regular contact with the Chairman of the Executive Board in order to discuss with him significant business occurrences. The composition of the Executive Board (including areas of responsibility) as well as of the Supervisory Board and its committees is set out on pages 6 et seq. and 261 respectively of the present Annual Report.
Working practice of the committees of the Supervisory Board In order to efficiently perform its tasks the Supervisory Board has formed a number of committees: the Finance and Audit Committee, the Standing Committee and the Nomination Committee. The Supervisory Board committees are each comprised of three members and prepare matters within their scope of competence for discussion and adoption of a resolution by the full Supervisory Board. In addition, the committees are also assigned their own authority to adopt resolutions.
The compliance report for the 2017 calendar year will be submitted to the Finance and Audit Committee in March 2018. The reporting sets out the structure and diverse range of activities of Hannover Re in this regard. The findings of the separate data privacy reporting for the 2017 calendar year are also included in the compliance report. After in-depth examination of topics such as directors’ dealings, ad hoc and other disclosure requirements, the insider register, consulting agreements, data protection, international sanctions and the Group-wide whistleblower system, the report concludes that only a few circumstances have been identified which point to breaches of relevant compliance standards. After detailed exploration of these incidents, the necessary safeguards were put in place to ensure that in the future Hannover Re is in conformity with the internal and external requirements governing its business activities.
Information on share-based payment pursuant to Item 7.1.3 of the German Corporate Governance Code is provided in section 8.3 of the notes “Share-based payment ”, page 239 et seq., and in the remuneration report with respect to the members of the Executive Board.
The remuneration report is guided by the recommendations of the German Corporate Governance Code and contains information which forms part of the notes to the 2017 consolidated financial statement as required by IAS 24 “Related Party Disclosures”. Under German commercial law, too, this information includes data specified as mandatory for the notes (§ 314 HGB) and the management report (§ 315 HGB). These details are discussed as a whole in this remuneration report and presented in summary form in the notes.
With an eye to these objectives, the remuneration system has two components: fixed salary / non-cash compensation and variable remuneration. The variable remuneration is designed to take account of both positive and negative developments. Overall, the remuneration is to be measured in such a way that it reflects the company’s sustainable development and is fair and competitive by market standards. In the event of 100% goal attainment the remuneration model provides for a split into roughly 40% fixed remuneration and roughly 60% variable remuneration.
The annual fixed salary is determined upon appointment for the entire term of the appointment.
Measurement of variable remuneration 1 Chief Executive Officer / Chief Financial Officer 70% profit bonus, 30% performance bonus (personal targets); Board members with divisional responsibility: 50% profit bonus, 50% performance bonus (25% personal targets / 25% divisional targets)
Measurement bases / conditions of payment for variable remuneration M 83
An individually determined and contractually defined basic amount is paid for each 0.1 percentage point by which the RoE of the past three financial years exceeds the risk-free interest rate. Goal attainment of 100% corresponds to an RoE of 8.8% plus the riskfree interest rate (2017: 0.76%). Goal attainment can amount to a maximum of 200% and a minimum of -100%.
Goal attainment of 100% is achieved in property and casualty reinsurance with a RoCA of 9.1% and in life and health reinsurance with a RoCA of 10.1%. These RoCA values are above the cost of capital and thus generate positive intrinsic value creation (IVC) 1.
The divisional bonus is determined by the Supervisory Board according to its best judgement. The determination also takes into account, in particular, the contribution made by the business under the responsibility of the Board member concerned to the achieved divisional performance and the relative change in the average IVC in the remuneration year. The Supervisory Board may make additions to or deductions from the arithmetically calculated values at any time in the event of over- or underfulfilment of the criteria.
Short-term Medium-term Long-term 60% of the variable remuneration with the next monthly salary payment following the Supervisory Board resolution 20% of the variable remuneration in the bonus bank; withheld for three years; the positive amount contributed three years prior to the payment date is available for payment, provided this does not exceed the balance of the bonus bank in light of credits / debits up to and including those for the financial year just ended; an impending payment not covered by a positive balance in the bonus bank is omitted; a positive balance in the bonus bank is carried forward to the following year after deduction of any payment made; a negative balance is not carried forward to the following year; loss of claims due from the bonus bank in special cases: resignation from office without a compelling reason; contract extension on the same conditions is rejected; no interest is paid on credit balances.
Negative variable total bonus = payment of EUR 0 variable remuneration. Any minus value of the variable total bonus for a financial year is transferred in full to the bonus bank (see “Medium-term” column).
All claims to the allocation of amounts to the bonus bank and / or awarding of HR-SAs after leaving the company are excluded. In cases where an individual leaves the company because of non-reappointment, retirement or death this shall not apply with respect to claims to variable remuneration acquired (pro rata) in the final year of the Board member’s work for the company.
Variable remuneration under the old remuneration structure (until 2011) The virtual stock option plan with stock appreciation rights existing under the old remuneration structure remains in force for all members of the Executive Board until all stock appreciation rights have been exercised or have lapsed. In the 2017 financial year no further stock appreciation rights were granted to active Board members. Of the stock appreciation rights granted in previous years, active and former Board members exercised amounts totalling EUR 0.6 million (previous year: EUR 0.7 million) in 2017.
As at 31 December 2017 active members of the Executive Board had at their disposal a total of 293 (39,585) granted, but not yet exercised stock appreciation rights with a fair value of EUR 9.4 thousand (EUR 366.7 thousand).
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 2017 Declaration of Conformity contained in the section “Statement of enterprise management practices” on page 106 et seq. of this Group Annual Report.
Amount of remuneration received by the Executive Board The total remuneration received by the Executive Board of Hannover Rück SE on the basis of its work for Hannover Rück SE and the companies belonging to the Group is calculated from the sum of all the components set out in the following table pursuant to DRS 17.
The remuneration (excluding pension payments) received by former members of the Executive Board totalled EUR 0.2 million (EUR 0.3 million).
2 The non-cash compensation has been carried in the amounts established for tax purposes. 3 In 2017 EUR 8,500 less in variable remuneration was paid out to Board members for 2016 than had been reserved.
