Equity attributable to shareholders of Hannover Rück SE 8,776.8 +2.9% 8,528.5 8,997.2 8,068.3 7,550.8
Book value per share in EUR 72.78 +2.9% 70.72 74.61 66.90 62.61
Dividend per share in EUR 3.75 + 1.50 2, 3 +5.0% 3.50 + 1.50 3 3.50 + 1.50 3 3.25 + 1.50 3 3.00 + 1.25 3
Share price at year-end in EUR 117.70 +12.2% 104.90 102.80 105.65 74.97
Return on investment (excl. funds withheld by ceding companies) 6 3.2% 3.8% 3.0% 3.5% 3.3%
1 Restated pursuant to IAS 8 2 Proposed dividend 3 Dividend of EUR 3.75 plus special dividend of EUR 1.50 for 2018, dividend of EUR 3.50 plus special dividend of EUR 1.50 for 2017, dividend of EUR 3.50 plus special dividend of EUR 1.50 for 2016, dividend of EUR 3.25 plus special dividend of EUR 1.50 for 2015 and dividend of EUR 3.00 plus special dividend of EUR 1.25 for 2014 4 Including expenses on funds withheld and contract deposits 5 Hannover Re Group’s net share for natural catastrophes and other major losses in excess of EUR 10 million gross as a percentage of net premium earned 6 Excluding effects from ModCo derivatives 7 Operating result (EBIT) / net premium earned
A complete list of our shareholdings is provided on page 186 et seq. of the notes. The addresses of the Hannover Re Group’s branch offices and subsidiaries abroad are to be found in the section “Further information” on page 287 et seq.
Hannover Re, with gross premium of more than EUR 19 billion, is the fourth-largest reinsurer in the world.
For our investors 2 Letter from the Chairman of the Executive Board 2
For the tenth consecutive year it is my pleasure to present here the annual financial statement of your company, Hannover Re. I am especially delighted that the 2018 financial year proved to be another successful one for Hannover Re: for the tenth year in a row we are reporting a double-digit return on equity and are able to propose a dividend that can be described as thoroughly attractive in light of the company’s market capitalisation.
I would like now to turn my attention to the upcoming 2019 financial year.
Personnel changes are coming to the Executive Board of Hannover Re in 2019. Firstly, at its meeting on 6 March 2019 the Supervisory Board appointed Silke Sehm to Hannover Re’s Executive Board. Secondly, Jean-Jacques Henchoz has been appointed as a member of Hannover Re’s Executive Board with effect from 1 April 2019 and – in accordance with an appropriate resolution adopted by the Supervisory Board – he will take the reins as Chief Executive Officer following the end of the Annual General Meeting on 8 May 2019. Ms. Sehm has served Hannover Re as an accomplished senior executive for many years and, most notably, she has been exceptionally successful in developing the area of structured reinsurance solutions. With the addition of Mr. Henchoz we have been able to recruit a proven expert with a long-standing track record in reinsurance to join our ranks at Hannover Re. I have no doubt that in its new composition the Executive Board of Hannover Re will assure the sustained success of your company going forward, as it has in the past.
The renewal season in property and casualty reinsurance as at 1 January 2019 once more passed off very successfully for Hannover Re. Despite the competitive pressure that remains in place, we were able to moderately improve the premium quality of the renewed business. Growth was again very vigorous, coming in at 15.4 percent in relation to our portfolio of traditional property and casualty reinsurance.
In view of the sustained positive cash flow that we expect to generate from the technical account and the investments themselves, our asset portfolio should continue to grow. Against a backdrop of further single-digit percentage growth in the premium volume, we anticipate Group net income in the order of EUR 1.1 billion for the current financial year. This guidance is subject to the proviso that major loss expenditure does not significantly exceed the budgeted amount of EUR 875 million and assumes that there are no unforeseen distortions on the capital markets.
I would like to take this opportunity to thank you, our valued shareholders, most sincerely for your trust – also on behalf of my colleagues on the Executive Board. A special word of thanks goes to our employees for their successful, very good and responsible work. Without them, Hannover Re’s achievements would not have been possible.
Ulrich Wallin Chairman Innovation Management Compliance Controlling Human Resources Management Internal Auditing Risk Management Corporate Development Corporate Communications
We were deeply saddened by the news of Jürgen Gräber’s passing. On 9 November 2018 he died suddenly and entirely unexpectedly at the age of 62.
He has left a deep void not only in his family and among his relatives, but also for us. The Supervisory Board, the Executive Board and the members of staff will honour his memory.
We operate with the lowest management expense ratio in the industry – a competitive edge that enables us to take the long view even in protracted soft market phases.
F or o u r in ve st or s negative earnings situation that had prevailed for a number of years in US mortality business, management exercised its right to implement consistent rate increases across the board. The resulting right of ceding companies to recapture treaties, however, led to considerable pre-tax strains on the IFRS result in life and health reinsurance over the year as a whole. The announcement of this development in connection with the half-yearly results was, however, well received thanks to the clear delimitation of the losses, the associated favourable earnings prospects going forward and the confirmed profit guidance for the full year. The share consequently continued to rise in price and on 9 November, a day after the nine-month results were released, it climbed to its highest point of the year – and new all-time high – of EUR 125.30. The upward trend was also supported by a shift in market sentiment. Against a backdrop of geopolitical and economic uncertainties as well as early indications of a slowdown in global economic growth, defensive securities such as insurance and reinsurance stocks moved back into focus for investors.
At the end of the financial year the Hannover Re share closed with a gain of 12.2% at EUR 117.70, delivering a performance of 17.1% including reinvested dividends. Looked at over the year as a whole, the Hannover Re share thus significantly outperformed its domestic benchmark indices, namely the DAX (-18.3%) and MDAX (-17.6%) as well as the international Global Reinsurance (Performance) Index (+7.2%). Since 2018 the Global Reinsurance Index has tracked the share performance including dividend payments of the world’s largest 10 (previously largest 15) reinsurers. Hannover Re measures its performance by this benchmark index.
In a three-year comparison the Hannover Re share delivered a performance (including reinvested dividends) of 27.6%. From a longer-term perspective it thus also continues to comfortably outperform the benchmark DAX (-1.7%) and MDAX
Annual General Meeting looked back on a satisfactory Group result despite a year of heavy losses
The shareholders accepted the proposal of the Executive Board and Supervisory Board that a gross dividend of EUR 5.00 per share should be paid. As in the previous year, the payout took the form of an ordinary dividend of EUR 3.50 per share and a special dividend of EUR 1.50 per share. In view of the fact that Mr. Wolf-Dieter Baumgartl and Mr. Klaus Sturany resigned their seats at the end of the Annual General Meeting on 7 May 2018, two by-elections for shareholder representatives on the Supervisory Board were also on the agenda. The two proposed candidates, Dr. Ursula Lipowsky and Mr. Torsten Leue, were each elected to the Supervisory Board on an individual basis by a substantial majority. The election of Dr. Ursula Lipowsky further increased the proportion of women on Hannover Re’s Supervisory Board to 44%. Furthermore, the Annual General Meeting approved the proposed resolutions put to the vote by management under all other items on the agenda by a comfortable three-quarters majority.
The developments in US mortality business were also addressed at Hannover Re’s 21st Investors’ Day, which was held on 18 October 2018 in London and carried as a parallel webcast on the company’s website. The Executive Board additionally took the opportunity to provide insights into new business prospects in life reinsurance outside the US as well as an update on the company’s capitalisation and risk profile. Discussions about the relevance of the cash flow in property and casualty reinsurance similarly featured on the agenda, a did the likely effects of implementation of the IFRS 17 accounting standard on financial reporting by (re)insurance undertakings.
Shareholding structure as at 31 December 2018 I 11 8.9% Private investors
Earnings per share (basic and diluted) 8.79 7.95 9.71 9.54 8.17
Return on equity (after tax) 4 12.2% 10.9% 13.7% 14.7% 14.7%
Price-to-cash flow (P / CF) ratio 8 6.4 7.5 5.3 4.1 4.7 1 Xetra daily closing prices from Bloomberg 2 Proposed dividend 3 Dividend of EUR 3.75 plus special dividend of EUR 1.50 for 2018, dividend of EUR 3.50 plus special dividend of EUR 1.50 for 2017 and 2016, dividend of EUR 3.25 plus special dividend of EUR 1.50 for 2015 and dividend of EUR 3.00 plus special dividend of EUR 1.25 for 2014 4 Earnings per share / average of book value per share at start and end of year 5 Dividend per share / year-end closing price 6 Year-end closing price / book value per share 7 Year-end closing price / earnings per share 8 Year-end closing price / cash flow (from operating activities) per share
Report on economic position 26 Macroeconomic climate and industry-specific environment 26
• Competitive advantages due to our low cost of capital and administrative expense ratio • Financial strength secured through sophisticated risk management
The strategy pursued in both property & casualty and life & health reinsurance supports our Group’s paramount mission, namely: “Creating value through reinsurance”. Our entire business operations are geared to our goal of being the best option for our business partners when they come to choose their reinsurance provider. It is for this reason that our clients and their concerns form the focus of our activities.
In the Life & Health reinsurance business group we are recognised – as customer surveys confirm – as one of the top players and a leading provider of innovative solutions. We achieve this standing by opening up new markets for our company and by identifying trends in order to anticipate the future needs of our customers.
Capital allocation The basis of value-based management is the risk-appropriate allocation of capital to the individual business activities. This enables us to evaluate the acceptance of underwriting risks and investment risks both in light of individual risk / return aspects and against the backdrop of our overall risk appetite. Our internal capital model supplies the key parameters for this purpose. Starting out from the Group’s overall risk situation, capital is first allocated to the functional areas of underwriting and investments. We then further divide the capital within the underwriting sector, first between the business segments of property & casualty reinsurance and life & health reinsurance and then between the various reinsurance products according to risk categories / treaty types and lines. In this way, we ensure consistent adherence to our profit targets – allowing for risk, cost and return considerations – in the evaluation and pricing of our various reinsurance products.
1 Restatement based on final Solvency II shareholders’ equity as at year-end 2 Income above risk-free interest rate after deduction of risk-appropriate cost of capital
In calculating the cost of capital, our assumption – based on a Capital Asset Pricing Model (CAPM) approach – is that the investor’s opportunity costs are 450 basis points above the risk-free interest rate, meaning that value is created above this threshold. Our strategic return on equity target of 900 basis points above risk-free thus already contains a substantial target value creation. We allocate equity sparingly and use equity substitutes to optimise our average cost of capital, which amounted to 4.6% in 2018.
Through the close interlinking of our internal capital model with the capital allocation and value-based management, we fulfil the requirements of the Solvency II use test.
With extensive contacts in the global insurance industry, Hannover Re is well placed to host an innovation platform allowing insurtechs to market their solutions exclusively to our clients. Our clients in turn have direct access to a pool of services, solutions and business cases that already demonstrate successful implementations around the world.
Looked at over the year, the pace of growth in the advanced economies faded in 2018, primarily owing to the slowdown in expansion during the second six months. The US economy, on the other hand, proved relatively robust on the back of a continued rise in consumer demand. In Japan, contrary to expectations, the economy softened both domestically and on the international front. Momentum in the Eurozone economy was similarly slowed by a number of factors, including the decline in car manufacturing owing to the adoption of new standards for exhaust emissions measurement. Manufacturing output in the United Kingdom contracted again from the moderate level already seen in the previous year.
Even though emerging market economies came under pressure in 2018, they were still comparatively stable. With the exception of Argentina and Turkey, the decline in their manufacturing output was merely modest. Fears voiced on occasion that this group of countries could suffer economic downturns similar in scale to those of 1997 / 98 owing to the intense pressure on financial markets proved unfounded. This is due in part to the fact that emerging nations have now largely adopted more flexible exchange rate regimes and hence are less vulnerable to currency speculation. In Asian countries the growth rates remained high overall despite slight contractions in GDP, while in India the pace actually increased. Manufacturing in Russia continued to trend clearly higher, and in Brazil growth in output recently began to pick up again – albeit from a low level.
Looked at individually, it is evident that some Eurozone countries – including Germany – were increasingly coming up against capacity constraints in 2018. In other countries, most notably Italy (GDP: +1.0%) and France (GDP: +1.6%), economic development is hampered by structural problems. The two crisis-hit countries of the past years, namely Portugal (GDP: +2.1%) and Greece (GDP: +2.3%), were able to stabilise their growth trajectory. The UK economy posted growth of 1.3% amid a cloud of uncertainty surrounding what form Brexit will take, a figure which was again poorer year-onyear.
The state of the labour market continued to improve, with the average jobless rate in the Eurozone falling by 0.9 percentage points relative to the previous year to stand at 8.2%. Nevertheless, Greece, Spain and Italy still struggled with very high levels of unemployment.
The harmonised index of consumer prices increased by 0.3 percentage points year-on-year to 1.8%, hence approaching the ECB’s target of 2%.
Asia Expansion in Asia remained brisk in 2018 at 6.6% (6.5%), although in China the rate of growth slowed slightly by 0.2 percentage points to 6.6%. The flattening in the pace of expansion is in line with the country’s goals: it is evident that the government is charting a more socially and environmentally sustainable path towards economic development. At the same time, it is making every effort to reduce the substantial risks posed by the recent sharp rise in debt levels, among other things by curbing bank lending.
Capital markets The investment climate proved to be highly volatile and challenging in the period under review owing to numerous geopolitical and economic policy issues. Among other things, the threat and initiation of tariff and trade disputes as well as the ongoing uncertainty surrounding the outcome of Brexit negotiations were unsettling factors. All in all, the extent to which financial markets were influenced by political events was striking. Concerns about Italy’s stability also resurfaced, adding to the unease felt by market players.
The pace of China’s growth, on the other hand, continues to dominate the increasingly important role played by emerging markets in recent years. The consistent worldwide expansion that was still evident in 2017 thus gave way to a more nuanced picture in 2018. While US economic growth accelerated sharply and China also ended the year with better-than-expected GDP growth, central banks in some emerging economies were compelled to adopt a significantly tighter monetary policy in order to protect their currencies. This led to an appreciable softening in the pace of growth. The resulting decline in demand from emerging markets was in turn also a reason for softer growth in the Eurozone.
In mid-December the European Central Bank announced that after almost four years it would be terminating its programme of corporate sector purchases at the end of the year. It did so despite the fact that in light of global political tensions and moves towards economic isolationism the ECB’s assessment of economic prospects was less favourable than at the start of the year. Yet there are also no plans for an abrupt end to the anti-crisis mode, since the ending of bond purchases only applies to the investment of new funds. Funds from maturing government and corporate bonds will continue to be reinvested. All in all, the policy pursued by central banks in our main currency areas was inconsistent. The ECB left the key interest rate for the Eurozone at a historically low 0.0%, while the Bank of England, which had raised the prime rate for pound sterling for the first time since 2007 to 0.5% in 2017, made another modest hike in the year under review to 0.75%. Once again, the US Federal Reserve moved much further along the path towards normalisation of monetary policy, raising the base rate for the US dollar in four increments to an average of 2.38% and thereby further widening the interest differential between the US dollar area and the Eurozone.
Sluggish progress towards reaching a deal between the European Union and the United Kingdom as a consequence of the British people’s vote in favour of Brexit led to continued uncertainty throughout 2018. In the year under review this manifested itself in renewed modest losses for pound sterling against the euro and US dollar as well as in the downturn on UK stock markets. The protracted lack of clarity surrounding the definitive shape of future economic and trade relations between the EU and UK as well as regarding freedom of movement for workers is, however, also generally detrimental to the national economies of the remaining EU member states since it impacts planning reliability and the readiness of companies to invest.
The euro gave back some of the previous year’s gains against the US dollar in the course of the year and fell from USD 1.20 to USD 1.15. Having already suffered heavy losses in the previous two years as a consequence of the Brexit vote, pound sterling again slipped slightly lower against the euro from GBP 0.89 to GBP 0.90. The Australian dollar similarly softened against the euro from AUD 1.53 to AUD 1.62.
The international (re)insurance industry was once again faced with a challenging environment in 2018.
The insurance industry in the United Kingdom continued to be impacted in the year under review by the UK government’s decision in 2017 to lower the rate used for discounting compensation payments in connection with personal injury claims (Ogden rate) from 2.5% to -0.75%. 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 the 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 this connection additional rate increases running
In India the IRDAI (Insurance Regulatory and Development Authority of India) approved a new reinsurance regulation in December 2018 that was already implemented on 1 January 2019. The regulation provides for a reform of the so-called “order of preference” for non-life reinsurance. Foreign reinsurers represented by a branch in India are now able to write non-life reinsurance on equal terms with other Indian reinsurers, provided this business was not previously placed with a local reinsurer entitled to preferential treatment. The order of preference does not apply to retrocessions.
In the context of advancing digitalisation, the market for insurance against cyber risks continued to expand rapidly in 2018. The premium volume has risen substantially in recent years, although the same is true of claim numbers. Similarly, premium volumes continue to grow in Germany, although the level here is still low compared to other European countries. The vast bulk of the worldwide insurance premium was still generated in the United States, but interest in such products continued to grow in Europe, too.
