Our necessary equity resources are determined according to the requirements of our internal capital model, solvency regulations, the rating agencies' assumptions for our target rating and the expectations of our clients and shareholders. Above and beyond this, we maintain an equity cushion in order to be able to act on new business opportunities at any time. Hannover Re's available capital continued to grow in 2016, driven especially by the positive Group net income of the previous financial year and a rise in other comprehensive income deriving from unrealised gains and losses on investments.
Hannover Re calculates the required risk capital as the Value at Risk (VaR) of the economic change in value over a period of one year with a confidence level of 99.97%. This reflects the goal of not exceeding a one-year ruin probability of 0.03%. The internal target capitalisation of the Hannover Re Group is therefore significantly higher than the confidence level of 99.5% required under Solvency II. The solvency ratio calculated in accordance with Solvency II stood at 230% as at 31 December 2016. Hannover Re is well diversified in every risk category and has a balanced risk profile.
Cost of capital and return on equity
Hannover Re uses various equity substitutes to optimise the cost of capital. We make use of subordinated bonds (hybrid capital), retrocessions and securitisations of reinsurance risks on the capital market. Thanks to efficient capital management, Hannover Re's weighted cost of capital ranks among the lowest and its return on equity among the best in the industry: the average return over the last 10 years is around 14.6%.
|Year||Actual in %|
|Average return on equity 2007 - 2016||14.6|
Despite the protracted low interest rate environment Hannover Re pursues a prudent investment policy that emphasises risk diversification: 86% of the assets under own management are invested in fixed-income securities, 5% in real estate, 4% in a well-balanced listed equity portfolio. When it comes to investing the capital entrusted to us, we incorporate environmental, social and governance (ESG) criteria into our investment policy. Our investment policy provides for the divestment of assets that fail to meet these criteria.
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
- ensuring the liquidity and solvency of Hannover Re at all times
- high diversification of risks
- limitation of currency exposures and maturity risks through matching currencies and maturities.