4 The nominal amount is stated; full or partial repayment in 2021, depending on the development until such time of the balance in the bonus bank. In 2017 altogether EUR 2,800 less than had been originally reserved was allocated to the bonus bank for 2016. 5 The nominal amount is stated; virtual Hannover Re share awards are automatically granted in an amount equivalent to 20% of the variable remuneration. The equivalent amount will be paid in 2022 at the prevailing share price of Hannover Re. In 2017 nominal amounts of EUR 2,800 less than had been originally reserved were used as a basis for allocation of the 2016 share awards.
Total 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 2016, 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 2012.
The following two tables show the remuneration of the Executive Board in the 2017 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 M 87 (target / minimum / maximum remuneration as nominal amounts)
Dividend on share awards for 2015 3 54.8 0.0 0.0 0.0 20.7 0.0 0.0 0.0 32.6 0.0 0.0 0.0 41.5 0.0 0.0 0.0
Dividend on share awards for 2016 3 0.0 52.2 52.2 52.2 0.0 23.0 23.0 23.0 0.0 32.1 32.1 32.1 0.0 38.8 38.8 38.8
4 Stock appreciation rights were awarded to Mr. Althoff in 2011 as a senior executive, exercise option discretionary until 31 December 2021 in the following tranches: 60% from 2016, 80% from 2017, 100% from 2018 onwards 5 For details of the service cost see the table “Pension commitments” on page 127. The service costs for Mr. Chèvre and Mr. Miller refer to the funding contribution for 2016 and for the first time to the personnel expense for 2017.
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 on reaching the age of 65. A non-pensionable fixed remuneration component was introduced in conjunction with the remuneration structure applicable from 2011 onwards.
Provision for surviving dependants If the Board member dies during the period of the service contract, the surviving spouse – or alternatively the eligible children – shall be entitled to continued payment of the fixed monthly salary for the month in which the Board member dies and the six months thereafter, at most until termination of the service contract. If the member of the Executive Board dies after pension payments begin, the surviving spouse and alternatively the dependent children shall receive continued payment of the retirement pension for the month of death and the following six months.
Premium 1 Percentage of pensionable income (fixed annual remuneration as at the contractually specified reference date). 2 Mr. Althoff and Mr. Vogel were first granted a pension commitment prior to 2001 on the basis of their service to the company prior to their appointment to the Executive Board; the earned portion of the commitment from the Unterstützungskasse 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. Measurement under IAS 19 consequently uses the defined benefit method. 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.
In accordance with § 14 of the Articles of Association 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 one-and-a-half times the said amounts.
All the members of the Supervisory Board receive an attendance allowance of EUR 1,000 for their participation in each meeting of the Supervisory Board and the Committees in addition to the aforementioned remuneration. If a meeting of the Supervisory Board and one or more committee meetings fall on the same day, the attendance allowance for this day is only paid once in total.
In the year under review no payments or benefits were granted to members of the Supervisory Board in return for services provided individually outside the committee work described above, including for example consulting or mediation services, with the exception of the remuneration paid to employee representatives on the basis of their employment contracts.
Dealings in shares, options and derivatives of Hannover Rück SE effected by members of the Executive Board or Supervisory Board of Hannover Re or by other persons with managerial functions who regularly have access to insider information concerning the company and who are authorised to take major business decisions – as well as such dealings conducted by certain persons closely related to the aforementioned individuals – in excess of EUR 5,000 are to be reported pursuant to § 15a Securities Trading Act (WpHG). The reportable transactions listed in the following table took place in the 2017 financial year.
Members of the Supervisory Board and Executive Board of Hannover Rück SE as well as their spouses or registered partners and first-degree relatives hold less than 1.0% of the issued shares. The total holding as at 31 December 2017 amounted to 0.004% (0.004%) of the issued shares, i. e. 4,681 (4,625) shares.
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 attainment are agreed between the senior executive and their supervisor.
Group of participants and total number of eligible participants in variable remuneration systems M 92 Valid: 31 December 2017
Head office Hannover 754 staff (excl. seconded employees) out of the altogether 1,385 at Hannover head office (incl. 91 senior executives) are GPB-eligible.
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 3%. Negative performance contributions are excluded; the minimum goal attainment is 0%. The maximum possible goal attainment is 150%.
Amount and payment of variable remuneration for senior executives The overall degree of goal attainment determines the amount of variable remuneration including share awards. On management level 2 (Managing Director) 60% of the variable remuneration is paid out annually in cash and 40% is granted in the form of share awards. On management level 3 (Director and General Manager) the variable remuneration is split into 65% cash payment and 35% granted as share awards.
On management level 3 (Director and General Manager) the minimum variable remuneration amounts to EUR 0 on the premise that the degree of attainment for all goals is 0%. For management level 2 (Managing Director) in treaty / regional departments the minimum limit for the variable remuneration is set at -10% if the degree of goal attainment for Group net income is -50% while at the same time goal attainment of 0% is determined for the divisional targets and individual targets. For management level 2 (Managing Director) in service departments -20% of the variable remuneration is possible as the lower limit, if the degree of goal attainment for Group net income is -50% and at the same time goal attainment of 0% is determined for the individual targets.
Allocation and payment of share awards to senior executives The total number of share awards allocated is determined according to the value per share of Hannover Re. This value is arrived at from the average of the closing prices of the shares in a period extending from 20 trading days before to 10 trading days after the meeting of the Supervisory Board at which the consolidated financial statement is approved. The number of share awards is established by dividing the specified portion of the total bonus (40% or 35%) by the value per share, rounded up to the next full share.
The cash bonus for the 2016 financial year was paid out in June 2017. The share awards for the 2016 financial year were also allocated in June 2017; they will be paid out in the spring of 2021 including dividends paid for the 2016, 2017, 2018 and 2019 financial years.
Forecast • Successful treaty renewals in property and casualty reinsurance as at 1 January 2018 • Stable premium volume in life and health reinsurance • Return on investment target of ≥ 2.7% for assets under own management • Group net income expected to exceed EUR 1 billion
The upturn in advanced economies, which include the United States, Japan and Germany as well as 30 other economically developed countries, will lose scarcely any impetus: after 2.4% in the financial year just ended, growth in the current year is expected to reach 2.3%. Economists expect to see a continuation of expansionary monetary policy, albeit on a slightly more muted scale, increased stimuli from the financial policy side and a fresh resurgence in demand from developing and emerging nations.