Business development • Currency-adjusted growth in gross premium of 11.6% beats target • Property and casualty reinsurance posts stronger-than-expected growth and improves segment result by 11.0% to EUR 929.1 million • One-time charges in life and health reinsurance connected with legacy US mortality business within the bounds of expectations • Return on investment comfortably surpasses target at 3.2% • Group net income reaches EUR 1.06 billion, meeting full-year target for 2018 of more than
Group net income improved by 10.5% to EUR 1,059.5 million (previous year: EUR 958.6 million) and is thus in line with our guidance of more than EUR 1 billion. This performance was supported by better-than-expected investment income.
Please find below a brief summary of the development of our two business groups – Property & Casualty reinsurance and Life & Health reinsurance – and our investments. More detailed information is to be found on pages 37 to 59.
Against this backdrop, gross premium rose by 11.8% to EUR 12.0 billion (EUR 10.7 billion). At constant exchange rates growth would have reached 16.2% and thus came in clearly better than we had anticipated.
The financial year just ended was once again dominated by major losses that exceeded market expectations. While 2017 went down as the year with the heaviest burden of large losses in Hannover Re’s history, the strains incurred on a net basis in the 2018 financial year came in only slightly higher than our large loss budget thanks to our traditionally prudent underwriting policy and the protective effect of our own reinsurance cessions. After the first half of 2018 passed off with a thoroughly moderate large loss experience, a significantly higher burden was incurred in the third and especially the fourth quarter. Altogether, Hannover Re’s net expenditure on large losses amounted to EUR 849.8 million (EUR 1,127.3 million). The combined ratio of 96.5% (99.8%) was slightly higher than our maximum full-year target of 96%.
Investment income from assets under own management in property and casualty reinsurance delivered a pleasing performance. Ordinary income increased, helped by very healthy earnings from real estate and private equity, by a modest 0.9% to EUR 1,024.3 million (EUR 1,014.7 million). Total investment income nevertheless contracted by 16.1% to EUR 999.3 million (EUR 1,191.5 million). The decline can be attributed to the elimination of the extraordinary income booked from the sale of our listed equities in 2017.
New business growth in Asia and good results in many parts of Europe, for example, were highly gratifying. Viewed from a global perspective, there was high demand for reinsurance solutions to cover longevity risks, driven in part by the exacting capital requirements placed on primary insurers for such business. Consequently, we booked another increase in the profit contribution from our financial solutions business. The performance of the legacy US mortality portfolio that we had acquired in 2009 was less satisfactory. Treaty recaptures prompted by our announced rate increases led to a one-time charge to earnings here of EUR 272.6 million. Allowing for the necessary release of an expense reserve, non-recurring pre-tax strains of EUR 185.4 million were incurred.
Gross premium income in life and health reinsurance rose by a modest 1.7% to EUR 7.2 billion (EUR 7.1 billion). Adjusted for exchange rate effects, growth would have come in at 4.6%. The Value of New Business (VNB) amounted to EUR 290 million, again beating the targeted level of EUR 220 million.
Capital markets once again proved to be difficult and challenging in 2018. With this in mind, we are thoroughly satisfied with the development of our investments as at 31 December 2018. Our portfolio of investments under own management grew to EUR 42.2 billion (31 December 2017: EUR 40.1 billion ). Exchange rate effects and the issuance of a bond in the second quarter more than offset the valuation declines on fixed-income securities. The operating cash flow of more than EUR 2 billion is a pivotal factor in the portfolio growth.
Income from assets under own management fell by 14.1% to EUR 1,322.0 million (EUR 1,539.0 million). The resulting annual return stood at 3.2% (3.8%), compared to our forecast figure of 2.7%. We beat our guidance above all because the interest rate level in the USD area rose more sharply than anticipated in the course of the year under review, hence enabling us to generate very pleasing growth in our interest income.
As a further factor, we had based our guidance on rather conservative distribution assumptions with regard to our
C om b in ed m an ag em en t re p or t investments both in private equity and the real estate sector. Investment income including interest on funds withheld and contract deposits declined to EUR 1,530.0 million (EUR 1,773.9 million), a decrease of 13.7% relative to the previous year. Interest on funds withheld and contract deposits totalled EUR 208.0 million (EUR 234.9 million).
The gross premium in our total business increased by 7.8% as at 31 December 2018 to EUR 19.2 billion (EUR 17.8 billion ). Growth of 11.6% would have been booked at constant exchange rates. We thus met our guidance, which had anticipated an increase of more than 10%. The level of retained premium remained stable at 90.7% (90.5%). Net premium earned rose by 10.6% to EUR 17.3 billion (EUR 15.6 billion). At unchanged exchange rates the increase would have been 14.5%.
Gross premium growth (Group) Gross premium growth in the single-digit percentage range or > 10% 1, 2
Gross premium growth for Life & Health reinsurance 3 to 5% 1, 3 +4.6% at constant exchange rates +1.7% not adjusted for currency effects
3 Organic growth only 4 Excluding ModCo derivatives 5 Assuming stable capital markets and / or major loss expenditure in 2018 that does not exceed EUR 825 million
United Kingdom 2.4% Africa 38.5% North America 19.7% Rest of Europe
Overall assessment of the business position Hannover Re is satisfied with the development of business in 2018. On the Group level we achieved or surpassed all our targets for the financial year. The burden of large losses caused by typhoons in Japan, forest fires in California and hurricanes in the United States remained within the bounds of our expectations overall, while the steps taken to remediate our US mortality business adversely impacted the result for the segment. Our investments delivered another highly pleasing contribution to Group net income, supported by very healthy earnings from real estate and private equity.
In property and casualty reinsurance we cannot discern any appreciable improvement in market conditions for reinsurers, despite the losses incurred over the past two years. Rates have stayed on a generally low, adequate level. The situation on global reinsurance markets is still shaped by undiminished intense competition.
• Gross premium volume up by 16.2% adjusted for exchange rate effects and clearly beats expectations
Accounting for 62% 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”.
We were satisfied with the outcome of the treaty renewals as at 1 January 2018 – when 65% of our portfolio in property and casualty reinsurance (excluding facultative business and structured reinsurance) was renegotiated. The rate increases in catastrophe business following the previous year’s devastating hurricane losses nevertheless fell short of market expectations. Although the treaty renewals proved challenging, we benefited from our customer intimacy and our ability to offer tailor-made reinsurance solutions. The increases were particularly marked in Australia, Asia and the United Kingdom.
The 2018 financial year was not dominated by major losses to the same extent as the previous year, which went down in Hannover Re’s history as the year with the heaviest burden of large losses. After a very moderate major loss experience in the first half of 2018, the loss incidence in the third quarter was essentially in line with our quarterly expectations. The most significant losses incurred in the third quarter included Typhoon “Jebi” in Japan, with an anticipated net strain for our account of EUR 134.7 million. We expect a net loss of EUR 37.4 million for Hurricane “Florence”. Expenditure on large losses in the fourth quarter, however, went significantly over our budget, with the forest fires in California topping the list of major loss events. A net loss of EUR 129.5 million is anticipated for the so-called “Camp Fire”, while the cost of the “Woolsey Fire” is put at EUR 63.8 million for net account. The net strain from Hurricane “Michael” is expected to amount to EUR 46.3 million. Our total net major loss expenditure in the 2018 financial year came to EUR 849.8 million (EUR 1,127.3 million), a figure slightly in excess of our large loss budget of EUR 825 million. For a detailed list of these large losses please see page 107. The underwriting result including interest and expenses on funds withheld and contract deposits increased appreciably to EUR 372.8 million (EUR 15.5 million ). The combined ratio improved to 96.5% (99.8%) and was thus slightly higher than our 96% target for the financial year.
Property & Casualty reinsurance: Major loss trend 1 in EUR million M 11
Credit, surety and political risks 743.2 11.5% 666.7 155.0 85.8% 94.1%
UK, Ireland, London market and direct business 992.5 25.4% 791.2 21.3 111.8% 98.1%
Structured reinsurance and insurance-linked securities 2,926.1 12.2% 2,606.8 129.3 97.7% 98.5%
Target markets Hannover Re classifies North America and Continental Europe as target markets. The premium volume rose by 9.5% to EUR 3,455.8 million (EUR 3,155.6 million). Growth thus surpassed our expectations. The combined ratio improved from 102.8% to 100.0%. The operating profit (EBIT) fell to EUR 416.6 million (EUR 441.8 million) owing to lower investment income.
North America The North American (re)insurance market is the largest single market both worldwide and for our company. Our business here is written largely through brokers.
The US economy continued its growth trajectory in 2018. This favourable development was shaped by a generally stable financial situation, a further decline in the unemployment rate and increased consumer spending. The move by the Federal Reserve to raise the key interest rate, hence making it possible to generate higher investment income in the US dollar area, was also gratifying. The stronger growth in the United States of course also had positive implications for premium growth in the insurance industry. All in all, the normalised premium growth was likely in the mid-single-digit percentage range.
Even though exceptionally high losses were incurred on the reinsurance side in 2017, they did not impact the overall market capacity. To this extent, the pricing adjustments were less marked than many market players had expected. While rate increases were booked under loss-affected programmes, significant improvements failed to materialise and there were no implications for loss-free programmes. What is more, the price trend lost further momentum as the year progressed. The sharply higher loss frequency in the second half of the year, however, subsequently ushered in some rate improvements.
Property & Casualty reinsurance: Breakdown of gross M 14 written premium in North America by line of business 8.6% Motor 0.4% Other 49.1% Property
The bulk of our activities in North America are conducted in liability and property business. Modest rate increases were obtained for liability business, which is split into the three subsegments of standard, special and professional liability. Against this backdrop we enlarged our premium volume. Selective growth was booked in the area of cyber covers; rising demand here was prompted by loss events and regulatory changes. In property insurance, too, we made the most of the improved rate quality to expand our business volume.
While major loss expenditure in 2018 was lower than in the previous year, the loss events resulted in a total strain slightly in excess of our expectations. Detailed figures on our large losses are provided on page 107. It is pleasing to note that in the financial year just ended the losses impacted Hannover Re less heavily than our market shares would have suggested – something which can be attributed to our prudent underwriting policy in highly exposed zones and our retrocession strategy.
On the whole, we were satisfied with our results in North America. We are a valued partner based on our expertise and robust financial strength. On this basis, we were able to acquire new clients while at the same time expanding long-standing customer relationships and we thereby further extended our market footprint. In the year under review we continued to cautiously expand our portfolio of program business, a form of primary insurance that we write through managing agents in North America.
Germany The German market is served within the Hannover Re Group by our subsidiary E+S Rück. As the “dedicated reinsurer for Germany”, the company is a sought-after partner thanks to its very good rating and the continuity of its business relationships. E+S Rück is superbly positioned in its domestic market and a market leader in property and casualty reinsurance.
The German insurance market was stable in the year under review and recorded modest premium growth. The largest increases in property and casualty insurance were seen in the highest-volume lines, namely motor and property insurance, and in the latter case especially in homeowners’ insurance as well as industrial and commercial lines. Altogether, the original market for property and casualty insurance probably grew by around 3%, hence keeping up the pace of the previous year. However, claims expenditure rose considerably more sharply than premium income, leading to a deterioration in overall market profitability. This was especially true of fire insurance for industrial customers, where the combined ratio is expected to clearly exceed 120%.
German insurers continued to raise their retentions in view of their healthy capital resources. So-called alternative capital, i. e. risk transfer to the capital markets, did not play a significant role in the German reinsurance market. On the whole, Hannover Re obtained slightly improved rates and conditions in the 2018 treaty renewals. This was also the case in industrial fire insurance, although the rate adjustments here were still not sufficient in view of the high frequency of large losses.
All in all, we are satisfied with the development of our property and casualty reinsurance portfolio in the German market. Premium income surged appreciably in the year under review through the expansion of existing customer relationships; we had anticipated a slight decrease in premium in our guidance.
On the reinsurance side, too, a competitive environment prevailed. Somewhat more lively demand, most notably for bespoke reinsurance solutions offering solvency relief, had a stabilising effect on prices and conditions. Tighter requirements placed on insurers’ capital resources by Solvency II and more rigorous supervision by regulators, coupled with the anticipated changes in accounting principles, additionally played a role here.
In Western Europe we continued to expand our market share on the back of stable, risk-appropriate rates. Growth was spread across various lines, including long-tail liability and accident business. We consolidated our good market position in builder’s risk insurance in France. Our motor business in the Netherlands also fared well.
On the whole, we were satisfied with the premium development and rate movements in Continental European markets. By expanding long-established customer relationships with both larger and smaller companies, we achieved further encouraging growth.
On the reinsurance side the supply of capacity remained unchanged. This did not, however, lead to premium reductions. The hurricanes in the third quarter of 2017 ensured that prices remained largely stable, albeit without having adverse runoff implications. Overall, the losses incurred in marine reinsurance were below average in 2018. The only exceptions here were a loss incurred in builder’s risk hull insurance in Germany, which was covered in the portfolios written by some Lloyd’s insurers, as well as Typhoon “Jebi”, which affected the Japanese marine market and hence also the reinsurance programmes.
Aviation After a protracted soft market phase on the aviation insurance market that had lasted several years, the encouraging tendencies already evident at the end of 2017 were sustained. One of the key drivers behind this development was a reduction in the available underwriting capacities which – depending on the particular segment – was in some cases substantial. Rate increases were especially marked for general aviation business in the United States, which accounts for roughly 50% of the global general aviation market. Nevertheless, appreciable signs of improvement could also be discerned in other segments, too, such as airline business.
Credit, surety and political risks Growth in the global primary insurance market picked up somewhat, albeit coming off a low level. Reinsurance cessions, on the other hand, were broadly stable relative to previous years, nudging higher only in the area of political risks.
United Kingdom, Ireland, London Market and direct business The gross premium booked from the United Kingdom, Ireland, the London Market and direct business rose from EUR 791.2 million to EUR 992.5 million. The combined ratio for this segment improved to 111.8% (140.9%). The operating profit (EBIT) totalled EUR 21.3 million (EUR -106.5 million).
United Kingdom, Ireland and London Market The result of the property and casualty business that we reinsure for companies in the United Kingdom and on the London Market was satisfactory in 2018. In general terms, the market climate in the UK was still highly competitive, primarily due to excess capacity.
Rates in most lines on the London Market stabilised in the year under review. The increase in natural catastrophe losses caused by various hurricanes and the major fires in California did not, however, give rise to an additional strain for our portfolio. Further premium increases running well into double -digit percentages were obtained for the motor third party liability line, which covers private customer portfolios and had been adversely affected by the reduction of the Ogden rates in 2017. Prices in property reinsurance similarly rose sharply for business that had been impacted by Hurricanes “Harvey”, “Irma” and “Maria” in 2017.
The Ogden rate (= discount rate used in the UK to calculate lump-sum compensation payments for personal injuries) was left unchanged in 2018 after the change made in 2017 – which had necessitated significant adjustments to loss reserves. We were, however, successful in our push to find a commercial solution for exposures to acts of terrorism committed in the UK where a motor vehicle is used to kill or injure.
As a result, with effect from 1 January 2019 this risk is now excluded under reinsurance treaties across the entire UK motor reinsurance market and is instead placed as a standalone cover.
Facultative reinsurance In contrast to obligatory reinsurance, a reinsurer underwrites primarily individual risks in facultative business. The general environment for both types of reinsurance in the various markets is, however, for the most part comparable.
Property & Casualty reinsurance: Breakdown of gross M 17 written premium in facultative reinsurance 5.7% Other 12.2% Motor 27.5% Liability 54.6% Property
Global reinsurance We combine all markets worldwide under global reinsurance with the exception of our target markets and specialty lines. This segment also encompasses global catastrophe business, the reinsurance of agricultural risks, Sharia-compliant retakaful business as well as structured reinsurance and insurance -linked securities.
Asia-Pacific region Highly destructive natural disasters such as typhoons and tsunamis shaped the market in the Asia-Pacific region. Most notably, Typhoons “Jebi”, “Trami” and “Prapiroon” caused considerable windstorm and flood losses in Japan. Although we observed further modest price reductions in Japan for catastrophe covers during the first half of the year, the large losses should have an appreciable effect on demand for reinsurance capacities as well as on prices. Bearing in mind the general environment described above, our market position in Japan remained stable. Our result, however, declined significantly year-on-year due to the high level of catastrophe losses.
In China we further cemented our market position as a local reinsurer. Thanks to our very good relationships with selected customers and our innovative market presence, we were able to substantially grow our portfolio despite sustained intense competition. Profitability was in line with our expectations.
In general terms, we are committed to further diversifying our range of covers and our regional footprint in Asia. Systematic expansion of our business in defined areas assures profitability and growth over the medium term, especially from tailor-made reinsurance solutions.
In India we have been operating as a local reinsurer since 2017 and are thus able to share in the promising growth opportunities offered by this country. Outside of agricultural insurance, however, our business did not perform satisfactorily in the financial year just ended. Among other things, this was due to flood losses and the ongoing generally difficult market conditions.
We have had a presence in Australia and New Zealand for more than three decades and are positioned as the number three among Australian property and casualty reinsurers. Australia, in particular, remains fiercely competitive. We generated especially strong growth here with multi-line covers. Reinsurers such as ourselves with a very good rating, long-standing expertise and excellent business relationships have opportunities here to obtain more attractive prices than the market as a whole. We can therefore look back on a very pleasing overall result for the region. Australia and New Zealand continue to be attractive catastrophe markets for global reinsurance capacities.
