Independent Auditor's Report

to Hannover Rück SE, Hannover

Report on the audit of the consolidated financial statement and the Group management report

Audit opinions

We have audited the consolidated financial statement of Hannover Rück SE, Hannover, and its subsidiaries (the Group) – comprising the consolidated balance sheet as at 31 December 2018, the consolidated statement of income, the consolidated statement of comprehensive income, the consolidated statement of changes in shareholders’ equity and the consolidated cash flow statement for the financial year from 1 January to 31 December 2018 as well as the notes to the consolidated financial statement, including a summary of major accounting policies. In addition, we audited the Group management report of Hannover Rück SE, which is combined with the management report of the company, for the financial year from 1 January to 31 December 2018. In accordance with German statutory requirements, we did not audit the content of the components of the Group management report specified in the “Other information” section of our independent auditor’s report.

In our opinion, based on the findings of the audit,

• the attached consolidated financial statement complies in all material respects with IFRS, as applicable in the EU, and with the additional requirements of German law applicable pursuant to § 315e Para. 1 Commercial Code (HGB) and gives a true and fair view of the Net assets and financial position of the Group as at 31 December 2018 as well as its results of operations for the financial year from 1 January to 31 December 2018 in accordance with these requirements, and
• the attached Group management report provides an accurate view overall of the position of the Group. In all material respects this Group management report is consistent with the consolidated financial statement, complies with German legal requirements and suitably presents the opportunities and risks of future development. Our audit opinion on the Group management report does not extend to the content of the components of the Group management report specified in the section “Other information”.

Pursuant to § 322 Para. 3 Sentence 1 Commercial Code (HGB), we confirm that our audit did not give rise to any reservations concerning the correctness of the consolidated financial statement and the Group management report.

Basis of the audit opinions

We conducted our audit of the consolidated financial statement and the Group management report in conformity with § 317 Commercial Code (HGB) and the EU Audit Regulation (No. 537/2014) with due regard to German generally accepted standards for the auditing of financial statements promulgated by the Institute of Public Auditors in Germany (IDW). Our responsibility according to these requirements and principles is described more extensively in the section of our audit report entitled “Responsibility of the auditor for the auditing of the consolidated financial statement and the Group management report”. We are independent of the Group companies in conformity with the requirements of European law as well as German commercial law and professional standards and we fulfilled our other German professional duties in conformity with these requirements. Furthermore, we confirm pursuant to Article 10 (2) letter f) EU Audit Regulation that we did not provide any prohibited non-audit services as defined by Article 5 (1) EU Audit Regulation. We are of the opinion that the audit evidence obtained is sufficient and appropriate to serve as a basis for our audit opinions on the consolidated financial statement and the Group management report.

Key audit matters in the auditing of the consolidated financial statement

Key audit matters are those matters that, in our professional judgement, are of the greatest significance to our audit of the consolidated financial statement for the financial year from 1 January to 31 December 2018. These matters were considered in the context of our audit of the consolidated financial statement as a whole and in forming our audit opinion thereon; we do not provide a separate audit opinion on these matters.

In our assessment, the following matters were of the greatest significance in our audit:

1. Measurement of certain financial instruments at Fair value
2. Measurement of the loss and loss adjustment expense reserve in property and casualty reinsurance
3. Measurement of the benefit reserve
4. Calculation of the estimated gross Premium

We have structured our presentation of these key audit matters as follows:

1. Facts of the matter and problem
2. Approach taken in the audit and insights gained
3. Reference to further information

The key audit matters are presented below:

(1) Measurement of certain financial instruments at fair value

(a) Financial instruments in an amount of EUR 53,062.0 million (82.3% of the consolidated balance sheet total) are recognised in the company’s consolidated financial statement.

Of these financial instruments, financial assets in an amount of EUR 36,523.8 million are measured at fair value. In turn, of these financial instruments, fair values of EUR 36,045.1 million are determined using valuation models or values indicated by third parties. The measurement of financial instruments, the fair values of which have to be determined using valuation models or values indicated by third parties, is subject to uncertainty because the most up-to-date market data / comparative values are not available for measurement in all cases and hence estimated values and parameters not currently observable on the market are also used.

