Shareholders’ equity also increased again in 2018 to reach a level of EUR 8.8 billion.
The German DAX index started the year at 12,918 points and climbed as high as 13,560 points in January – a level which was also its highest for the year. German blue chips began to see their first price corrections over the remainder of the year, unsettled by clouds on the economic horizon and early profit warnings coming out of export-oriented companies. The announcement by the European Central Bank in mid-December to the effect that it would be terminating its purchases of new government and corporate sector bonds at yearend accelerated the downward slide on European stock markets. On 27 December, one day before the close of trading, the German bellwether index sank to its lowest level of the year at 10,382 points. The DAX closed out the final trading day down on the year for the first time since 2011 at 10,559 (-18.3%).
EUR 516 million 1 Annual average growth, otherwise weighted averages 2 Excluding effects from ModCo derivatives 3 After tax; target: 900 basis points above the five-year average return on ten-year German government bonds 4 Growth in the economic equity including dividend paid
Target: 600 basis points above the five-year average return on ten-year German government bonds 5 In accordance with our internal capital model and Solvency II requirements 6 Average over the reinsurance cycle; at constant exchange rates 7 Including large loss budget of EUR 825 million 8 EBIT / net premium earned 9 Value contribution relative to allocated economic capital 10 Organic growth only; target: annual average growth over a three-year period; at constant exchange rates 11 Based on Solvency II principles; pre-tax reporting 12 Annual average growth over a three-year period 13 Strategic target since the 2018 financial year
The decline in vehicle manufacturing not only impacted upstream and downstream sectors of the economy, it also had implications for the domestic and external expenditure components of consumption, capital expenditure and exports. Private households exercised restraint despite rising incomes, with spending increasing by 1.1% (1.8%). Companies were similarly hesitant to boost their capital expenditures – the increase of 2.3% contrasted with 2.9% in the previous year. Exports grew by 2.0% (4.6%) in 2018. While exports to the United Kingdom and Russia were sharply lower, there was a strong surge in goods shipped to the United States and China. The increase in imports was also slower at 3.3%, compared with 4.8% in the previous year.
In non-traditional reinsurance we offer our expertise in leveraging diversification effects. Our structured reinsurance solutions cater to our clients’ business situation in its entirety and help them to optimise their fulfilment of solvency requirements through the use of reinsurance.
Against this backdrop gross premium rose by 11.8% in the calendar year to EUR 12.0 billion (previous year: EUR 10.7 billion). At constant exchange rates the increase would have been 16.2%, a figure well ahead of our expectations. The level of retained premium climbed to 90.7% (89.7%). Net premium earned increased by 18.0% to EUR 10.8 billion (EUR 9.2 billion); adjusted for exchange rate effects, growth would have amounted to 22.5%.
Gross Net Net expectation for major losses 1 1 Natural catastrophes and other major losses in excess of EUR 10 million gross (until 31 December 2011: in excess of EUR 5 million gross)
In Northern Europe we further cemented our position through our local footprint and boosted our premium income despite a difficult market climate. Notwithstanding an increased frequency of mid-sized losses, mostly the result of fires, we were able to generate an underwriting profit.
Marine After somewhat softer prior years, marine reinsurance largely stabilised in 2018 on the level of the previous year. Given the continued low price of oil, despite a brief surge in the middle of the year, oil companies held back from making investments and insurance demand remained unchanged. The excess capacities still existing in the market for transportation of freight and cargo did nothing to ease a highly competitive situation. The resulting further slight market softening made itself felt in the insurance terms and conditions.
Our underwriting strategy in this phase remained disciplined. We kept our focus on the non-proportional segment, where we operate as one of the market leaders.
Thanks to greater decentralisation of our underwriting activities and the associated expansion of competencies at regional entities, we were able to significantly strengthen our customer relationships. This led to potential avenues for new business and corresponding additional premium income in our target regions of the United States, Asia and Australia. What is more, the investments that we had made in past years in the areas of cyber risks and renewables were rewarded with attractive premium growth in the year under review.
The premium volume increased by 17.0% in the year under review to EUR 5,600.8 million (EUR 4,787.7 million). The combined ratio improved to 95.4% (98.2%). The operating profit (EBIT) climbed to EUR 484.8 million (EUR 328.9 million ).