South Africa Our property and casualty reinsurance business in South Africa is produced by three companies: our subsidiary Hannover Reinsurance Africa Limited writes reinsurance in all lines. Compass Insurance is responsible for direct business generated mostly through underwriting management agencies (UMAs). Our third subsidiary, Lireas Holdings, holds interests in several of these UMAs. This enables us to comprehensively steer and control the business. Agency business forms the pillar of our activities in South Africa, although traditional reinsurance is also written in South Africa and other African countries.
The African insurance and reinsurance market was unremarkable in the year under review, with significantly fewer large losses than in the 2017 financial year. The market hardening observed in the previous year therefore continued to stabilise.
Our involvement in insurtech activities also gave grounds for satisfaction in the year under review. These include, among others, Pineapple. This start-up evolved directly out of our innovation competition held in 2016 under the name Journey Re, which delivered valuable stimuli for our business and led to the founding of several new start-ups. Not only has Pineapple gone on to commence insurance operations, it has also won numerous national and international awards. Taking the role of a digital broker, the company offers an insurance solution that enables its customers to participate in positive insurance results within a self-defined risk pool. Above and beyond this, we are involved in various other promising initiatives and start-ups in the South African market in what is a very dynamic environment.
The markets of Central and South America continue to see above-average growth rates, albeit with considerable differences from country to country. Heightened demand for high-quality risk protection still holds sway in most countries, enabling financially robust reinsurers to book business at adequate prices. Recent acquisitions of sizeable portfolios by primary insurers in Latin America have prompted increased demand for reinsurance capacities, a development from which our company will continue to benefit.
The prevailing price level is commensurate with the risks given the available worldwide capacities. When it comes to proportional capacity for the coverage of catastrophe risks, capacity would appear to be in somewhat short supply.
It is to be expected that the high frequency and severity of windstorm events in the Caribbean will continue. Particularly with this in mind, we offer our clients solutions designed to close potential gaps in coverage, such as for flood losses.
In the financial year just ended most Latin American markets continued to show very vigorous growth. Primary insurance premiums are currently rising here – depending on the market – by between 5% and 15% annually. This is driven not only by high rates of inflation, but also by the growing purchasing power of the middle class. The strongest demand for reinsurance covers was in the area of catastrophe risks, not only within individual markets but also increasingly across national borders.
Broadly speaking, we are satisfied with the development of our business in Latin America and the Caribbean, which delivered a clearly pleasing result in the year under review.
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. To this end, we are represented by our Bahrain-based subsidiary Hannover ReTakaful B.S.C. We also maintain a branch in Bahrain with responsibility for traditional reinsurance in the Middle East. Furthermore, we have established two branches in Labuan, Malaysia, that specialise in family-owned enterprises and retakaful business in the local markets.
Our retakaful business has grown very vigorously since we entered the segment in 2006 and we are now optimally positioned in the market. The development of our business in the year under review was satisfactory on the whole. The insurance markets of the Middle East and North Africa continue to post dynamic growth rates, with the United Arab Emirates and Saudi Arabia still constituting the largest single markets.
Catastrophe XL (Cat XL) We write the bulk of our catastrophe business out of Bermuda, the worldwide centre of competence for this segment. In the interest of diversifying the portfolio, our subsidiary Hannover Re (Bermuda) Ltd. has also written risks in some specialty lines.
After the historically high windstorm losses of 2017, the reinsurance of natural catastrophes continued to be a focus of renewal negotiations in the financial year just ended. The dominant factors were an unchanged excess supply of capacity and sustained high capital inflows from the ILS market, as a consequence of which prices increased only slightly. Rate increases were higher under loss-affected programmes, although they fell short of market expectations. In Florida, for example, increases of around 20% were booked under programmes that had suffered losses. Furthermore, certain programmes impacted by forest fires and mudslides in California saw rate rises of up to 30% in the course of the year under review. We are seeing growing demand for reinsurance covers from government programmes offering protection against flood risks.
The gross premium volume for our global catastrophe business grew to EUR 376.4 million (EUR 354.2 million). Given the reduced burden of large losses compared to the previous year, the combined ratio improved to 88.3% (121.1%). The operating profit (EBIT) also improved to EUR 50.9 million (EUR -3.3 million).
Insurance-linked securities (ILS) Demand on the capital market for insurance and reinsurance risks essentially remains strong, particularly due to the diversifying nature of such investments. The worldwide volume of newly issued catastrophe bonds was again in the order of USD 11 billion in 2018. The entire ILS market likely reached a volume of USD 95 billion. According to our estimates, up to two-thirds of this amount derives from collateralised reinsurance, under which insurers and investors conclude private risk transfer agreements which are secured by collateral held in trust accounts. We support these transactions through socalled fronting arrangements.
Investors have not lost faith in the ILS market despite taking a hit from various loss events in recent years. This underscores the important role played by the ILS markets in protecting against catastrophe risks.
We leverage the entire spectrum of opportunities offered by the insurance-linked securities market. On the one hand we take out reinsurance with ILS investors, while at the same time we transfer risks for our customers to the capital market as a service. This is done in the form of catastrophe bonds or through collateralised reinsurance. We are also active ourselves as an investor in catastrophe bonds.
C om b in ed m an ag em en t re p or t rectly or indirectly from a named storm. This was the first time that FEMA transferred risks to the capital market using such an instrument.
The key role played by the capital market in our purchasing of retrocession protection remains unchanged. Thus, for example, we were able to renew the protection cover for Hannover
Re known as the “K cession” at a level of roughly USD 600 million for 2018. This is a modelled quota share cession consisting of non-proportional reinsurance treaties in the property, catastrophe, aviation and marine (including offshore) lines that has been placed inter alia on the ILS market since 1994. In addition to the K cession we use the ILS market for other protection covers as well.
• Currency-adjusted gross premium growth of 4.6% in line with expectations • One-time charge from recaptures in legacy US mortality business within the anticipated bounds • US financial solutions business delivers another very good result
Earnings per share in EUR 1.54 +7.7% 1.43 2.10 2.40 1.70 1 Restated pursuant to IAS 8 2 Operating result (EBIT) / net premium earned
Insurers in our domestic German market are increasingly preoccupied with the capital adequacy and solvency ratios prescribed by the European Solvency II Directive. Reinsurance covers offer one possible solution for meeting the required ratios. Demand for reinsurance solutions was, however, more subdued in the year under review owing to transitional measures that allow insurers to satisfy reduced requirements for a certain period of time.
The total gross premium income booked in life and health reinsurance for the year under review amounted to EUR 7,200.4 million (EUR 7,079.6 million). This is equivalent to modest growth of 1.7%; the increase would have been 4.6% at constant exchange rates, which was in line with our expectations. The level of retained premium stood at 90.7% (91.7%). Net premium earned was stable at EUR 6,484.8 million (EUR 6,472.8 million), corresponding to growth of 3.2% adjusted for exchange rate effects.
We provide below a more detailed discussion of developments in the individual reporting categories of “Financial Solutions”, “Longevity Solutions” and “Mortality and Morbidity Solutions” as well as an overview of our extensive range of services under the heading “Underwriting Services”.
Financial Solutions In our financial solutions business we concentrate on reinsurance solutions geared to optimising the solvency, liquidity and capital position of our customers. These forms of reinsurance are highly diverse and individually structured because they are always tailored to the customer’s needs. The decisive differentiating feature is that the customer’s primary motivation is not exclusively the coverage of biometric risks, but rather the protection of its financial and balance sheet position. We can draw on decades of global expertise in this field.
Demand for financing solutions to help fund the additional interest rate reserve (“Zinszusatzreserve”) eased somewhat. The reserve requirements were softened through regulatory adjustments, as a consequence of which primary insurers were not under quite as much pressure as they had been in the previous year.
Longevity Solutions In the longevity solutions reporting category we group together all reinsurance business where the primary risk covered is the longevity risk. We develop innovative annuity products tailored to the individual needs of policyholders in various life situations. The bulk of the business in this category consists of traditional annuity policies, pensions blocks taken out for new business and enhanced annuities – under which pensioners with a pre-existing condition are guaranteed a higher annuity payment for their remaining shortened life expectancy.
International demand for longevity solutions in the financial year was again sharply up on previous years. Interest in our tailor-made product solutions is no longer restricted just to our former core markets such as the United Kingdom and the Netherlands, but rather it spans the globe – with a focus on Canada, Asia, Australia and South Africa. Through these activities we are also able to play a part in the fight against poverty in old age, which is a major problem in some of these regions.
In Australia, for example, longevity was a dominant topic on the market following a change to retirement provision due to a regulatory adjustment. This compelled insurers to take action in relation to existing covers, hence opening up new business potential both for ourselves and our customers.
Another factor in the increased demand worldwide was the exacting solvency-based capital requirements imposed on insurers under the various local prudential regimes. Where longevity risks are involved, primary insurers need to hold very high reserves as collateral for pension commitments that are often still in the distant future. In some instances financial solutions arrangements can also be considered here, as discussed above.
The United Kingdom continues to be our largest and most mature market for longevity solutions. Minimal mortality improvements on the market could be discerned (provisionally)
Mortality and Morbidity Solutions In the global (re)insurance industry it is standard practice for mortality and morbidity risks 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 significant developments in the past year affecting our mortality and morbidity business.
Gross premium for mortality business contracted by 5.0% to EUR 3,039.5 million (EUR 3,200.1 million). Altogether, it contributed 42.2% of the total gross premium income booked in life and health reinsurance (EUR 7.2 billion).
Mature markets were increasingly preoccupied with the issue of long-term care (insurance) in old age. In Germany, for example, we have consistently expanded our range of solutions as part of an ongoing dialogue with our customers.
In the countries of Central and Eastern Europe, too, a greater awareness of life situations with critical health implications could be discerned in the reporting period just ended. In addition to the coverage offered by state-run schemes, the level of which is still inadequate, it is becoming increasingly important to have sufficient private provision. Consequently, it was evident that our customers generally showed stronger interest in critical illness products and health insurance coverage.
In the United States we continued to build on our leading position in the ACO (Accountable Care Organization) market. ACOs are groups of healthcare providers who come together voluntarily to give coordinated high-quality care to their patients. The goal is to ensure that patients – especially those with chronic diseases – get the best possible care at the right time through appropriate treatment. We have been a reliable partner of ACOs for some years now and provide actuarial and risk-related support for these organisations, which are managed exclusively by healthcare providers such as doctors and hospitals. From an overall perspective, our health and special risk business in the US developed as anticipated and delivered a healthy profit contribution.
In Australia we observed a market-wide deterioration in individual occupational disability business. The higher-than- expected losses adversely affected our result – in common with that of other market players – in this reporting category.
Gross premium for morbidity business grew by 13.3% in the financial year just ended to EUR 1,956.5 million (EUR 1,727.5 million).
Underwriting Services Under the heading of Underwriting Services we report on the activities and services that we perform for our customers above and beyond pure risk transfer. Our automated underwriting systems and the associated process automation for our customers are a major feature in this regard. In the year under review it was again evident that these services constitute a key competitive advantage and cement our business relationships with our customers. Furthermore, our automated underwriting systems help our customers to structure the underwriting process more efficiently, expand their product range and hence respond to the needs of individual policyholders in an optimal and timely manner.
Our expectations for the development and take-up rate of our underwriting systems were far exceeded. Most importantly, the consistently positive feedback received from our customers confirms that we have found the right concept for translating our experience into a future-ready and appropriately tailored solution. The combination of a state-of-the-art and flexibly customisable underwriting system that efficiently organises the application process with a comprehensive range of support and other services is seen as a clear win in the eyes of our customers.
In the French market, too, a change in the law drove the need for innovation in the credit life sector. We support primary insurance partners by reinsuring a newly launched form of credit life insurance that rewards a healthy active lifestyle. Preferential rates are available to insureds who follow a defined but basic programme of sports activities.
• Another good investment performance with stable ordinary income despite challenging environment
• Stronger earnings from fixed-income securities more than offset loss of dividend income • Return on investment beats target at 3.2%
Impairments and depreciation totalling EUR 52.7 million (EUR 71.9 million) were taken. An impairment loss of EUR 15.3 million (EUR 8.4 million) was recognised on alternative investments. The write-downs on fixed-income securities amounted to just EUR 0.5 million (EUR 0.3 million). Impairments were also taken on our real estate portfolio in a volume of EUR 2.9 million (EUR 18.0 million). Depreciation on directly held real estate increased to EUR 34.0 million (EUR 31.0 million), reflecting the further increase in our involvement in this sector. These write-downs contrasted with write-ups of EUR 3.6 million (EUR 0.9 million).
Result from participations in associated companies 5.0 -68.9% 16.0 9.1 19.2 1.0
Change in fair value of financial instruments 3 31.2 -19.2% 38.6 26.1 0.9 (33.3)
Net investment income from assets under own management 1,322.0 -14.1% 1,539.0 1,218.3 1,270.1 1,095.8
Net investment income from funds withheld and contract deposits 208.0 -11.5% 234.9 332.1 395.0 376.1 1 Excluding income and expenses on funds withheld and contract deposits 2 Including depreciation / impairments on real estate 3 Portfolio at fair value through profit or loss and trading
Hannover Re’s investment policy continues to be guided by the following core principles: • generation of stable and risk-commensurate returns while at the same time maintaining the high quality standard of the portfolio
By adjusting the maturity pattern of our fixed-income securities to the expected payment patterns of our liabilities we reduce the economic exposure to the interest rate risk. In the current reporting period this gave rise to a broadly neutral modified duration of our bond portfolio, which stood at 4.8 (previous year: 4.8) as at 31 December 2018. Through active and regular 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. As at year-end 2018 we held 30.1% (30.1%) of our investments in euros, 45.8% (45.5%) in US dollars, 7.7% (8.2%) in pound sterling and 5.9% (5.9%) in Australian dollars.
We further boosted our real estate portfolio as part of the strategic expansion of this asset category by acquiring one property in the United States and one in Australia. We also acted on market opportunities in the United States and sold one of our properties. The real estate allocation of our total asset portfolio thus increased slightly to reach the current level of 5.6% (5.3%). In all other asset classes we made only minimal changes in the context of regular portfolio maintenance.
The portfolio of fixed-income securities excluding short-term assets rose to EUR 36.5 billion (EUR 34.3 billion). This increase can similarly be attributed not only to the positive operating cash flow but also to the aforementioned issuance of a senior bond in the second quarter and exchange rate effects, which more than offset the valuation declines on fixed-income securities. Hidden reserves for available-for-sale fixed-income securities, which are included in shareholders’ equity, totalled EUR 91.4 million (EUR 706.2 million). This reflects the yield increases observed in the course of the reporting period, especially in the area of USD-denominated sovereign bonds and debt securities issued by semi-governmental entities, as well as the broadly higher risk premiums on corporate bonds. As to the quality of the bonds measured in terms of rating categories, the proportion of securities rated “A” or better remained on a consistently high level and stood at 78.4% (76.6%) as at year-end.
Capital structure as at 31 December 2018 M 30 7.7% Other liabilities 14.8% Equity 4.0% Long-term debt and notes payable 73.5% Technical provisions and liabilities
The technical provisions and liabilities shown above, which include funds withheld / contract deposits and reinsurance payable, make up 73.5% (77.1%) of the balance sheet total and are more than covered by our investments, (assets-side) funds withheld / contract deposits, accounts receivable and reinsurance recoverables.
The equity including non-controlling interests at 14.8% (15.2%) of the balance sheet total as well as the long-term debt and – especially – notes payable at altogether 4.0% (2.8%) of the balance sheet total represent our most important sources of funds.
We ensure that our business is sufficiently capitalised at all times through continuous monitoring and by taking appropriate steering actions as necessary. For further information in this regard please see the following section “Management of policyholders’ surplus”.
Non-controlling interests in shareholders’ equity increased by EUR 7.2 million to EUR 765.2 million as at 31 December 2018. The bulk of this – in an amount of EUR 706.1 million – is attributable to the non-controlling interests in E+S Rückversicherung AG.
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 bonds issued to ensure lasting protection of our capital base – in part also in observance of rating requirements. The total volume of long-term debt and notes payable stood at EUR 2,558.9 million (EUR 1,742.1 million) as at the balance sheet date.
Our bonds supplement our equity with the aim of reducing the cost of capital and also help to ensure liquidity at all times. As at the balance sheet date altogether four bonds had been placed on the European capital market through Hannover Rück SE and Hannover Finance (Luxembourg) S. A.
The following table presents an overview of the amortised cost of the issued bonds.
Amortised cost of our bonds M 33 in EUR million Issue date Coupon in % 2018 2017
Several Group companies have also taken up long-term debt – principally in the form of mortgage loans – amounting to EUR 323.2 million (EUR 250.1 million).
For further explanatory information please see our remarks in the notes to this report, section 6.12 “Long-term debt and notes payable”, page 240 et seq., and section 6.13 “Shareholders ’ equity and treasury shares”, page 242 et seq.
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 266 et seq.
Liquidity We generate liquidity from our operational reinsurance business, investing activities 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 168 et seq.
Change in cash and cash equivalents according to cash flow statement 315.8 (13.0)
Cash flow from operating activities The cash flow from operating activities, which also includes inflows from interest received and dividend receipts, amounted to EUR 2,224.6 million in the year under review as opposed to EUR 1,693.9 million in the previous year. The increase of altogether EUR 530.7 million was essentially due to higher claims paid in the previous year as a consequence of the comparatively heavy burden of losses in 2017.
Cash flow from financing activities The cash inflow from financing activities amounted to EUR 149.5 million (cash outflow of EUR 690.0 million) in the year under review. This item includes primarily the dividends paid out by Group companies in the financial year totalling EUR 657.7 million (EUR 647.1 million) and the receipts from issuance of a senior bond in a nominal amount of EUR 750.0 million.
For further information on our liquidity management please see page 94 et seq. of the risk report.
International Insurance Company of Hannover SE 2 A+ 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 senior bond, EUR 750 m; 2018 / 2028 AA- –
Hannover Rück SE subordinated debt, EUR 500 m; 2014 / undated A a+
Hannover Finance (Luxembourg) S. A. subordinated debt, EUR 500 m; 2010 / 2040 A aa-
The following paragraphs explain major agreements concluded by the company that are subject to reservation in the event of a change of control, inter alia following a takeover bid, and describe the resulting effects. Some letter of credit lines extended to Hannover Rück SE contain standard market changeof -control clauses that entitle the banks to early termination of a credit facility if Talanx AG loses its majority interest or drops below the threshold of a 25% participation or if a third party acquires the majority interest in Hannover Rück SE. 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 266.
In addition, retrocession covers in property & casualty and life & health business contain standard market change-of-control clauses which in each case grant the other contracting party a right of termination if a significant change occurs in the ownership structure and participation ratios of the affected contracting party.
The company has not concluded any compensation agreements with the members of the Executive Board or with employees in the event of a takeover bid being made.
Hannover Rück SE transacts reinsurance business in the business groups of Property & Casualty and Life & Health reinsurance. Through its global presence and activities in all lines of reinsurance the company achieves extensive risk diversification.
The 2018 financial year was a pleasing one for Hannover Rück SE. The gross premium of Hannover Rück SE in total business grew by 10.1% to EUR 14.6 billion (previous year: EUR 13.3 billion). The level of retained premium retreated from 78.4% to 71.8%. Net premium earned increased by 2.0% to EUR 10.4 billion (EUR 10.2 billion).
Condensed profit and loss account of Hannover Rück SE M 39 in EUR thousand 2018 2017
Allocated investment return transferred from the non-technical account, net of retrocession 203,602 185,841
The underwriting result (before changes in the equalisation reserve) improved in the year under review from EUR -12.7 million to EUR -0.2 million. Following a withdrawal of EUR 165.9 million in the previous year, an amount of EUR 25.3 million was withdrawn from the equalisation reserve and similar provisions in the year under review.
After a thoroughly moderate major loss experience in the first half of 2018, the volume of losses incurred in the third and especially the fourth quarter was significantly higher. The burden of large losses consequently came in slightly above the large loss budget that we had set aside. The total net expenditure on major losses incurred by Hannover Rück SE was EUR 536.6 million (EUR 689.8 million).
Ordinary investment income including deposit interest was clearly higher than in the previous year at EUR 1,234.0 million (EUR 1,002.9 million), principally due to increased distributions from our investment holding companies as well as stronger ordinary income from fixed-income securities. Despite the continued low level of interest rates, the latter showed a pleasing rise to EUR 458.6 million (EUR 419.0 million ) based on the substantial asset volume. Net gains of EUR 140.9 million (EUR 247.9 million) were realised on disposals. The sharp decline can be attributed for the most part to the liquidation of our portfolio of non-strategic listed equities in the previous year. Write-downs of EUR 88.4 million (EUR 20.7 million) were taken on investments, primarily on bearer debt securities held as current assets. The write-downs contrasted with write-ups of EUR 1.2 million (EUR 13.7 million) that were made on assets written down in previous periods in order to reflect increased fair values.
Casualty Gross premium in casualty business rose by a modest 0.4% to EUR 1,590.1 million (EUR 1,584.0 million). The loss ratio increased from 44.3% to 91.9%. The underwriting result consequently deteriorated in the year under review to EUR -195.1 million (EUR 349.5 million). An amount of EUR 64.4 million was withdrawn from the equalisation reserve and similar provisions; the allocation in the previous year had totalled EUR 305.1 million.
Accident Gross premium income for the accident line increased by 16.4% in the year under review to EUR 391.1 million (EUR 336.1 million). The net loss ratio retreated to 48.9% (64.6%). The underwriting result came in at EUR 34.7 million (EUR 18.0 million). After a withdrawal of EUR 24.9 million in the previous year, an amount of EUR 13.3 million was allocated to the equalisation reserve and similar provisions.
Aviation The gross premium volume contracted by 5.3% from EUR 238.1 million to EUR 225.4 million. The loss ratio deteriorated sharply to 63.1% (-42.7%). The negative figure in the previous year had been influenced by the ending of a legal dispute, which led to the release of reserves. The underwriting result came in at EUR 18.6 million (EUR 198.6 million). An amount of EUR 3.3 million was allocated to the equalisation reserve and similar provisions in the year under review, after a withdrawal of EUR 57.1 million in the previous year.
Marine Gross written premium for the marine line fell by 4.1% in the 2018 financial year to EUR 329.3 million (EUR 343.2 million). The net loss ratio improved appreciably from 96.2% to 37.9%. The underwriting result closed at EUR 75.8 million (EUR -35.8 million). An amount of EUR 9.8 million was allocated to the equalisation reserve and similar provisions in the year under review, following a withdrawal of EUR 28.6 million in the previous year.
The underwriting result in life business amounted to altogether EUR 29.6 million (EUR 29.3 million) for the reporting period.
C om b in ed m an ag em en t re p or t hail, livestock and windstorm lines. Other indemnity insurance encompasses legal protection, fidelity as well as other pure financial losses and property damage.
Our portfolio of assets under own management grew in the year under review to EUR 28.7 billion (EUR 26.5 billion), equivalent to an increase of 8.7%. Along with the positive operating cash flow, this reflects the fact that the issuance of a senior bond in the second quarter and exchange rate effects more than offset the valuation declines on fixed-income securities. The balance of unrealised gains on fixed-income securities and bond funds decreased to EUR 366.6 million (EUR 662.9 million). In addition to the yield increases on USD- and GBP-denominated sovereign bonds already mentioned, this is a reflection of sometimes substantially higher risk premiums on corporate bonds across all rating categories.
A dividend of EUR 3.50 plus a special dividend of EUR 1.50 per share, equivalent to EUR 603.0 million (EUR 603.0 million ), was paid out in the year under review for the 2017 financial year.
It will be proposed to the Annual General Meeting on 8 May 2019 that a dividend of EUR 3.75 plus a special dividend of EUR 1.50 per share should be paid for the 2018 financial year. This corresponds to a total distribution of EUR 633.1 million. The dividend proposal does not form part of this consolidated financial statement.
The business development of Hannover Rück SE is essentially subject to the same risks and opportunities as that of the Hannover Re Group. As a general principle, Hannover Rück SE shares in the risks of participating interests and subsidiaries according to the amount of its respective holding; these are described in the risk report. The relations with participating interests of Hannover Rück SE may give rise to losses from legal or contractual contingent liabilities (particularly novation clauses and guarantees). Please see our explanatory remarks in the notes to this report.
We received an adequate consideration for all transactions with affiliated companies according to the circumstances of which we were aware at the time when the transactions were effected. We incurred no disadvantages as defined by § 311 Stock Corporation Act (AktG).
Within the Hannover Re Group risks are evaluated in light of risk-mitigating measures. In connection with non-financial aspects no material risks were identified by the established organisation for sustainability management or within risk management that are linked to our own business activities or the company’s business relations, products or services and which are very likely to materialise and have or will have serious adverse implications for non-financial matters. Emerging risks, the content of which cannot yet be evaluated with any certainty, are monitored in the context of Group-wide risk management.
Pursuant to § 315b (1) Sentence 3 German Commercial Code (HGB), reference is also made to non-financial information provided elsewhere in the combined management report with respect to certain aspects. Unless otherwise stated, all information refers to the Hannover Re Group.
The combined non-financial information statement is guided in the description of material issues by the internationally accepted framework of the Global Reporting Initiative (GRI) and reflects both the materiality definition of the GRI and that of the German Commercial Code (HGB). For more detailed information on the definition of materiality we would refer to the section entitled “Materiality analysis”.
For a detailed description of the business model please see the section “Business model” under “Foundations of the Group” in the combined management report.
Group strategy 2018 – 2020 1. We have ambitious economic growth targets
• Use special dividends to balance equity growth with profit growth 7. We conduct our business with lower costs than our competitors due to our high efficiency
• Develop new business opportunities on the basis of digitalisation and automation
• Optimise internal processes and shape the interaction with our clients as efficiently as possible 9. We are committed to sustainability, integrity and compliance
• Encourage sustainability in the transaction of our business, with a special focus on the avoidance of adverse impacts on the environment 10. We strive for Performance Excellence and continuous improvement
Sustainability also forms an integral part of our actions. Our goal is to harmonise our business operations with environmental and social requirements. To do this, we have refined a sustainability strategy that complements the guiding model of our Group strategy. This defines four action fields (Governance and Dialogue, Product Responsibility, Employees, Environment and Society) as well as concrete goals and measures, while also taking into account the major requirements and interests of our stakeholders. Of particular relevance here are our customers, our investors and our employees.
Materiality analysis With a view to identifying material non-financial topics, we conducted another stakeholder survey with an external partner in 2018. Representatives of the stakeholder groups comprised of customers, brokers, the capital market, employees, non-governmental organisations (NGOs) and the public sector were surveyed by means of an online questionnaire and telephone interviews. On this basis, our already existing materiality analysis was reviewed and adjusted. In this context, we took into account the various materiality approaches of the GRI, which constitutes the basis for our extensive annual sustainability report, and the German Commercial Code (HGB), on which this combined non-financial information statement is based. As a first step, potential issues were identified using internal sources and already received stakeholder feedback as well as information obtained from media analysis, a peer comparison and global standards. The issues were then categorised according to our four action fields in the context of the sustainability strategy. While the external survey developed on this basis focused on the relevance of these issues, the internal survey carried out among our employees included additional dimensions, namely “business relevance” and “impacts on business operations”. All three dimensions were rated on a scale of 1 to 7, with the lowest figure indicating very low relevance and the highest reflecting a very high degree of relevance. We considered issues rated 5.0 and higher to be material for our company within the meaning of this legislation. The survey findings were discussed and approved at an internal workshop attended by representatives of various specialist units and management.
The following table compares the reportable aspects as defined by the German Commercial Code (HGB) with the material issues identified by our company and pinpoints thematic overlaps with the aspects. The individual material issues are then discussed.
Supplier management 1 x x x x x 1 Matter identified as non-material according to the dimensions of the German Commercial Code (HGB), but which has a high stakeholder relevance / impact on business operations and on which we therefore additionally report in conformity with the materiality approach of the GRI.
In addition to our continuous engagement with the changing general legal framework, since 2003 we have provided an annual Declaration of Conformity with the German Corporate Governance Code (DCGK) which is published on our company ’s website and reproduced in the present management report.
In our annually published sustainability report we provide regular updates on our achievements as a responsible enterprise. In so doing, we follow the currently applicable and internationally recognised guidelines of the GRI. In our sustainability communication we also fulfil the transparency requirements of environmental, social and governance (ESG) rating agencies, as reflected in the favourable evaluations of our company. Hannover Re is rated by the following rating agencies specialising in sustainability: FTSE4Good, Robeco SAM, Oekom Research, Sustainalytics, VigeoEiris, CDP and MSCI. In addition, we are included in the FTSE4Good Index, the Global Challenges Index initiated by the Hannover Stock Exchange parent company BÖAG Börsen AG as well as in major STOXX indices.
Optimisation of sustainability management Our sustainability management is regularly reviewed and continuously improved. It is envisaged that a Web-based database will be created for central recording of sustainability information.
Along with the intranet and the corporate website, sustainability information has been published through other internal communication platforms since 2018. Work is ongoing on a training concept.
Refinement and optimisation of reporting on sustainability topics in accordance with the GRI standards
Generally speaking, the risk of human rights violations in connection with our business operations is minimal. We have nevertheless put special emphasis on respect for human rights within the supply chain. For further information we would refer to the section “Supplier management”.
With the aid of our Tax Guideline, which applies throughout the Group, a Tax Compliance System that is currently under development and the associated review of all relevant task areas, processes and responsibilities, we want to ensure – going forward, as in the past – that despite growing complexity we satisfy tax liabilities arising out of our international business operations in accordance with the respective national legal requirements.
Data privacy and security As part of our business activities we process and store personal data. The data are required primarily in the context of underwriting, for providing customer and contract-related services as well as in claims and benefit management. Furthermore, personal data are collected, processed and stored in connection with, among other things, human resources management and shareholder administration. We also process personal data in order to assert our own legitimate interests or those of third parties. In particular, this may be necessary in order to safeguard IT security and IT operations and to meet official requirements. It is incumbent on the Hannover Re Group to uphold the statutory data privacy rights of data subjects, and we have implemented appropriate procedures and methods for this purpose. The general principle is that personal data may only be collected, processed and stored by Group employees to the extent that this is necessary for a precisely defined purpose as part of their lawful task fulfilment or a corresponding basis exists in law. We make use of external service providers to some extent in order to perform our contractual and statutory duties. These external data recipients are to be viewed as part of the data processing operations, as is the case with brokers, outside experts, business partners etc. All external recipients are contractually bound to comply with statutory data protection requirements and are checked in this regard. The EU General Data Protection Regulation does not directly affect all Hannover Re companies if their registered office is located outside the European Union or European Economic Area. The respective national legal frameworks are primarily determinative for these com-
Risks arising out of the areas of data protection and information security are integrated into the system of risk management as operational risks and monitored here.
As a consequence of the roll-out of the new General Data Protection Regulation (GDPR), we specified our existing policies in greater detail and also created new processes, including for example the conduct of a data protection impact assessment if a particular instance of data processing will likely pose considerable risks to the rights and freedoms of natural persons.
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 company’s various stakeholder groups into our business operations. Furthermore, this dialogue helps us 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 stakeholder groups are particularly relevant to us: our clients, our employees, the capital market, the public sector and non-governmental organisations (NGOs).
Furthermore, we take part in various initiatives that address the financial costs of natural disasters in developing and emerging countries due to underinsurance. To this end we engage in an exchange with state actors such as the Federal Ministry for Economic Cooperation and Development and we work with the German Corporation for International Cooperation (GIZ). Not only that, in the context of the InsurResilience Solutions Fund we are partnering with a leading broker and an NGO on a pilot project for the development of an innova-
We are also a member of the Insurance Development Forum, the Chief Risk Officer (CRO) Forum and the “Extreme Events and Climate Risks” working group of the Geneva Association. We have been a sponsor of the Global Earthquake Model Foundation for ten years.
Along with our direct impacts on the environment and society, we are able to make a positive contribution to sustainable development through our investing activities by avoiding socially harmful investments. Sustainability in asset management is therefore a major concern for our company.
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 asset 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 approach on the investment side is defined in writing in our “Responsible Investment Policy ”, which we developed in 2011 and have subsequently already updated on two occasions. 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. Instruments issued by companies that fail to respect human rights or are complicit in human rights abuses are excluded from our investment universe, as are issuers that disregard basic labour standards and environmental protection considerations. Similarly, exposures to companies that have been noted for their use of compulsory / child labour or their involvement in discrimination or corruption are also avoided. In our review of government issuers the focus is on whether they are currently subject to sanctions and, if so, what these sanctions are. Furthermore, we avoid exposures to issuers who are involved in the development and proliferation of controversial weapons. With regard to the fossil fuels sector, from 2018 onwards we are no longer purchasing securities of issuers who generate 25% or more of their turnover from coal mining and coal-based energy generation.
C om b in ed m an ag em en t re p or t be the case. The portfolio subjected to this screening encompasses major asset classes such as fixed-income securities (government debt securities and debt securities issued by semi-governmental entities, corporate bonds and covered bonds) and listed equities. Altogether, depending on strategically motivated allocation changes, virtually 90% of our investments under own management (EUR 42,197.3 million) are therefore screened according to ESG criteria.
In the year under review we also implemented a “best-inclass ” investment approach as an additional tool within our responsible investment policy. An ESG officer on the investment team assures the development and application of our sustainable investment guideline. In addition, major investment decisions are discussed and approved by the Investment Committee, two of whose members belong to the Executive Board.
Goal to be achieved by 2020: ESG criteria in asset management
Refinement of the sustainability approach in asset management The existing ESG Investment Guideline was expanded in 2018 to include sustainability criteria in the area of fossil fuels. Investments in issuers who generate 25% or more of their turnover from coal mining and coal-based energy generation are excluded. Furthermore, a best-in-class investment approach was developed and technically implemented as an additional tool.
Fostering customer dialogue including on ESG-related topics In the year under review we continued to actively promote knowledge sharing with our customers in the context of product- and / or market-specific seminars and workshops.
In April and May 2018, for example, we held customer seminars in Istanbul and China on the topic of digitalisation.
In the Life&Health reinsurance business group we developed a concept in 2018 for an online platform that is designed to enable customers and external business partners to exchange (re) insurance products and services on an independent basis in the future.
We employed 3,317 staff (previous year: 3,251) Group-wide as at the end of the year under review. Our company’s continuing growth prompted further expansion of the workforce in the financial year just ended. Consequently, there were no major job losses in the year under review, as was also the case in previous years.