Financial instruments measured using models are subject to an increased valuation risk in this connection owing to a reduced scope for objectivity and the underlying discretionary decisions, estimates and assumptions of Management. Given that the estimates and assumptions used, especially those in relation to interest rates and cash flows, as well as the applied measurement methods can potentially have material implications for the measurement of these financial instruments and for the net assets and results of operations of the Group and also bearing in mind that extensive disclosures in the notes are required on measurement methods and scope for discretion, this was a key audit matter in the context of our audit.

(b) In the context of our audit we analysed the financial instruments measured using valuation models and values indicated by third parties, with our focus being on the measurement uncertainties. In this regard, we evaluated the adequacy and effectiveness of the relevant controls used for measurement of these financial instruments and for model validation. In so doing, among other things, we assessed the integrity of the underlying data and the process for establishing the assumptions and estimates included in the valuation.

With the support of our internal specialists in financial mathematics, we also evaluated the adequacy of the methods adopted by Management to test assets for impairment and the parameters used for this purpose. We compared the methods and assumptions used to calculate measurement adjustments in the financial year with recognised practices and industry standards and examined the extent to which they are appropriate for proper recognition in the balance sheet.

On the basis of the audit procedures performed we were able to assure ourselves that the methods and assumptions used by Management to measure certain financial instruments (those measured on the basis of models and values indicated by third parties) are suitable overall and the remarks and disclosures presented in the notes to the consolidated financial statement are appropriate.

(c) The information provided by the company regarding the measurement of financial instruments is contained in the sections of the notes to the consolidated financial statement entitled “Accounting policies” and “Notes on the individual items of the balance sheet”, subsection “Investments under own management”.

(2) Measurement of the loss and loss adjustment expense reserve in property and casualty reinsurance

(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.

The loss reserves in property and casualty reinsurance are estimated based on empirical values in light of the information provided by ceding companies. The measurement of the loss reserves is derived using actuarial methods that necessitate a sufficiently long data history and stability of the observed data. The mathematical methods incorporate assumptions regarding premiums, ultimate loss ratios and run-off patterns that are built upon an expert assessment based on past experience. Taking into account the results of the actuarial procedures and other influencing factors in relation to the uncertainties associated with the calculations, Management determines the amount of the loss reserves.

The determination of the loss reserve requires discretionary decisions, estimates and assumptions on the part of Management. Minimal changes to these assumptions and the methods used can materially affect the measurement of this provision.

Against this backdrop, and also bearing in mind the material significance (in terms of amount) of this provision for the net assets and results of operations of the Group, the measurement of this provision was of particular significance in the context of our audit.

(b) As part of the audit, in light of the significance of the loss reserve, we evaluated the methods used by the company and the assumptions made by Management in cooperation with our own actuaries. In so doing, we worked on the basis of, among other things, our industry expertise and our industry experience.

Among other things, we assessed the adequacy of the design of the reserving process and performed functional checks in order to evaluate the effectiveness of the internal controls. In so doing, we focused especially on controls that ensure the data used are adequate and complete and that the calculation process is subject to a sufficient form of quality assurance.

Building on the review of the controls, we conducted further analytical and substantive audit procedures in relation to the measurement of the loss reserve. Bearing in mind the significance of the loss reserve for the company’s total business, our internal measurement specialists evaluated the adequacy of the methods used by the company. Furthermore, our internal measurement specialists assessed the models used by the company and assumptions made by Management on the basis of industry expertise and experience with general accepted actuarial practices. In this context, the consistent application of the measurement methods was also reviewed.

On the basis of our audit procedures we were able to assure ourselves that the estimates and assumptions made by Management with regard to the loss reserve are appropriate overall.

(c) The information provided by the company on the loss reserves in property and casualty reinsurance is contained in the sections of the notes to the consolidated financial statement entitled “Accounting policies” and “Notes on the individual items of the balance sheet”, subsection “Technical provisions”. Risk information is provided in the section of the Group management report entitled “Risk report”, subsection “Underwriting risks in property and casualty reinsurance”.

(3) Measurement of the benefit reserve

(a) Technical provisions of altogether EUR 9,184.4 million (14.2% of the consolidated balance sheet total) are recognised in the company’s consolidated financial statement under the balance sheet item “benefit reserve”. The benefit reserve was established largely for reinsurance transacted in the lines of life and health reinsurance.