Source: Kiel Institute for the World economy; figures for Germany are calendar-adjusted.
Europe In the Eurozone, too, the upturn in cyclical activity is set to continue. Industrial output is high and new orders in the manufacturing sector are very brisk, prompting the experts at the Kiel Institute for the World Economy to forecast expansion of 2.3% for 2018. France should be able to modestly extend its growth (+2.0%), with expansion in Spain set to continue at a slower pace (+2.6%). In Italy the balance of power will probably remain problematic even after the parliamentary elections scheduled for March 2018. This also dilutes the potential for economic stimuli, and growth is therefore likely to stay stubbornly low (+1.5%). The recovery in Greece is expected to continue (+2.1%).
With the upswing set to continue, unemployment in the Eurozone is forecast to decrease further from 9.1% in the previous year to 8.5% in the current year. Given the increasingly high utilisation of production capacities, core inflation in the Eurozone will probably see a further gradual increase. The overall rise in consumer prices will, however, likely be on a par with the previous year at 1.7% because oil price effects will work against inflation.
Germany The Kiel-based economists expect the positive trend in Germany to see a further slight improvement in 2018, hence boosting growth in gross domestic product by two-tenths of a percentage point to 2.5%. With utilisation levels already far above normal, production capacities are close to their limit. Supported by income gains, private consumption will keep on rising, while the construction boom is set to continue in view of unchanged favourable financing conditions.
Exports will likely receive another boost from the surging global economy and rise by 5.0% (previous year: 4.3%). Most notably, exports of goods to the Eurozone and Asia will be further expanded. The import side will gain added impetus from the lively state of the domestic economy, with the value of imported goods forecast to grow by 5.7% in the current year (4.8%).
China, India, Japan The Kiel Institute for the World Economy expects growth in China to experience a further slowdown in 2018, declining to 6.4%. Whereas in recent years the government has been able to stabilise the economy through a more expansive fiscal and monetary policy, it is now dialling this back in favour of qualitative targets. With this in mind, it is focused on stemming rising indebtedness and on the overdue structural transformation towards a service-oriented economy with growth that is socially and environmentally more sustainable.
Following the successful implementation of reforms, India’s economy will be able to pick up the pace of expansion again and should grow by 7.3% in 2018. Measured by the size of its economy, India will thus move past the United Kingdom and France to become the fifth-largest national economy in the world.
The basic starting point for the world economy should nevertheless be assessed as positive, since none of the major world economies is in or entering retrocession; instead, they moving in relative lockstep on an expansionary course for the first time in quite a while. The Eurozone is enjoying a stable upturn
and benefiting from low interest rates and what is still a comparatively weak euro. The US economy can profit from a historic package of tax reforms, although it remains to be seen whether this is reflected in real economic factors since many business actors likely realise that low taxes today can mean higher charges down the road. Increased commodity prices should, however, assist the economic recovery in numerous emerging markets.
In contrast, the US Federal Reserve will progressively turn away from an expansionary policy in response to the economic upswing in the United States and will press ahead with the cycle of rate hikes. This may also be reflected in a strengthening US dollar. Observers are keenly waiting to see how the upcoming personnel changes at the Fed will affect its policy. The new faces, just like the old ones, will face the challenge of keeping inflation under control without jeopardising domestic consumption as well as a need to combat systemic risks with an appropriate overall policy framework.
Central banks will therefore be compelled to strike a new balance, which may lead to elevated volatility. In this context, the goal will still be to put in place a foundation on which national economies can be less dependent on the previous extremely relaxed monetary policy.
International bond markets will thus once again see largely below-average and continued divergent interest rate levels in 2018. In the relevant currency areas for our company we expect slightly upsloping yield curves. For the most part, government bonds with higher risk premiums issued by countries of the European Monetary Union that have been the focus of so much attention of late should continue to stabilise. The prevailing credit cycle in the United States, which has proven its durability, and the stabilisation of emerging markets will continue to shape the economic environment. This may potentially be positively influenced by the ending of austerity drives undertaken by several industrial nations and by a worldwide upswing in private consumption.
Compared to the soaring valuations of US equities, which delivered another exceptional performance in 2017, equities in Europe and emerging markets are lagging somewhat behind the cycle and some markets are even seeing bubble tendencies. These could deflate quickly and trigger turmoil on other markets too. Virtually historically low risk premiums on corporate and financial bonds also suggest that a great deal of positive momentum has already been priced in and the speculative scope for further price jumps on the scale seen in recent years appears rather limited, given that central banks are now stepping away from providing markets with an unconditional supply of liquidity. The extent to which effects associated with expectations placed on Donald Trump’s economic policy – which have already been factored into valuations – may be changed by adverse geopolitical developments or restrictive trade measures remains one of the elements of uncertainty for 2018, the implications of which will not leave Europe and emerging economies untouched. After all, the question arises as to who else can invest if everyone is already appropriately invested and liquidity is tending to tighten. On the other hand, we anticipate a thoroughly positive scenario in the emerging economies, which for the most part have proven astonishingly stable in coping with volatility associated with uncertainties in China and the oil price distortions of the recent past. 2018 will thus again be distinguished by an unusual combination of geopolitical and monetary policy uncertainty as well as the risk of bubbles forming in certain asset classes and markets. All in all, it should be noted that the strongly liquidity-driven search by investors for assets offering high returns is leading to inflation in asset prices which in some areas now makes the risk / reward ratio look rather critical. To this extent, increased attention must be paid to investment decisions. Consequently, broad diversification within the investment portfolio will continue to be of considerable importance in 2018.
Insurance industry Even though the insurance industry still finds itself facing numerous – in some cases considerable – challenges in 2018, the mood throughout the sector is gradually lifting. The reasons here include the generally good overall economic sentiment and the positive approach taken by the industry in addressing the demands of change. This includes the fact that many companies are now actively partnering with insurtechs, as new market entrants, in their business models and finding numerous points of connection for developing new products.