Going forward, we see further strong growth opportunities in North America, Europe and Asia. The purchasing habits of many customers have shifted of late towards holistic reinsurance solutions. This trend shows no signs of easing and will result in more and more customers seeking structured contracts with increasingly complex arrangements in the future. In general terms, though, premium income in this business can fluctuate sharply given that it is routinely based on large individual contracts.
The highlights of the reporting period included thoroughly pleasing new business growth in Asia and good results in large parts of Europe as well as the opening of our new Abidjan representative office in Côte d’Ivoire. We have laid the foundation for the future with this local presence, enabling us to work closely with our customers on the spot in a developing region that offers considerable promise.
Customers in Asia – especially China – showed a lively interest in the area of financial solutions and we were thoroughly successful in writing such business. Gross premium income from financial solutions rose by 3.7% to EUR 928.2 million (EUR 895.1 million). The written premium corresponds to 12.9% of the total gross premium booked in life and health reinsurance. Furthermore, financial solutions delivered another appreciable EBIT contribution from contracts with a reduced risk transfer, with income of EUR 197.0 million being recognised in other income / expenses. The operating result (EBIT) came in at a very pleasing EUR 319.4 million (EUR 223.8 million).
The market in Australia was already undergoing a period of consolidation as large Australian banks have either sold their life insurance subsidiaries or are currently trying to do so. The banks are focusing on their core business which, in their assessment, offers the potential for higher margins than their insurance activities. It is evident that international players are usually the ones buying stakes in these life insurance operations and hence more and more Australian insurers are coming under foreign ownership. As a reinsurer, we are closely monitoring the ongoing developments and we are talking both to our own customers and new market entrants.
Morbidity Solutions Within the morbidity solutions reporting category, we cover business centred around the risk of deterioration in a person ’s state of health due to disease, injury or infirmity. A hallmark of this business is the wide range of possible combinations of different covered risks, including for example strict (any occupation) disability, occupational disability and various forms of long-term care insurance. A dedicated team of staff equ ipped with both specialist expertise and access to our network of business centres stands ready to assist with transactions of this type. In this way, our customers are able to optimally benefit from our global know-how on a local basis.
In the United States, for example, we worked together with a US insurtech on the successful implementation of our underwriting system hr|ReFlex. Our cooperation partner uses online and mobile channels to sell life insurance directly to end consumers. This was a first for the US life insurance market. Sales were expanded to virtually all US states in the year under review. This innovative combination of online sales with our underwriting system hr|ReFlex delivers a cost-efficient and flexible solution for end consumer and provider alike. Initial results indicate that this solution has been well received by policyholders.
Thereof cash and cash equivalents at the end of the period excluding disposal group 1,072.9 835.7
Hannover Finance (Luxembourg) S. A. subordinated debt, EUR 500 m; 2012 / 2043 A aa-
Rating agencies testify to our excellent credit status and financial strength. Their assessment focuses on our company’s stable profitability and superb competitive position.
Our Code of Conduct is accepted by our employees as an integral component of their employment contract and therefore has binding effect. It encompasses, among other things, specific rules of conduct in the form of instructions for the avoidance and disclosure of conflicts of interest, for the granting and acceptance of benefits, gifts and invitations, for the arrangement of donations and sponsorships as well as with respect to sideline activities and involvement in other companies and business transactions. The Compliance Officer is to be notified of any suspicious cases. As a general principle, all employees receive compliance training when they join the Group. In the year under review four training activities were held for altogether 107 employees. In order to stay updated on compliance issues such as combating corruption, we use traditional communication channels including intranet portals and online newsletters. Important information of company -wide relevance is made available to staff in the intranet.
Our business activities do not give rise to any direct negative impacts on society or the environment. Rather, our reinsurance services help to ensure that societal and environmental risks can be adequately insured and that the effects in the event of loss or damage can be rectified or mitigated. At its very heart, the business of insurance involves cushioning the burden caused by loss events and providing financial protection for companies and private individuals alike through the transfer and spreading of risks. In this way, we can prevent risks having adverse impacts on society and our company. Often, it is only the backing of internationally operating reinsurers such as Hannover Re that enables primary insurers to cover large individual risks and the risks associated with natural perils. We thereby help to increase insurance density, especially in emerging and developing countries, and promote social and financial inclusion. Furthermore, by offering sustainable reinsurance solutions and supporting sustainable primary insurance solutions, we are able to respond to the opportunities and risks associated with these issues and come up with innovations. With this in mind, we support sustainable insurance solutions that are designed to minimise negative environmental and social repercussions. It is nevertheless important to bear in mind the potential indirect environmental and social impacts of the reinsurance industry. Extensive exclusions can, for example, even cause the insurance gap to grow inasmuch as the protection in place against risks becomes inadequate. It is therefore vital to give comprehensive consideration to all possible implications.
Promote, preserve and restore the physical and mental well-being of employees, including through our Employee Assistance Programme (EAP)
We believe in enabling our employees to strike a healthy balance between their professional and private life. With this in mind, we offer part-time and teleworking models that can be individually structured and flexible working-time arrangements without core hours. Through this flexibility we want to make it easier for our employees to organise everyday life in phases such as starting a family or preparing for the end of their professional career, e. g. through partial retirement arrangements. These benefits are reflected in a low staff turnover rate and the long periods of time that our employees stay with the Group.
Hannover Re has set up risk management functions and bodies Group-wide to safeguard an efficient risk management system. The organisation and interplay of the individual functions in risk management are crucial to our internal risk steering and control system. The central functions of risk management are closely interlinked in our system and the roles, tasks and reporting channels are clearly defined and documented in terms of the so-called “three lines of defence”. The first line of defence consists of risk steering and the original risk responsibility on the divisional or company level. The second line of defence is made up of the core risk management functions, the actuarial function and the compliance function. These units are responsible for monitoring and control. The third line of defence is the process-independent monitoring performed by the internal audit function. The following chart provides an overview of the central functions and bodies within the overall system as well as of their major tasks and powers.
In the context of its business operations the Hannover Re Group enters into a broad variety of risks. These risks are deliberately accepted, steered and monitored in order to be able to act on the associated opportunities. The parameters and decisions of the Executive Board with respect to the risk appetite of the Hannover Re Group, which are based on the calculations of risk-bearing capacity, are fundamental to the acceptance of risks. Through our business operations on all continents and the diversification between our Property & Casualty and Life & Health reinsurance business groups we are able to effectively allocate our capital in light of opportunity and risk considerations and generate a higher -than-average return on equity. Along with our principal business operations as a reinsurer of property & casualty and life & health business, we also transact primary insurance in selected niche markets as a complement to our core reinsurance business. With this approach we are well positioned for further profitable growth. In this context crucial importance attaches to our risk management in order to ensure that, among other things, risks to the reinsurance portfolio remain calculable and even exceptional major losses do not have an unduly adverse impact on the result.
3 Minor differences for 31 December 2017 compared to the Annual Report 2017. Figures based on final Solvency II year-end reporting as presented in the Solvency and Financial Condition Report.
"Carr" forest fire, United States 23 July – 30 August 2018 13.4 8.0 1 Natural catastrophes and other major claims in excess of EUR 10 million gross
Foreign exchange risks are especially relevant if there is a currency imbalance between the technical liabilities and the assets. Through extensive matching of currency distributions on the assets and liabilities side, we reduce this risk on the basis of the individual balance sheets within the Group. The short-term Value at Risk therefore does not include quantification of the foreign exchange risks. We regularly compare the liabilities per currency with the covering assets and optimise the currency coverage by regrouping assets. In so doing, we make allowance for collateral conditions such as different accounting requirements. Remaining currency surpluses are systematically quantified and monitored within the scope of economic modelling. A detailed presentation of the currency spread of our investments is provided in section 6.1 of the notes entitled “Investments under own management ” on page 212.
Business process risks are associated with the risk of deficient or flawed internal processes, which can arise inter alia as a consequence of an inadequate process organisation. We have defined criteria for managing the risk that result in a high process quality. Data quality is similarly a highly critical success factor, especially in risk management, because for example the validity of the internal model is largely based on the data provided.
Compliance risks are associated with the risk of breaches of standards and requirements, non-compliance with which may entail lawsuits or official proceedings with not inconsiderable detrimental implications for the business activities of the Hannover Re Group. Compliance with regulatory standards, the company’s Code of Conduct, tax regulations, data privacy requirements as well as the stipulations of anti-trust and competition law have been defined as issues of particular relevance.
Based on our currently available insights arrived from a holistic analysis of the opportunities and risks, the Executive Board of Hannover Re cannot discern any risks that could jeopardise the continued existence of the Hannover Re Group in the short or medium term or have a material and lasting effect on its assets, financial position or net income. We are convinced that: • our established system of risk management affords us a transparent overview of the current risk situation at all times
We would also refer to the explanatory remarks on the financial strength ratings of our subsidiaries in the “Financial position ” section of the management report on page 66. In addition, the risk trigger mechanism and internal monitoring system are reviewed annually by the independent auditor. The Group-wide risk management system is also a regular part of the audits conducted by the internal audit function. For additional information on the opportunities and risks associated with our business please see the Forecast on page 150 et seq.
This assessment is also not cast into question by the fact that the Committee Chair cannot be considered independent within the meaning of the German Corporate Governance Code for the period from 1 January 2018 to 8 May 2018. Furthermore, since his service as Chief Financial Officer of Hannover Rück SE dates back to a period that is already some fifteen years ago, it is also the case that the reviews and checks performed by the Finance and Audit Committee no longer relate to any timeframe within which he himself was still a member of the Executive Board or decisions initiated by him as a member of the Executive Board were still being realised.
When it comes to selecting candidates who are to be put forward to the Annual General Meeting for election to the Supervisory Board, care is taken to ensure that the individuals concerned have the necessary knowledge, skills and specialist experience. The principle of diversity is also reflected in the selection process. Four women currently sit on the Supervisory Board. Moreover, one woman belongs to the Finance and Audit Committee and one is a member of the Nomination Committee. On the level of the Executive Board, the goal is that at least one woman should be appointed to the company ’s Executive Board by June 2022.
(until 7 May 2018) Member of the • Supervisory Board • Standing Committee • Finance and Audit Committee • Nomination Committee
Sources: Kiel Institute for the World Economy; figures for Germany are calendar-adjusted.
Capital markets In 2019 financial markets will once again bring promising opportunities but also an abundance of volatility and uncertainty.
In South Africa our organisation is well established within the local insurtech ecosystem. Over the coming years we want to extend this to the continent as a whole, since we view this as a promising strategy for the profitable growth of our portfolio. Based on a stabilisation in reinsurance prices, we expect to book premium growth for our reinsurance and specialty business in the current year.
In our retakaful business we anticipate a predominantly soft rate level on account of the competition-induced excess supply of capacity as well as a comparatively low oil price. Risk selection and good customer relations will therefore play a pivotal role in our underwriting of profitable business. Our focus in 2019 will be on specialty lines. We are also moving forward with our cautious entry into proportional motor business because the available rates are rising on the back of newly implemented motor tariffs in 2017. All in all, we expect the premium volume to remain stable.
We anticipate further attractive opportunities for leading reinsurers since larger companies will continue to follow the trend towards purchasing worldwide covers. The number of reinsurers for such programmes will steadily diminish. What is more, there will be no easing in the considerable pressure when it comes to mergers and acquisitions. In view of the sizeable losses from floods and forest fires, primary insurers in the affected regions will likely seek to secure additional coverage.
In the area of insurance-linked securities (ILS) we essentially expect to see continued growth in demand. Investors are seeking a negative or minimal correlation with other financial investments and hence greater diversification. We are responding to this market situation with a strong emphasis on service, offering individually tailored solutions – from collateralised reinsurance to the transformation of catastrophe bonds – for property and life reinsurance risks. Over the coming years we expect our ILS activities to deliver a positive and consistently rising profit contribution. The capital market remains an important element in the retrocession coverage taken out by our own company. For example, we were able to renew the protection cover for Hannover Re known as the ‘K cession” – which has been placed inter alia on the ILS market since 1994 – with an increased capacity of roughly USD 650 million (USD 600 million) for 2019.