As a global entity, we are able to offer our employees an attractive workplace that fosters motivation, dedication and teamwork. Our attractiveness as an employer is further reinforced by systematic career development programmes. We are committed to clearly expressing our appreciation of employees and we enable them to participate in the sustained success of the business.
The basis of our common corporate culture is the greatest possible delegation of tasks, responsibilities and authority. In this way we ensure that our employees are able to act in a quick and flexible manner. This is supported through management by objectives, and we expect our managers to instil a sense of individual accountability in their staff. Our managers therefore play a particularly important role. They lead their staff according to our management principles. We support them in developing their leadership qualities, inter alia with the aid of the management feedback process that gives members of staff an opportunity to provide feedback to their supervisor on how his or her management style is experienced. For further information we would refer to the section “Employee retention”.
When it comes to expanding and establishing our personnel development measures, we set particularly great store by a range of activities tailored to specific needs and target groups. Our programme of further training, which is open to all employees, encompasses above all offerings in the fields of reinsurance, information technology, social and methodological skills as well as language courses. The range of measures is continuously reviewed and extended.
In the financial year just ended we focused our training and development activities especially on supporting our employees and managers in dealing with the implications of markedly changing work environments. In this context the effects of agile forms of working or automated and digitalised workflows play a particularly important role. For example, we launched a new workshop called “Fit for changes”. This event has a preparatory purpose inasmuch as change processes are simulated for both employees and managers in order to prevent the stressful situations that can arise. The workshop is thus consciously designed to serve as a bridge between the topics of change and health.
We also supported our managers by holding “practical training days” on which the challenges of a manager’s daily routine were explored by small groups operating in a safe space with the help of a trainer and issues could be worked through with the aid of coaching and conflict resolution techniques. We continued to cover subjects such as “Wellness - Manage-
Staff at our Hannover head office also enjoy access to an extensive range of fitness opportunities, including company sports groups dedicated to various types of sport and cooperation arrangements with fitness studios. When it comes to individual workstations, we take care to provide an optimal room layout and ergonomic furnishings.
In the financial year just ended the EAP once again proved to be a helpful and popular support tool.
We attach great importance to the satisfaction of our employees in order to remain a consistently attractive employer. Regular feedback from our staff is taken very seriously and we therefore offer various channels through which this can be communicated. In 2018 we initiated a new implementation round of what we refer to as management feedback: the employees working under a defined group of managers are able to give their direct supervisors feedback on just how their style of leadership is experienced. This raw feedback is then aggregated into a results report that forms the basis for discussion between the manager and his or her staff, thereby making it possible to identify measures for improving management effectiveness and teamwork.
Our employees are paid according to their specific tasks, their skills and qualifications and their performance. At the same time, employees in Germany benefit from the security and advantages of the collective agreement for the private insurance industry. 93% of our employees at the Hannover location are covered by the collective bargaining agreement. The remaining 7% can be attributed to some non-collective agreements with managers.
Furthermore, we offer our employees a number of additional voluntary benefits. All members of our staff are granted the same benefits in proportion to their working hours.
Maintaining strong employee affinity (low staff turnover rate of 3 – 5% at the Hannover location)
The staff turnover rate as at 31 December 2018 was 4.1%
Holding of Group-wide employee surveys on a recurring basis (participation rate of at least 60%)
One of the cornerstones of our successful business activities, along with our employees’ skills and commitment, is a considerable degree of diversity in the workforce. At our Hannover location, for example, the members of staff come from altogether 43 different nations, a reflection of the international dimension of our operations. 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. Our employees are paid according to their specific tasks, their skills and qualifications and their performance.
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. 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 participated as mentors in the 2017 / 2018 round of the programme.
Improving the conditions needed to ensure a healthy work / life balance for our employees
The environmental impacts of our commercial operations are comparatively slight, deriving principally from business trips taken by our employees and their commuting to and from work as well as the operation of our office premises. Nevertheless, we take our responsibility for the environment very seriously. In our Sustainability Strategy we regularly define concrete targets and measures for protecting the environment and conserving resources.
Continuous refinement of environmental management Since 2016 our Hannover location has been carbon-neutral. In 2018 we began to record the business trips made by plane at our offices in the Asia-Pacific region. The goal is to fully offset the CO2 emissions caused there by plane travel from 2020 onwards.
In relation to our direct environmental aspects we have set various operational goals to be achieved by 2020, which are published in our EMAS environmental statement. These include, inter alia, reducing our power consumption by 10% per employee, cutting the need for climate-neutral heating energy by 5%, lowering paper consumption by 15% and maintaining our levels of water consumption and CO2 emissions.
As a reinsurer, our business activities have lower impacts on the environment than other industries. Through our selection of suppliers and based on specifications for the production process used by our suppliers, we are nevertheless able to indirectly influence labour practices.
Altogether, we procure goods for IT, the operation of our premises and the conduct of our business from some 360 suppliers. Roughly two-thirds of these suppliers are from Germany or indeed the Greater Hannover region. In addition, we purchase IT products from primarily the European Union and the United States.
Ongoing evaluation of ~90% of suppliers (measured by purchasing volume) according to environmental and social standards 80% of the purchasing volume in Facility Management and more than 90% in the IT sector are currently evaluated according to these ESG criteria.
In the private sphere, householders and car owners are particularly hard hit by inadequate protection: some half a million vehicles were written off in the region flooded by Harvey. In industry, too, flood damage to structures is often not covered – or the indemnity limits are too low. Depending on the timing and duration of the bad weather, losses can also result from business interruption and crop failures and they may impact shipping and aviation.
Our current corporate strategy encompasses ten guiding principles that safeguard the realisation of our vision “ Creating value through reinsurance” across the various divisions. For further information on the corporate strategy and the strategic principles we would refer to our website (www.hannover-re.com/135441/group-strategy-at-a-glance).
Strategic targets for the risk position M 58 in EUR million Limit Indicator as at
Probability of loss of shareholders’ equity under IFRS < 0.03% 0.02%
Parallel to the regulatory developments in Europe, we are seeing adjustments worldwide to the regulation of (re)insurance undertakings.
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. While significant rate increases are now being seen on the USD and GBP side, negative yields persist on euro area government bonds well into the medium maturity segment. The ending of the ECB’s programme of monthly corporate sector purchases (CSPP) at year-end, protracted uncertainty surrounding the process for the United Kingdom’s exit from the European Union and numerous geopolitical flashpoints as well as simmering trade and tariff wars impacted the capital market climate in the period under review. As a result, many areas of the capital market were rather unsettled. Thus, for example, risk premiums on corporate bonds increased – sometimes markedly – in the course of the year, while the losses seen on stock markets towards the end of the year were in some instances appreciable. Owing to the liquidation of our equity portfolio in the previous year, however, we remained unaffected. As far as our investments are concerned, we anticipate elevated volatility on global equity and credit markets in the immediate future, although we also see this as an opportunity and believe that we are appropriately prepared with the currently more defensive posture of our asset portfolio. For further information please see the “Investments ” section of the management report on page 58 et seq.
Brexit: The terms of the United Kingdom’s withdrawal from the European Union have still not been determined. The possibility of the UK leaving the EU without an agreement continues to exist. The Hannover Re Group is prepared for this and all other scenarios and a Group-wide working group has been set up to address readiness measures.
The Hannover Re Life UK Branch will be materially affected. In order to be able to continue its activities even after a “hard” Brexit, an application to operate under the so-called temporary permissions regime (TPR) has been filed and already approved by the financial regulator. Increased administrative expenses and higher capital costs cannot be ruled out over the medium term. Argenta Holdings Limited is a wholly owned subsidiary of Hannover Re that operates on a standalone basis in the United Kingdom and is already authorised as a member of Lloyd’s. We also write reinsurance business in the United Kingdom through Group companies in Han-
nover, Ireland and Bermuda. In this regard we do not anticipate any significant changes as a result of Brexit.
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 financial 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% to 12.5% (rising over the next nine years). We have undertaken some restructuring activities within the Group in order to avert this increased burden of taxation. Most notably, US life reinsurance business previously written through Hannover Re Ireland was transferred to a Bermuda-based subsidiary. The latter is subject to US taxation, thereby avoiding a substantial tax loss; the solvency ratio decreased, however, due to a higher risk margin for the Hannover Re Group.
Natural catastrophe risks and climate change: 2017 was notable for an above-average number of natural disasters. Large losses caused by typhoons and hurricanes left their mark on 2018 as well. The scale of the natural disasters recorded in the financial year was reflected in the assumptions underlying the natural perils models which are used for pricing and managing catastrophe risks. The possibility that the increased storm activity of recent years is due in part to progressive global warming cannot be ruled out. Hannover Re works together with partners to closely monitor the implications of global warming for extreme weather events so as to be able to incorporate the insights gained into the models and the management of risks.
Risks from US mortality business: The actual mortality experience of the portfolio acquired by Hannover Re at the beginning of 2009 proved to be better than expected in 2018. As part of our inforce management measures we initiated rate adjustments for the portfolio concerned. In a few remaining isolated instances one-time charges to the IFRS result may arise if cedants affected by rate adjustments exercise their right of recapture. We are monitoring the further development of the underlying mortality on an ongoing basis.
In the interests of our shareholders and clients we strive to ensure that our risks remain commensurate with our capital resources. Our quantitative risk management provides a uniform framework for the evaluation and steering of all risks affecting the company as well as of our capital position. The internal capital model – a stochastic enterprise model – is a central tool in this context. It covers all subsidiaries and business groups of the Hannover Re Group. The core variable in risk and enterprise management is the economic equity, which is calculated according to market-consistent measurement principles and also constitutes the basis for calculating the own funds under Solvency II. Hannover Re’s internal capital model reflects all risks that influence the development of the economic equity. These are split into underwriting risks, market risks, counterparty default risks and operational risks. For each of these risk classes we have identified a number of risk factors for which we define probability distributions. These risk factors include, for example, economic indicators such as interest rates, exchange rates and inflation indices, but also insurance-specific indicators such as the mortality of a particular age group within our portfolio of insureds in a particular country or the number of natural catastrophes in a certain region and the insured loss amount per catastrophe.
The 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 to use the model for operational risks, the difference now rests solely in the Solvency II requirements that non-controlling interests are to be treated as partially ineligible. The solvency ratio calculated in accordance with Solvency II stood at 245.7% as at 31 December 2018. The key risk indicators and own funds shown for the Hannover Re Group and Hannover Rück SE as at 31 December 2018 reflect the static volatility adjustment of the yield curves.
We strive for a rating from the rating agencies most relevant to our industry that facilitates and secures our access to al reinsurance business worldwide. Hannover Re is analysed by the rating agencies Standard & Poor’s (S & P) and A.M. Best as part of an interactive rating process. The current financial strength ratings are assessed as “AA-” (Very Strong, stable outlook) by Standard & Poor’s and “A+” (Superior, stable outlook ) by A.M. Best. Standard & Poor’s evaluates Hannover Re’s risk management as “Very Strong”, the best possible rating.
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 requirements for risk management as well as international standards and developments relating to appropriate enterprise management.
Risk identification A key source of information for monitoring risks is the risk identification carried out on a periodic basis. All identified risks are documented in a central register containing all material risks. Risk identification takes the form of, among other things, structured assessments, interviews or scenario analyses. External insights such as recognised industry know-how from relevant bodies or working groups are incorporated into the process. Risk identification is important for ensuring that our risk management consistently remains up-to-date.
Risk analysis and assessment In principle, every risk that is identified and considered m aterial is quantitatively assessed. Only risk types for which quantitative risk measurement is currently impossible or difficult are qualitatively assessed (e .g. strategic risks, reputational risks or emerging risks). Qualitative assessment can take the form of, for example, expert evaluations. Quantitative assessment of material risks and the overall risk position is performed using Hannover Re’s internal capital model. The model makes allowance for risk concentration and risk diversification.
Risk steering The steering of all material risks is the task of the operational business units on the divisional and company level. In this context, the identified and analysed risks are either consciously accepted, avoided or minimised. The risk / reward ratio is factored into the division’s decision. Risk steering is assisted by the parameters of the central and local underwriting guidelines and by defined limits and thresholds.
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 activities for staff. The regular sharing of information between risk-steering and risk-monitoring units is also fundamental to the proper functioning of risk management.
In this section we compare the available economic capital with the required risk capital in greater detail. Hannover Re calculates the economic equity as the difference between the market-consistent value of the assets and the market-consistent value of the liabilities. While fair values are available for most investments, the market-consistent valuation of reinsurance treaties necessitates a specific valuation model. We establish the market-consistent value of technical items as the present value of projected payments using actuarial methods. This is adjusted by a risk loading that factors in the potential fluctuation in future payments. Such fluctuations result from risks that cannot be hedged by means of capital market products, such as underwriting risks. For the discounting of future cash flows we use the risk-free basic yield curves calculated in accordance with Solvency II requirements and also for the first time effective 31 December 2018 the static volatility adjustment approved by the supervisory authority. Market prices for options and guarantees embedded in insurance contracts are determined or approximated using option valuation models from the field of financial mathematics. The volume of these options and guarantees in our portfolio is, however, comparatively slight. The adjustments for assets under own management shown in the following table indicate the difference between fair value and book value of those investments recognised under IFRS at book values. Other adjustments encompass above all the deferred taxes. The available economic capital, which is available as liable capital for policyholders, is composed of the economic equity and the hybrid capital and includes the deduction of foreseeable dividends as required by Solvency II. Hybrid capital is recognised at market -consistent value as required by Solvency II, with changes in the own credit risk not being included in the valuation.
Available economic capital 13,323.1 13,041.0 1 This table contains information that has not been audited by the independent auditor.
The required risk capital of the Hannover Re Group with the target confidence level of 99.5% increased to EUR 5,135.4 million as at 31 December 2018, compared to EUR 4,729.0 million as at 31 December 2017. This was driven principally by the larger business volumes, which led to an increase in market risks and underwriting risks in property and casualty reinsurance. In addition, the weakening of the euro against the US dollar contributed to a rise in foreign-currency volumes and an increase in risks in euro.
Along with the larger volumes, elevated default and spread risks – as are also evident in the generally higher spread level – are a major reason for the increase in market risks. The underwriting risks in property and casualty reinsurance increased primarily as a consequence of higher underwriting capacities for natural perils and model adjustments made to specific large loss models. The underwriting risks in life and health reinsurance decreased due to a reduced exposure to longevity and mortality risks. This contrasts with a higher exposure to morbidity risks resulting from expansion of the business. The increase in counterparty default risks can be attributed principally to a higher volume of receivables due from ceding companies and retrocessionaires as well as elevated volatility of the modelled losses due to generally increased credit spreads.
The decrease in operational risks can be attributed above all to an updated expert assessment regarding the impact of individual scenarios.
The internal capital model is based on current methods from actuarial science and financial mathematics. In the case of underwriting risks, we are able to draw on a rich internal data history to estimate the probability distributions, e. g. for the reserve risk. For risks from natural perils we use external models, which are adjusted in the context of a detailed internal review process such that they reflect our risk profile as closely as possible. In the area of life and health reinsurance long-term payment flows are modelled under various biometric and lapse scenarios. With respect to all the aforementioned risks we use internal data to define scenarios and probability distributions. The internal data is enhanced by way of parameters set by our internal experts. These parameters are especially significant in relation to extreme events that have not previously been observed.
Underwriting risk property and casualty 3,819.3 3,485.4 1 Required risk capital with a confidence level of 99.5%
The reserve risk, i. e. the risk of under-reserving losses and the resulting strain on the underwriting result, is a high priority in our risk management. We attach importance to maintaining a conservative reserving level. In order to counter the risk of under-reserving we calculate our loss reserves based on our own actuarial estimations and establish, where necessary, additional reserves supplementary to those posted by our cedants as well as the segment reserve for losses that have already 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 7,134.6 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 229 et seq.
In the case of asbestos- and pollution-related claims it is difficult to reliably estimate future loss payments. The adequacy of these reserves can be estimated using the so-called “survival ratio”. This ratio expresses how many years the reserves would cover if the average level of paid claims over the past three years were to continue.
In order to partially hedge inflation risks Hannover Re holds securities in its portfolio with inflation-linked coupons and redemption amounts. An inflation risk exists particularly inasmuch as the liabilities (e. g. loss reserves) could develop differently than assumed at the time when the reserve was constituted because of inflation. The specified bonds protect these parts of the loss reserves against inflation risks.
For the purposes of risk limitation, maximum amounts are also stipulated for various extreme loss scenarios and return periods in light of profitability criteria. Risk management ensures adherence to these maximum amounts. The Executive Board, Risk Committee and P & C Executive Committee are kept regularly updated on the degree of capacity utilisation. The limits and thresholds for the 200-year aggregate loss as well as the utilisation thereof are set out in the following table: Limit and threshold for the 200-year aggregate annual loss as well as utilisation thereof in EUR million
All natural catastrophe risks 1 200-year aggregate annual loss 1,873 1,686 1,446 1 Loss relative to the underwriting result
Net expenditure on major losses in the year under review amounted to EUR 849.8 million (EUR 1,127.3 million). Our company incurred the following catastrophe losses and major claims in the 2018 financial year: Catastrophe losses and major claims 1 in 2018 M 69 in EUR million Date gross net
"Camp" forest fire, United States 8 November – 3 December 2018 352.6 129.5
"Woolsey" forest fire, United States 8 – 22 November 2018 122.7 63.8
Typhoon "Trami", Japan 28 September – 1 October 2018 107.2 26.9
Hurricane "Florence", United States 14 – 20 September 2018 81.7 37.4
Torrential rain, Colombia 28 April – 11 June 2018 77.1 48.4
Earthquake, Papua New Guinea 25 – 26 February 2018 22.1 12.9
Calculation of the loss expectancy • Historical loss and exposure analysis • Changes in the quality of underlying risks • Changes in the quantity of underlying risks • Discounting of future cash flows
In addition, Hannover Re’s regional and treaty departments prepare regular reports on the progress of their respective renewals. The reporting in this regard makes reference inter alia to significant changes in conditions, risks (such as inadequate premiums) as well as to emerging market opportunities and the strategy pursued in order to accomplish targets. The development of the combined ratio in property and casualty reinsurance in 2018 and prior years is shown in the table below: Combined and catastrophe loss ratio M 71
The reserves are determined on the basis of secure biometric actuarial bases in light of the information provided by our clients. The biometric actuarial bases used and the lapse assumptions are continuously reviewed with an eye to their adequacy and if necessary adjusted. This is done using the company ’s own empirical data as well as market-specific insights. Our current risk profile in life and health reinsurance is dominated by mortality and longevity risks. This is due to the fact that under some of our contracts we pay death benefits, while under others we pay survival benefits. The volume of our annuity portfolio contributes to diversification within life and health reinsurance. We calculate the diversification effect between mortality and longevity risks prudently in view of the fact that the contracts are normally taken out for different regions, age groups and individuals. The required risk capital with a confidence level of 99.5% for underwriting risks in life and health reinsurance breaks down as follows: Required risk capital 1 for underwriting risks in life and health reinsurance
The actual mortality experience for the portfolio in question proved to be better than expected in 2018. We are monitoring the further development of the underlying mortality on an ongoing basis.
Required risk capital 1 for market risks M 73 in EUR million 31.12.2018 31.12.2017
With a view to preserving the value of our assets under own management, we constantly monitor adherence to a trigger mechanism based on a clearly defined traffic light system that is applied across all portfolios. This system defines clear thresholds and escalation channels for the cumulative fluctuations in fair value and realised gains / losses on investments since the beginning of the year. They are unambiguously defined in conformity with our risk appetite and trigger specified information and escalation channels if a corresponding fair value development is overstepped.
Interest rate and spread markets were relatively volatile over the course of the year under review. Needless to say, our conservatively oriented investment portfolio was not left unaffected by these market movements. While EUR interest rates were rather stable on a low level, USD and GBP interest rates recorded appreciable increases and risk premiums on corporate bonds fluctuated sharply during the year before settling for the most part on a substantially higher level at year-end than at the beginning of the reporting period. A significant decrease – albeit one in line with our planning – was thus booked in the hidden reserves for fixed-income securities over the year as a whole.
Scenarios for changes in the fair value of material asset classes M 76 in EUR million Scenario Portfolio change on a fair value basis Change in equity before tax
The portfolio of fixed-income securities is exposed to the interest rate risk. Declining market yields lead to increases and rising market yields to decreases in the fair value of the fixed-income securities portfolio. The credit spread risk should also be mentioned. The credit spread refers to the interest rate differential between a risk-entailing bond and risk-free bond with the same maturity. Changes in these risk premiums, which are observable on the market, result – analogously to changes in pure market yields – in changes in the fair values of the corresponding securities. We minimise interest rate risks by matching the durations of payments from fixed-income securities as closely as possible with the projected future payment obligations under our insurance contracts.
We use derivative financial instruments only to the extent needed to hedge risks. The primary purpose of such financial instruments is to hedge against potentially adverse developments on capital markets. A portion of our cash flows from the insurance business as well as foreign exchange risks arising because currency matching cannot be efficiently achieved are hedged to some extent using forward exchange transactions.
Hannover Re holds further derivative financial instruments to hedge interest rate risks from loans taken out to finance real estate. In addition, Hannover Re holds hedges in the form of equity swaps to hedge price risks in connection with the stock appreciation rights granted under the Share Award Plan. These are intended to neutralise changes in the fair values of the awarded stock appreciation rights. Contracts are concluded with reliable counterparties and for the most part collateralised on a daily basis so as to avoid credit risks associated with the use of such transactions. The remaining exposures are controlled according to the restrictive parameters set out in our investment guidelines.
Our investments entail credit risks that arise out of the risk of a failure to pay (interest and / or capital repayment) or a change in the credit status (rating downgrade) of issuers of securities. We attach equally vital importance to exceptionally broad diversification as we do to credit assessment conducted on the basis of the quality criteria set out in the investment guidelines. We measure credit risks in the first place using the standard market credit risk components, especially the probability of default and the potential amount of loss – making allowance for any collateral and the ranking of the individual instruments depending on their effect in each case.
We then assess the credit risk first on the level of individual securities (issues) and in subsequent steps on a combined basis on the issuer level. In order to limit the risk of counterparty default we set various limits on the issuer and issue level as well as in the form of dedicated rating quotas. A comprehensive system of risk reporting ensures timely reporting to the functions entrusted with risk management.
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
Counterparty default risk 312.6 282.0 1 Required risk capital with a confidence level of 99.5%
69.6% 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 241.8 million (6.1%) of our accounts receivable from reinsurance business totalling EUR 3,975.8 million were older than 90 days as at the balance sheet date.
The following chart shows the development of our reinsurance recoverables – split by rating quality – due from our retrocessionaires.
Reinsurance recoverables as at the balance sheet date M 80 in EUR million
Operational risks refer to the risk of losses occurring because of the inadequacy or failure of internal processes or as a result of events triggered by employee-related, system-induced or external factors. In contrast to underwriting risks (e. g. the reserve risk), which we enter into in a deliberate and controlled manner in the context of our business activities, operational risks are an indivisible part of our business activities. The focus is therefore on risk minimisation. Unlike market, counterparty default and underwriting risks, operational risks are categorised as non-financial risks.
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 risk management function or the respective 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.
Required risk capital 1 for operational risks M 81 in EUR million 31.12.2018 31.12.2017
Operational risk 575.3 637.0 1 Required risk capital with a confidence level of 99.5%
Outsourcing risks can result from the outsourcing of functions, services and / or organisational units to third parties outside Hannover Re. Mandatory rules have been put in place to limit this risk; among other things, they stipulate that a risk analysis is to be performed prior to a material outsourcing. In the context of this analysis a check is carried out to determine, inter alia, what specific risks exist and whether out-
When it comes to reducing business interruption risks, the paramount objective is the quickest possible return to normal operations after a crisis, for example through implementation of existing contingency plans. Guided by internationally accepted standards, we have defined the key framework conditions and – among other measures – we have assembled a crisis team to act as a temporary steering body in the event of an emergency. The system is complemented by regular exercises and tests. A leaflet is available setting out the correct behaviour in the event of a business interruption; this condenses in compact form the key information that all employees need to know, such as the information channels to use in a crisis situation.
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 “Combined non-financial information statement” on page 75 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 structure of the investments. Above and beyond the foreseeable payments, unexpected and exceptionally large payments may pose a threat to liquidity. In reinsurance business, however, significant events (major losses) are normally paid out after a lead time that can be reliably planned. As part of our liquidity management we have nevertheless defined asset holdings that have proven to be highly liquid – even in times of financial stress such as the 2008 financial crisis. Our holdings of unrestricted German, UK and US government bonds as well as cash during the year under review were larger than possible disbursements for assumed extreme events, which means that our liquidity is assured even in the unlikely case of financial crises coinciding with an extreme event that needs to be paid out quickly. The liquid asset reserve stood at EUR 4.9 billion as at the balance sheet date. In addition, we manage the liquidity of the portfolio by checking on each trading day the liquidity of the instruments contained therein. These measures serve to effectively reduce the liquidity risk.
Trends are systematically identified and analysed with the support of external sources and partners and the needs of our clients are anticipated along the entire insurance-related value -added chain. Targeted consideration is given to new business opportunities that promise access to innovative technologies and enhance our appeal in the eyes of customers. To this end Hannover Re cultivates business-related partnerships with accelerators, incubators, company builders, startups and research institutes in order to boost our competitiveness in the insurtech sector and the area of digital solutions. A competence centre has been set up specifically to evaluate the strategic and technical significance of innovative new digital technologies.
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.
Based on the project results, Hannover Re partnered with investors on the launch of three insurtechs in 2018. The young start-ups have also been recognised with a number of international prizes and awards.
The networking of the innovative minds at work within Hannover Re gives rise to close links with other projects, working groups and bodies, such as with the working group on “Emerging Risks und Scientific Affairs” in regard to emerging risks and opportunities (see page 117 et seq. “Other risks”). This working group carries out qualitative assessments of emerging risks. As a result, however, not only are the potential risks explored but also any available business opportunities.
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.
As an internationally operating reinsurance group, we move in a highly complex environment. Nevertheless, thanks to our business activities in all lines of reinsurance we are able to achieve optimal risk spreading through geographical and risk-specific diversification while at the same time maintaining a balanced opportunity / risk profile. We consider the risks described in the above sections to be manageable, particularly because our steering and monitoring measures are effectively and closely interlinked. Despite these diverse mechanisms, individual and especially accumulation risks can decisively affect our assets, financial position and net income. In accordance with our understanding of risk, however, we consider not only risks but also at the same time opportunities. We therefore only enter into those risks that go hand-inhand with opportunities. 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.
Our own evaluation of the manageability of existing risks is confirmed by various financial indicators and external assessments. Specific monitoring indicators, corresponding notification thresholds and potential escalation steps are defined on a mandatory basis in our central system of limits and thresholds for the material risks of the Hannover Re Group. As a result, the system provides us with a precise overview of potentially undesirable developments in the defined risk tolerances and enables us to react in a timely manner. One testament to our financial stability, for example, is the growth of our shareholders’ equity: the total policyholders’ surplus (hybrid capital, non-controlling interests and shareholders’ equity ) stands at 150% of the corresponding figure from 2011. In this context, our necessary equity resources are determined by the requirements of our economic capital model, solvency regulations, the assumptions of rating agencies with respect to our target rating and the expectations of our clients and shareholders. This increase gives us a sufficient capital cushion to be able both to absorb risks and act on business opportunities that may arise. Similarly, our very good ratings (see page 66) also testify to our financial stability. The quality of our Enterprise Risk Management (ERM) is evaluated separately by Standard & Poor’s. In the year under review Standard & Poor’s gave our risk management its highest possible grade of “Very Strong”. Most notably, our established risk management culture – one of the rating agency’s benchmark criteria – promotes the development of appropriate risk monitoring systems and strategic risk management. The evaluation further encompasses the areas of risk controls, emerging risk management and risk models. This external appraisal confirms the quality of our holistic approach to risk management.
This subsection is a section of the report that the legislator has expressly exempted from the audit of the financial statement / audit of the management report (§ 317 Para. 2 Sentence 6 and Sentence 4 German Commercial Code (HGB); unaudited information).
Declaration of Conformity pursuant to § 161 Stock Corporation Act (AktG) regarding compliance with the German Corporate Governance Code at Hannover Rück SE
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
The amount of variable compensation deriving from the granting of share awards is thus capped at the time when the share awards are allocated, but it is not capped again at the time of payment. Bearing in mind the harmonisation of the interests of shareholders and of the members of the Executive Board of Hannover Rück SE that is sought through the share awards, the company does not consider further limitation of the amount of variable remuneration resulting from the granting of share awards at the time of payment to be expedient. From the company’s perspective, the use of Hannover Re share awards as a method of payment constitutes – in economic terms – a compulsory investment in Hannover Re shares with a four-year holding period.
Code Section 5.3.2 Para. 3; Independence of the Chair of the Audit Committee and recommendation that the Chair of the Supervisory Board and Chair of the Audit Committee shall not be the same person The current Chair of the Supervisory Board and Chair of the Finance and Audit Committee of Hannover Rück SE at the same time also served as the Chair of the Board of Management of the controlling shareholder until the end of the Annual General Meeting of Talanx AG on 8 May 2018 and hence cannot, in the company’s legal assessment, be considered independent.
In the opinion of Hannover Rück SE, it is therefore in the interest of the company to diverge from the recommendation contained in Section 5.3.2 Para. 3.
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. The current Sustainability Strategy for the period from 2018 to 2020 defines four action fields and specifies concrete goals and measures that are to be implemented in the strategy cycle. In accordance with the CSR Directive Implementation Act of 11 April 2017, Hannover Rück SE has also published a combined non-financial statement which can be found on page 75 et seq. of this year’s Group Annual Report.
We thus strive to reduce as far as possible the greenhouse gas emissions produced by our day-to-day business activities in order to come closer to reaching our goal of a net zero carbon footprint. Furthermore, we have defined strategic principles for our human resources management, since we consider our employees to be a crucial factor in the success of our company. Along with skills, qualifications and commitment, a high degree of diversity is one of the cornerstones of our successful business operations. Performance indicators have therefore been defined for personnel development and advancement.
The proportion of women serving on the Supervisory Board in 2018 was 44% and thus exceeded the 30% target currently defined pursuant to §§ 76 Para. 4, 111 Para. 5 Stock Corporation Act (AktG) for the period from 1 July 2017 to 30 June 2022. This is equivalent to an increase of 33% compared to the previous year. The target for the Executive Board is 14%, which means that one woman shall serve as a member of the Executive Board in the specified period.
The Rules of Procedure of the Executive Board are intended to ensure that a consistent business policy is elaborated and implemented for the company in accordance with its strategic objectives. Within the framework of a consistent business policy, the principle of “delegation of responsibility” enjoys special status. In the interests of shareholders, importance is expressly attached to an organisation that facilitates cost-effective, quick and unbureaucratic decision processes. Open and trusting cooperation geared to the interest of the whole is the foundation of success. In this context, the members of the Executive Board bear joint responsibility for the overall management of business. Irrespective of their overall responsibility, each member of the Executive Board leads their own area of competence at their individual responsibility within the bounds of the resolutions adopted by the Executive Board. Only persons under the age of 65 may be appointed to the Executive Board. The term of appointment shall be determined such that it expires no later than the end of the month in which the member of the Executive Board turns 65. The Supervisory Board takes account of diversity considerations in the composition of the Executive Board.
The Rules of Procedure of the Supervisory Board provide inter alia that each member of the Supervisory Board must have the knowledge, skills and professional experience required for orderly performance of their tasks and that the Supervisory Board must have a sufficient number of independent members.
Currently, at least two of the six shareholder representatives are independent as defined by Item 5.4.1 Para. 4 of the German Corporate Governance Code. Persons suggested to the Annual General Meeting as candidates for election to the Supervisory Board may not be older than 72 at the time of their election and shall normally not belong to the Supervisory Board as a member for longer than three full consecutive terms of office; the term of office commencing from the end of the 2014 Annual General Meeting shall be counted as the first term of office in this regard. Nominations shall take account of the company’s international activities as well as diversity.
The composition of the Supervisory Board shall be such that overall its members are equipped with the knowledge, abilities and specialist experience necessary for proper performance of the tasks. The make-up of the Supervisory Board shall ensure that the Executive Board in an internationally operating, broadly positioned reinsurance group receives qualified supervision and advice from the Supervisory Board. Above and beyond the legally required specialist expertise in investing, underwriting and accounting, the topics of internationality, taxation, M & A, human resources, risk management, IT and compliance have been taken into account on a voluntary basis. The goal is that the Supervisory Board as a whole has all the know-how and experience considered to be material in light of the activities of the Hannover Re Group. In addition, special attention is to be paid to the integrity, character, commitment, professionalism and independence of individuals put forward for election. In accordance with the Code of Conduct of the Supervisory Board, for example, members of the Supervisory Board shall ensure that they have sufficient time at their disposal for their activities and that potential conflicts of interest are avoided. Furthermore, candidates shall be put forward to the Annual General Meeting for election to the Supervisory Board only if they will not have passed the age of 72 by the time of their election and – with effect from the election of the new Supervisory Board in 2014 – provided they have not sat on the Supervisory Board for more than three full consecutive terms of office. With regard to the appropriate number of independent Supervisory Board members from the perspective of the Supervisory Board, the Supervisory Board has decided that it shall have at least two independent members as defined by Section 5.4.2 German Corporate Governance Code (DCGK). The Supervisory Board currently meets this target. Staff representatives on the Supervisory Board are disregarded in this context.
C om b in ed m an ag em en t re p or t er things, to assure the availability on the Supervisory Board of the expertise needed to cover all the Group’s areas of business. In addition, Supervisory Board members may not hold mandates on governing bodies at major competitors of the company or of a Group undertaking, nor may they perform individual advisory tasks for such competitors.
With an eye to Hannover Re’s international orientation, it is to be ensured that a sufficient number of members with long-standing international experience belong to the Supervisory Board. Based on their current or former service as a board member / chief executive officer or in a comparable role as managing director with internationally operating undertakings or organisations, all the shareholder representatives on the Supervisory Board have long-standing international experience. In the opinion of the Supervisory Board, due consideration is given to the international dimension of operations.
Information regarding the following items is provided in the remuneration report: - Remuneration report for the Executive Board and disclosure of the remuneration received by Supervisory Board members pursuant to Items 4.2.5 and 5.4.6 of the German Corporate Governance Code, - Securities transactions, - Shareholdings.
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 2018 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 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.