The industry also remains intensely preoccupied with changes in customer expectations. Against a backdrop of advancing digitalisation, customer habits are becoming increasingly unpredictable. Expectations are also shifting significantly when it comes to benefits and services. Insurers are responding by enhancing the quality of their services, stepping up customer contact management and developing new products that live up to the changed requirements.
The rate situation turned around sharply for the better on account of the heavy losses from the three hurricanes in the year under review: overall, rates increased as at 1 January 2018 as expected; this is especially true of hurricane-exposed business, although price gains were also recorded under loss-free programmes. In addition, modest rate improvements were booked for casualty business. Against this backdrop we enlarged our business volume in these lines. We see further scope for selective growth in the area of cyber covers, where demand is rising due to heightened awareness in the market of potential loss events. In view of our successful treaty renewals as at 1 January 2018 we expect to book moderately higher growth for our North American portfolio in the current year. Our focus on existing customer relationships remains unchanged.
When it comes to covers for cyber risks and extended natural hazards, we expect to see a further rise in demand. A modest premium contraction is anticipated for our domestic market in 2018.
Aviation In view of the unchanged strained state of the aviation insurance market, and also as a consequence of developments following the hurricane events in the United States and the Caribbean, prices on the reinsurance market stabilised on their low level. In non-proportional business we enlarged our shares in programmes which in our assessment offer profit potential. However, based on our continued selective underwriting approach, especially in relation to proportional acceptances, we anticipate a marginally reduced premium volume for the 2018 financial year.
Global reinsurance Worldwide treaty reinsurance Insurance markets in the Asia-Pacific region should stay on their growth track in 2018. We see attractive opportunities here to enlarge our portfolio.
As far as our Japanese portfolio is concerned, we expect to maintain a stable market position with opportunities to write specific additional treaties or increase our shares. Given the high degree of market concentration, however, we do not include Japan among our growth markets in Asia. At the main renewal date on 1 April 2018 we expect conditions for most lines to at least remain stable; a trend towards rehabilitation should set in for natural catastrophe covers, which will favour reinsurers.
In Australia and New Zealand the market players expect to see clear improvements in conditions in the run-up to the 1 July renewals. With demand for natural catastrophe capacity sharply higher, a global hardening of the reinsurance market will undoubtedly have clear implications for pricing in Australia and New Zealand too.
Rates in South Africa are expected to see continued appreciable hardening in light of the loss situation in the previous year. Having taken a cautious stance in the soft market as part of our cycle management, we shall leverage our good position in order act on business opportunities and further enlarge our portfolio. We therefore anticipate premium growth in the order of 10% for our reinsurance and specialty business in the current year. We also expect to see the business launch of some of our insurtech initiatives.
The market and the placement of reinsurance cessions are just as fiercely competitive in Latin America as they are in other insurance markets. In view of the considerable large losses in the year under review, however, original rates and treaty conditions improved appreciably in the renewals as at 1 January 2018. Based on our good market position and superb financial strength, we profited from the easing pressure on prices in the renewals. In addition, we are paying closer attention to an adequate level of primary insurance rates and making our capacity available accordingly. By adhering to our selective underwriting policy, and reflecting the improvement in primary insurance conditions, it is our assumption that we shall be able to profitably expand our portfolio in Latin American markets and the Caribbean in the current financial year.
Owing to the implementation of risk-based models for calculating solvency requirements not only within but also outside the European Union, the surge in demand for structured reinsurance products is likely to remain undiminished. The key driver here continues to be the growing integration of reinsurance into insurers’ risk management as a means of offsetting the increasingly exacting capital requirements placed upon them. In addition, the increasing pressure on the profit margins of our customers around the world is creating a greater need for tailor-made reinsurance solutions that can optimise the cost of capital. For the current year we are expecting further significant growth in the premium volume.
In life and health reinsurance we see ourselves as more than a pure risk carrier. In our role as an expert partner, we draw on our worldwide know-how to give our customers comprehensive support. We attach just as much importance to the advantages of already being closely integrated into the business process in advance so as to jointly identify the exact reinsurance requirement as we do to staying involved throughout the process and keeping track of the business experience. Due to the very longterm relationships that this business routinely entails, there is a mutual interest in the reinsurance coverage generating sustainable value for all parties concerned.
Owing to the pressure of consolidation in the German life insurance market, it remains likely that several primary insurers will firm up their plans to sell parts of their books of life insurance that are closed for new business. We are confident of our ability to assist companies in this situation. Along with this challenge, German life insurers are under considerable pressure to safeguard the future viability of the industry with innovative new product concepts. Particularly in the increasingly relevant area of insurance products for seniors, we operate directly at our customers’ side in order to develop and implement concrete solutions.
Broadly speaking, it is our assumption that the need and demand for both solvency and capital relief will generally increase in European markets. The requirements that have to be met for individual risks – which in some instances are very high – are at times putting primary insurers under heavy pressure. In the area of financial solutions we similarly see thoroughly positive growth opportunities in Australia and the United States.
The tax reform package adopted in the United States shortly before the end of 2017 will also have implications for our life reinsurance business there. Thanks to our robust Group structure, we will nevertheless be able to continue operating as one of the leading providers in the world’s largest life reinsurance market. We stand ready to support our clients with our customary expertise and service.
With regard to the book of US mortality business assumed in 2009, we anticipate further strains in the current year on account of higher-than-expected mortality rates.
The enlargement of the asset portfolio should have a positive effect on investment income. Despite the persistently low level of interest rates, we expect to maintain a stable average return on our investments. The interest rate increases observed in the course of the year under review in our main currency areas could provide a valuable boost in this respect. In view of the low returns on more secure investments, we shall continue to invest in products offering attractive credit spreads and selectively expand our holdings in the areas of alternative investments, real estate and emerging markets. We intend to significantly slow or even wind up the moves made over the past two years to expand the portfolio of lower-rated fixed-income securities while at the same time increasing the proportion of government bonds in order to safeguard the return while maintaining the overall level of risk virtually unchanged.
If we see corrections to the current valuation levels of listed equities we are ready to enter the market on a moderate scale.
In the current financial year we anticipate a very good overall result for the Hannover Re Group. Bearing in mind the developments in property and casualty as well as life and health reinsurance, we are looking to book single-digit percentage growth in gross premium – based on constant exchange rates.
In property and casualty reinsurance we expect a good increase in premium volume in light of the outcome of the treaty renewals as at 1 January 2018. The principal driver here is higher premium income in Asia and Australia, Western and Eastern Europe as well as North America, coupled with strong demand in structured reinsurance business. We shall nevertheless stand by our selective underwriting policy, under which in large part we write only business that satisfies our margin requirements. Looking ahead to the subsequent rounds of renewals during the year, the situation is expected to be similar to the one at the start of the year. Thanks to our good ratings, long-standing stable customer relationships and low expense ratio, a solid outcome should be attainable. We anticipate a good underwriting result, provided the burden of large losses is within our expectations. In terms of our targeted combined ratio, we continue to aim for a figure under 96%. The EBIT margin for property and casualty reinsurance should amount to at least 10%.
In the context of our Group strategy cycle we partially modified the key performance indicators for our worldwide life and health reinsurance. This is especially true of the growth target for gross premium, with average organic growth now expected to come in between 3% and 5% from 2018 onwards (at constant exchange rates; over a 3-year period, aligned with the 3-year Group strategy cycle). Going forward, we shall dispense with target EBIT margins for each reporting category. Instead, the new target that we have set ourselves is EBIT growth of more than 5% on average over a 3-year period. The targeted level for the Value of New Business remains unchanged at a minimum of EUR 220 million per year.
For 2018 we anticipate Group net income of more than EUR 1 billion. This is subject to the proviso that large loss expenditure does not significantly exceed the budgeted level of EUR 825 million and that there are no unforeseen distortions on capital markets.
Events after the reporting date Matters of special significance occurring after the closing date for the consolidated financial statements are described in section 8.10 of the notes “Events after the balance sheet date” on page 248.
Fixed-income securities – at fair value through profit or loss 6.1 212,042 239,917
Other financial assets – at fair value through profit or loss 6.1 88,832 57,665
Total assets 61,196,846 63,594,547 1 Restated pursuant to IAS 8 (cf. section 3.1 of the notes)
Total liabilities 61,196,846 63,594,547 1 Restated pursuant to IAS 8 (cf. section 3.1 of the notes)
Profit / loss from investments in associated companies 7.2 16,006 9,101
Income / expense on funds withheld and contract deposits 7.2 234,915 332,149
Commission and brokerage, change in deferred acquisition costs 7.3 3,499,270 2,978,642
Acquisition / disposal of treasury shares – – – – – – (13) (13) – (13)
Total income and expense recognised directly in equity – – 192,195 170,784 (5,486) (17,207) – 340,286 19,882 360,168
Total income and expense recognised in equity – – (85,846) (742,630) 411 3,180 – (824,885) (28,339) (853,224)
Changes in ownership interest with no change of control status – – – 109 – – (9,889) (9,780) (980) (10,760)
Capital repayments – – – – – – – – (1) (1)
Cash and cash equivalents at the beginning of the period 848,667 820,995
Cash and cash equivalents at the end of the period 835,706 848,667
1 The income taxes paid, dividend receipts as well as interest received and paid are included entirely in the cash flow from operating activities. 2 Including dividend-like profit participations from investment funds
The present consolidated financial statement was released for publication by a resolution of the Executive Board on 23 February 2018.
The amendments to existing standards listed below were applicable for the first time in the year under review and had no significant implications overall for the net assets, financial position or result of operations of the Hannover Re Group.
Changes in assumptions that do not relate to interest rates or financial risks are not recognised directly in the statement of income but are booked against the contractual service margin and hence spread across the remaining coverage period. Changes in estimates are only recognised immediately in profit or loss in the case of those groups of insurance contracts that are expected to be loss-making.
IFRS 17 includes an approximation method for short-term contracts that captures the liability for providing insurance coverage through unearned premium, as has been the case to date. Liabilities from outstanding claims must be discounted using current interest rates under IFRS 17. IFRS 17 modifies the general valuation model for large parts of life insurance business by requiring that changes in the shareholders’ share in the development of returns on the items underlying the surplus participation also be recognised in the contractual service margin and spread over the remaining period for which coverage is provided.
Hannover Re had already launched a very extensive implementation project in the middle of last year. At this moment, however, it is too early to comment on any specific implications of the new standard at the time of initial application.
In January 2016 the IASB issued IFRS 16 “Leases” setting out new principles governing the recognition, measurement, presentation and disclosure of leases. The most significant new requirements relate principally to accounting by lessees. In future, the lessee shall as a general principle recognise a lease liability for all leases. At the same time it shall recognise a right to use the underlying asset. Accounting by lessors remains comparable with current practice, according to which the lessor classifies each lease as an operating lease or a finance lease. The standard is to be applied to annual periods beginning on or after 1 January 2019. Hannover Re intends to apply the standard using a modified retrospective approach and will recognise the cumulative effect of application of the standard in retained earnings as at 1 January 2019. The detailed analysis conducted by Hannover Re determined that the consolidated balance sheet will be extended by around EUR 115 million at the time of initial application through the recognition of rights of use and lease liabilities. The expense from leases in the form of impairments taken on rights of use and interest on lease liabilities will probably amount to around EUR 23 million.
Published: Title Initial application to annual periods beginning on or after the following date: December 2017 Annual Improvements to IFRS Standards 2015 – 2017 Cycle 1 January 2019 (still to be endorsed by the EU)
October 2017 Prepayment Features with Negative Compensation (Amendments to IFRS 9)
October 2017 Long-term Interests in Associates and Joint Ventures (Amendments to IAS 28)
In the consolidated financial statement for the 2016 financial year Hannover Re netted components of the deferred acquisition costs and the unearned premium reserve with the benefit reserve for a certain portfolio of reinsurance treaties. This incorrect disclosure was corrected retrospectively in accordance with IAS 8 “Accounting Policies, Changes in Accounting
Estimates and Errors” with restatement of the comparative figures for previous periods. The effects of this change on the individual items of the consolidated balance sheet and the consolidated statement of income are shown in the following table. There were no implications for Group net income.