Total income and expense recognised directly in equity – – (85,846) (742,630) 411 3,180 – (824,885) (28,339) (853,224)
In January 2016 the IASB issued IFRS 16 “Leases” setting out new principles for the accounting of leases. The most significant new requirements relate principally to accounting by lessees. In future, the lessee shall as a general principle recognise a lease liability for all leases. At the same time it shall recognise a right to use the underlying asset. Accounting by lessors remains comparable with current practice, according to which the lessor classifies each lease as an operating lease or a finance lease. The standard is to be applied to annual periods beginning on or after 1 January 2019. Hannover Re intends to apply the standard using a modified retrospective approach and will recognise the cumulative effect of application of the standard in retained earnings as at 1 January 2019. At the end of 2017 a detailed analysis was carried out of the implications for Hannover Re’s consolidated financial statement, which was adjusted at the end of 2018 to reflect current exchange rates. The analysis determined that the consolidated balance sheet will probably be extended by around EUR 108 million at the time of initial application through the recognition of rights of use and lease liabilities. The expense from leases will in future be recognised in the form of impairments taken on rights of use and interest on lease liabilities.
Unlisted structured bonds Yield curve, volatility surfaces Hull-White, Black-Karasinski, LIBOR market model etc.
The individual companies’ statements of income prepared in the local currencies are converted into euro at the average rates of exchange and transferred to the consolidated financial statement. The conversion of foreign currency items in the balance sheets of the individual companies and the transfer of these items to the consolidated financial statement are effected at the mean rates of exchange on the balance sheet date. In accordance with IAS 21 “The Effects of Changes in Foreign Exchange Rates” differences from the currency translation of financial statements of foreign Group companies must be recognised in the consolidated financial statement as a separate item in shareholders’ equity.
Information on the non-controlling interests in shareholders’ equity and profit or loss as well as on the major non-controlling interests is provided in section 6.14 “Non-controlling interests”. On the balance sheet date there were no significant restrictions on access to or the use of Group assets due to protective rights in favour of non-controlling interests.
HR GLL Central Europe GmbH & Co. KG 1, Munich / Germany 87.67 EUR 350,734 4,850
Oval Office Grundstücks GmbH 4, 6, Hannover / Germany 50.00 EUR 1,628 999
Internationale Schule Hannover Region GmbH 8, Hannover / Germany 9.17 EUR 4,402 193
Argenta Continuity Limited 1, 9, London / United Kingdom 100.00 GBP – –
Thatch Risk Acceptances (Pty) Ltd. 1, Johannesburg / South Africa 49.00 ZAR 2,559 4,437
Film & Entertainment Underwriters SA (Pty) Ltd. 1, Johannesburg / South Africa 35.70 ZAR 537 549
Hannover Rück SE Korea Branch, Seoul / South Korea 47,822 47,134 2,889 3,315
Liabilities related to assets held for sale 2,246,129 5. Segment reporting Based on the “management approach” of IFRS 8, which requires segment information to be presented as it is reported internally to management and normally used by the chief operating decision maker to decide upon the allocation of resources to a segment and evaluate its performance, Hannover Re has identified the reportable segments of property & casualty reinsurance and life & health reinsurance. With regard to the object of business operations within the two segments please see our explanatory remarks on Hannover Re’s business model on page 19 of the management report. The report on economic position on page 26 et seq. contains remarks on the economic environment in which the Group operates.
Equity securities – available for sale 28,729 37,520 – – – – 28,729 37,520
Total investments and cash under own management 32,092,110 31,000,184 10,030,024 8,988,934 75,204 68,360 42,197,338 40,057,478
Government debt securities of EU member states 28,624 217 471 – 29,095
The fair value of investment property amounted to EUR 1,945.4 million (EUR 1,743.6 million) as at the balance sheet date.
The above table shows the financial assets that are to be recognised in future in accordance with IFRS 9 and splits them into a group that satisfies the cash flow criterion for financial assets as well as all other financial assets. The latter encompass the financial assets currently measured at fair value through profit or loss, especially equity instruments held and shares in investment funds that by their very nature cannot fulfil the cash flow criterion enshrined in IFRS 9. The cash flow criterion is met if the contractual conditions of the financial instrument give rise to cash flows at set times that are solely payments of principal and interest (SPPI test).
Net book value at 31 December of the year under review 85,588 91,692
Net book value at 31 December of the previous year 63,285 76,592
In order to show the net technical provisions remaining in the retention the following table compares the gross provisions with the corresponding retrocessionaires’ shares, which are shown as assets in the balance sheet.
Net book value after currency translation 28,764,465 1,689,667 27,074,798 26,211,667 1,385,757 24,825,910
Net book value at 31 December of the year under review 3,166,964 93,678 3,073,286 3,541,194 96,402 3,444,792
Recognised pension obligations at 31 December of the financial year 183,656 177,315 thereof: Capitalised assets 349 471 thereof: Recognised pension obligations from IFRS 5 1,714 –
The impairments taken on fixed-income securities amounted to just EUR 0.5 million (EUR 0.3 million).
With regard to the fundamental approach adopted for firsttime application of IFRS 15 we would refer to the remarks in section 2 “Accounting principles”.
Change in deferred taxes due to changes in tax rates (3,160) (30,430)
Domestic / foreign breakdown of recognised tax expenditure / income N 86 in EUR thousand 2018 2017
Excess deferred tax assets are recognised with respect to losses in the year under review or in the previous year only to the extent that, based on strong evidence, it is likely that the company concerned will generate sufficiently positive taxable results in the future. This evidence was provided for deferred tax assets of EUR 60.7 million (EUR 23.0 million).
Under a purchase agreement dated 1 August 2018, 50.22% of the shares in International Insurance Company of Hannover SE, which is wholly owned by Hannover Rück SE, were sold to HDI Global SE, a subsidiary of Talanx AG, with economic effect from 1 January 2019 for a purchase price of EUR 107.2 million. For details please refer to the information provided in section 4.4 “Major disposals and retirements”.
Actuarial opinions with respect to the pension commitments given to staff are drawn up for Hannover Rück SE and E+S Rückversicherung AG by HDI Pensionsmanagement AG (name change in January 2019, formerly: Talanx Pensionsmanagement AG) and HDI Lebensversicherung AG under an actuarial service contract.
The Conditions for the Granting of Stock Appreciation Rights were cancelled for all eligible recipients. Awarded stock appreciation rights continue to be exercisable until the end of their period of validity.
The amount paid out is limited to a maximum calculated as a quotient of the total volume of compensation to be granted in the allocation year and the total number of stock appreciation rights awarded in the year in question. In the event of cancellation or termination of the employment relationship as a consequence of a termination agreement or a set time limit, a holder of stock appreciation rights is entitled to exercise all such rights in the first exercise period thereafter. Stock appreciation rights not exercised in this period and those in re-
Member companies of the Hannover Re Group are involved in judicial and supervisory procedures as well as in arbitration proceedings as part of the conduct of insurance and reinsurance business. Depending upon the subject matter of the procedure, the Hannover Re Group sets aside provisions for the amount in dispute in such proceedings – for the most part in the technical account and in exceptional cases as a charge to other income / expenses – if and to the extent that the resulting commitments are likely to materialise and their amount can be estimated with sufficient accuracy. The provision established in each case covers the expense that can be expected in our assessment as at the balance sheet date.
Services relating to auditing of the financial statements 7,521 2,671 8,953 3,328
(a) Technical provisions (known as “loss reserves”) of EUR 28,758.6 million (44.6% of the consolidated balance sheet total) are recognised in the company’s consolidated financial statement under the balance sheet item “loss and loss adjustment expense reserve”. Of this, EUR 24,542.8 million is attributable to the area of property and casualty reinsurance.
Responsibility of Management and of the Supervisory Board for the consolidated financial statement and the Group management report
Hannover (since 7 May 2018) Deputy Chairman Chairman of the Board of Management of HDI Haftpflichtverband der Deutschen Industrie V.a.G. Chairman of the Board of Management of Talanx AG
HR Hannover Re, Correduría de Reaseguros, S. A. Paseo del General Martínez Campos 46 28010 Madrid
M 89 German Corporate Governance Code, Item 4.2.5 Para. 3 – Table 1 (target / minimum / maximum remuneration as nominal amounts) 138