Basic remuneration; Non-cash compensation, fringe benefits: Accident, liability and luggage insurance, company car for business and – if desired – personal use (tax on the non-cash benefit payable by the Board member), reimbursement of travel expenses and other expenditures incurred in the interest of the company
Cash 3 Bonus bank 3 HR share awards 3 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)
Performance bonus The performance bonus for the Chief Executive Officer and the Chief Financial Officer is arrived at from individual qualitative and, as appropriate, quantitative targets defined annually by the Supervisory Board that are to be accomplished in the subsequent year. For members of the Executive Board with responsibility for a certain division, the performance bonus consists in equal parts of the divisional bonus and the individual bonus.
Decision of the Supervisory Board according to its best judgement 1 An instrument of value-based management used to measure the attainment of long-term goals on the level of the Group, business groups and operational units (see also page 22 et seq.).
Payment procedures for the total variable remuneration Of the total amount of defined variable remuneration, a partial amount of 60% is paid out in the month following the Supervisory Board meeting that approves the consolidated financial statement. The remaining amount of 40% is initially withheld as explained below with a view to encouraging longterm value creation: Payment procedures for the total variable remuneration M 86
If the contractual relationship ends normally prior to the end of the vesting period for the bonus bank or HR-SAs, and if a contract extension is not offered, the member of the Executive Board retains his entitlements to payment from the bonus bank – making reference to a defined forward projection of the bonus bank – and for already awarded HR-SAs.
Variable remuneration under the old remuneration structure (until 2011) The virtual stock option plan with stock appreciation rights existing under the old remuneration structure has been terminated because all stock appreciation rights have been exercised.
(allocation) 5 1 As at the balance sheet date no Board resolution was available regarding the performance-based remuneration for 2018. The variable remuneration is recognised on the basis of estimates and the provisions constituted accordingly.
2 The non-cash compensation has been carried in the amounts established for tax purposes. 3 In 2018 EUR 33,600 more in variable remuneration was paid out to Board members for 2017 than had been reserved.
Total expense for share-based remuneration of the Executive Board M 88
The following two tables show the remuneration of the Executive Board in the 2018 financial year in accordance with the recommendations of the German Corporate Governance Code: German Corporate Governance Code, Item 4.2.5 Para. 3 – Table 1 (target / minimum / maximum remuneration as nominal amounts)
Dividend on share awards for 2016 3 52.2 0.0 0.0 0.0 23.0 0.0 0.0 0.0 32.1 0.0 0.0 0.0 38.8 0.0 0.0 0.0
Dividend on share awards for 2017 3 0.0 45.7 45.7 45.7 0.0 22.0 22.0 22.0 0.0 28.4 28.4 28.4 0.0 33.8 33.8 33.8
Dividend on share awards for 2016 3 29.3 0.0 0.0 0.0 30.7 0.0 0.0 0.0 30.7 0.0 0.0 0.0
3 Stock appreciation rights were awarded in 2010, exercise option at the discretion of the Executive Board until 31 December 2020 in the following tranches: 60% from 2015, 80% from 2016, 100% from 2017 onwards.
Roland Vogel Chief Financial Officer 1 This refers in each case to payment of the variable remuneration for the previous year. Remuneration for seats with Group bodies that is counted towards the variable remuneration accrues in the year of occurrence. The company’s Supervisory Board only decides on the final amount paid out for the 2018 financial year after the remuneration report has been drawn up.
Pension payments to former members of the Executive Board The pension payments to former members of the Executive Board and their surviving dependants, for whom 17 (17) pension commitments existed, totalled EUR 1.7 million (EUR 1.6 million) in the year under review. The projected benefit obligation of the pension commitments to former members of the Executive Board amounted to altogether EUR 26.0 million (EUR 24.7 million).
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.
In addition, the members of the Finance and Audit Committee formed by the Supervisory Board receive remuneration of EUR 15,000 for their committee work and the members of the Standing Committee formed by the Supervisory Board receive remuneration of EUR 7,500. In this case, too, the Chairman of the Committee receives twice and the Deputy Chairman oneand -a-half times the stated amounts. No remuneration is envisaged for the Nomination Committee.
Individual remuneration received by the members of the Supervisory Board M 92
Deputy Chairman of the • Supervisory Board Member of the • Standing Committee
Member of the • Supervisory Board • Finance and Audit Committee
In order to avoid potential conflicts of interest, Hannover Rück SE or its subsidiaries may only grant loans to members of the Executive Board or Supervisory Board or their dependants with the approval of the Supervisory Board.
In 2018 no loan relationships existed with members of the Executive Board or Supervisory Board of Hannover Rück SE, nor did the company enter into any contingent liabilities for members of the management boards.
Structure and system The remuneration scheme for senior executives below the Executive Board (management levels 2 and 3) and for key function holders in Germany belonging as a matter of principle to the ranks of senior executives consists of a fixed annual salary and a system of variable remuneration. This is comprised of a short-term variable remuneration component, the annual cash bonus, and a long-term share-based remuneration component, the Share Award Plan. This variable remuneration has been uniformly applied worldwide since 1 January 2012 to all Group senior executives (i. e. Managing Directors, Directors and General Managers). As part of the reorientation of the remuneration system for senior executives the Share Award Plan of the Executive Board was consciously extended to include management levels 2 and 3. Given that at the same time the stock appreciation rights plan for senior executives was cancelled with effect from the 2012 allocation year, this means that a uniform share-based remuneration component has been maintained for the Executive Board and senior executives alike.
Group of participants and total number of eligible participants in variable remuneration systems Valid: 31 December 2018 M 93
Hannover Re Group All 157 Group senior executives worldwide receive a cash bonus upon corresponding goal attainment and participate in the Share Award Plan.
Head office Hannover 796 staff (excl. seconded employees) out of the altogether 1,426 at Hannover head office (incl. 90 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 res ponsibility, namely Property & Casualty reinsurance or Life & Health reinsurance, is therefore taken as a one-year measurement basis. The xRoCA describes the IVC in relation to the allocated capital and shows the relative excess return generated above and beyond the weighted cost of capital. Goal attainment of 100% exists if the xRoCA in Property & Casualty reinsurance reaches 2% and the xRoCA in Life & Health reinsurance reaches 2%. Negative performance contributions are excluded; the minimum goal attainment is 0%. The maximum possible goal attainment is 150%.
Spreading the burden of large risks across many shoulders is the principle at the heart of reinsurance. The more diversified the portfolio, the easier it is to offset losses in individual lines or regions with positive loss experiences elsewhere.
Hannover Re is active worldwide in all classes of property & casualty and life & health reinsurance. The company writes business in an extremely diverse range of lines, including for example high-risk sports.
We are a leading professional reinsurer with numerous specialist fields of expertise. This enables us to write business that others may consider too risky: by practising systematic cycle management we are able to act on business opportunities where rates are commensurate with the risks.
Global economy Economic growth will continue to trend higher in 2019, albeit at a reduced pace. In its year-end forecast the Kiel Institute for the World Economy expects growth to slow by 0.3 percentage points in 2019 to 3.4%. One of the reasons here is that capacity utilisation in the advanced economies will scarcely increase further. What is more, output in the emerging economies will expand at only a moderate tempo in view of a challenging fiscal climate and in many instances an unfavourable general environment. As a further factor, the deterioration in the trading environment will likely curb business activity.
The upswing seen in the advanced economies will lose momentum in the face of a slow tightening of expansionary monetary policy, diminishing stimuli on the fiscal policy side and only a moderate rise in demand from developing and emerging nations: after an increase of 2.4% in the year just ended output in the group of advanced economies is expected to rise by 2.1% in the current year.
Risks are posed in particular by a further ratcheting up of trade war tensions: although the spiralling disputes over market access that prompted the United States and China to impose reciprocal tariffs have been put on hold for the time being, the uncertainties swirling around the trade policy framework remain. Further potential for conflict exists between the United States and the European Union, where issues relating to the balance of trade are being fought over indirectly through the automobile manufacturing sector. In Europe the question of debt sustainability in Italy, the delays over implementing reforms in France and the possibility of a disorderly Brexit will be reflected in poorer economic growth than anticipated.
Europe In the Eurozone, too, the pace of expansion is gradually easing.
Growth will slow by 0.2 percentage points to 1.7%. Continued favourable financing conditions and an expansionary fiscal policy are nevertheless helping to keep the economy on an upward track. In addition, stronger impetus is set to come from foreign trade in the years ahead after a softer 2018. In France (+1.4%) and Italy (+0.7%) growth will slow further in the face of continued doubts surrounding reforms. Particularly in Italy, the pressure from financial markets may keep increasing in view of the high level of debt. While Portugal (+2.0%) will probably not be able to sustain the growth tempo of the previous year, growth in Greece (+2.5%) continues to trend higher.
Even in the current phase of slightly fading upward momentum, unemployment in the Eurozone will continue to fall in 2019; the jobless rate is forecast to retreat from 8.2% in the previous year to 7.7%. Although core inflation is gradually picking up, the inflation rate of 1.5% in the current year will be slightly lower than in the previous year and remain below the target set by the ECB.
Exports are set to bounce back in the current year after the dip seen in 2018 and expected to rise by 3.6% (2018: 2.0%). Imports will be further bolstered by the brisk domestic economy, with the result that the value of imported goods will increase by 5.2% in 2019 (2018: 3.3%).
The job market will see continued employment growth and a further rise in wages driven by the increasingly scarce supply of labour. The jobless rate will retreat from an annual average of 5.2% in the previous year to 4.8% in the current year. The upsurge in prices seen in the previous year (+1.9%) is expected to gain momentum and climb to a good two percent in 2019.
The growth rate in Japan, the world’s third-largest economy, is set to increase to a modest 1.0% in 2019. With a view to mitigating an economic cooldown resulting from a planned hike in the consumption tax, the government approved a record amount of public spending in December for the budget year starting in April 2019.
Above all, geopolitical risks and protectionism have continued potential for adverse repercussions in some areas. Populist moves may increasingly leave their mark on the real economy. One of the primary arenas here remains Europe, where it is still impossible to foresee how the Brexit vote will be translated into political and economic reality. The second focus of attention is the United States, where the behaviour of political actors is difficult to predict and there is a risk of growing instability in view of their impact on global politics. It will be especially important to keep a close eye on trade disputes with China and other countries. Similarly, though, the tense ongoing dialogue between the European Union and Italy, France’s partial abandonment of its reform programme and the political shift in Brazil all have the potential to move markets.
The announcement by the ECB that it would finally be terminating its programme of corporate sector purchases at the end of 2018 after almost four years appears to herald a normalisation phase. This is despite the fact that in light of global political tensions and moves towards economic isolationism the ECB’s assessment of the economic outlook is no longer so rosy. Yet there are also no plans for an abrupt end to the anti-crisis mode, since the curtailment of bond purchases only applies to the investment of new funds; funds from maturing government and corporate bonds will continue to be reinvested. It does now appear that a first step towards raising the interest rate on deposits can be taken in 2019. Nevertheless, the ECB is expected to leave the key interest rate for the Eurozone at the historically low level of 0.00% at least until mid-year. The change in leadership at the helm of the ECB upcoming in the autumn is not likely to bring any significant shifts in the central bank’s approach.
In contrast, having already hiked rates in four increments in the year under review, the US Federal Reserve will continue to move away from the past expansionary policy in response to the economic upswing in the United States and is expected to press ahead along the path towards normalisation in 2019, albeit at a reduced tempo. This will further accentuate the interest differential between the US dollar and euro areas and may also be reflected in an even stronger US currency. The implications of personnel changes at the Fed for its policy going forward are a subject of considerable anticipation. The new team will similarly be challenged to keep inflation in check without jeopardising domestic consumption as well as to counteract systemic risks through an adequate overall policy. If it is to succeed in this balancing act, it must avoid market overheating without stifling the momentum for growth. It would seem that the central bankers at the Fed have so far been able to resist the actions urged by politicians and preserve their independence.
International bond markets will therefore once again see largely below-average and continued divergent interest rate levels in 2019. In the relevant currency areas for our company we expect slightly upsloping yield curves. For the most part, sovereign bonds with higher risk premiums issued by countries of the European Monetary Union that of late have been the focus of considerable attention should continue to stabilise, particularly in light of recent indications of a more harmonious interaction between the EU and Italy. The prevailing credit cycle in the United States – despite slowing momentum and higher premiums – as well as the stabilisation of emerging markets will continue to shape the economic environment.
In the latter case, however, we still see a positive scenario going forward as they have largely been able to channel the outside pressure of the past years into economic and fiscal optimisations. Based on more flexible labour markets and with inflation in check – a few exceptions notwithstanding –, we anticipate a sideways tendency here on the domestic economy side and stabilisation in foreign trade.
Once again, then, 2019 will be a year distinguished by an unusual and challenging combination of geopolitical and monetary policy uncertainty. In view of the increasing risks, even greater attention must be paid to the risk / reward ratio when making investment decisions. Consequently, broad diversification within the investment portfolio will continue to be of considerable importance in 2019.
Insurance industry Even though the insurance industry still finds itself facing numerous – in some cases considerable – challenges in the current financial year, the mood throughout the sector is gradually lifting. The reasons here include the prevailing upbeat business sentiment overall 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 nexus points for the development of new products.
The industry also remains intensely preoccupied with changes in customer expectations. Against a backdrop of advancing digitalisation, consumers are showing greater agility in their behaviour. Customer 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 shifting requirements.
Overview After four years of declining reinsurance rates the heavy natural catastrophe losses incurred in 2017 and again in 2018 caused the rate level to move higher as 2018 got underway and subsequently stabilise overall as the year progressed. The supply of reinsurance capacity – from both the traditional reinsurance sector and the ILS (insurance-linked securities) market – nevertheless still outstrips demand. In the treaty renewals as at 1 January 2019 the prices that could be obtained for reinsurance programmes and in regions that had been spared losses came under slightly more pressure compared to the situation in 2018. On the other hand, rate increases running into double-digit percentages were recorded for programmes that had once again suffered losses.
Adjusted for exchange rate effects, we boosted our premium volume as at 1 January in traditional property and casualty reinsurance by altogether 15.4% to EUR 6,406 million (EUR 5,551 million). On this date 66% of the traditional property and casualty reinsurance portfolio (excluding facultative reinsurance, ILS business and structured reinsurance) was up for renewal.
Reinsurance prices were generally commensurate with the risks in the renewal season at the beginning of the year, and viewed from an overall perspective we were able to secure slightly improved conditions. As one of the world’s leading reinsurers we continue to benefit from our very robust financial strength as well as a trend among primary insurers towards consolidation of their reinsurance partners. Particularly attractive opportunities to expand the portfolio opened up in Asia, North America and Germany.
Expectations for the development of individual markets and lines in property and casualty reinsurance are described in greater detail below, broken down into the areas of Board responsibility.
Target markets North America In North America the primary insurance market should continue to develop favourably, also bearing in mind the general economic climate. The considerable losses incurred in the last two years from windstorm events, forest fires and floods further highlighted the benefit of risk-mitigating insurance and reinsurance solutions and led to stronger demand. The North American market is of strategic importance to Hannover Re and over the years we have expanded our long- standing customer relationships and added new clients.
Credit, surety and political risks Following a revival in the global economy in 2018, growth will likely slow in the coming year. As a consequence, the number of insolvencies around the world may rise slightly from the existing low level. Against this backdrop, we expect loss ratios in credit and surety business as well as in the area of political risks to remain stable or increase moderately. In the context of the progressive regional diversification of our portfolio it is our expectation that premium growth will be sustained going forward, although the tempo in credit and surety business will be held back by general economic conditions. In the area of political risks, on the other hand, demand is likely to remain high in view of the elevated risk situation around the world. All in all, we are looking for a stable market environment in the current financial year despite a slowdown in global economic growth. Against this backdrop, we expect to book modestly increased premium income and a good result.
Facultative reinsurance The current financial year is expected to bring increased demand for facultative reinsurance at improved conditions on the whole. This will be driven by the above-average loss incidence in the previous year and hence also reflects the shift in our clients’ risk appetite. Given our strong focus on the customer, we should be able to benefit disproportionately strongly from the potential market opportunities. We shall enlarge our reinsurance portfolio in those regions and lines where we have been able to push through higher prices. Particularly healthy premium growth is anticipated in the United States, Europe and Southeast Asia. Overall, we expect to see an increase in premium income for our facultative business in the current financial year and better results than in 2018.
Global reinsurance Worldwide treaty reinsurance Insurance markets in the Asia-Pacific region should stay on their growth track in 2019. Consequently, we see good opportunities here to enlarge our portfolio.
Our organisational set-up with decentralised underwriting at our local branches – under strategic management from Hannover Home Office – is very well received by our customers and will enable us to put our Group capital efficiently on risk going forward, just as we have in the past. The extent to which natural catastrophe losses from typhoons, earthquakes and floods in Japan, for example, will influence general reinsurance capacities and prices in Asia remains to be seen.
As far as our business in Japan is concerned, it is our expectation that the previously mentioned losses will bring higher reinsurance prices for the renewals on 1 April, especially for natural catastrophe covers. Certain customised individual transactions that are currently in the initiation phase will likely help us to significantly grow our portfolio in Japan.
The markets of South and Southeast Asia similarly offer a broad spectrum of growth opportunities. Our activities are focused on supporting our customers in the development of products, processes and systems.
The renewal season in India as at 1 April 2019 will see efforts to bring about a qualitative improvement in conditions as well as to further expand the business plan pursued by our branch in Mumbai. Given appropriate conditions, we would be prepared to expand our business substantially in keeping with our ambitions for the Indian market.
In the treaty renewals as at 1 January 2019 we obtained appreciable rate increases under loss-impacted programmes. All in all, though, the Cat XL market remains challenging. In areas that had escaped losses it was at most possible to achieve minimal price increases in occasional instances. Furthermore, the tendency towards multi-year programmes and early treaty renewals still prevails.
In general terms, we plan to grow our business only under selected programmes given the current market conditions. This is motivated by, among other things, the fact that certain cedants now tend to request significant capacities solely from preferred business partners – including our company.
Owing to the implementation of risk-based models for calculating solvency requirements not only within but also outside the European Union, demand for structured reinsurance products is likely to keep on rising. 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 these companies. 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.
Regulatory issues relating to capital adequacy and solvency ratios have dominated the more mature markets for a number of years. We expect this trend to continue in the upcoming reporting period. As an established and long-standing valued partner, our clients trust in our expertise and we consider ourselves well prepared for potential new developments.
Looking at individual regions, Australia is particularly likely to see a tightening of the regulatory requirements governing the financial services sector. Just what form developments actually take will become clearer in the course of 2019.
In general terms, we increasingly see ourselves as more than just a pure risk carrier. In our role as an expert partner, we draw on our worldwide know-how spanning a wide range of topics to give our customers comprehensive support. 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. The business relationships with our customers are routinely of a long-term nature because life and health reinsurance typically involves long-duration treaty types. This makes it all the more important to generate sustainable value for all parties concerned in their mutual interest.
The enlargement of the asset portfolio should have a positive effect on investment income. Despite the persistently low euro interest rate level, we expect to maintain a stable average return on our investments thanks to higher US interest rates and wider credit spreads. In view of the low returns on more secure investments, we shall continue to invest in products offering attractive credit spreads such as corporate bonds, although in this regard we shall increasingly move back towards higher-quality segments. The widening of spreads towards the end of the year under review is putting a more healthy risk / reward ratio within reach again. In the areas of alternative investments, real estate and emerging markets we also intend to selectively expand our holdings.
In property and casualty reinsurance we expect significant growth at largely stable conditions based on the outcome of the treaty renewals as at 1 January 2019. We shall retain unchanged 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 generally expected to be similar to the one at the start of the year. An exception here is likely to be the segments that have been particularly hard hit by natural disasters, such as covers for hurricanes in the United States, typhoons in Japan and forest fires in California; we anticipate stronger rate increases in these cases, because as the year progresses a clearer picture will emerge of the results achieved by reinsurers and hence the pressure on capital market investors will likely grow in light of market and interest rate factors.
In life and health reinsurance the current financial year is expected to deliver moderate premium growth. On the earnings side, the strains in US mortality business should decrease quite substantially. This should give rise to an unusually strong surge in profitability, with EBIT expected to be in the order of EUR 400 million. The targeted level for the value of new business remains unchanged at a minimum of EUR 220 million per year.
With regard to the IVC targets that we use to map economic value creation, it remains our expectation that a minimum xRoCA of 2% will be generated for property and casualty reinsurance and for life and health reinsurance.
In view of the expected positive cash flow that we generate from the technical account and the investments themselves, and assuming stable exchange rates and interest rate levels, our asset portfolios should continue to grow. We are looking to deliver a return on investment of at least 2.8% for 2019.
Hannover Re continues to anticipate a payout ratio for the ordinary dividend in the range of 35% to 45% of its IFRS Group net income. The ordinary dividend will be supplemented by payment of a special dividend in light of capital management considerations if the comfortable level of capitalisation remains unchanged.
Other financial assets – at fair value through profit or loss 6.1 190,759 88,832
Consolidated statement of income 2018 N 02 in EUR thousand Notes 1.1. – 31.12.2018 1.1. – 31.12.2017
equity in EUR thousand Unrealised gains / losses Currency translation Hedging instruments Other
Total income and expense recognised in equity – – (470,670) 263,917 3,132 (2,766) – (206,387) (23,660) (230,047)
Capital repayments – – – – – – – – (19) (19)
Change in fair value of financial instruments (through profit or loss) (31,160) (38,569)
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.
1. Company information Hannover Rück SE and its subsidiaries (collectively referred to as the “Hannover Re Group” or “Hannover Re”) transact all lines of property & casualty and life & health reinsurance. With gross premium of approximately EUR 19.2 billion, Hannover Re is the fourth-largest reinsurance group in the world. The company’s network consists of more than 170 subsidiaries, affiliates, branches and representative offices worldwide with a total workforce of roughly 3,300. The Group’s German business is conducted by the subsidiary E+S Rückversicherung
AG. Hannover Rück SE is a European Company, Societas Europaea (SE), which has its registered office at Karl-WiechertAllee 50, 30625 Hannover, Germany, and is entered in the commercial register of Hannover County Court under the number HR Hannover B 6778. 50.2% (rounded) of the shares of Hannover Rück SE are held by Talanx AG, Hannover, which in turn is majority-owned – with an interest of 79% – by HDI Haftpflichtverband der Deutschen Industrie V.a.G. (HDI), Hannover.
The consolidated financial statement reflects all IFRS in force as at 31 December 2018 as well as all interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), application of which was mandatory for the year under review. IFRS 4.38 et seq. “Insurance Contracts” requires disclosures on the nature and extent of risks stemming from reinsurance contracts, while IFRS 7.31-42 “Financial Instruments: Disclosures” requires similar information on risks from financial instruments. Furthermore, § 315 Para. 2 Number 1 German Commercial Code (HGB) also contains requirements for insurance undertakings with regard to information on the management of underwriting and financial risks that is to be provided in the management report. The disclosures resulting from these requirements are included in the risk report. With regard to the disclosures required by IFRS 4 and IFRS 7, we would refer in particular to pages 105 to 109 “Underwriting risks in property and casualty reinsurance / Underwriting risks in life and health reinsurance” and to pages 110 to 114 “Market risks” respectively. We have dispensed with an additional presentation of the same content in the notes. In order to obtain a comprehensive overview of the risks to which Hannover Re is exposed it is therefore necessary to consider both the risk report and the relevant information in the notes. We refer the reader accordingly to the corresponding remarks in the risk report and the notes.
The consolidated financial statement was drawn up in euros (EUR), the amounts shown have been rounded to EUR thousands and – provided this does not detract from transparency – to EUR millions. Figures indicated in brackets refer to the previous year.
The present consolidated financial statement was released for publication by a resolution of the Executive Board on 4 March 2019.
The IASB published amendments to IFRS 4 “Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts” which give certain insurance entities the option to defer mandatory application of IFRS 9 “Financial Instruments” to 2021. At its meeting on 14 November 2018 the IASB also tentatively decided to defer the date of initial application of IFRS 17 “Insurance Contracts” by one year to annual reporting periods beginning on or after 1 January 2022. In this connection it was further decided to correspondingly extend the period for exercise of the optional temporary exemption from applying IFRS 9 that is available to companies whose activities are predominantly connected with insurance. Hannover Re is exercising the deferral option, inter alia due to the interdependency between the recognition of financial instruments and insurance contracts. The new disclosures required as part of the deferral approach, which are intended to facilitate some comparability with entities already applying IFRS 9, are provided for the first time in section 6.1 of the notes to the consolidated financial statement “Investments under own management ”.
Hannover Re is applying IFRS 15 “Revenue from Contracts with Customers” for the first time with effect from 1 January 2018. The standard specifies when and in what amount revenue is to be recognised and which disclosures are required for this purpose. Financial instruments and other contractual rights and obligations which are to be recognised under separate standards as well as (re)insurance contracts within the scope of IFRS 4 “Insurance Contracts” are expressly exempted from the standard’s scope of application. The predominant activity of the Hannover Re Group falls within the scope of application of IFRS 4. As expected, therefore, the services falling within the scope of application of IFRS 15 did not have any significant implications overall for the Group’s net assets, financial position or results of operations. The modified retrospective approach was chosen for initial application. In addition, the practical transition relief provided in the standard with respect to completed contracts and contract modifications was utilised. Disclosure of the amount restated for each item of the financial statement affected by application of IFRS 15 in the year of initial application, which arises due to the adjustment of prior-year comparatives recognised according to the requirements of IAS 18 and associated interpretations applicable prior to the change, is similarly omitted in accordance with the materiality concept. Disclosures regarding revenue as defined by IFRS 15 are provided in section 7.4 of the notes to the consolidated financial statement “Other income / expenses”.
In addition, 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 Hannover Re.
• Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2),
• Transfers of Investment Property: Amendments to IAS 40 “Investment Property”
• Amendments as part of the “Annual Improvements to IFRS Standards 2014 – 2016 Cycle” with respect to IAS 28 “Investments in Associates and Joint Ventures” and IFRS 1 “First-time Adoption of International Financial Reporting Standards”
Instead of reporting premium income when it is received, insurance revenue is reported when it is earned by recognising in each period the changes in the liability for providing coverage for which the insurance entity receives compensation as well as the part of the premiums that covers acquisition costs. Receipts and payments relating to savings components are not recognised as revenue or as profit or loss in the statement of income. Insurance finance income and expenses result from discounting effects and financial risks. For each portfolio of insurance contracts they may either be recognised in profit or loss in the statement of income or in other comprehensive income.
October 2018 Amendment to IFRS 3 Business Combinations 1 January 2020 (still to be endorsed by the EU)
March 2018 Amendments to References to the Conceptual Framework in IFRS Standards 1 January 2020 (still to be endorsed by the EU)
February 2018 Amendments to IAS 19: Plan Amendment, Curtailment or Settlement 1 January 2019 (still to be endorsed by the EU)
December 2017 Annual Improvements to IFRS Standards 2015 – 2017 Cycle 1 January 2019 (still to be endorsed by the EU)
October 2017 Amendments to IFRS 9: Prepayment Features with Negative Compensation 1 January 2019 (endorsed by the EU)
June 2017 IFRIC Interpretation 23 Uncertainty over Income Tax Treatments 1 January 2019 (endorsed by the EU)
IFRS 4 sets out basic principles for the accounting of insurance contracts. Underwriting business is to be subdivided into insurance and investment contracts. Contracts with a significant insurance risk are considered to be insurance contracts, while contracts without significant insurance risk are to be classified as investment contracts. The standard is also applicable to reinsurance contracts. IFRS 4 contains fundamental rules governing specific circumstances, such as the separation of embedded derivatives and unbundling of deposit components, but it does not set out any more extensive provisions relating to the measurement of insurance and reinsurance contracts. In conformity with the basic rules of IFRS 4 and the IFRS Framework, reinsurance-specific transactions therefore continue to be recognised in accordance with the pertinent provisions of US GAAP (United States Generally Accepted Accounting Principles) as applicable on the date of initial application of IFRS 4 on 1 January 2005.
Financial assets held to maturity are comprised of non- derivative assets that entail fixed or determinable payments on a defined due date and are acquired with the intent and ability to be held until maturity. They are measured at amortised cost. The corresponding premiums or discounts are recognised in profit or loss across the duration of the instruments using the effective interest rate method. An impairment loss is taken in the event of permanent impairment. Please refer to our comments on impairments in this section.
Currency forwards Yield curves, spot and forward rates Interest parity model
Insurance derivatives Fair values, actuarial parameters, yield curve Present value method
Financial assets at fair value through profit or loss consist of securities held for trading and those classified as measured at fair value through profit or loss since acquisition. This refers principally to unsecured debt instruments issued by corporate issuers and derivative financial instruments. Within the scope of the fair value option provided under IAS 39 “Financial Instruments: Recognition and Measurement”, according to which financial assets may be carried at fair value on first-time recognition subject to certain conditions, all structured securities that would have needed to have been broken down had they been recognised as available for sale or under loans and receivables are also recognised here. Hannover Re makes use of the fair value option solely for selected subportfolios of its financial assets. Securities held for trading and securities classified as measured at fair value through profit or loss since acquisition are carried at their fair value on the balance sheet date. If stock market prices are not available for use as fair values, the carrying amounts are determined using generally acknowledged measurement methods. All changes in fair values from this measurement are recognised in investment income. The classification of financial assets at fair value through profit or loss is compatible with Hannover Re’s risk management strategy and investment strategy, which are oriented extensively towards economic fair value variables.
Establishment of the fair value of financial instruments carried as assets or liabilities: we establish the fair value of financial instruments carried as assets or liabilities using the methods and models described below. The fair value of a financial instrument corresponds to the amount that Hannover Re would receive or pay if it were to sell or settle the said financial instrument on the balance sheet date. Insofar as market prices are listed on markets for financial assets, their bid price is used; financial liabilities are valued at ask price. In other cases the fair values are established on the basis of the market conditions prevailing on the balance sheet date for financial assets with similar credit rating, duration and return characteristics or using recognised models of mathematical finance. Hannover Re uses a number of different valuation models for this purpose. The details are set out in the table above. Financial assets for which no publicly available prices or observable market data can be used as inputs (financial
A n n u al f in an ci al s ta te m en ts 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”.
Impairments: As at each balance sheet date we review our financial assets with an eye to the need to take impairments. Permanent impairments on all invested assets are recognised directly in the statement of income. In this context we take as a basis the same indicators as those subsequently discussed for fixed-income securities and securities with the character of equity. Qualitative case-by-case analysis is also carried out. IAS 39 “Financial Instruments: Recognition and Measurement ” contains a list of objective, substantial indications for impairments of financial assets. In the case of fixed-income securities and loans reference is made, in particular, to the rating of the instrument, the rating of the issuer / borrower as well as the individual market assessment in order to establish whether they are impaired. With respect to held-to-maturity instruments as well as loans and receivables recognised at amortised cost, the level of impairment is arrived at from the difference between the book value of the asset and the present value of the expected future cash flows. The book value is reduced directly by this amount which is then recognised as an expense. With the exception of value adjustments taken on accounts receivable, we recognize impairments directly on the assets side – without using an adjustment account – separately from the relevant items. If the reasons for the writedown no longer apply, a write-up is made in income up to at most the original amortised cost for fixed-income securities.
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.
The other intangible assets include the expected profits from acquired life reinsurance portfolios. These are carried at the present value of future profits (PVFP) at time of acquisition, which is calculated as the present value of profits expected from the acquired blocks of business disregarding new business and tax effects. Amortisation is taken according to the periods of the underlying acquired contracts. The PVFP is regularly tested for impairment using a liability adequacy test and impairment losses are taken if necessary. In this regard please see section 3.2 “Major discretionary decisions and estimates”. Separately identifiable intangible assets in connection with business combinations, such as customer base or contractual / legal rights, are also recognised under this item.
Purchased and proprietary software is recognised at acquisition cost less depreciation. Intangible assets are regularly tested for impairment and an impairment loss is recognised where necessary.
Contributions to defined contribution plans are expensed when the beneficiary of the commitment has performed the work that entitles them to such contributions.
Under the balance sheet item Other liabilities we recognise not only the sundry non-technical provisions but also minority interests in partnerships. Direct minority interests in partnerships, i. e. liabilities to holders of minority shares in partnerships arising out of long-term capital commitments, which are puttable at fair value by the holder of the interest, are
recognised as debt pursuant to IAS 32 and measured at the fair value of the redemption amount as at the balance sheet date.
The balance sheet item Long-term debt and notes payable consists principally of issued bonds, some of which involve subordinated liabilities that can only be satisfied after the claims of other creditors in the event of liquidation or bankruptcy. Both long-term debt and notes payable are measured at amortised cost using the effective interest rate method. The transaction costs as well as premiums / discounts arising in connection with the issuance of bonds are amortised and recognised together with the nominal interest as financing costs.
Financial liabilities at fair value through profit or loss: Hannover Re does not make use of the fair value option provided by IAS 39 “Financial Instruments: Recognition and Measurement” to classify financial liabilities in this category upon first-time recognition.
Disclosures about financial instruments: IFRS 7 “Financial Instruments: Disclosures” requires more extensive disclosures according to classes of financial instruments. In this context, the term “class” refers to the classification of financial instruments according to their risk characteristics. A minimum distinction is required here between measurement at amortised cost or at fair value. A more extensive or divergent distinction should, however, be geared to the purpose of the corresponding disclosures in the notes. In contrast, the term “category” is used within the meaning of the measurement categories defined in IAS 39 “Financial Instruments: Recognition and Measurement” (held to maturity, loans and receivables, available for sale and financial assets at fair value through profit or loss with the subcategories of trading and designated financial instruments). Essentially, the following classes of financial instruments are established:
• Certain financial assets in the balance sheet item “Other liabilities”
Transactions in foreign currencies reported in Group companies ’ individual financial statements are converted into the functional currency at the transaction rate. In accordance with IAS 21 “The Effects of Changes in Foreign Exchange Rates” the recognition of exchange differences on translation is guided by the nature of the underlying balance sheet item. Exchange differences from the translation of monetary assets and liabilities are recognised directly in the statement of income. Currency translation differences from the translation of non-monetary assets measured at fair value via the statement of income are recognised as profit or loss from fair value measurement changes. Exchange differences from non-monetary items – such as equity securities – classified as available for sale are initially recognised outside income in a separate item of shareholders’ equity and only booked to income when such non-monetary items are settled.
A n n u al f in an ci al s ta te m en ts 3.2 Major discretionary decisions and estimates