A key strategic objective of Hannover Re is long-term capital preservation. Just as in previous years, we issued hybrid capital as an equity substitute in order to keep the cost of capital on a low level. The policyholders’ surplus is an important management ratio in the context of Hannover Re’s comprehensive capital management. The total policyholders’ surplus is defined as follows:
The policyholders’ surplus totalled EUR 11,035.1 million (EUR 10,778.5 million) as at the balance sheet date. Retained earnings increased by EUR 455.9 million to EUR 7,440.3 million (EUR 6,984.4 million) on the back of the good Group net income booked in the year under review. On the other hand, the foreign currency gains and losses and the net gains on investments recognised in equity were lower in total. Overall, the policyholders’ surplus consequently increased by 2.4%.
Hannover Re uses “Intrinsic Value Creation” (IVC) as its central value-based management tool. As part of this methodology, we apply the principles of economic allocation of equity and efficient use of debt as an equity substitute in order to achieve the lowest possible weighted cost of capital. This concept as well as the objectives and principles in accordance with which we conduct our enterprise management and capital management are described in greater detail in our remarks in section "Value-based management".
In its capital management Hannover Re is guided by the requirements and expectations of the rating agencies with an eye to its targeted rating. Furthermore, while making appropriate allowance for business policy considerations and factors that influence market presence, the allocation of capital to the Group’s operational companies is based upon the economic risk content of the business group in question. The Group companies are also subject to national capital and solvency requirements. All Group companies met the applicable local minimum capital requirements in the year under review. Adherence to these capital requirements is continuously monitored by the responsible organisational units on the basis of the latest actual figures as well as the corresponding planned and forecast figures. If, despite the capital allocation mechanisms described above, a scenario occurs in which there is a danger of minimum capital requirements being undershot, suitable options are immediately discussed and measures set in motion to counteract such an eventuality. From the Group perspective we manage Hannover Re’s solvency using our internal capital model (see “Opportunity and risk report”).