Reinsurance contracts: IFRS 4 “Insurance Contracts” represents the outcome of Phase I of the IASB project “Insurance Contracts” and constitutes a transitional arrangement. IFRS 17, which was issued by the IASB in May 2017, establishes binding principles for the measurement of insurance contracts effective for annual reporting periods beginning on or after 1 January 2021.
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. A write-down is taken in the event of permanent impairment. Please refer to our comments on impairments in this section.
Hannover Re | Annual Report 2017 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 please see our explanatory remarks on the fair value hierarchy in section 6.1 “Investments under own management”.
With respect to impairments on securities with the character of equity, IAS 39 “Financial Instruments: Recognition and Measurement ” states, in addition to the aforementioned principles, that a significant or prolonged decrease in fair value below acquisition cost constitutes objective evidence of impairment. Hannover Re considers equity securities to be impaired under
IAS 39 if their fair value falls significantly, i. e. by at least 20%, or for a prolonged period, i. e. at least nine months, below acquisition cost. In accordance with IAS 39 the reversal of impairment losses on equities to the statement of income once impairment has been taken is prohibited, as is adjustment of the cost basis. Impairment is tested in each reporting period using the criteria defined by Hannover Re. If an equity security is considered to be impaired on the basis of these criteria, IAS 39 requires that a value adjustment be recognised in the amount of the fair value less historical cost and less prior value adjustments, meaning that depreciation is taken on the fair value as at the closing date – if available, on the publicly quoted stock exchange price. We also apply this method to participations in funds that invest in private equity. In order to reflect the specific character of these funds (in this case initially negative yield and liquidity flows from the so-called “J curve” effect during the investment period of the funds), we take an impairment to net asset value as an approximation of the fair value for the first time after a two-year waiting period if there is a significant or prolonged decrease in value.
Own-use real estate: The portfolio of own-use real estate is measured at cost less scheduled 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.
Restructuring provisions are recognised if a detailed formal plan for restructuring measures exists and steps to implement it have already begun or if key details of the restructuring have been published. The provisions cover only expenditures arising directly as a consequence of restructuring that are not connected with the company’s regular activities.
Partial retirement obligations are carried at present value according to actuarial principles. During the phase when the employee is still working a provision is set aside to cover the liability amounting to the working hours not yet compensated. Top-up payments are accumulated in instalments until the end of the work phase. In periods when the employee is remunerated according to the partial retirement arrangements without performing any work, the provision is released.
Share-based payments: The share-based payment models existing within the Hannover Re Group are remuneration plans with cash settlement. In accordance with the requirements of IFRS 2 “Share-based Payments”, the services rendered by the eligible beneficiaries and the resulting liability are to be recognised at the fair value of the liability and expensed over the vesting period. Until settlement of the liability the fair value of the liability is remeasured at each closing date and at the settlement date. All changes in fair value are recognised in profit or loss for the period.
By analysing a broad range of observable information it is possible to classify losses as major individual loss events. Measurement of the obligations existing in this connection is carried out using a separate process, which is based largely on contract -specific estimates.
For further details, for example concerning the modelling of natural catastrophe scenarios and the assumptions relating to asbestos and pollution risks, the reader is referred to our comments in the risk report on page 78 et seq. 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 6.1 “Investments under own management” 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”.
Capital consolidation The capital consolidation is carried out according to the requirements of IFRS 10 “Consolidated Financial Statements” on the basis of a consistent consolidation model for all entities that identifies control as the single basis for verifying the consolidation requirement, irrespective of whether control is substantiated in company law, contractually or economically. Group companies are consolidated from the point in time when Hannover Re gains control over them. Control exists if Hannover Re directly or indirectly has decision-making power over a Group company on the basis of voting rights or other rights, if it has exposure or rights to positive and negative variable returns from its involvement with the Group company and if it can use its power to influence these returns. All of these criteria must be met. Other circumstances may also give rise to control, for example the existence of a principal-agent relationship. In this case a party outside the Group with decision-making powers (agent) acts for Hannover Re, but does not control the company since it merely exercises decision-making powers that have been delegated by Hannover Re (principal). These principles are also applied to structured entities, on which further information is provided in section 4.2 “Consolidated companies and complete list of shareholdings”. Group companies are consolidated until the Hannover Re Group loses control over them. The accounting policies of Group companies are adjusted, where necessary, in order to ensure consistent application of the Hannover Re Group’s accounting policies.
The capital consolidation is based on the acquisition method. In the context of the acquisition method the acquisition costs, measured at the fair value of the consideration rendered by the parent company on the acquisition date, are netted with the proportionate shareholders’ equity of the subsidiary at the time when it is first included in the consolidated financial statement after the revaluation of all assets and liabilities. After recognition of all acquired intangible assets that in accordance with IFRS 3 “Business Combinations” are to be accounted for separately from goodwill, the difference between the revalued shareholders’ equity of the subsidiary and the purchase price is recognised as goodwill. Under IFRS 3 scheduled amortisation is not taken on goodwill. 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.
Only subsidiaries which are of minor importance – both individually and in their entirety – for the net assets, financial position and results of operations of the Hannover Re Group are exempted from consolidation. Hannover Re assesses whether a subsidiary is of minor importance on the basis of the company ’s total assets and net income relative to the corresponding values for the Group as a whole on average over the last three years. For this reason 14 (19) companies at home and abroad were not consolidated in the year under review. A further 4 (5) individual companies as well as 2 (2) subgroup accounts with altogether 17 (13) individual companies were not included at equity in the consolidated financial statement for the same reason. The business object of these altogether 35 (37) companies is for the most part the rendering of services for reinsurance companies within the Group.
Hannover Life Re AG 1, 2, Hannover / Germany 100.00 EUR 1,911,179 –
International Insurance Company of Hannover SE 1, 2, Hannover / Germany 100.00 EUR 168,845 –
Hannover Insurance-Linked Securities GmbH & Co. KG 3, Hannover / Germany 100.00 EUR 20,382 6
FUNIS GmbH & Co. KG 1, Hannover / Germany 100.00 EUR 86,196 (4,303)
Hannover America Private Equity Partners II GmbH & Co. KG 1, Hannover / Germany 95.42 EUR 331,514 84,908
Hannover Re Global Alternatives GmbH & Co. KG 1, Hannover / Germany 94.72 EUR 156,919 1,558
HR GLL Central Europe GmbH & Co. KG 1, Munich / Germany 87.67 EUR 453,798 5,392
HR GLL Central Europe Holding GmbH 1, Munich / Germany 87.67 EUR 60,246 1,276
HAPEP II Komplementär GmbH 1, Hannover / Germany 82.40 EUR 41 3
Oval Office Grundstücks GmbH 1, 4, Hannover / Germany 50.00 EUR 628 15
A nn ua l f in an ci al s ta te m en ts
Perseus Technologies GmbH 6, Berlin / Germany 19.98 EUR – –
Internationale Schule Hannover Region GmbH 7, Hannover / Germany 9.17 EUR 4,210 521
Hannover Finance (Luxembourg) S. A., Luxembourg / Luxembourg 100.00 EUR 35,052 654
Hannover Life Re of Australasia Ltd 1, Sydney / Australia 100.00 AUD 495,812 15,075
Hannover Re (Bermuda) Ltd. 1, Hamilton / Bermuda 100.00 USD 1,209,893 128,058
Hannover ReTakaful B. S.C. (c) 1, Manama / Bahrain 100.00 BHD 72,699 6,507
Integra Insurance Solutions Limited 1, Bradford / United Kingdom 100.00 GBP 4,990 184
Argenta Holdings Limited 1, 8, London / United Kingdom 100.00 GBP 43,121 10,741
APCL Corporate Director No. 1 Limited 1, 8, London / United Kingdom 100.00 GBP – –
Names Taxation Service Limited 1, 8, London / United Kingdom 100.00 GBP 10 –
Argenta General Partner Limited 1, 8, Edinburgh / United Kingdom 100.00 GBP – –
Argenta SLP Continuity Limited 1, 8, Edinburgh / United Kingdom 100.00 GBP – –
Argenta Syndicate Management Limited 1, 8, London / United Kingdom 100.00 GBP 7,462 2,019
Argenta Underwriting No. 1 Limited 1, 8, London / United Kingdom 100.00 GBP 22 –
Argenta Underwriting No. 3 Limited 1, 8, London / United Kingdom 100.00 GBP 1,933 1,702
Argenta Underwriting No. 4 Limited 1, 8, London / United Kingdom 100.00 GBP (152) –
Argenta Underwriting No. 8 Limited 1, 8, London / United Kingdom 100.00 GBP (22) (1)
Argenta Underwriting No. 11 Limited 1, 8, London / United Kingdom 100.00 GBP (32) (7)
Argenta No. 13 Limited 1, 8, London / United Kingdom 100.00 GBP – –
Residual Services Limited 1, 8, London / United Kingdom 100.00 GBP – –
Hannover Reinsurance Group Africa (Pty) Ltd. 1, Johannesburg / South Africa 100.00 ZAR 206,527 111,707
Nashville West, LLC 1, 8, Wilmington / USA 95.15 USD 29,160 1,520 1225 West Washington, LLC 1, 8, Wilmington / USA 95.15 USD 24,467 385 975 Carroll Square, LLC 1, 8, Wilmington / USA 95.15 USD 49,898 1,253
Broadway 101, LLC 1, 8, Wilmington / USA 95.15 USD 13,176 658
River Terrace Parking, LLC 1, 8, Wilmington / USA 95.15 USD 19,550 522 3290ATL LLC 1, 8, Wilmington / USA 95.15 USD 71,075 2,913
Kaith Re Ltd. 1, Hamilton / Bermuda 88.00 USD 554 (360)
3541 PRG s. r.o. 1, Prague / Czech Republic 87.67 CZK 871,309 (5,458)
HR GLL Roosevelt Kft 1, Budapest / Hungary 87.67 HUF 19,012,206 (87,935)
HR GLL Liberty Corner SPÓLKA Z OGRANICZONA ODPOWIEDZIALNÓSCIA 1, Warsaw / Poland 87.67 PLN 49,385 3,413
HR GLL CDG Plaza S. r.l. 1, Bucharest / Romania 87.67 RON 151,086 5,002
Lireas Holdings (Pty) Ltd. 1, Johannesburg / South Africa 70.00 ZAR 209,880 22,943
Firedart Engineering Underwriting Managers (Pty) Ltd. 1, Johannesburg / South Africa 49.00 ZAR 1,845 1,234
Landmark Underwriting Agency (Pty) Ltd. 1, Bloemfontein / South Africa 45.85 ZAR 4,685 1,945
Transit Underwriting Managers (Pty) Ltd. 1, Cape Town / South Africa 39.67 ZAR (20) (435)
Synergy Targeted Risk Solutions (Pty) Ltd 4, 5, Johannesburg / South Africa 35.70 ZAR 2,042 –
Film & Entertainment Underwriters SA (Pty) Ltd. 1, Johannesburg / South Africa 35.70 ZAR (12) 697
Hannover Re Services Japan 1, Tokyo / Japan 100.00 JPY 126,916 12,563
Hannover Services (México) S. A. de C. V. 5, Mexico City / Mexico 100.00 MXN 6,524 150
Hannover Mining Engineering Services LLC, Itasca / USA 100.00 USD 300 –
Hannover Rück SE Escritório de Representação no Brasil Ltda. 5, Rio de Janeiro / Brazil 100.00 BRL 3,408 485
U FOR LIFE SDN. BHD. 1, Petaling Jaya / Malaysia 60.00 MYR (21,304) (8,638)
HMIA Pty Ltd 1, Sydney / Australia 55.00 AUD 1,069 1,081
Svedea Skadeservice AB 5, Stockholm / Sweden 53.00 SEK 284 –
ITAS Vita S. p.A. 5, Trento / Italy 34.88 EUR 100,880 2,719
Clarendon Transport Underwriting Managers (Pty) Ltd. 1, Johannesburg / South Africa 29.40 ZAR 18,512 12,833
Marmic Taxi Parts (Pty) Ltd 1, Durban / South Africa 8.82 ZAR 2,484 2,484
Reaseguradora del Ecuador S. A. 1, Guayaquil / Equador 30.00 USD 16,865 1,977
Sureify Labs, Inc. 1, 7, Wilmington / USA 20.66 USD 622 (2,148)
Meribel Topco Limited 1, St. Helier / Jersey 20.11 EUR 844 (70)
Monument Insurance Group Limited 1, Hamilton / Bermuda 20.00 USD 628 (67)
Trinity Underwriting Managers Ltd. 1, 5, Toronto / Canada 20.00 CAD (1,711) 29
Life Invest Holding AG 1, 14, Zurich / Switzerland 15.00 CHF 38,776 36,776
Somerset Reinsurance Ltd. 5, Hamilton / Bermuda 12.31 USD 350,157 (5,602)
Centaur Animal Health, Inc. 15, Olathe / USA 6.90 USD 1,886 202
Liberty Life Insurance Public Company Ltd 5, Nicosia / Cyprus 3.30 EUR 7,873 (2,504)
Material branches of the Group We define the branch of a Group company as an unincorporated business unit that is physically and organisationally separate from the Group company, is bound by the latter’s instructions in their internal relationship and has its own independent market presence.
International Insurance Company of Hannover SE, Australian Branch, Sydney / Australia 62,296 32,558 2,151 59
International Insurance Company of Hannover SE, Italian Branch, Milan / Italy 3 – – – –
In addition, other companies belonging to the Hannover Re Group maintain further branches in New Zealand, Canada and Malaysia that both individually and collectively are to be classified as immaterial to the Group.
As at the balance sheet date Hannover Re had not rendered any financial or other support for a consolidated structured entity. Hannover Re does not intend to render financial or other support for one or more of such entities without being contractually required to do so.
Investing activities and investments in catastrophe bonds (ILS) Within the scope of its investment activities Hannover Re has participated since 1988 inter alia in numerous structured entities.
Hannover Re participates through its subsidiary Leine Investment SICAV-SIF, Luxembourg, in a number of structured entities that issue catastrophe bonds for the securitisation of catastrophe risks by investing in such bonds. Leine Investment General Partner S.à.r.l. is the managing partner of the asset management company Leine Investment SICAV-SIF, the business object of which is to build, hold and manage a portfolio of insurance-linked securities (catastrophe bonds) – including for third-party investors outside the Group. In addition, a portfolio of such securities is also managed by Hannover Insurance-Linked Securities GmbH & Co. KG, Hannover. The volume of these transactions is derived from the book values of the respective investments and amounted to EUR 56.0 million (EUR 70.3 million) as at the balance sheet date. The maximum risk of loss corresponds to the book values.
By way of its “K” transactions Hannover Re has raised underwriting capacity for catastrophe risks on the capital market. The “K Cession”, which was placed with investors in North and South America, Europe and Asia, involves a quota share cession on worldwide natural catastrophe business as well as aviation and marine risks. Of the total volume of the “K Cession”, a large part equivalent to EUR 349.3 million (EUR 384.4 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.
Collateralised fronting (ILS) As part of its extended Insurance-Linked Securities (ILS) activities, Hannover Re has concluded so-called collateralised fronting arrangements under which risks assumed from ceding companies are passed on to institutional investors outside the Group using structured entities. The purpose of such transactions is to directly transfer clients’ business. The volume of the transactions is derived from the ceded exposure limit of the underlying retrocession agreements and amounted to EUR 5,235.2 million (EUR 4,914.2 million) as at the balance sheet date. Part of the ceded exposure limit is funded and collateralised by contractually defined investments in the form of cash and equivalent liquid assets, while a further part remains uncollateralised or is collateralised by less liquid assets. The maximum risk of loss from these transactions is derived from the uncollateralised exposure limit and the credit risk of the collateral and amounted to EUR 2,775.4 million (EUR 2,860.6 million) as at the balance sheet date. This does not, however, correspond to the economic risk of loss, which is established using recognised actuarial methods. The expected loss on a modelled basis in a worst-case scenario of 10,000 years amounts to at most EUR 50.0 million (EUR 50.0 million).
Book values from business relations with unconsolidated structured entities N 14 in EUR thousand
Fixed-income securities – at fair value through profit or loss – 70,291 –
As at the balance sheet date Hannover Re had not rendered any financial or other support for an unconsolidated structured entity. Hannover Re does not intend to render financial or other support for one or more of such entities without being contractually required to do so.
On 20 July 2017 Hannover Re acquired all the shares in Argenta Holdings Limited, London, UK. The purchase price of the shares amounted to EUR 162.2 million. Along with this company, Hannover Re also acquired its interests in various subsidiaries. The primary business object of these companies is the assumption of insurance risks and management of Syndicate 2121 at Lloyd’s. In addition, third-party services are performed for other Lloyd’s syndicates and companies.
In view of the fact that the fair values of the recognised, identifiable assets, liabilities and contingent commitments fall short of the acquisition costs associated with the transaction, the capital consolidation gave rise to positive goodwill of EUR 28.8 million which in accordance with IFRS 3.32 results in an intangible asset and is tested annually for impairment pursuant to IAS 36. The other assets include gross receivables of EUR 11.3 million, for which no bad debt provisions were established.
Within the 95.2%-owned US subgroup Hannover Re Real Estate Holdings, Inc., the special purpose property company 320AUS LLC, Wilmington, was established via the subsidiary GLL HRE CORE Properties, L.P., for the purpose of real estate acquisition. An amount of roughly EUR 83.3 million was invested in this connection. In addition, Hannover Re Real Estate Holdings, Inc., Orlando, acquired an interest in HR US Infra Equity LP, Wilmington, the business object of which is to participate in US infrastructure investments.
Effective 1 February 2017 the Indian branch Hannover Rück SE – India Branch, Mumbai, commenced business operations.
Effective 21 December 2017 Hannover Life Reassurance Company of America, Orlando, USA, transferred all the shares in Hannover Life Reassurance Company of America (Bermuda) Ltd., Hamilton, Bermuda, to Hannover Finance, Inc., Wilmington, USA. This internal transaction within the Group has no implications for Group net income.
Fixed-income securities – available for sale 23,662,710 24,337,185 7,617,113 7,831,889 2,085 13,099 31,281,908 32,182,173