2. Accounting principles

Hannover Rück SE and its subsidiaries are required to prepare a consolidated financial statement and group management report in accordance with § 290 German Commercial Code (HGB).

Pursuant to EU Regulation (EC) No. 1606 / 2002, the present consolidated financial statement and group management report of Hannover Re have been drawn up in accordance with the International Financial Reporting Standards (IFRS) that are to be applied within the European Union. In addition, we have made allowance for the regulations that are also applicable pursuant to § 315a Para. 1 German Commercial Code (HGB) and the supplementary provisions of the Articles of Association of Hannover Rück SE as amended on 30 May 2016.

The consolidated financial statement reflects all IFRS in force as at 31 December 2017 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 “Insurance Contracts” requires disclosures on the nature and extent of risks stemming from reinsurance contracts, while IFRS 7 “Financial Instruments: Disclosures” requires similar information on risks from financial instruments. Additionally, § 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. 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.

In view of the fact that reinsurance contracts, in conformity with IFRS 4 “Insurance Contracts”, are recognised according to the pertinent provisions of United States Generally Accepted Accounting Principles (US GAAP) as applicable on the date of initial application of IFRS 4 on 1 January 2005, we cite individual insurance-specific standards of US GAAP using the designation “Statement of Financial Accounting Standard (SFAS)” that was valid at that time.

The declaration of conformity required pursuant to § 161 German Stock Corporation Act (AktG) regarding compliance with the German Corporate Governance Code has been submitted and, as described in the Declaration of the Executive Board regarding the Corporate Governance of the Company, made permanently available on the Hannover Re website.

The annual financial statements included in the consolidated financial statement were for the most part drawn up as at 31 December. Pursuant to IFRS 10 “Consolidated Financial Statements” there is no requirement to compile interim accounts for Group companies with diverging reporting dates because their closing dates are no earlier than three months prior to the closing date for the consolidated financial statement. Insofar as no interim accounts were drawn up, allowance has been made for the effects of significant transactions between the diverging reporting dates and the closing date for the consolidated financial statement.

The annual financial statements of all companies were drawn up in accordance with standard Group accounting and measurement rules pursuant to IFRS.

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 23 February 2018.

New accounting standards or accounting standards applied for the first time

The amendments to existing standards listed below were applicable for the first time in the year under review and had no significant implications overall for the net assets, financial position or result of operations of the Hannover Re Group.

• Disclosure Initiative (Amendments to IAS 7)
• Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12)
• Annual Improvements to IFRS Standards 2014 – 2016 Cycle

Standards or changes in standards that have not yet entered into force or are not yet applicable

In May 2017 the IASB published the final version of IFRS 17 “Insurance Contracts”, which has still to be endorsed by the EU. IFRS 17 replaces IFRS 4 and thereby establishes for the first time consistent principles for the recognition, measurement, presentation and disclosure of insurance contracts, reinsurance contracts and investment contracts with discretionary participation features. The measurement model of IFRS 17 requires entities to measure groups of insurance contracts based on estimates of discounted future cash flows with an explicit risk adjustment for non-financial risks (“fulfilment cash flows”) as well as a contractual service margin, representing the expected (i. e. unearned) profit for the provision of insurance coverage in the future.

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 cover 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.

Changes in assumptions that do not relate to interest rates or financial risks are not recognised directly in the statement of income but are booked against the contractual service margin and hence spread across the remaining coverage period. Changes in estimates are only recognised immediately in profit or loss in the case of those groups of insurance contracts that are expected to be loss-making.

IFRS 17 includes an approximation method for short-term contracts that captures the liability for providing insurance coverage through unearned premium, as has been the case to date. Liabilities from outstanding claims must be discounted using current interest rates under IFRS 17. IFRS 17 modifies the general valuation model for large parts of life insurance business by requiring that changes in the shareholders’ share in the development of returns on the items underlying the surplus participation also be recognised in the contractual service margin and spread over the remaining period for which coverage is provided.