The measurement of the benefit reserve is derived using actuarial methods from the present value of future payments to ceding companies less the present value of future premiums still to be paid by ceding companies. Defined actuarial bases are applied upon initial recognition of the treaty in question. Depending on the structuring of the treaty and the regular course of business, the calculation is based either on a combination of available statements of account from ceding companies, as necessary adjusted by estimates of the treaty experience for accounting periods not yet available, or on model-based own calculations of the benefit reserve. In this regard, actuarial assumptions are made in connection with interest rates, investment income, mortality, morbidity, longevity, expenses and future policyholder behaviour.

An annual liability adequacy test is performed on the level of Portfolios managed as a unit in order to verify whether the technical provisions, and hence in particular the benefit reserve, established as at the balance sheet date using the actuarial bases for initial recognition, less existing deferred acquisition costs, are sufficient to cover the best estimate as at the balance sheet date of the expected present value of future payments less the present value of premiums payable from the portfolios managed as a unit.

The assessment of the adequacy of the reported benefit reserve, the estimates made in cases where statements of account from ceding companies were not available and the model-based calculations of the benefit reserve are subject to considerable scope for discretion on the part of Management and hence associated estimation uncertainties.

Against this backdrop and in view of the material significance (in terms of amount) of the benefit reserve for the Group’s net assets and results of operations as well as the complexity of the underlying calculations, this matter was of particular significance in the context of our audit.

(b) As part of our audit, in light of the significance of the benefit reserve, we evaluated the methods used by the company and the assumptions made by Management in cooperation with our actuaries. In so doing, we worked on the basis of, among other things, our industry expertise and our industry experience.

For the purposes of our evaluation, we assessed the design and effectiveness of the controls put in place to determine and document the benefit reserve. A special focus here was on the controls that ensure new products and contracts are correctly classified and that changes in assumptions are correctly implemented in the systems.

Building on the review of the controls, we conducted further analytical and substantive audit procedures in relation to the measurement of the benefit reserve. With the involvement of our actuaries, we compared the actuarial methods applied in each case and the material assumptions made with generally recognised actuarial practices and industry standards and we examined the extent to which they are suitable for measurement. In the context of case-by-case checks we assessed the correct and appropriate use of statements of account available from ceding companies in the determination of the benefit reserve. In this connection we also evaluated the adequacy of the material assumptions by analysing the actuarial methods used to arrive at them.

Based on the liability adequacy tests performed, we formed an opinion on whether the actuarial bases and methods used were appropriately applied. If market interest rates were used for measurement purposes, we reviewed the adequacy of the discount rates used through comparison with parameters that could be observed on the market. In this context, we devoted particularly close attention to the liability adequacy test for US mortality solutions business on account of the significance of this business to the Group. Furthermore, we analysed the development of the benefit reserve compared to the previous year, in particular with an eye to whether the assumptions consistently reflect the latest available cedant information as well as current business developments at ceding companies and our expectations based on market observations.

On the basis of the audit procedures that we conducted, we were able to assure ourselves that the methods and assumptions used by Management for measurement of the benefit reserve are appropriate overall.

(c) The information provided by the company on the benefit reserve is contained in the sections of the notes to the consolidated financial statement entitled “Accounting policies” and “Notes on the individual items of the balance sheet”, subsection “Technical provisions”. Risk information is provided in the section of the Group management report entitled “Risk report”, subsection “Underwriting risks in life and health reinsurance”.

(4) Calculation of the estimated gross premium

(a) The company reports gross written premium of EUR 19,176.4 million in the statement of income contained in its consolidated financial statement.

Premiums for reinsurance assumed are recognised according to the terms and conditions of the reinsurance treaties. Where statements of account from ceding companies are not yet available, the company has made supplementary or complete estimates of the premiums. The estimates are based on assumptions and are therefore subject to considerable uncertainty and highly discretionary.

In view of the material significance (in terms of amount) of the estimated premium volume for the Group’s net assets and results of operations as well as the considerable discretionary scope of Management and the associated estimation uncertainties, this matter was of particular significance in the context of our audit.

(b) For the purpose of auditing the estimated gross premium, as a first step we conducted the structural audit of the premium and estimation process. In this connection we identified the material key controls and analysed their design. On this basis, as part of the functional audit, we tested the effectiveness of the key controls implemented in the process and evaluated the adequacy of the material assumptions by reproducing and analysing the calculation method used to arrive at the estimated gross premium.

In the context of audit procedures conducted on a caseby- case basis we critically examined the key assumptions underlying an estimate and had the company provide us with corresponding justifications for the estimate that was made. Using information on the premiums expected in the previous year, we made a comparison with the actual figures and were thus able to draw conclusions about the quality of the estimates.

On the basis of our audit procedures we were able to assure ourselves that the calculation methods used by Management to arrive at the estimated gross premium are appropriate overall.

(c) The information provided by the company on written and estimated gross premium is contained in the sections of the notes to the consolidated financial statement entitled “Accounting policies” and “Notes on the individual items of the statement of income”.

Other information

Management is responsible for the other information. The other information encompasses the following components of the Group management report, the content of which was not audited:

• the declaration on corporate governance pursuant to § 289f Commercial Code (HGB) and § 315d Commercial Code (HGB) contained in the section of the Group management report entitled “Enterprise management”
• the non-financial information statement pursuant to § 289b Para. 1 Commercial Code (HGB) and § 315b Para. 1 Commercial Code (HGB) contained in the section of the Group management report entitled “Combined non-financial information statement”
• the disclosures contained in the Group management report that are identified as unaudited in connection with Solvency II reporting

The other information additionally encompasses the other parts of the Annual Report – excluding further cross-references to external information –, with the exception of the audited consolidated financial statement, the audited Group management report and our audit report.

Our audit opinions on the consolidated financial statement and on the Group management report do not extend to the other information, and hence we do not express an audit opinion or draw any other form of audit conclusion in this regard.

In connection with our audit, our responsibility is to read the other information and assess whether the other information

• shows material inconsistencies with the consolidated financial statement, the Group management report or knowledge that we obtained as part of the audit or
• appears to be materially misstated in other respects.

Responsibility of Management and of the Supervisory Board for the consolidated financial statement and the Group management report

Management is responsible for preparation of the consolidated financial statement, which in all material respects is in conformity with IFRS, as applicable in the EU, and with the additional requirements of German law applicable pursuant to § 315e Para. 1 Commercial Code (HGB) and for ensuring that the consolidated financial statement gives a true and fair view of the Group’s net assets, financial position and results of operations in accordance with these requirements. In addition, Management is responsible for the internal controls that they have determined to be necessary in order to facilitate preparation of a consolidated financial statement that is free of material misstatements, whether intended or unintended.

In preparing the consolidated financial statement, Management is responsible for assessing the capacity of the Group to continue as a going concern. Furthermore, they are responsible for declaring facts and circumstances connected with continuation as a going concern, where relevant. In addition, they are responsible for financial reporting on the going concern basis of accounting, unless there is an intention to liquidate the Group or cease operations or there is no other realistic alternative.

Moreover, Management is responsible for the preparation of the Group management report, which overall gives an accurate view of the position of the Group and in all material respects is consistent with the consolidated financial statement, complies with German legal requirements and suitably reflects the opportunities and risks of future development. Management is also responsible for the safeguards and measures (systems) that they considered necessary in order to facilitate the preparation of a Group management report in conformity with applicable German legal requirements and in order to be able to provide sufficient appropriate evidence for the statements contained in the Group management report.

The Supervisory Board is responsible for monitoring the financial reporting process used by the Group for drawing up the consolidated financial statement and the Group management report.

Responsibility of the auditor for the auditing of the consolidated financial statement and the Group management report

Our objective is to obtain reasonable assurance as to whether the consolidated financial statement as a whole is free of material – intended or unintended – misstatements and whether overall the Group management report gives an accurate view of the Group’s position and in all material respects is consistent with the consolidated financial statement as well as with the insights gained from the audit, is in conformity with German legal requirements and suitably presents the opportunities and risks of future development; it is also our goal to provide an audit report that contains our audit opinions on the consolidated financial statement and on the Group management report.

Reasonable assurance is a high degree of assurance, but not a guarantee, that an audit performed in conformity with § 317 Commercial Code (HGB) and the EU Audit Regulation and with due regard to German generally accepted standards for the auditing of financial statements promulgated by the Institute of Public Auditors in Germany (IDW) always detects a material misstatement. Misstatements may be due to fraud or error and are considered to be material if it could reasonably be expected that individually or as whole they influence the economic decisions made by users on the basis of this consolidated financial statement and Group management report.

During the audit we exercise our due discretion and maintain a fundamentally critical attitude. In addition,

• we identify and assess the risks of material – intended or unintended – misstatements in the consolidated financial statement and in the Group management report, plan and conduct audit procedures in response to these risks and obtain audit evidence that is sufficient and appropriate to serve as a basis for our audit opinions. The risk of material misstatements not being detected is greater with fraud than with error, because fraud may involve fraudulent collaboration, falsifications, wilful incompleteness, misleading representations or the bypassing of internal controls.
• we obtain an understanding of the internal control system relevant to the audit of the consolidated financial statement and the safeguards and measures relevant to the audit of the Group management report in order to plan audit procedures that are appropriate under the existing circumstances, albeit not with the aim of providing an audit opinion on the effectiveness of these systems.
• we assess the adequacy of the accounting policies applied by Management as well as the reasonableness of the estimated values presented by Management and associated disclosures.
• we draw conclusions regarding the adequacy of the going concern accounting principle applied by Management as well as, on the basis of the audit evidence obtained, regarding whether material uncertainty exists in connection with events or circumstances that can raise significant doubts about the capacity of the Group to continue as a going concern. If we conclude that material uncertainty exists, we are required in the audit report to draw attention to the associated disclosures in the consolidated financial statement and in the Group management report or, if these disclosures are inadequate, to modify our audit opinion. We arrive at our conclusions on the basis of the audit evidence obtained until the date of our audit report. Future events or circumstances may, however, result in the Group no longer being able to continue as a going concern.
• we assess the overall presentation, the structure and the content of the consolidated financial statement including the disclosures as well as whether the consolidated financial statement presents the underlying business transactions and events in such a way that the consolidated financial statement gives a true and fair view of the net assets, financial position and results of operations of the Group in conformity with IFRS, as applicable in the EU, and with the additional requirements of German law applicable pursuant to § 315e Para. 1 Commercial Code (HGB).
• we obtain sufficient suitable audit evidence for the accounting information of the companies or business activities within the Group in order to be able to provide audit opinions on the consolidated financial statement and on the Group management report. We are responsible for the direction, monitoring and conduct of the audit of the consolidated financial statement. We bear sole responsibility for our audit opinions.
• we assess the consistency of the combined management report with the consolidated financial statement, its conformity with the law and the view of the position of the Group that it conveys.
• we conduct audit procedures with respect to the prospective information presented by Management in the Group management report. In particular, based on sufficient suitable audit evidence we verify the major assumptions taken as a basis by Management for the prospective information and assess the proper derivation of the prospective information from these assumptions. We do not provide an independent audit opinion on the prospective information or on the underlying assumptions. There is a considerable unavoidable risk that future events may differ substantially from the prospective information.

We discuss with those charged with governance, among other things, the planned scope and the timetable of the audit as well as significant audit findings, including any deficiencies in the internal control system that we identify during our audit.

We provide to those charged with governance a declaration to the effect that we complied with the relevant independence requirements, and we discuss with them all relationships and other matters that can reasonably be assumed to affect our independence as well as the safeguards implemented in this respect.

We determine from among the matters that we discussed with those charged with governance those matters that were most relevant to the current reporting period in the audit of the consolidated financial statement and therefore constitute the key audit matters. We describe these matters in the audit report, unless laws or other legal provisions prevent public disclosure of the matter.

Miscellaneous statutory and other legal requirements

Other information pursuant to Article 10 EU Audit Regulation

We were selected as the auditor of the consolidated financial statement by the Supervisory Board on 8 March 2018. We received the audit mandate from the Supervisory Board on 13 June 2018. We have served as the auditor of the consolidated financial statement of Hannover Rück SE, Hannover, since the 2018 financial year.

We declare that the audit opinions contained in this audit report are consistent with the additional report to the Audit Committee in accordance with Article 11 EU Audit Regulation (long-form audit report).

Lead engagement partner

The lead engagement partner for the audit is Mathias Röcker.

Hannover, 5 March 2019

PricewaterhouseCoopers GmbH
Wirtschaftsprüfungsgesellschaft