Subject to endorsement in EU law, IFRS 17 is effective for annual reporting periods beginning on or after 1 January 2021.

Hannover Re had already launched a very extensive implementation project in the middle of last year. At this moment, however, it is too early to comment on any specific implications of the new standard at the time of initial application.

In January 2016 the IASB issued IFRS 16 “Leases” setting out new principles governing the recognition, measurement, presentation and disclosure of leases. The most significant new requirements relate principally to accounting by lessees. In future, the lessee shall as a general principle recognise a lease liability for all leases. At the same time it shall recognise a right to use the underlying asset. Accounting by lessors remains comparable with current practice, according to which the lessor classifies each lease as an operating lease or a finance lease. The standard is to be applied to annual periods beginning on or after 1 January 2019. Hannover Re intends to apply the standard using a modified retrospective approach and will recognise the cumulative effect of application of the standard in retained earnings as at 1 January 2019. The detailed analysis conducted by Hannover Re determined that the consolidated balance sheet will be extended by around EUR 115 million at the time of initial application through the recognition of rights of use and lease liabilities. The expense from leases in the form of impairments taken on rights of use and interest on lease liabilities will probably amount to around EUR 23 million.

In July 2014 the IASB published the final version of IFRS 9 “Financial Instruments”, which supersedes all previous versions of this standard and replaces the existing IAS 39 “Financial Instruments: Recognition and Measurement”. The standard contains requirements governing classification and measurement, impairment based on the new expected credit loss impairment approach and general hedge accounting. Initial mandatory application of the standard, which was endorsed by the EU in November 2016, is set for annual periods beginning on or after 1 January 2018. In September 2016, however, the IASB published “Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (Amendments to IFRS 4)”. These amendments address the implications of the different effective dates for initial application of IFRS 9 and IFRS 17, the new standard governing the recognition of insurance and reinsurance contracts which has now been published. Under the so-called deferral approach provided for in the amendments, entities whose predominant activity is issuing insurance and reinsurance contracts within the scope of IFRS 4 are granted an optional temporary exemption from recognising their financial instruments in accordance with IFRS 9 until the recognition of insurance and reinsurance contracts has been finally settled, although this option may not be used after 1 January 2021. Hannover Re reviewed the application requirements based on the consolidated financial statement as at 31 December 2015 with a positive outcome and decided to make use of the deferral approach. Hannover Re primarily anticipates implications for the classification of financial instruments. The IFRS 9 implementation project is running parallel to and in close coordination with the IFRS 17 implementation project.

In May 2014 the IASB issued IFRS 15 “Revenue from Contracts with Customers”. The standard specifies when and in what amount revenue is to be recognised and which disclosures are required for this purpose. IFRS 15 provides a single five-step model framework to be applied to all contracts with customers. In the “Clarifications to IFRS 15 Revenue from Contracts with Customers”, which were published in April 2016, the IASB clarified various principles of IFRS 15 and included additional transition relief provisions. 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. Both the standard and the clarifications are to be applied for the first time to annual periods beginning on or after 1 January 2018. Hannover Re subjected the service contracts existing as at the balance sheet date to analysis and does not anticipate any significant changes relative to current practice. The predominant activity of the Hannover Re Group falls within the scope of application of IFRS 4. Consequently, the services falling within the scope of application of IFRS 15 will probably not have any significant implications overall for the Group’s net assets, financial position or result of operations. Hannover Re intends to opt for the modified retrospective approach on initial application of IFRS 15, according to which the cumulative effect of applying the new standard is recognised in retained earnings as at 1 January 2018. In addition, the practical transition relief provided in the standard with respect to completed contracts and contract modifications will be utilised.

In addition to the accounting principles described above, the IASB has issued the following standards, interpretations and amendments to existing standards with possible implications for the consolidated financial statement of Hannover Re, application of which was not yet mandatory for the year under review and which are not being applied early by Hannover Re. Initial application of these new standards is not expected to have any significant implications for Hannover Re’s net assets, financial position or result of operations: